Against a backdrop of falling stock prices, Pfizer Inc. (NYSE: PFE) and Bristol-Myers Squidd company (NYSE: BMY) have bucked the trend of the day and both are seeing a rise in their share prices after reporting that “apixiban” has tested as being superior to and safer than the generic drug “warfarin.” Both drugs are intended to aid in preventing strokes in patients with dangerously irregular heart rhythms. “Apixiban” is the experimental blood thinner being developed by both Pfizer and Bristol Myers. “Warfarin” is the generic version of Coumadin, whose patent expired more than 10 years ago.
The hope is that this will lead to another blockbuster drug with more than $1 billion in sales. The timing couldn’t be better for the two companies as Big Pharma companies are generally facing an industry-wide patten cliff, where a number of significant pattens will soon expire. As a result, less expensive and far-less-profitable generics will soon displace proprietary pharmaceuticals along with much off the revenues these products generate. This has so far not managed to keep these companies from being able to offer extremely high dividends.
The news of apixiban’s successful tests negatively impacted the prices of companies manufacturing competing blood thinners. Bayer AG (BAYRY.PK) and Johnson & Johnson (NYSE: JNJ ) are seeking FDA approval for “xarelto,” their own blood thinner, traded lower. In mid-day activity, Bayer traded at $77.15, down 7.26%, while Johnson and Johnson traded at $64.85, down 1.85%. Sanofi-Aventis (NYSE: SNY) who partners with Bristol-Myers in co-marketing, the hugely successful blood thinner, “Plavix” traded down over 2% at $37.08. “Plavix” will lose its patent protection in the near future.
The successful tests of “apixiban” effectively make Bristol-Myers a double winner by compensating for the impending expiration of its proprietary position with a promising new blood thinner. In mid-day activity, shares of Bristol-Myers traded up 5.4% at $29.25, while Pfizer traded up 2.1% at 20.72. Shares of both companies are near their highs for the day.
Before today’s announcement, the consensus price target for Pfizer was $23.37 per share, giving the shares an implied upside a tad less than 13%. With today’s gains, Bristol-Myers Squibb has essentially surpassed its posted consensus target price. Keep in mind that unforeseen and significant new product introductions like “apixiban” have the potential of powering upside adjustments in consensus price targets, earnings and revenue estimates, and even in the overall bias. The question is, how much of a game changer will “apixiban,” prove to be . . . not merely in “targets” but in realized revenues and profits.
Morgan Stanley has now boosted its rating on Bristol-Myers Squibb to Overweight and said they win from this much more than Pfizer due to relative size.
JON C. OGG
Dendreon Corporation (NASDAQ: DNDN) is one we have been very positive about before the FDA approval of Provenge for metastatic prostate cancer. We often like to feature both sides of the coin, and the other side of the coin is one of caution from Credit Suisse this week. If this research call is right, shareholders could face some competitive pressure in shares of Dendreon.
Credit Suisse has been very cautious when it comes to Dendreon Corporation (NASDAQ: DNDN). The firm noted that an editorial in this week’s New England Journal of Medicine was published based upon Johnson & Johnson (NYSE: JNJ) and its abiraterone post-chemotherapy trial results. What made the concern is the focus on results which validate abiraterone’s action.
Some may consider one article not a strong enough basis for this week’s caution. Credit Suisse believes that the results can imply off-label pre-chemotherapy use as a competing agent against Provenge from Dendreon. Another bit was the combination data of abiraterone and other agents as lacking, but the firm believes that its concerns about abiraterone as a competitor are currently under-appreciated.
The belief is that these trial results show that abiraterone might possibly be used in all patients with metastatic castration-resistant prostate cancer. This is a longer-term concern rather than near-term, but and the firm is not assuming either “a pre-chemo approval in 2011 or significant off-label use ahead of an approval.” Still, it does seem to enhance compeitive risks to Provenge.
The article from the NEJM suggests that this could impact both how new drugs are developed and used. There is also a concern that a lack of combination data could eventually impact how Provenge is used in combination with other therapies.
Credit Suisse’s official rating Underperform with a discounted cash flow model price target obkective of $29.00 per share. The firm is much more cautious on the risks here than most Wall Street analysts based upon competitive threats and based upon lower E.U. pricing and penetration.
Credit Suisse has modelled $0.59 EPS for 2012 on about $877.2 million in revenues and it sees 2013 estimates of $1.68 EPS and $1.162 billion in sales.
