Related Articles 5 reasons drug stocks aren't worth what they were Related Resources Drug News See how MSN Moneys StockScouter rates a stock Find out today's big trends Jubak's Journal Recent articles: • 5 ways to play the credit shift, 10/7/2004 • 5 stocks for the coming technology rally, 10/5/2004 • 5 great, cheap growth stocks and a tool to find more, 10/1/2004 More... | Jubak's Journal Merck's pain isn't Pfizer's gain With Merck yanking its blockbuster Vioxx off the shelf, you'd think makers of competing arthritis drugs would prosper. But in the complex, cutthroat drug industry, things arent that simple. By Jim Jubak If your toughest competitor pulled its $2.5 billion blockbuster drug from the market and consumers had to turn to your products as a substitute, it's an almost sure bet that your companys stock would soar. If you had made exactly that bet last week, you would have been dead wrong. After Merck From the close on Sept. 29, the day before Mercks stunning news, to the close on Oct. 4, Pfizers shares soared a whopping 4%, or $1.12 a share. By Oct. 6, they had actually started to pull back from the Oct. 4 high. And on Oct. 7, they fell 4%. Ive been deluged with e-mail asking why Pfizers shares werent moving up more strongly and wondering if this was just another example of Wall Streets myopic focus on the near-term to the exclusion of all else.
Hate to say it, but the markets got it just about right this time around, and heres why: Sacrificing Vioxx to save Arcoxia On Sept. 23, an outside research panel monitoring Mercks huge clinical trial of 2,600 patients testing Vioxx advised Merck to shut down the trial to protect those patients. The panel concluded that Vioxx patients were about twice as likely to suffer a stroke or heart attack as the patients taking a placebo. After verifying the data from the research panel, Merck faced a bigger problem than merely shutting down a single drug trial. What should the company do about those patients outside the trial who were taking Vioxx to manage the pain of arthritis? About a week later, Merck decided to completely pull Vioxx from the market. That was an extraordinary act. After all, Vioxx had been shown to be only relatively more risky than a placebo, and the drug does come with offsetting benefits. (Vioxx had been shown to produce 15 heart attacks or strokes per 1,000 patients taking the drug for 18 months or longer versus the 7.5 heart attacks and strokes produced by the placebo. Even people taking sugar pills get heart attacks and strokes. Vioxx alternatives such as aspirin, ibuprofen and naproxen all have downsides ranging from ulcers to gastro-intestinal bleeding. One of the advantages of the COX-2 inhibitors, the class of drugs that includes Vioxx, Pfizers Celebrex, and that same companys Bextra, is that they dont cause those types of stomach ailments.) But put Mercks decision in the context of the current state of the drug industry and it seems more understandable. Mercks drug was in a dogfight with Pfizers products. And it was already competing at a disadvantage since earlier test data had found some evidence that patients taking Vioxx had higher rates of heart attacks and strokes, but no studies had yet linked Celebrex or Bextra to increased cardiac events. More worries about the relative safety of Vioxx certainly would make marketing the drug more difficult. And even though Mercks drug controlled 35% of the market, Pfizers Celebrex had a 43% stake and its newcomer, Bextra, was at 22% and climbing fast. Both Merck and Pfizer were looking at further erosion as more second-generation COX-2 inhibitors were released, including Prexige from Novartis Withdrawal was the smartest move In todays cutthroat drug market, part of judging a drugs potential means gauging how far an existing label can be extended. The most recent Vioxx trial wasnt for the benefit of the arthritis market; instead the company was hoping to collect data that would convince the U.S. Food and Drug Administration to approve Vioxx for the treatment of intestinal polyps. That would have expanded the market for Vioxx at a fraction of the cost of developing a new drug. Pfizers Celebrex is already approved in the United States and Europe for the treatment of some types of colorectal polyps No doubt Merck was mindful of litigation when it pulled the drug. Attorneys in several states have wasted no time in trying to get a class-action lawsuit certified against the drug maker after it announced it was pulling the product. For example, on Oct. 4, lawyers in Illinois filed a class-action suit that covers the estimated 300,000 people in that state who took Vioxx. Keeping the drug on the market in that legal environment and with test results that showed greater odds of heart attack and strokes than if a patient took a placebo would have been a gift to plaintiffs lawyers. Withdrawing the drug is a shrewd