Option traders betting on BMS takeover/merger?

Tuesday's Wall Street Journal had an interesting article (subscription required) regarding some trading activity involving BMS options.

To quote a couple of excerpts:

• "About a month ago, we heard some rumors and there was some [options] activity and then it stopped," said Joe Kinahan, chief derivatives strategist for thinkorswim. Now we're starting to hear again that Bristol-Myers might be in play, that a few of the other drug companies are starting to take a look at it, and that seems to be bearing out in some of the activity we're seeing," he said.

• Almost 26,700 call options on Bristol-Myers changed hands yesterday, compared with only 2,800 puts, according to Track Data. Investors focused on November calls that convey the right to pay $30 a share for the stock in the weeks ahead.

BMS of course didn't comment and Sanofi's name was widely bandied. Given all the negative news regarding Accomplia, Sanofi does need something like Bristol's Apixaban to shore up its revenues (Plavix LoE in a few years and serious competition for Lovenox).

BMS is probably looking to stay independent given that they have all these new compounds in the pipeline (oncology, Factor Xa & DPP-4 compounds). They have certainly spread the co-promote deals around to reduce their attractiveness to potential suitors (with AZ for DPP-4 & with Pfizer for Factor Xa development). AZ is unlikely to do an M&A deal with BMS given that they just paid 15B for MedImmune.

That pretty much leaves Sanofi & Pfizer as the two most likely candidates interested in an M&A deal. Sanofi as a European company will probably have to pay a premium to Bristol's American shareholders compared to Pfizer - but that shouldn't be a problem at all given the weak dollar & the consequent appreciation of Sanofi's stock & cash position. Pfizer on the other hand may be more desperate. PFE probably needs all of the potential Apixaban revenues to offset its LoEs (Lipitor in 2011, Norvasc, Zoloft etc) & Bristol's heritage in the oncology area would be a good fit with Pfizer's emerging oncology pipeline. Other BMS products (Sustiva, Orencia) may also offer interesting combo molecule opportunities. According to some IMS data Pharmalyst has seen, Abilify too is seeing some commercial success. Certainly a BMS+Sanofi or BMS+Pfizer deal makes more sense than say a Pfizer+Wyeth deal. However it would have to be a friendly merger rather than an acquisition and that leaves the amount of efficiencies that can be extracted from such a deal in question.

Pfizer gets some adult supervision

According to this press release, Pfizer has elected two new directors to its board: James M. Kilts (former CEO of Gillette) and Suzanne Nora Johnson (former head of research at Goldman Sachs).

Pharmalyst's own view is that it is high time that Pfizer's board saw some changes of this nature. The previous board tolerated their previous CEO McKinnell for too long and let him walk away with an obscene pension package. At one time, their board included people like Frankin Raines (former CEO of Fannie May and who according to many had a key role in the accounting scandals in that company...to Pfizer's credit, Mr. Raines didn't stand for re-election once the scandals at Fannie May emerged).

If you look at Pfizer's current board (see here) it is clear that this board could use people like Mr. Kilts and Ms. Johnson. The board does have eminent scientists, academics and policy wonks. However on the corporate side (corporate strategy, finance, governance etc) it does seem to lack heavyweights with the notable exception of William C. Steere Jr. (he was their CEO before Mr. McKinnell). Based on what Mr. Kilts did at Gillette (& later the deal with P&G) and what Ms. Johnson did at Goldman, Pfizer's CEO could get some real adult supervision now.

These changes coupled with a few other things such as the ones below bode interesting times for Pfizer ahead.

• Selzentry being studied for RA
• Neurontin patent litigation heading to the supremes
• Chantix sales are smokin' hot :-)
• New CFO announced
  
• New head of R&D (To be announced)
  

Sanofi opens the R&D kimono

The WSJ Health Blog recently had an interesting post on a recent presentation made by Sanofi brass in Paris featuring their R&D pipeline. Besides rethinking their Accomplia strategy, Sanofi revealed a couple of interesting products.

