Thursday, May 31, 2007

Pfizer and GSK shares can only go up from here?

Story here on bloomberg.

End of the evergreening trend? WSJ blog handicaps Xyzal

Pharmalyst had previously posted about the faltering of some of big pharma's evergreening efforts. Per this post on the WSJ health blog, looks like UCB & Sanofi's Zyrtec to Xyzal switcheroo efforts are likely to stumble.

Chantix Pricing in China

Well, my little poll was not of much help in guesstimating the price of this product in China (too few & scattered responses - but thanks anyway!). Pharmalyst was initially thinking that the price would be lower due to lower incomes and lower costs of cigarettes in China. Also in markets like China & India one has to look at the fakes that will inevitably enter. If the product were priced at $40 in China, then presumably fewer counterfeiters would be tempted to enter the market.

However after considering the poll and other factors, Pharmalyst believes that Pfizer will price this product at the $300 level in China (at least initially). The Cutler & Gleaser study points out that smoking rates tend to decline with increasing incomes. However this only happens on the upper part of the income scale. On the lower part of the income scale, smoking rates actually rise with increasing incomes given that the product suddenly becomes more affordable. Given GDP and other figures, a majority of China's smokers will presumably fall in this bucket. So the customer segment that is most likely to want to quit is the really high income segment and this segment will probably try Chantix if things like quitting cold turkey fail. And this upper income segment will probably be willing and able to pay the $300 for 12 weeks price tag.

From a counterfeiting standpoint too, the $300 pricing may not be so bad. If the product were priced at say $50, it would make it a mass market product and would still be attractive to counterfeiters given the larger volumes. Finally, pricing the product at the same levels as in Europe & US ensures that incentives for arbitrage/parallel trade/re-importation are minimized.

The US figures show that roughly 10% of smokers are likely to try Chantix over the next couple of years. Given lack of DTC and lower income levels the percentage of people in China who may try this product will be a fraction of the US/Europe figures. Even if only 0.1% of China's smokers were to try this product by say 2010, that works out to roughly $90 million in revenues if this product is priced at $300 (given that China has 300 million smokers!).

Friday, May 18, 2007

Chantix Pricing in China: Pharmalyst Reports....

....You decide by taking the poll at the end of the post.

Hat Tip: Pharmagossip for link to survey widget.
Data Sources:
1. WHO Tobacco Atlas
2. UN Human Development Index 2006

Thursday, May 17, 2007

End of the "evergreening" trend?

The WSJ Health Blog has an interesting post today regarding how Sanofi's efforts to switch people from the now generic Ambien to the more expensive Ambien CR are faltering. A few weeks earlier, there were reports regarding the lackluster Q1 sales of JNJ's Invega.

Looks like aggressive managed care/PBM efforts are beginning to see some success in getting customers to switch to/stay on cheaper generics when the brand extensions are of marginal/questionable benefits. Besides managed care, media & bloggers like Dr. Howard Brody are actively questioning such tactics (see interesting post from Dr. Brody's blog here). Per Pharmalyst's recollection, the last really successful evergreening effort was the Prilosec to Nexium switcheroo by Astra Zeneca.

Perhaps the new evergreening model is in the form of combination molecules (Vytorin, Caduet etc). How long before managed care "manages" this? Also Pharmalyst expects more generic mfrs to launch combination generic molecules.

Wednesday, May 16, 2007

Chantix/Champix - Developed country sales

In a previous post Pharmalyst had guesstimated that Pfizer with its field force and DTC efforts would be able to persuade around 4.5 million (out of 45 million) adult smokers in the US to try their smoking cessation drug Chantix. If 65% of these smokers take the full course, this works out to about $775 million in US sales for Pfizer. Pharmalyst estimates that Pfizer is on track to reach this figure by 2009/2010.

Obviously a big determinant of total sales for this product (known as Champix in most markets) will be its overseas sales. In this post Pharmalyst attempts to look at what the numbers in developed country markets might look like.

Pricing: Previously Pharmalyst had argued that the pricing of Chantix will be similar to the US price (though typically in many such markets prices are lower than US prices due to the bargaining power of single payer systems). This hunch is based on the fact that the product will be priced relative to the price of cigarettes. In many developed nations, cigarettes are even more expensive than those US states that tax tobacco heavily. The US average price for a pack of 20 Marlboro cigarettes is $3 to $3.99. The price is similar in most EU nations. In the UK, the price is higher than $5 (source: WHO tobacco atlas). Also Pharmalyst expects that many of the single payer systems in other markets will not initially reimburse this product or require smokers to have tried other methods before reimbursing this product (like many US insurers). Even if some of the systems do decide to reimburse, Pfizer will have some bargaining power as this is the only drug in class currently.

