Abelson shows his usual level of tolerance toward the FDA and Drug company CEOs then finishes with a plug for ELN in this week's column...
Whole column: online.barrons.com
Extract:
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BEFORE THEY LAY THEMSELVES down to sleep each night, one group of CEOs pray for themselves, their loved ones (more explicitly, their spouses, their kids and their bonuses) and President Bush (please make him remember all those millions we invested to get him reelected). But most fervently, they pray that the new year will be better than the old. And well they might, for we shudder to imagine what fate has in store for them if '05 proves worse than '04. We're referring, of course, to the heads of the big drug companies.
Oh, the troubles they've seen. Slings and arrows coming their way from every quarter -- nasty politicians, goody-goody special interests, corporate types (you'd think they, at least, would know better), the ungrateful public on whose behalf they toil day and night -- all angry as rampaging killer bees about inexorably climbing drug prices. And let's not forget the FDA, which has been so chummy in recent years, suddenly getting real huffy about a stray problem or two involving drugs it had approved; some friend. It's enough to make you sick.
While on their knees in a beseeching mood, Big Pharma's top dogs might include as deserving heavenly notice the painful plight of their loyal shareholders, who could only watch helplessly as their stocks were being ruthlessly pummeled and bludgeoned. The sad part is that what happened to the drugs was so predictable. The near-universal concern over mounting health-care costs and the worsening fiscal condition of a huge bearer of such costs -- old Uncle Sam -- were enough to cast a pall over the prospects of the pharmaceutical companies, whose eternally higher prices were made all the more conspicuous by the industry's exceedingly chubby profit margins. Even the FDA might not have been so precipitous in its reaction to disclosure of product defects were the overall climate for drug makers not so hostile, had beating up on the drug companies not become so politically correct.
It was this increasingly harsh climate that prompted Larry Feinberg early last year in these columns to caution against committing your hard-earned money (or even your easily earned money, for that matter) to the big drug stocks. And how right he was. Larry runs Oracle Partners, a hedge fund specializing in just about everything to do with health care, and, last we asked, he was up 25% last year, and that's after the usual outrageous hedge fund fees. He sees no letup in the pressure on drug companies. On that score, heresy of heresies, he hazards that the Medicare legislation due to take effect next year may cause a decline -- repeat, decline -- in drug pricing for the first time ever.
The current untidy investment scene in health care is made to order, he avers, for someone who loves to play both sides of the market, as he does. For one reason or another, he thinks hospitals, drug distributors and prescription-benefit managers are destined to be among the laggards. And, while he not as bearish on the drug makers as he was -- their stocks have discounted an awful lot of the bad news -- he sees a great divide between the companies that have "me too" offerings and those that are blessed with "must have" drugs. As an example of the latter, he singles out Elan, an Irish company (ADS listed on the Big Board), of which Oracle, it may not surprise you to learn, owns a bundle.
Elan has partnered with Biogen Idec (which Larry recommended here at a much lower price and thinks still has plenty of room on the upside) to develop a recently FDA-approved treatment for multiple sclerosis -- MS -- called Tysabri (née Antegren) with, he believes, awesome potential. Elan was flying high around the turn of the century -- the stock hit 65 in '01 -- only to crash and darn near burn the very next year as its shares sank to within a hair of 1. What did the company in -- and murdered its stock -- was fancy accounting for its numerous joint ventures that, when uncovered by The Wall Street Journal, triggered class action suits and an SEC probe. Both were settled this past fall. Meanwhile, to keep afloat, the company did a corporate strip tease that saw assets shrink from $8 billion to slightly over $3 billion in a scant three years.
Its compromised past aside, Elan is not, to be frank, exactly our cup of tea. It's not earning any money and hasn't for the past few years. At first blush, anyway, finances are not a thing of beauty, although the company does boast a comforting stash of cash, the proceeds of that strip tease. The stock's already had a big run. And just about everything bullish about the company is on the come. But it does have a half interest in Tysabri and, by Larry's reckoning, that's pure gold.
He figures there are roughly 800,000 MS patients in the U.S. and Europe. Of these, 330,000-350,000 are on drug therapy and another 100,000 have had to quit therapy because of side effects or because the drugs didn't work.
Tysabri, Larry says, is twice as effective as anything now in use and has few side effects. Which is why he expects as many as a quarter of the 180,000 U.S. MS patients on drug therapy to switch to Tysabri by the end of this new year, and at least half by the end of '07. He expects Europe to give its official OK to the drug by midyear and acceptance there to follow the same pattern as in the U.S. Moreover, he anticipates something like 50,000 of the 450,000 MS sufferers here and in Europe now "untreated" to go on Tysabri, boosting the potential number of users to 200,000.
Elan's roughly 50% of the profits from Tysabri, Larry calculates, translates into 7.5 cents a share after tax for each $100 million in the drug's sales; as volume swells, so does the impact on earnings, scaling up to 10 cents a share per $100 million. OK. Multiply 200,000 by $23,500, which is what a year's worth of Tysabri will cost, subtract discounts and price concessions to big payors, and Larry comes up with $4 billion in yearly sales within the next three years. Which, by his math, works out to $3.50-$4 a share for Elan.
Larry, we can attest, is exuberant but not irrational. The nice thing about his story is even if his estimates overshoot a bit, the numbers are still mighty impressive. We should note that the Street consensus is much more restrained in its forecasts and subdued in expectations for the stock, which is now 26 and change, up from 7 a year ago. Nothing daunted, Larry's looking for a double in Elan this year, as his vision of the company's earning power gradually gains currency and applications for Tysabri for diseases other than MS are explored. |