One of these is a smoking cessation drug called dianicline. Perhaps Pfizer's Chantix/Champix will see competition from this drug before other products in this category (such as the Novartis/Cytos nicotine vaccine deal). Meanwhile, WSJ Health Blog just reported that the sales of Pfizer's Chantix are "on fire" in the US.

Another interesting product is a Zetia like compound - AVE5530. Sanofi wants to sell it separately and pair it with a statin. Sanofi plans to file the drug for approval in 2010. Given that Vytorin has been such a huge success, Sanofi ought to be selling the statin combo from day one. If they plan to file in 2010, they probably have already selected the statin to pair this with - either Lipitor or Crestor (Sanofi are unlikely to pair it with the generic simvastatin given the competetive positioning of this product wrt Vytorin). Since AZ is already working on other combo options for Crestor (with Abbott's Tricor), it is quite likely that this drug will be sold in combination with Pfizer's Lipitor. Exactly how much such a combo drug would benefit Pfizer is unclear to Pharmalyst given that Lipitor's patent is set to expire in the US in 2010. Merck and Schering have already announced that they will sell the Zetia Lipitor combo once Lipitor goes generic.

Chantix's Foibles

Yesterday Pharmalyst caught the tail end of what appears to be a teaser ad for Pfizer's smoking cessation drug Chantix. The ad aired around 7:50pm on the ABC networks in the US. The ad showed some thing like a hare and a tortoise & then the imagery of a cigarette being crushed with the Pfizer logo on the screen. The word Chantix wasn't mentioned & looked like some sort of a play on the well known Aesop's fable. Pharmalyst wasn't too impressed...but its early days with just the teaser ad being out there. The ad mentioned a website with the word fable in it. After some googling, Pharmalyst thinks it is http://followthefable.com. Looks like a crappy website...the website insisted on installing some software before Pharmalyst could view it and for a moment Pharmalyst wondered if someone was trying to install some hacking software on Pharmalyst's computer.

Meanwhile ABC news featured a rather unusual & bizzare story on Chantix here.

Isentress (Raltegravir) Pricing

We know that Pfizer's Selzentry (maraviroc) costs $10,585 per year (see Pharmalot's posting here). Any thoughts on what Merck's new integrase inhibitor Isentress will be priced at? Given that it doesn't have any kind of tropism test issues, perhaps Merck will price it higher than Selzentry. Further looks like Isentress does not have some of the safety issues Selzentry has (though the incidence of cancer in the trials was slightly higher). Will be interesting to see if Merck prices it like Roche's Fuzeon (20K per year) or whether they match Selzentry or end up somewhere in between. Pharmalyst welcomes reader comments on this.

Pharma Sector - In Private Equity's Crosshairs?

A while back, Pharmalyst had argued the case for big pharma to take on more debt. Today, FT.com reports that private equity groups now have their eyes on the pharma sector. The article quotes a leading industry consultant who states that these groups "are in discussions that could lead to the takeover of a large quoted drug company". He further revealed that "there was discussion about how to sell the research functions of pharmaceutical groups, boost their sales and efficiency, gear them up and run them for cash".

If so, this is very interesting news. So far most of the private equity interest has been in the generics sector where the risks of new drug discovery & development are non-existent and the cash flows very predictable. However, after years of treading water, perhaps big pharma investors and these private equity groups are taking a second look.

One way to make sense of a private equity deal for a research-based big pharma is to spin off parts that are less risky and have predicable cash flows. Take for instance GSK. Even if one ignores the consumer health biz, they sell nearly 50 products. Out of the 23.2 billion pounds of 06 revenues, roughly 20 billion came from the pharma biz (rest from consumer health. See here.). The top ten drugs (such as Avandia and Advair) accounted for almost 10 billion implying that the 40 or so smaller products almost generated 10 billion. Arguably not much research or new risky development work is going on for many of these smaller products and they generate very predictable cash flows.

Unlike GSK's consumer health biz, these 'boring' products will not have much of a strategic fit with other buyers like a P&G & so would be ideal candidates for a private equity shop to take over. These private equity firms could really pay a premium to current GSK shareholders, load up the spun off company with debt, cut the fat and almost run it like a utility company. They could then use the strong cash flows to pay off debt. Of course even half of GSK's pharma biz is probably still too big for the private equity players to do a club deal....they probably are looking at a player much smaller than GSK. Also while with the sub prime & other issues while floating debt may have become difficult, looks like AZ was able to issue $9 billion worth of bonds last week. Interesting times ahead indeed!