Market Adoption: Pharmalyst believes that in many European markets, where the smoking rates are higher than the US, the adoption rate of this product will be lower (though to be sure in recent years anti-smoking regulations and attitudes in Europe have tended to converge with the US). One very interesting paper that Pharmalyst read regarding country to country comparisons is titled "Why do Europeans smoke more than Americans?". The paper was published by the National Bureau of Economic Research and authored by economists David Cutler & Edward Gleaser of Harvard U. You can download this fascinating paper here.

The fact that smoking rates in Europe are higher than the US is somewhat paradoxical given that in most other health measures (such as obesity rates), Americans tend to have worse numbers. This is even more remarkable since American smoking rates were higher than Europe's in the sixties. According to Professors Cutler & Gleaser, almost half of the disparity is due to the differences in beliefs about the health effects of smoking. In the year 1994, 91% of the US population (and 83% of smokers) believed that smoking is harmful. In Europe by contrast, only 84% of the population ( and 73% of smokers) believed that smoking is harmful. Presumably the numbers for Europe have converged with the US in the ensuing decade but given more recent smoking rate data, differences still remain.

For each developed nation market, Pharmalyst will discount the US adoption rate by a factor proportional to the excess smoking rate in the country (over the US) to arrive at a potential market adoption rate. Further, given that the US allows DTC advertising and most other markets do not (the other exception being New Zealand) , Pharmalyst guesstimates that the general adoption rate will be about a third lower than the US (in the US, Pharmalyst's assumption was that about 1.5million of the 4.5 million customers were acquired via DTC campaigns).

Projected Developed Nation Revenues: Based on these assumptions regarding the market adoption rates and pricing, the calculations for developed nations is provided in the spreadsheet below. For existing smoking rates, Pharmalyst used the tobacco atlas data provided by the WHO. For the US, there are some discrepancies between the WHO numbers and the CDC numbers that Pharmalyst has used before. As this is just a back of the envelope calculation, Pharmalyst stuck to the CDC numbers for the US. These rough calculations reveal that the total sales in the US and other developed markets will be about 2.5 billion dollars!...Perhaps the market adoption rate in countries like France, Germany, Japan & Korea may be lower than Pharmalyst's projections. Even then this product is perhaps on track to generate north of $2 billion in annual revenues...and Pharmalyst guesses that Pfizer could reach these levels by the year 2010 or 2011. The model also doesn't include numbers from large developing nations like China and India (subject of future post).

What could go wrong with this picture: One issue is that the early success with this product in the US could be just a passing fad...perhaps after the initial success, many of the quitters go back to smoking, the reputation of the product suffers and potential new customers stop trying Chantix/Champix.

The second challenge to Chantix will come from the couple of competitors in the pipeline...for example Novartis recently paid big bucks ($500 MM) to acquire exclusive rights to market Cytos biotech's anti-smoking vaccine. If these vaccines are proven safe, they could really be Chantix killers...With Chantix, a wannabe quitter has to stay motivated to take the full course and other factors like counseling are key to success. With a vaccine, once you take the shot, then factors like lack of willpower may not be that pertinent. However the safety hurdle will be higher for a vaccine compared to a pill which can be easily discontinued if the side effects can't be tolerated easily. Pharmalyst will be eagerly watching out for any news regarding safety/side effects of the Novartis vaccine.

PS: Pharmalyst welcomes reader comments/e-mail (incl. anonymous) on this & other posts (especially the couple of readers who according to Google Analytics are from Basel & Lucerne. Pharmalyst guesses that these readers may be somehow connected to Novartis and therefore may have insightful comments...esp on the Cytos deal).

Saturday, May 12, 2007

Purdue Pharma - A pusher of another kind

Another rather harsh Bill Maher clip (pharma bit towards the end). Warning: Rated R.

NYT: Psychiatrists, Children and Drug Industry’s Role

NYT's GREAT piece (registration) on the above topic has received wide coverage in the bloggosphere. Below is a link to what Bill Maher had said a while back on use of psychiatric drugs in children. Rather harsh but definitely a grain of truth.
Warning: Non PC and definitely non PG-13 content. Enjoy or Weep!

The making of a quiet blockbuster - Update

A few weeks back Pharmalyst had posted about the makings of a quiet blockbuster at Pfizer (Chantix - their new smoking cessation drug). Based on past CDC surveys of smokers, Pharmalyst had estimated Pfizer would probably enlist 2.6 million smokers to try Chantix and perhaps 65% of them would complete the full course and generate around $447million for Pfizer (@$265 per course).

