The Pharma Initiative

First, let’s take a look at the pharma & biotech sector in comparison to the entire market.  The Healthcare Spider (XLV) and now the Biotech Spider (XBI) are now under performing the market.  The most logical explanation for this is the passage of the health care bill.  If the reimbursement is less, pharma and its compadres will also collect less.  Many of the companies have already factored in the hit to earnings, so it is known the ramifications going forward.  Drugs will always be needed, as they are one of the scientific advances for extending life (which in turn makes medical care more expensive).  The population is not getting any younger, so economies of scale will kick in and increase revenue, giving incremental increases in profit (if it is a well run company).  So, on to the picks.

Figure 1.  Comparison of XLI & XBI against major market indices.

Merck & Company

Merck & Co. traces its origins to Friedrich Jacob Merck who purchased a drug store in Darmstadt, Germany in 1668; and Emanuel Merck who took over the store several generations later, in 1816. Emanuel and his successors gradually built up a chemical-pharmaceutical factory that produced — in addition to raw materials for pharmaceutical preparations — a multitude of other chemicals.

In 1891, George Merck established his roots in the United States and set up Merck & Co. in NY as the US arm of the family partnership, E. Merck (named for Emanuel Merck), which is now Merck KGaA. Merck & Co. was confiscated in 1917 during World War I and set up as an independent company in the United States. Between the wars and during World War II, the company was led by George W. Merck, who oversaw America’s germ-warfare research at Fort Detrick. 


Figure 2.  2010 Merck stock price. 

Merck has a broad therapeutic focus, with key products historically positioned within the cardiovascular (Zocor, Cozaar/Hyzaar), infectious diseases, endocrine, respiratory (Singulair) and musculoskeletal segments shaping its therapeutic stance.  But, with the generic erosion of Zocor, and soon to be Singulair and Cozaar/Hyzaar, the company was forced to merge with Schering-Plough to drive long-term sales.  In addition to the strengths of Merck, the combined company will have a further reach into the immunology and inflammatory, genitourinary, CNS and oncology areas(much of which was part of Organons pipeline upon Schering’s purchase in 2007).

In 2009, Merck reported total prescription pharmaceutical sales of $25.2 billion, a growth of 3.4% over the period 2003–09.  This is a huge positive because of the patent expires of Zocor (> $5B/yr), Fosamax (~ $2B/yr), as well as the withdrawal of Vioxx and its litigation.  The growth was due in part to its R&D productivity, where the company launched new product Janunvia (diabetes) and Isentress (HIV).  (Januvia is a fascinating story in itself, as the company  was behind the competition (Novartis) and ended up first to market by taking huge risks in the clinical trials.) Now, with a full year consolidation of Schering-Ploug, Merck’s sales will ramp up to more than $40 billion in 2010, beyond which a range of opposing drivers will lead to overall flat sales out to 2015.  Key growth drivers for the ‘new’ Merck’ will be Januvia, Isentress, sitagliptin/pioglitazone (Diabetes), Saphris (psychosis), SCH 530348 (thrombosis), Boceprevir (hepatitis C) and Simponi (autoimmune disorders), while its two biggest growth resistors will be Singulair (asthma) and Cozaar/Hyzaar (hypertension), both of which go off patent in the coming 2 years (discussed here).

Figure 3.  Merck’s Next Few Years of Stagnant Growth.

What’s under the hood at Merck?  The company’s pipeline is impressive (Figure 4). 

Figure 4.  Merck’s Pipeline as of May 2010.

Twenty new products are expected to add combined annual sales >$7 billion by 2015. Half of its new launches were obtained in the company’s merger with Schering-Plough, thereby attaching a significant source of value to the $41 billion deal.  Recently, a number of approvals (Elonva, Simponi and Saphris being the most recent) have been announced from the company, but regulatory failings have impacted the progression of Merck’s key pipeline programs in obesity (taranabant), acute heart failure (rolofylline) and hyperlidpidemia (Tredaptive), dampening expectations for its launch portfolio.

The key pipeline drivers (all from Schering) in the near-term will be Saphris (asenapine) for schizophrenia and bipolar disorder, Simponi (golimumab) which is a fully human version of Remicade approved for three separate autoimmune indications, an extended release GnRH analog for infertility called Elonva (corifollitropin alpha), and a mometasone/formoterol combination for asthma.  Long-term growth from Merck’s pipeline will be the fixed-dose combination of sitagliptin (Januvia) and pioglitazone (Actos) that the company can launch for diabetes following the patent expiry of Actos (2012), the Schering-Plough developed SCH 530348 (thrombin receptor antagonist) which is being developed for thrombosis, boceprivir for hepatitis C, MK-0974 (telcagepant) for migraine, ridaforolimus for sarcomas (licensed from Ariad – a PSW pick in August 2009), and V503 for the vaccination of cervical cancer.

Overall, Merck has a few holes to fill when Singulair and Cozaar go off patent, but there are a few gems in the pipeline that should more than cover what may be lost.  Knowing the pains ahead and the market may be unforgiving and the VIX is high, buying the stock for about $32, and selling  one 2012 January $35 call and $30 put for every 100 shares of stock for about $9 makes for a great entry.  This allows for Merck to grow in the coming 18 months and offers one to get in at a discount of about 19% from the initial entry.  If the market rebounds a bit in the next few weeks, buying a protective put (one for every 200 shares for a 1/2 cover on the down side) in the January 2011 $30 could ease the pain of any short term volatility in the market.  Buying the stock here and selling one  January 2012 $30 call for every 100 shares of stock for $5.90 gives a 10% return not including any dividends collected over that time.