Chantix/Champix - International Pricing & PR Scams

Pharmalyst had previously speculated on the pricing of Chantix/Champix overseas. My speculation was that Pfizer would perhaps target the upper income segment and therefore price it similar to US/Europe levels ($300 for 12 week course). Recently I checked with some fellow students (who were international and had the opportunity to visit their home country over the summer) whether Champix was being sold in their countries. Turns out that Pfizer (at least in some South American markets) is casting a wider net and targeting on both the upper and middle income segments. The price in a couple of markets appears to be around 60% of the US price according to my survey (n=2). That works out to $180 and correlates roughly with the cost of cigarettes in those countries. In the US this is priced roughly at 60 packs of cigarettes (pack a day for two months). Pricing in Latin America is using a similar approach it seems.

Meanwhile it looks like the Asian launch of this drug is under way and the PR arm of Pfizer is in full swing. Take a look at this puff piece in a UAE newspaper. According to this article:

"Dr Bassam Mahboub, incoming head of the national anti-tobacco committee, advised smokers against attempting to quit on their own."

Rather strange given that in most countries (US CDC Survey, UK NHS Surveys etc) cold turkey is the most effective method and with that method you don't deal with the side effects. Here is the head of the "national anti-tobacco committee" recommending that people don't try cold turkey and instead implying that they try stuff like Champix. And look at the Pfizer spokesman giving quotes that are not really backed up by the data. According to him/her:

"Smoking is not only a habit like many people would think. It is a real addiction and the smokers need medical help to be able to successfully quit," he said, promising that varenicline tartrate would "multiply your willpower (to quit) by four."

Gee I wonder if the UAE package insert makes that claim.

Medical financing: Subprime loans part deux?

The New York Times yesterday ran a fascinating story about how banks, insurers and doctors are now extending loans to people for various healthcare-related issues. You can read the full article here (registration required). To quote an excerpt:

"Zero-interest financing, a familiar sales incentive at car dealerships and furniture stores, has found its way to another big-ticket consumer market: doctors’ and dentists’ offices.

For $3,500 laser eye surgery, $6,000 ceramic tooth implants or other procedures not typically covered by insurance, millions of consumers have arranged financing through more than 100,000 doctors and dentists that offer a year or more of interest-free monthly payments.

Of course, going into debt to pay for medical procedures is nothing new for many people. And this type of financing is still only a fraction of the nation’s $900 billion market for consumer revolving credit.

But as the price of health care continues to rise and big lenders pursue new areas for growth, this type of medical financing has become one of the fastest-growing parts of consumer credit, led by lending giants like Capital One and Citigroup and the CareCredit unit of General Electric.

Big insurers, too, are devising new financing plans with various payback options. Upstart players have also aggressively cut deals with doctors."

As the movie "Sicko" and others have illustrated, besides large number of uninsured people, we Americans also have a significant number of under insured folks. Will this new lending market take off given such large numbers of the un and under insured? What is the next step for the Wall Street lenders in this? Securitize these loans like mortgages, auto loans and credit card debt and sell them off as CDOs to investors worldwide? Start selling credit default swaps on these :-)?

If this market were to grow, much of that growth would have to come from the subprime sector (the more wealthy are well insured and/or don't need the loans). In the event of rising defaults, it will be fun to watch say a bunch of Australian hedge funds trying to foreclose on a bunch of dental crowns in New Jersey!

As the NYT reports, banks, insurance companies and doctors are getting into the lending act. May be big pharma (which is sitting on buckets of money) too? Perhaps big pharma can extend its "patient assistance" programs to include loans. If your insurance company won't reimburse that $10,000 a year drug, big pharma can lend you the money if you are above a certain income level and don't qualify for their assistance. I'm kidding........but the way big pharma has invested its money lately, may be this is better for both patients and big pharma investors. I'm hoping that this "phoni patient assistance program" will be the subject of a future post on PharmaGiles.