Sadly, this call is one that is very expensive to hedge against. The call is long-term rather than short-term, so we looked at longer-dated LEAPS in options. Going all the way out to the JAN-2013 $35 PUTS is almost at $6.50 per contract, implying that a sub-$29 share price is the breakeven point on your contract.
Reuters noted that of the analysts following Dendreon, the ratings were as follows:
- BUY- 11
- OUTPERFORM- 6
- HOLD- 5
- UNDERPERFORM- 1
- SELL- 1
Thomson Reuters has a consensus price target objective of $49.72 and Dendreon shares are currently trading around $42.25 with a 52-week range of $25.78 to $44.85.
AFTERTHOUGHT…… I have already been receiving some emails that need to be considered regarding abiraterone’s side-effects. These were not really covered in the report summary and they are very important to consider. I also kept the comments mostly to what this report was simply because it was one of the only standout research calls from the rest of the pack.
JON C. OGG
The biotech sector has been full of consolidation and mergers of late, but now we have a new model whereby a smaller company is set to grow by taking a part of a larger company. We cannot exactly call it a reverse merger. Alkermes, Inc. (NASDAQ: ALKS) and Elan Corporation, plc (NYSE: ELN) have signed a definitive pact where Alkermes will merge with Elan’s unit called Elan Drug Technologies.
The drug technologies unit is profitable and is the drug formulation and manufacturing unit. The cash and stock transaction is valued toda at roughly $960 million and Alkermes and the unit will be combined under a new holding company structure that is incorporated in Ireland called Alkermes plc.
Alkermes says this deal will be immediately accretive to cash earnings. It also is said to accelerate Alkermes’ path “to building a sustainably profitable biopharmaceutical company with expertise in developing treatments for central nervous system diseases and a broad, diversified portfolio of products and pipeline based on proprietary science and technologies.”
The deal is a game-changer because on a standalone basis Alkermes was set to have a loss of -$0.31 EPS on $213.27 million in its fiscal year March-2012. The combined company is said to see a growing product, royalty and manufacturing revenues in excess of $450 million annually. Alkermes said it will also become immediately profitable on a cash earnings basis. In short, Alkermes instantly transforms. Now the company will have a revenue stream from 25 commercialized products and its 5 growth products will now be from RISPERDAL CONSTA, INVEGA SUSTENNA, AMPYRA, VIVITROL, and BYDUREON.
For Elan, it gets to cut the debt on its balance sheet and will get to improve its capital structure, increase its operating leverage, and this will allow for additional focus and disciplined investments. It also gets a stake in Alkermes plc that can drive its value ahead.
RISPERDAL CONSTA and INVEGA SUSTENNA are both commercialized by Johnson & Johnson (NYSE: JNJ) as long-acting injectable atypical antipsychotic medications for schizophrenia and bipolar I disorder. Ampyra is an MS drug under Acorda Therapeutics, Inc. (NASDAQ: ACOR). Bydureon is an extended release Typy-II diabetes treatment that Alkermes is in with Amylin Pharmaceuticals, Inc. (NASDAQ: AMLN) and Eli Lilly and Company (NYSE LLY).
Elan is set to receive $500 million plus it will also receive 31.9 million ordinary shares of Alkermes plc common stock. The companies will also enter into a shareholder agreement that contains a lockup, standstill and voting agreement for Elan’s shares of Alkermes plc.
As far as existing Alkermes holders, they will receive one ordinary share of Alkermes plc per each share of Alkermes, Inc. owned at the merger date. The new Alkermes plc shares will be registered in the United States and are expected to trade on NASDAQ. Alkermes plc will be headquartered in Dublin, Ireland The company did note that this transaction is expected to be taxable to existing Alkermes holders and it has obtained a commitment from Morgan Stanley & Co. and HSBC to provide up to $450 million of term loans to finance the transaction.
Revenues are expected to grow in fiscal 2012 and is expected to reach double-digit growth rates in fiscal 2013 and beyond. Pro forma Adjusted EBITDA margins in fiscal 2012 are projected at 15% to 20%, pro forma Adjusted EBITDA is put at $70 million to $90 million, and pro forma adjusted EBITDA margins should expand to 30% to 35% in fiscal year 2013 and beyond. Also noted was that it has identified about $20 million of annual synergies in U.S. operations that can be fully realized by fiscal 2013.