Regeneron Pharmaceuticals

When it comes to monoclonal antibodies and technologies that go behind them PDL Pharma and Regeneron lead the way.  Unlike PDL’s business model of licensing the technology for generation of antibodies, Regeneron generates its own pipeline.   Regeneron’’s commercial product includes ARCALYST (rilonacept) injection for subcutaneous use for the treatment of cryopyrin-associated periodic syndromes, including familial cold auto-inflammatory syndrome and muckle-wells syndrome in adults and children.

Figure 5.  Regeneron Pipeline.

Products under Phase III clinical trials include Rilonacept for the prevention and treatment of gout-related flares; VEGF Trap-Eye for eye diseases using intraocular delivery (with Bayer); and Aflibercept for the treatment of oncology (Sanofi-Aventis). The company’s earlier stage clinical programs REGN475, an antibody to nerve growth factor, which is being developed for the treatment of pain; REGN88, an antibody to the interleukin-6 receptor, which is developed in rheumatoid arthritis; REGN421, an antibody to delta-like ligand-4, for the treatment of oncology; REGN727, an antibody to proprotein convertase substilisin/kexin type 9, which is developed for low density lipoprotein cholesterol reduction; and REGN668, an antibody to the interleukin-4 receptor for certain allergic and immune conditions.  Regeneron Pharmaceuticals also conducts other preclinical research programs in the areas of oncology and angiogenesis, ophthalmology, metabolic and related diseases, muscle diseases and disorders, inflammation and immune diseases, bone and cartilage, pain, cardiovascular diseases, and infectious diseases. The company has strategic collaboration with sanofi-aventis Group to discover, develop, and commercialize fully human monoclonal antibodies; and Bayer HealthCare LLC for the development of the VEGF-Trap-Eye. Regeneron Pharmaceuticals was founded in 1988 and is based in Tarrytown, New York.

Figure 6.  Regeneron Stock Price Movement in 2010. 

A few notes on some early clinical trial leads.  At the highest single dose, the cholesterol drug, REGN727, significantly lowered mean LDL cholesterol for more than a month, showing a maximum mean reduction of more than 60 percent.  

The pain medication, REGN475 targets nerve growth factor or NGF, a molecule that can help control pain.  A test of the drug appeared to diminish pain in people with osteoarthritis of the knee but not so much in people with nerve root compression induced pain, also known as acute sciatica.

Regeneron is not profitable as it lost $67.8 million in ’09, but it was 14 percent less than it lost in 2008. Some of the revenue is due to Arcalyst.  The chart shows a bit of concern as it appears that a double top may be in the works, so any entry will need to be covered.  If the stock retreats to the $24 range, it may be worth picking up an initial entry as there is some strong support.  Selling a 1/4 entry of the June 25 P for $1.50 or better sets up for that initial range, and if the stock falls through, the June $25s can be easily rolled out and down.  (A 1/4 entry means if one plans to own a total of 400 shares, selling one put would establish an initial entry.)  If selling puts is not an option, then buying 100 shares of the stock here and selling a November $25 call for $6 gives one a 11% return if the stock is called away.

VIVUS Inc.

Along with Alzheimer’s, cancer, and pain, obesity is one of the largest markets of unmet medical needs.  Yes, diet and exercise should be the first and almost last thing most people should employ to lose weight, but let’s face it, society as a whole likes to take drugs.  Several questions remain, will the FDA approve the late stage ones in clinical trials (Contrave, Qnexa, lorcaserin and cetilistat), will insurance pay for it or will they insist on behavior modification, and last, will patients take one for obesity?  The focus in the following paragraphs is on the FDA issue, as insurance and taking a drug are other articles in and of themselves.

PSW members have been discussing VIVUS, Orexigen and Arena for well over a year.  OREX was an early pick, and those that bought in at $3 did very well.  ARNA has been a bit of a drag, but many members including me are long ARNA, and many have been reducing our costs by entering at a lower basis, selling a few when it moves higher, as well as selling puts along the way.  VIVUS has not been a favorite, but it appears from a stock perspective to be the darling of the three.  Here is my take on VVUS.

Figure 7.  VIVUS vs. ARNA

VIVUS is up 60% over the past 6 mo. where ARNA has been dragged through the mud.   VIVUS does have an interesting pipeline, but in the forefront of everyone’s mind is the obesity angle.  

Arguments are made that Qnexa, which is an investigational, once a day, proprietary, oral, controlled-release formulation of low dose phentermine (a.k.a "speed’) and topiramate, to have superior data to Arena’s lorcaserin.  All in all, it may be slightly better (a good summary of the data are here and here).  But there are two strikes against Qnexa….patent issues regarding 2 generic drugs (assuming the controlled release is patentable), but more concerning is the side effects.  Topiramate is used for the treatment of seizures and migranes.  It is a powerful drug, and the side effects are numberos, including paresthesia (numbness & tingling,) diarrhea, nausea, anorexia, memory problems, psychomotor slowing, memory problems, fatigue and confusion.  These are not things that most people would like to experience on a daily basis.  The FDA has had a track record of voting for safety issues over efficiacy, and this is one where safety (like as safe as water type of safety) is warranted.  These patients are not cancer patients, or having convulsions, they are overweight.  July is an Advisory Committee meeting in which VIVUS has to present its safety and tolerability data, Arena has no such meeting.

In essence, VVUS, once the VIX retreats a bit, should be shorted, as it is my belief that the company will have an uphill battle on the approval of an antipsychotic and ‘speed’ for those overweight.  I just don’t see it happening!  We will discuss in chat when a good time to short VIVUS will be, so join us at the PSW site for daily discussions about these companies and many others.