Generic Drug Wars… Is Dr. Reddy’s The Answer? (RDY, TEVA, GSK)
Generic drugs are just one of the many combined issues that are coming front and center in the world of healthcare reform. Frankly this is not a new notion. Not all. This weekend came a feature in Barron’s “Asian Trader: Pill Maker That’s Set To Pop” calling Dr. Reddy’s Laboratories Ltd. (NYSE: RDY) of India the next big drug play for investors. We wanted to look closer under the hood here.
The Indian generic drug company’s ADR closed at $24.61 Friday and Barron’s noted two analysts with big price targets: one giving it room up to $29.63 and and another implied rupee price we pegged around $30.82.
Sales are expected to approximately double to around $3 billion by 2013 and the waves of name brand drugs coming off patent in the U.S. may offer some added hope there. That is the biggest wild card with many noting that generics have a chance to capture a part of what is put at $70 to $80 billion.
Dr. Reddy’s is thought of by the US investor public as a generic player, but it has its own products. It produces finished dosage forms, active pharmaceutical ingredients and intermediates, and biotechnology products; and it conducts R&D in cancer, diabetes, cardiovascular, inflammation, and bacterial infection.
There are some issues here in other drug makers. Teva Pharmaceutical Industries (NASDAQ: TEVA) is perhaps the best generics player out there with a whopping $53 billion market cap today versus about $4.1 billion as Dr. Reddy’s market cap.
Teva is a large customer and Dr. Reddy’s also has a distribution pact with GlaxoSmithKline (NYSE: GSK) for emerging markets and there are some who expect GSK to take a significant stake in the Indian drug maker. Teva’s stock is right around $60 and analysts on average have a price target of $63 and the highest target seen is $70.00. If Teva gets more downgrades on valuation, it seems as though it could pull Dr. Reddy’s down simply as the best can drag down or pull peers higher.
If the markets are flat or solid, it seems that Dr. Reddy’s may have a 2% or so Barron’s-pop. Our problem here with this one is that Dr. Reddy’s shares are up almost 200% in the last year. Its 52-week range is $7.27 to $27.33.
Dr. Reddy’s may have more room to run, but the big move has probably been seen. The recalls may be behind and they may not, ditto with FDA scrutiny. The stock is not cheap by some Indian company valuation standards, so it seems that waiting may offer better risk-reward here than chasing.
JON C. OGG
InterMune Volatility Compression (ITMN)
InterMune Inc. (NASDAQ: ITMN) has shown some very interesting options trading, and the trading looks to be a bet against all that huge volatility we have seen.
Joe Kunkle of OptionsHawk.com noted:
- ITMN with a 2,000X4,000X2,000 contract butterfly call spreads at the March $25/$30/$35 strikes. This trade bets on volatility to collapse, which will happen after the March 9th FDA meeting on it’s lung drug pirfenidone, given priority review for treating the chronic lung disease idiopathic pulmonary fibrosis, a disease impacting around 200,000 people in the US and Europe. Lazard Capital feels there is more than a 50% chance the drug gets approved, and has a $25 target for shares. However, the FDA may require post-approval studies for indications of effectiveness. It also sees shares doubling to $30 , currently trading at $15. The trade cost a debit of 50 cents, and offers profit from $25.50 to $34.50 in shares, with max profits at the $30 body strike, which offers around an 800% return. Implied volatility stands near 250% ahead of the event, and the straddle is pricing in around a 55% move in shares. Another large trade today was a buyer of 4,000 March $20 calls at the $2.55 offer. 20,996 calls and 3,348 puts have traded on the day, 8X average call volume.
It is just past noon and InterMune shares are down 4.1% at $14.70 on 975,000 shares. The 52-week range is $10.48 to $18.14 and the average stock volume is about 760,000 shares.