JON C. OGG
Genzyme Corporation (NASDAQ: GENZ) may have managed to save itself without really saving itself. That is what happens when buyout interest emerges in a struggling situation, particularly in the world biotechnology. With Sanofi-Aventis (NYSE: SNY) first having interest per reports Friday, the stock rose over 15% to $62.52. After the weekend, we have shares up 6.7% at $66.76 on word that Johnson & Johnson (NYSE: JNJ), GlaxoSmithKline plc (NYSE: GSK), or potentially other suitors may be interested.
What we wanted to check on was the pricing of near-month stock options to try to establish an implied buyout price. Genzyme stock options are showing right at $2.00 for the AUG-2010 $70 Calls. The AUG-2010 $65 Puts are at $2.55.
Using current prices alone does not give a 100% accurate read on any implied buyout price indications. Quite simply, the snapshot of today does not always reflect the trading book of an options market maker. It does give theoretical pricing and probability.
You also have to consider that we have already now seen a large run-up and the buyout interest that had been indicated could have easily been based upon where shares were… in the low-to-mid-$50′s. Corporations rarely care about appeasing speculators who invest in and around the potentiality of a merger, but they do have to keep in mind that securing a merger often requires more than just appeasing shareholders who are happy to get a boost from low levels.
After crunching numbers based on options prices today, it seems that $70.00 is the implied theoretical buyout price. Extra premium on top of this would garner the hope that GSK or J&J would try to jump in with a rival bid or a higher bid.
Again, these prices are merely based on snapshots in time. Options are merely one component of what is a convoluted situation. Sometimes these are dead-on, and sometimes they are off by a mile.
As far as this comparison, the Call options are far more active and have a far larger open interest than the Put options. Generally that is a sign that speculation is for upside rather than downside. Of the speculative Put strikes in August, we have only seen a bit more than 5,000 contracts trade today versus a prior open interest of 5,877 contracts. Today’s Calls have seen more than 12,000 contracts trade versus a prior open interest of more than 27,000 contracts.
What Genzyme ultimately fetches, if it garners a deal, points to a high implied bid of around $70.00 by our take. The value of anything is what someone is willing to pay for it. That could be far more or far less. Genzyme’s average share price for last week before the reported bid rumors was close to $53.00.
JON C. OGG
Genzyme Corp. (NASDAQ: GENZ) was up more than %6 this morning as traders continued to speculate about what seems to be the inevitable buyout of the biotech company. Last week, bearish sentiments amount the stock increased as the company’s 2Q profits showed severe financial difficulties as a result of manufacturing-end drug shortages. Outlook for the company started to improve, however, after pharma giant GlaxoSmithKline (NYSE: GSK) expressed a very casual interest in purchasing Genzyme.
Speculation about a potential acquisition of the third-largest biotech company in the world continued throughout the week, and Johnson & Johnson (NYSE: JNJ) was added to the list of potential suitors, although perhaps seen as more of a long shot than GSK. On Friday, Sanofi-Aventis (NASDAQ: SNY) made a casual approach to to GENZ which appeared to be a more serious expression of interest.
-Michael B. Sauter
Tibotec Pharmaceuticals, a subset of Johnson & Johnson (NYSE: JNJ), announced yesterday at the International AIDS Conference results from two pivotal Phase 3 tests comparing the safety and tolerability of its investigational non-nucleoside reverse transcriptase inhibitor TMC278 versus efavirenz. TMC278, an experimental HIV drug, worked just as well as efavirenz but with fewer side effects, although almost almost twice as many patients failed to respond to treatment while taking it.
Adverse events leading to discontinuation and serious adverse events possibly resulting from the drugs however were almost half for the TMC278 group compared with efavirnez. This is a very positive sign for Tibotec and Johnson & Johnson.
-Michael B. Sauter
Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) is still a holder of some drug companies and medical devices companies. Here are the Berkshire Hathaway biohealth positions as of September 30, 2009:
- Becton Dickinson & Co. (NYSE: BDX) 1.2 million shares, same as last quarter.
- GlaxoSmithkline (NYSE: GSK) 1.51 million shares, same as before.
- Johnson & Johnson (NYSE: JNJ) was just over 36.91 million shares; Same as last quarter and still well under the 62 million shares at one point in 2008… probably held more as a consumer goods rather than for medical device and drug exposure.
- Sanofi Aventis (NYSE: SNY) more than 3.9 million shares, same as before.
Warren Buffett’s newest full stock holdings in Berkshire Hathaway Inc. (NYSE: BRK-A) are available here.
JON C. OGG
It used to be that pharmaceutical jobs and medical device maker jobs were among the best and most immune of all sectors in the economy. They paid well, there was job security, the benefits were solid, stock option and retirement plans were always growing, and on. That is still the case in many positions inside those companies. But mergers, competition, efficiency, redundancy, and a new spending environment are changing this for many jobs in these once-safe sector.