Well, Pfizer's Q1 numbers are in and Pfizer reported $162 million in sales ($145 million in the US and $17MM international). Annualizing those figures, it does appear that Pfizer will generate around $580 million in annual sales (though to be sure the Q1 numbers probably included a number of people who wanted to quit smoking per their new year resolutions - so the annualized US figure will be less than 145*4). Ever the consummate CYA artist, Pharmalyst had caveated his $447 million estimate with the following statement:

"The actual figure could easily be double that (or even more, given the total potential market size) if Pfizer's DTC advertising succeeds in a big way. "

With Pfizer on track to generate around $550 million without a branded DTC campaign (currently there is an unbranded campaign), Pharmalyst would estimate that they will probably reach around 3 million patients. If their branded campaign is reasonably successful, they might increase their patient base by 50% to 4.5million. If 65% of these 4.5 million patients complete the full course of Chantix, this works out to around $775 million in US sales alone!

Coming soon on this topic: 1.Estimates for other developed markets 2. Estimates for some large developing markets (China reportedly has 300 million smokers and looks like Pfizer wants to launch this product in China to coincide with the least that was Hank McKinnel's strategy)

Sunday, May 6, 2007

The case for debt

Sorry for not posting last week...just finished the finals....phew!

A few days back Pharmagossip had an interesting post regarding Big Pharma moving into debt. The post referenced the following Reuters item which talks about Astra Zeneca's decision to go into permanent debt following the chunk of change they plunked down for MedImmune. The move was praised by many financial types such as David Beadle, analyst at UBS who said:
"Astra are partly responding to what they are being told by the investment community, that you need to be progressively geared". The same article also quotes GSK CEO Jean-Pierre Garnier saying "Yes, some investors would like us to gear up our balance sheet."

The case for levering/gearing: The case for leverage is clear to anyone who has flipped a condo before the recent bust. You borrow at low rates, buy real-estate and flip it in a couple of months for a substantial gain. Use part of the proceeds to pay your debt and keep the rest for yourself...all for a very low initial investment of your own money.

For Big Pharma majors like GSK, J&J, Merck, Pfizer etc, the case for more leverage is clear. If you take a company like GSK, the return on average assets was 20.84% in 2006 according to Google finance. For Merck & Co, this figure was 9.92% in 2006. Both GSK and Merck have a debt rating of AA. Only in recent months has Pfizer's rating been cut from AAA to AA. With an AA rating, Big Pharma can borrow at extremely low rates (around 0.68% higher than Uncle Sam according to this article on Bloomberg). So debt makes sense for Big Pharma. They can borrow at 6%, invest the money in their own business, and earn anywhere from 9% to 20%.

Of course the fact that Big Pharma can borrow doesn't necessarily make it good for investors. Investors could achieve the same effects of leverage by borrowing themselves and using the borrowed money to invest in the unlevered shares of Big Pharma (to make the same returns). The reason that it makes sense for Big Pharma, rather than the investor to borrow is taxation (interest paid by Big Pharma on debt is tax-deductible. For investors, only mortgage interest is tax-deductible...and only in some countries like the US). More academic stuff on capital structure here.

How much to lever: Exactly how much to lever is harder to determine. As the company borrows more, its tax benefits become greater due to greater interest payment deductions. However more borrowing will cause Pharma's debt ratings to be downgraded and will raise interest rates on debt. At higher debt levels, there are also other costs of financial distress that make borrowing unattractive. Given that there is a trade-off between positive and negative effects of debt, there is an optimal debt to equity ratio for a firm. Exactly determining this is more art than science.

That being said, based on the book value (in practice one should look at the market value), it does appear that the current levels of debt at Big Pharma are too low. According to Reuters, the average Long-Term Debt to Equity ratio at a Big Pharma company is only 0.27 compared to 0.59 for the S&P 500 companies. So it does appear that Big Pharma should lever up from current levels, if they want to maximize returns for shareholders.

Why Big Pharma doesn't like debt: Despite people like GSK's Garnier making the right statements, why has Big Pharma resisted this so far? As anyone with a student loan (or other kind of debt) already knows, debt puts tremendous pressure. Given the strong cash flows, Big Pharma managers are not really forced to take on more debt. Their thinking seems to be something like "Why take on more debt for shareholder's benefit when we can get by without debt and a lot less pressure on us?"(see here for a slightly related New Yorker cartoon).

AZ's Statement on Debt: While in general more debt is in order, Pharmalyst is not really sure about AZ. Ideally they should have increased their leverage while in a position of strength (where they really didn't need the money but were increasing debt to maximize shareholder returns). With the MedImmune acquisition though, they are being forced to take on more debt. This probably will increase the cost of debt and make it less attractive for their shareholders.