Just last week we saw comments from the company. Chairman and CEO Dan Welch noted, “Fourth quarter and recent events have been highlighted by the very important developments related to the regulatory progress of pirfenidone for the treatment of patients with idiopathic pulmonary fibrosis, or IPF. Our NDA for pirfenidone was granted Priority Review status on January 4, and is scheduled to be discussed at an FDA advisory committee meeting on March 9, 2010. If approved by the FDA, pirfenidone would be the first approved medicine for the approximately 100,000 Americans who suffer from this terrible disease. Regarding Europe, we currently expect to submit a Marketing Authorization Application (MAA) for pirfenidone in the European Union in the current quarter.”
JON C. OGG
Two key Analyst Call in BioHealth Space (DNDN, HGSI)
We have seen two very key biotech analyst calls this morning, and shares of both are responding. Dendreon Corp. (NASDAQ: DNDN) and Human Genome Sciences (NASDAQ: HGSI) were both given positive brokerage initiations this morning.
Dendreon Corp. (NASDAQ: DNDN) is seeing gains this morning after the stock was started as “Overweight” and $46 target at JPMorgan. The call is based upon a belief that PROVENGE will be approved for advanced prostate cancer. This is actually not the highest price target as a $50 target does already exist, but this implies a 42% upside to the target price versus the $32.36 closing bell price on Friday. Shares are up 2.6% before the open on this call.
Human Genome Sciences (NASDAQ: HGSI) was resumed at “Buy” with a $35 price target at BofA/Merrill Lynch. The belief here is that its Lupus drug BENLYSTA will be approved and a focus on its other franchises with more room for upside. The $35 price target implies upside of about 18.6% to Friday’s closing price of $29.47. The 52-week trading range was $0.45 to $32.07. Shares are only indicated up so 0.5% this morning before the open.
JON C. OGG
Buyout Rumors Resurface in Biotech, Maybe (DNDN, MYGN)
Sometimes it is the action seen in stock options gets traders moving more than the action in the stock. With more commentators on CNBC and other media outlets talking about ‘elevated options trading seen in…’ it gets even more on alert. From our best read today, that seems to be the case in Dendreon Corp. (NASDAQ: DNDN) and Myriad Genetics Inc. (NASDAQ: MYGN). There has been talk of ‘buyout rumors’ but we would first and foremost stress ‘caveat emptor’ when it comes to this.
Dendreon shares are up only 1.4% before the closing bell at $32.46 and not even on any crazy volume. But there was a new high today of $32.62. So far we have seen more than 18,000 CALLS and more than 6,000 PUTS trade today… but again, expiration may be part of the issue here.
Myriad Genetics saw more than 3,000 CALLS trade, but 1,100 of those were in the MARCH 2010 $24.00 CALLS, almost $2.00 above today’s share price. Myriad was up over 3% late in the day at $22.30, but its 52-week trading range is $20.62 to $47.08 and it traded about 150% of normal trading volume.
These ‘buyout rumors’ get tossed around far too liberally. Today was options expiration date and lots of the ‘unusual activity’ is frequently nothing more than expiration roll-outs in the last few trading days of each month when options are expiring. We’d also note that if there were genuine rumors of substance rather than of hope then you would be seeing much more than just a few thousand options contracts and more than 100% or 150% of normal volume.
Anything is possible, particularly in biotech. But for traders to really be honing in on buyouts, there is generally far more interest than this.
Earnings is getting tiring and the world is tired of it…. That being said i am going to do an early preview and have it ONLY focused on the big retail names so that it is targeted. That is the bulk of the earnings of big companies next week anyhow.
JON C. OGG
Rigel Attacks Rheumatoid Arthritis with AstraZeneca (RIGL, AZN)
Rigel Pharmaceuticals (NASDAQ: RIGL) may be the biotech winner this Tuesday. The company has signed a pact with AstraZeneca (NYSE: AZN) which could ultimately bring in about $1.25 billion if all targets are met. This pact is a licensing agreement for Rigel’s rheumatoid arthritis drug R788 or fostamatinib disodium.
Rigel said last year that its R788 significantly improved rheumatoid arthritis symptoms in patients in a phase II study and Rigel has been seeking a development partner to help finance phase III studies.