legal move. It shows the company responding responsibly to test data and putting safety over profits. Such a move is especially important in the case of Vioxx because the drug has been criticized by medical heavyweights such as the Cleveland Clinic. That criticism dates back to 2000, just a year after the drug was approved for arthritis pain by the FDA. Last, but certainly not least, Mercks actions take a lot of the heat off the FDA. In April 2002, the agency required new labeling for Vioxx that pointed out the association of Vioxx with higher risk of heart attack and stroke. But that label wasnt enough to quiet critics: In the August 2004 issue of the medical journal The Lancet, the Cleveland Clinic had called for the FDA to show some backbone and require the highest level of label warning, called a black box label. Getting new drugs through a regulatory agency that has been embarrassed by the safety questions around one of your current drugs isnt exactly the path of quick approval. Merck is certainly savvy enough to know that. Arcoxia, the Vioxx replacement already launched in 40 countries, could win FDA approval as early as the end of 2004 if the agency isnt distracted by a continuing furor over Vioxx. That pretty much covers the ins and outs of Mercks decision to pull Vioxx. I dont see much there to convince me I should get excited about Pfizer because of Mercks problems. Only a drop in a $53 billion bucket For example, lets say that Pfizer picks up 50% of the lost Vioxx revenue for 2005, as Prudential Equity Group estimates. Thats good for an extra penny of earnings per share in 2004 ($2.14 instead of $2.13) and an extra dime in earnings for 2005 ($2.43 instead of $2.33). Lehman Brothers comes up with similar estimates: If Pfizer can pick up 30% to 60% of Vioxx sales, it would be good for 5 cents to 15 cents per share in earnings in 2005. The problem is that Pfizer is so big that even 50% of Vioxxs $2.5 billion in sales isnt enough to put much juice in the companys earnings. Not when 2004 revenue is projected at $53 billion. And drug income doesnt last as long as it used to, either. Yes, that extra 10 cents a share from picking up 50% of Vioxx sales would push 2005 earnings growth up to 14% year-to-year, according to Prudential Equity. On the surface that makes Pfizer seem cheap, since the stock is trading at just 14.8 times projected 2004 earnings per share. But remember all those second-generation COX-2 inhibitors up for approval in 2005 and 2006. If the sales trends for Bextra, Celebrex and Vioxx are any predictors, the newcomers will take market share away from the older market leaders. At the least, companies like Pfizer will be required to spend more on marketing to keep current market share. So the withdrawal of Vioxx may represent a one-time bonus to Pfizer rather than a continuing stream of extra revenue and profits. And if by withdrawing Vioxx from the market, Merck is able to prevent the FDA from dragging its feet on its new COX-2 drug Arcoxia, then the extra revenue and earnings will be extra for a very short time indeed. Notice that Ive concluded that the withdrawal of Vioxx from the market isnt enough to make me want to buy shares in Pfizer without talking about the elephant in the room. The elephant? The possibility that all COX-2 inhibitors, including Pfizers Celebrex, present higher risks of heart attacks or strokes. An Oct. 7 editorial in the New England Journal of Medicine by a drug researcher at the University of Pennsylvania said that all COX-2 drugs suppress a factor that keeps the walls of blood vessels healthy. The data from animal tests is enough to keep patients, doctors and the stock market worried about all COX-2 drugs. (The same issue of the Journal carried a call from Eric Topol of the Cleveland Clinic for a complete investigation into why the FDA allowed Vioxx to be marketed in the first place. That pretty much guarantees that the agency wont move quickly on new COX-2 approvals and spells further problems for Merck.) If all this corporate maneuvering seems endlessly cynical, shockingly calculating, brutally competitive and horrendously complex, welcome to the world that drug company CEOs have to navigate every day. Even when a company isnt dodging lawsuits, its a tough time to make a buck in the drug business. And that goes for anyone who buys stock in the big drug companies, too. Changes to Jubak's Picks Buy Texas Instruments Im going to take advantage of the likely stock market weakness before a long holiday weekend to add shares of Texas Instruments New developments on past columns 10 winning stocks for a stuck-in-the-rut market On Oct. 6, Wolverine World Wide Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak did not own or control shares of any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||
|
|||||||||||||||||
MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.