And finally what happens when these loans go bad? Will there be a federal bail out? Boy that would be one convoluted way to expand govt subsidized health care!

Pfizer + Wyeth = ?

First things first - Thanks to insider for the hilarious picture on the left illustrating the trouble with mergers. As most readers of this blog have already read, there has been increasing talk in the egosphere and elsewhere regarding the potential merger of Pfizer and Wyeth (see here for the posting from Pharmalot). The genesis of this discussion was a note by Credit Suisse analyst Catherine Arnold suggesting that the lack of overlap between the two companies, the Alzhiemer's & other Wyeth pipeline products and the biologics capabilities of Wyeth would be well worth it for the Pfizer pfolks to splurge on.

A couple of semesters ago, Pharmalyst took a course in corporate strategy & the Professor had some interesting insights on why most mergers fail. According to her, most companies tout the cost savings that any proposed merger is likely to generate (by reduction of overlapping functions, facilities etc). However most of these cost savings barely cover the premium that the acquiring company pays. Then there are the merger related costs (integration of systems, severance packages etc). Once you add it all up, most mergers end up destroying value. She had a few interesting case studies to illustrate this (like the merger of Diamler and Chrysler). According to her, the only merger that generates value is the one that has what she called "unique synergies"...above and beyond the usual cost savings.

With that insight, Pharmalyst would like to present some numbers from Feb 2000, when Pfizer acquired Warner Lambert. This merger was has widely been viewed as a success.

Deal Size: $90 billion

Premium Paid: $30.6 billion (34% premium). There was also a break up fee paid to Wyeth (AHP then) of $1.8 billion

Combined market cap of the entity after the merger: $230 billion

Recent market cap of Pfizer: $170 billion (that is some amazing value destroyed over the years..don't forget that this includes Pfizer gobbling up Pharmacia and some other small companies & just one big divestiture of its consumer health business)

Annual Cost Savings Generated by Merger (from 2002): $1.6 billion

As you can see from the figures above the cost savings is hardly the factor that made this merger work. The redeeming factor for this merger was the drug Lipitor. Around the time of the merger, Lipitor had annual sales of around $5 billion. In seven years, this has grown to around $12 to $13 billion (though it is on its way back to 5!). This growth in Lipitor revenues was the unique synergy and the sole thing that justified the $30 billion premium paid.

I haven't had time to google the Pharmacia data but doesn't look like any Pharmacia drugs saw that kind of a spike in revenue (in fact Pfizer probably had similar expectations for the COX-2 franchise but that turned out to be quite the opposite!). Not sure what in Wyeth's current set of products can show the Lipitor kind of growth if Pfizer were to acquire them...unless Pfizer feels there are some gems in the Wyeth pipeline that it could grow dramatically and that the current valuation of Wyeth doesn't reflect those prospects, it is a safe bet that any such merger will destroy value.

At least the PR arm is working well at Astra Zeneca!!

Thanks to this post on Experimental Chimp blog, Pharmalyst recently became aware of how someone on the Astra Zeneca corporate network (someone in PR perhaps?) made some mods to the wikipedia entry on Seoquel.

Here is the before version:

"Quetiapine has the United States Food and Drug Administration (FDA) and international approvals for the treatment of schizophrenia, treatment as an adjunct to either Lithium or Divalproex, and acute mania in bipolar disorder. Quetiapine was first approved by the FDA in 1997. In October 2006, Seroquel was also approved by the FDA for the treatment of depressive episodes associated with Bipolar I (or Bipolar-II) Disorder and is the only agent approved for this indication as a single agent monotherapy. Despite a general National Institutes of Health recommendation against its use in children or those under 18, as well as a known risk that teenagers taking the drug “may be more likely to think about harming or killing themselves or to plan or try to do so”, Seroquel is controversially marketed to parents of moody and irritable teenagers in magazines such as Parade and TV Guide…"

Now here is the after version:

"SEROQUEL is indicated for the treatment of schizophrenia as well as for the treatment of acute manic episodes associated with bipolar I disorder, as either monotherapy or adjunct therapy to lithium or divalproex. SEROQUEL received its initial indication from the FDA for treatment of Schizophrenia in 1997. In 2004, it received its second indication for the treatment of Mania associated Bipolar Disorder. Seroquel is controversially marketed to parents of moody and irritable teenagers in magazines such as Parade and TV Guide…"

Wikiscanner reports, you decide. Wikiscanner is a new app started by a UCal graduate student that attempts to match Wikipedia edits to the networks those edits originate from. NPR's morning edition did a good segment on this today morning which you can listen to here.