AstraZeneca will design a global phase III study for the RA drug and believes that the study will be initiated in the second half of this year. We will double-check the goal dates here because the new drug application target date appears to be 2013 for the FDA and European Medicines Agency.
AstraZeneca is making an upfront payment of $100 million as the first part of the pact. There is also an additional amount which can go up to an additional $345 million if certain milestones are achieved. But the big kicker here for Rigel comes in the form of up to an additional $800 million if specific sales are achieved as well as significant stepped double-digit royalties on global sales.
Rigel had a market cap of about $488 million based on a close of $9.43 on Friday. The company effectively has no sales and its September-2009 balance sheet lists approximately $156 million in cash and short-term investments with effectively no considerable long-term debt.
Rigel closed at $9.43 on Friday and we have shares trading up 6% at $10.00 ahead of the opening bell. Its shares have traded in a range of $4.19 to $14.75 over the last 52-weeks.
JON C. OGG
FEBRUARY 16, 2010
Dividends Coming In Biotech & Pharma? (WCRX, AMGN, MRK, PFE, PPH, BBH)
Many investors have been focusing on the number of dividend raises we have so far seen since the end of December. It is the perfect vote of confidence issued by a company, much more so than a share buyback plan. The dividend means “we will be able to this rate over and over” for investors. There have been very few big moves in the BioHealth arena. We have two very interesting dividend candidates. Amgen Inc. (NASDAQ: AMGN) as the world’s largest independent biotech stock, and Warner Chilcott plc (NASDAQ: WCRX) as perhaps the newest and best up and comer in the pharmaceuticals sector.
Neither pay a dividend. Not yet. It would seem that the most likely candidate of the two would be Warner Chilcott because companies like Merck & Co. (NYSE: MRK) and Pfizer Inc. (NYSE: PFE) do pay dividends with roughly a 4% yield. Amgen is opting for share buybacks right now and its peers are not known for being thge greatest of the world’s dividend candidates. We wanted to take a look at each in a deep review of the basics that allow for dividends.
There is a precedent here. The two key ETF products we have used to follow the sector are in the HOLDRs family, which are the oldest of the drug and biotech ETF products. And they are liquid, mostly and usually. The Pharmaceutical HOLDRs (NYSE: PPM) pays dividends, but these are irregular and are dependent upon which shares are making quarterly distributions through each quarter. Then there is the Biotech HOLDRs (NYSE: BBH), which are currently less liquid than what we have seen in the past. Dividends are more sporadic here, but they are present.
WARNER CHILCOTT
Warner Chilcott plc (NASDAQ: WCRX) seems to quietly and rapidly emerging as one of the greatest drug companies on the scene in years. Many pharma and biohealth investors still do not even really know the company. If all goes well and according to plan, the company may be one of the best value stocks out there in the land of pharma and biotech. The company pays no dividend, but after we get a couple of more quarterly adjusted balance sheets and earnings reports behind us it seems as though the company will want to join Merck & Co. (NYSE: MRK) and Pfizer Inc. (NYSE: PFE) with a dividend to help further get on the map.
The stock has done very well since it completed the acquisition of the global branded pharmaceutical business from The Procter & Gamble Company (NYSE: PG) on October 30, 2009. Its most recent guidance is as follows for 2010: Adjusted total revenue for 2010 after the impact of its distribution agreement with LEO Pharma A/S in range of $2.9 to $2.95 billion; Adjusted gross margin of 88% to 89%; Total SG&A expenses in the range of $1.2 to $1.25 billion; total R&D in the range of $180 to $200 million; net income of $190 to $215 million; adjusted cash net income in the range of $842 to $867 million; and using 255 million ordinary shares adjusted cash net income per share of $3.30 to $3.40 per share for the full year 2010.
We would think it is safe to assume that the company wants to get a couple more quarters to pass before a dividend is launched, but barring any other mergers we would expect the company to get on the map with a dividend. With shares close to $25.00, a 4% yield would be about $1.00 per year of that $3.30 to $3.40 per share in 2010 earnings. Thomson Reuters has estimates of $3.37 EPS and that would give a forward P/E ratio expected of less than 8-times earnings. An estimated guess is that the dividend will start at about $0.60 to $0.75 per year, for now.