Mergers have led to many “efficiencies” to be realized, and allowed “redundancies” (i.e. low-yield jobs and departments) to be eliminated. And now there is an ongoing threat to the sector from Washington. While the target has gone away from all of healthcare to health insurance, we are still seeing the announcement from major companies of more job cuts. We have compiled a few of the latest found announcements, ad this is just a part of the whole pie.
AstraZeneca PLC (NYSE: AZN) is reportedly offering buyouts “to thousands of its near-5,000 workers” from its U.S. sales force.
Pfizer Inc. (NYSE: PFE) has outlined more job cuts from its Wyeth combination as part of a projected 15% cut to the combined Pfizer-Wyeth team. What this number will ultimately come to is still unknown, and Pfizer’s head count had already fallen by over 6,000 to 75,400 at the end of last quarter.
Boston Scientific (NYSE: BSX) had job cuts a couple years ago, and it appears that the job cuts may not be over. Recent health reform legislation from the Senate Finance Committee was noted by its CEO as being an event which could potentially trigger another 1,000 to 2,000 job cuts.
Bristol-Myers Squibb Co. (NYSE: BMY) has been in an ongoing 10,000 layoff mode since last year, but in the last week came word that about 25% of its Abilify antipsychotic drug sales force after an evaluation from its co-marketing pact with Otsuka Corp. These were recent cuts and are still unquantified.
Eli Lilly and Co. (NYSE: LLY) announced last month that it is targeting $1 billion in savings… with the elimination of up to 5,500 jobs total by some time in 2011.
This summer came the announcement from Johnson & Johnson (NYSE: JNJ) about its plan to cut up a range of 3,615 to to 4,800 jobs. That is a small amount considering the number of deals it has made and considering it has 120,000 employees.
JON C. OGG
OCTOBER 20, 2009
Palomar Medical Technologies Inc. (NASDAQ: PMTI) has seen better days. The company disclosed that Johnson & Johnson (NYSE: JNJ) dropped its partnership and licensing for Palomar’s home-use light-based devices used to reduce or reshaping body fat including cellulite, reducing skin aging appearance, and the prevention of acne.
J&J cited the primary reason for dropping the partnership as being “weak economic conditions” in the disclosure. The sad part about this is that the new development is probably going to put a serious dent in the market for home-use lasers. We were never contacted back by company representatives over pricing of models in June, but Palomar’s $120+ million cash arsenal is probably going to be used up faster now on a standalone basis if it cannot secure a new partner. And J&J probably would not have dropped the deal if sales were tracking well.
The full description of the news is available at 24/7 Wall Street, but the damage is being done to the stock. Palomar shares are down some 15% at $12.90 on the news. and it is seeing exponential trading volume.
JON C. OGG
OCTOBER 16, 2009
Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) still holds healthcare and medical and drug related companies in the Berkshire Hathaway portfolio. Of these, some are health insurance, two are drug, one is a medical and consumer products conglomerate, and one is medical products. Any changes in the position notes are during Q2 for the period ending June 30, 2009 and are compared to Q1.
Buffett’s got some drugs. Sanofi Aventis (NYSE: SNY) is more than 3.9 million shares, which looks same as Q1. He holds GlaxoSmithkline (NYSE: GSK) as 1.51 million shares, also the same as before.
Johnson & Johnson (NYSE: JNJ) is one we think Buffett holds for its consumer products mostly, but he has grown his stake here to rival what it once was. The new holdings are about 32.5 million. This is above the prior 28.6 million shares from Q1 but still way down from the 62 million last year.
Becton Dickinson & Co. (NYSE: BDX) appears to be a new holding over last quarter according to our records. Berkshire holds 1.2 million shares, even though the Fed Filing listed this one as “Beckton Dickson” in the filing. B&D is a medical technology company that develops, manufactures, and sells medical supplies, devices, laboratory equipment, and diagnostic products.
Buffett still has some health insurance operators, although he has lightened up here from a quarter ago. Wellpoint Inc. (NYSE: WLP) is 3.5 million, which is down from the 4.7773 million shares in Q1. United Health Group (NYSE: UNH) was listed as 4.5 million, down from over 6 million in Q1.
Since Buffett is getting closer and closer to 80 years old, he’s probably getting more interested in various aspects of healthcare as each day passes.
JON C. OGG
AUGUST 14, 2009