Novartis, Glivec & the Indian Patent Board: Curry in a hurry version

If you want to read one blogger's insightful and interesting take on the Glivec issue in India, please read this post on the SpicyIP blog. Looks like the patent board rejected NVS application on the basis of some opaque definition of efficacy - which they refuse to clarify any further. Also looks like someone in the Patent office is now sitting on the panel that will hear Novartis' appeal thru the Indian patent process....so much for conflict of interest etc. Regardless of how sound the courts rationale in India, Pharmalyst does think that this could hurt their own pharma companies in the long run.




Hat Tip: Pharmalot

Can't build a better mousetrap in India?

So the Indian Patent office has refused to grant IP protection to the beta crytsal form of Glivec (Gleevec). Recently the high court in India refused to rule on a motion filed by Novartis stating that NVS should pursue the matter with the WTO appeals process (for which the Swiss government would have to become involved) rather than the Indian courts (Novartis can proceed with an appeal with India's Intellectual Property Appellate Board). More details can be found here.

While the beta crystal form may be marginal innovation at best, India should have granted patent protection to the initial version of Glivec - however at the the WTO rules had not kicked in at the time and the government there was pretty much looking out for their generic drug makers.

However sound the Indian Patent Office's judgment regarding incremental innovation in this matter may be - it better be prepared to face the unintended consequences of its decision. Under the new WTO IP regime, Indian drug makers are bracing for more competition from western multinationals. Many generic drug makers are trying to develop new molecules instead of making copycats of big pharma's gems. Take the intriguing case of Sun Pharma Advanced Research (SPARC). According to this Economic Times (an Indian newspaper) article, many of this company's Phase II molecules are incremental improvements on compounds from big pharma. For instance these guys are working on new forms of the anti-epilepsy medication Neurontin. The Indians could get a taste of their own medicine, if say the Swiss government were to deny IP protection to SPARC's "innovative" version of Neurontin or if SPARC's patents were challenged in India itself on the basis of the treatment Glivec has received there.

Has Pfizer lost its marketing mojo?

Quite a few blogger guns have been trained on the marketing arm of the drug giant recently. The Judge (John Mack) has added them to his league of undistinguished DTC advertisers. PharmaGiles has penned a funny post titled "Rigor Marketis". Yahoo's seeking alpha blog, references a Derek Lowe post and headlines that "Exubera Proves It: Pfizer's Marketing Can Get It Only So Far". Even the cafepharma boards have some postings regarding the departure of some high profile sales and marketing pfolks at Pfizer.


So, has Pfizer lost its marketing mojo? Exubera has some fundamental issues that no amount of marketing could fix (and to be sure Pfizer's management has cited bad market research as the cause of their flawed initial projections). Setting Exubera aside, Pharmalyst looked for other indicators of Pfizer's marketing prowess and below is a summary of what he found:

Chantix/Champix: As this post from Pharmalot shows, this drug is really generating a lot of prescriptions. Smoking cessation has historically been a category where initial high expectations have subsequently been dashed (Zyban, NRTs etc). Pfizer's low key unbranded campaign coupled with reps pounding the pavement has so far worked. Pharmalyst gives their marketing & sales group an A here.

Sutent: Perhaps the performance of this drug is best compared to Bayer/Onyx's Nexavar. Nexavar was approved before Sutent and Bayer just reported Nexavar's Q2 sales at $82.4 million (up 161%). Now compare that to Sutent's Q2 sales which according to their Q2 earnings release stood at a whopping $141 million - up almost 300%. This despite the fact that Nexavar has lots of good stuff going on for it in areas like liver cancer. Here their marketing & sales group gets an A+.