AMGEN INC.
Amgen Inc. (NASDAQ: AMGN) is the world’s biggest independent biotech by market cap. Yet the stock has been stodgy enough and its anemia franchise has been under fire enough that Amgen almost feels like a good old-fashioned Big Pharma stock now. It seems like an unlikely dividend stock on the surface and not just because it wants to be thought of as a biotech that does not pay dividends. So far, the company has chosen to conduct share buybacks to deploy cash and it is not in a hurry to begin paying a dividend.
In the investor Q&A of its investor relations site, the phase is there: “Amgen does not pay a dividend on stock, and does not foresee doing so in the immediate future.” There is an issue though and that is that the expected earnings growth leaves more and more room for Amgen to begin rewarding its shareholders. It recently announced a $5 billion share buyback, on top of the $1.2 billion remaining at the time still authorized for buybacks. But share buybacks were the shareholder-friendly actions of 2007 to 2009. In the new normal, the dividend may matter more to holders who want to get money back from companies. Amgen trades at a mere 11-times 2010 estimates from Thomson Reuters.
We do not want to say that Amgen has been dead money for five years, but it has been very quiet money. For more than 3 years the stock has had a hard time staying above $60 for very long. And for some time we have noted that Amgen is effectively valued more like a Big Pharma stock than a biotech stock. With $5 billion in cash flow and with a mountain of cash, it can afford a dividend on top of its debt and on top of its buyback plans. Both Merck & Co (NYSE: MRK) and Pfizer Inc. (NYSE: PFE) yield close to 4%, and Amgen could easily afford to pay close to 2% or $1.00 per share for its initial dividend rate.
There are two issues which would keep Amgen from paying a dividend for years. The first is a big acquisition, but the company likely knows that this would likely take its stock lower as we have seen in most buyer situations. Amgen could also embark on a huge debt pay-off in the future. That is also shareholder friendly. But initiating a dividend, and a noticeable one, might be the best effort the company could make.
JON C. OGG
FEBRUARY 11, 2010
Cell Therapeutics Facing Tougher FDA (CTIC)
Cell Therapeutics, Inc. (NASDAQ: CTIC) is getting clipped on Pixantrone this morning. The company was told by the FDA that there is limited clinical data on its proposed cancer drug, and that there were higher side effects and higher death incidents. Unfortunately, this comes ahead of a panel review date that is set for Wednesday, February 10, 2010. We have late April, on or about April 23, 2010, as the final decision date from the FDA for Pixantrone.
Pixantrone is the company’s pending treatment of relapsed and refractory non-Hodgkin’s lymphoma, although this is indicated for those who have seen their disease progress after having received treatment with at least two other therapies.
Cell Therapeutics had raised about $30 million in January via securities sales. Pixantrone was under FDA Fast Track and it has an Orphan Drug designation under EMEA in Europe.
The FDA noted that the main trial arm ended early due to a smaller number of enrollment, which is always a concern. This may not be a dead outcome yet, but this sets a bias of extreme caution going into Wednesday’s event.
At 9:45 AM EST we have shares down 29.4% at $0.743 on 23 million shares. Average volume is 12 million shares and the 52-week trading range is $0.05 to $2.23.
JON C. OGG
New Restless Leg Syndrome Review for XenoPort (XNPT, GSK)
XenoPort, Inc. (NASDAQ: XNPT) has a big day coming for its GSK1838262/XP13512 (gabapentin enacarbil) next week. The company has a date of February 9 for an FDA Prescription Drug User Fee Act (PDUFA) decision on its Horizant. This is the dated goal for the company’s New Drug Application for Horizant for the treatment of moderate-to-severe primary restless legs syndrome. Horizant is licensed to GlaxoSmithKline (NYSE: GSK) in the United States and several other countries.
There is one concern here… The company’s release last week noted that the GaxoSmithKline partnership may be in doubt because Glaxo has noted that it may end research on depression and pain treatments. GSK and XenoPort are discussing the next steps in the development plan for XP13512 in the neuropathic pain area and will disclose this development plan at a future date.
XenoPort shares closed up 3.4% at $19.01 Friday on 422,000 shares. Average volume is 337,000 shares, but the stock trading has been elevated over the last week.
Date Volume Close
5-Feb 422,100 $19.01
4-Feb 504,800 $18.38
3-Feb 373,200 $19.90
2-Feb 420,200 $19.99
1-Feb 216,400 $18.50
There is also a binary options event factored in here, although on far fewer options contracts than what you normally see. Here is the CALL and PUT volume for Feb-2010 expiration that expire on February 19, with data on the Friday volume and the open interest:
CALL Volume OpInt
17.50 44 1,006
20.00 167 1,995
22.50 170 1,938
PUT$ Volume OpInt
12.50 209 1,062
15.00 95 1,467
17.50 114 2,055
20.00 170 2,812
The stock did manage to close up for the week, which might be impressive considering the weak stock ticker tape action we saw this last week. It looks like the company still has $150 million or so in liquidity with revenues from partnership income looking very spotty and also looking like they are in the rear-view mirror. Analysts expect losses in 2010 and revenues of only about $63 million per Thomson Reuters consensus data.
XenoPort will be able to survive without GSK if push comes to shove. But the restless leg syndrome is not an area without controversy. Ask someone with it if they think it is real or not. Then ask one of their younger family members if they think it largely from inactivity or what the RLS patient consumes daily.
This PDUFA date may not seal the fate of XenoPort, but a very positive review will be of help. The stock has a 52-week trading range of $13.36 to $28.33 and a market cap of about $576 million.
JON C. OGG
AMAG Fights Back (AMAG)
AMAG Pharmaceuticals, Inc. (NASDAQ: AMAG) has had a very tough week, whether it was a market with a bad trading tape or not. The stock’s weakness was after an analyst from a relatively unknown firm called Summer Street downgraded the stock to Neutral from Buy over concerns that Feraheme patients are being hospitalized with severe allergic reaction events. Shares were above $45.00 on Wednesday, yet the stock went as low as $35 today before word that a rebuttal was coming. Then after the close, the company is out defending itself showing that the risks here are very low and may not be any different than previously thought.
After the close of trading today, the maker of treatments for anemia and imaging agents provided a safety update on Feraheme®. The company noted, “Since the commercial launch of Feraheme in July 2009, serious adverse events have been reported at a rate consistent with that contained in the U.S. package insert. Of the estimated 35,000 patient exposures to date, 40 serious adverse events have been reported, an approximate rate of 0.1 percent. No mortality signal has been observed. A single reported death occurred in a patient two days post-Feraheme treatment, which the Company does not believe was the result of Feraheme.”
Shares closed down 0.9% at $37.77 today, and shares are now up 5% at $39.75 in the after-hours trading session. Including the after-hours trading this one has traded 4.6 million shares today versus an average volume of 630,000 shares.
The drop today was not with as much volume as the stock traded over 8.5 million shares on Thursday. The 52-week range is $22.20 to $58.23 and the market cap here is $647 million as of the closing price.
JON C. OGG
Human Genome Sciences… When Insiders Sell Stock (HGSI)
Human Genome Sciences, Inc. (NASDAQ: HGSI) has been one of the great biotech success stories, with returns far dwarfing the 10-bagger or 1,000%. This went from a small genomics company to a company with what seems to be or likely to be the newest lupus treatment in a generation after (and if) the FDA approves of it. While management has been quick to quiet buyout rumors, the investment community for most of 2009 was betting or hoping that the company would be acquired.
Yet when you see insiders making share sales, and some significant share sales, it probably makes you think no real deal is on the table. In short, buying Human Genome Sciences here now better be for that pending FDA approval and for its pipeline rather than for a hope of a buyout. Here were the insider sales we have seen so far this month:
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