Viva Viagra: Their new ad has come under a lot of criticism and Viagra is losing market share to Cialis. Pharmalyst agrees with most bloggers that the Viva Viagra ad (which you can see here) is definitely not an "ethical pharmaceutical" ad. But as an ad for a "recreational" drug, it is really good. Catchy tune, all American roadhouse, macho imagery all provide tonnes of self expressive benefits to the target audience (in this case somewhat young men who do NOT have ED). Their marketing prowess is the sole reason that this drug has not become another Levitra against the "Le weekend" pill Cialis. An A grade here too (not for ethics but for marketing).

Lipitor: This may be the one place where the marketing pfolks get a C. A semester ago, Pharmalyst took a marketing class where the Professor offered an interesting insight...according to him, increasingly in all categories there is a tendency towards bifurcation - one set of brands finds success in the low-cost/value end of the spectrum and the other set of brands finds success in the premium end of the spectrum. Any brand that tries to straddle the middle gets creamed (one of his examples was the retail sector where brands like Target have done well on the low end and brands like Nordstrom's have done well in the premium segment but a brand like a Sears or a JC Penney in the middle gets clobbered). Since simva going generic, this appears to be the case with Lipitor. Simva owned the value end of the market and Vytorin/Crestor owned the premium end. Pfizer did not lower the price of Lipitor & they did not do any licensing deals to make a Vytorin like compound. They pretty much played in the middle. Also all their talk about 5 new indications & outcomes did not really differentiate the product. These new indications did not offer them a sustainable advantage as all the benefits were perceived to be a class effect. The Robert Jarvik DTC campaign was also vague and did not really make Lipitor stand out. In contrast the Vytorin ads really hammered home the point that it works against two sources of cholesterol & was a home run.

So in general looks like Pfizer still has plenty of marketing juice left but the longer the drought of good products to market, the faster the erosion of sales & marketing talent. They may lose their marketing mojo unless they can bring promising products like apixaban to market faster.

Rheoscience & Dr. Reddy's: Brass Cojones?

Sure looks that way. The IN VIVO blog reports that they have just dosed their first patient for phase III trials for their partial PPAR gamma agonist balaglitazone.

Given all the issues with Rezulin, Avandia, Pargluva etc, that does take some solid cojones. What the IN VIVO folks did not report in their post was that Novo Nordisk (an almost pure play diabetes company) had previously decided to stop developing balaglitazone (this is one Dr. Reddy's first forays into original molecules). See press article on Novo's decision here ). Either Rheo sees the partial agonism aspect as truly unique with this compound or they are just desperate.

Correction: In Vivo did reference Novo's decision in their post. The link is fixed too. I'm sorry

Image Courtesy: Wall Street Bull by Jermany on Flickr.

Lilly, Pfizer: The new "Pet shop buys"

People (including yours truly) have previously commented about Eli Lilly's doggie prozac. WSJ health blog, Pharmalot and others have also featured Pfizer's Slentrol & Cerenia. (Update: See Pharmalot's postings here, here and here . Ed - thanks for links via comments).

The latest issue of BusinessWeek has some staggering statistics on the pet market. No wonder Lilly & others are gravitating to this market. You can read the full BusinessWeek article here. Here are some select stats:

• Neuticles - A patented testicular implant for neutered pfidos has sold over 240,000 pairs at $900+ a pair
  

• Americans spend $41 billion a year on pets (more than what they spend on movies and video games - about 10 to 12 billion each)

• 42% of dogs sleep on the same bed as their owners

• 77% of dogs have been medicated in the past year

• 71 million US homes have at least one pet

Bet big pharma especially likes the last two of those stats.

In a related note, everyone has been receiving loads of spam e-mails for Viagra, Xanax, Prozac, Vicodin etc. etc....This morning however Pharmalyst was amused to receive this spam for pet medications. When the spammers have caught on, you know that this is a big trend.
That doggie picture at the top was due to courtesy of the WSJ health blog & flickr.