Net income was $1.51 billion, or $0.49 in earnings per share; on an adjusted basis the figures were $2.98 billion in income and $0.97 EPS.  We had estimates of $0.95 EPS for the adjusted figure.  Revenue was up 1.6% to $12.29 billion and that was a bit shy of the $12.52 billion expected.  Merck’s total pharmaceutical sales were up about 3% to $10.76 billion

As far as guidance, Merck gave a projected 2012 earnings range of $3.75 to $3.85 in earnings per share and the consensus estimate is $3.83 per share.

The only real driving force today is the higher dividend, which jumped to $0.42 at the last payment.  That was the first such dividend hike since all the way back to 2004.

Maybe investors are pleased that generics are not killing brand drugs as much as feared.  The stock is actually up 1.4% at $39.18 in the pre-market and investors need to remember that the 52-week high is $39.43 right now.

JON C. OGG

As far as 2012 is concerned, Pfizer is targeting $2.20 to $2.30 earnings per share, which is slightly under prior targets and is currently compared to a Thomson Reuters consensus of $2.28 EPS.  The new 2012 guidance for sales is $60.5 billion to $62.5 billion versus a prior range of $62.7 billion to $64.7 billion.  The Thomson Reuters consensus is $2.30 EPS for this coming year.

The company noted:

• Its Primary Care unit revenues were favorably impacted primarily by foreign exchange;  growth from Celebrex, Lyrica, Pristiq and Spiriva, among others; and the addition of $93 million, or 2%, from legacy King products…
• Negatively impacted by the loss of exclusivity of Lipitor and Caduet in Nov-2011 and Aricept in Nov-2010; Together, those losses reduced Primary Care unit revenues by $775 million, or 13%, versus fourth-quarter 2010.
• Emerging Markets unit revenues were negatively impacted by foreign exchange and increased pricing pressures.
• Animal Health unit revenues rose 13% due to the addition of legacy King products as well as strong performance in the global livestock portfolio.

Pfizer has been trading up and down in the early hours of the pre-market and shares are up 0.3% at $21.65 on last look against a 52-week range of $16.63 to $22.17.

JON C. OGG

It makes you wonder how far behind a potential blockage of the Medco Health Solutions Inc. (NYSE: MHS) and Express Scripts Inc. (NASDAQ: ESRX) merger is.  Express Scripts is the would-be acquirer and the deal has been heavily criticized by many watch groups and we have noted how wide the merger-arbitrage spread is.  The blocked AT&T Inc. (NYSE: T) acquisition of T-Mobile started (or added to) much of the blocking concerns from investors.

The FTC issued a complaint to block the hostile acquisition of the rival long-term care pharmacy provider alleging that this combination of the two largest U.S. long-term care pharmacies would harm competition and also because the merger would allow Omnicare to raise the price of drugs for Medicare Part D consumers and others.  As noted (full release):

“If Omnicare is allowed to purchase its biggest and only national competitor, it will diminish competition and raise health care costs – leaving taxpayers and patients to foot the bill,” said Richard Feinstein, Director of the FTC’s Bureau of Competition. “The Bureau will continue to be vigilant in our efforts to prevent these sorts of anticompetitive deals.”

JON C. OGG

Because we have covered this merger and because we cover financial news, we receive many emails on this topic.  While we have received little to no great emails on how the merger will benefit the public, we have received ample emails from industry watch groups and public outreach groups which have stated their opposition to this merger.  Take a look at the headline summaries from MergerInvesting.com and you can see just how much opposition there is compared to support.

The merger arbitrage spread in this deal today is right at 13% when other normal mergers carry traditional merger arbitrage spreads of 1% to 4%.  Part of the arbitrage is because Express Scripts has offered to buy Medco in cash and stock, but there is a serious degree of approval uncertainty priced in here. 

With a deal that is not expected to receive approvals until the first or second quarter (if then), it sure seems as though the merger-arb community is not overly convinced that this merger will go through.  If the deal does go through, there could be many divestitures or asset sales which are required.

One institutional broker who covers some merger-arbitrage and index-arbitrage accounts gave a bit of a funny quote here when we asked for feedback.  His answer, from one of his clients, about whether or not the merger would be allowed was simply “Give me one second, there is no easy answer.”

The Department of Justice noted as far back as September of 2011 that this merger was going to face an extended review period.  Medco holders will own about 41% of the combined interest after this merger, if it is approved.

The company with the highest degree of flux before and after this deal could be Catalyst Health Solutions, Inc (NASDAQ: CHSI) with a market cap of under $3 billion.  Much of the public (and investing public) is not even aware of it under the name Catalyst Rx.

There is one interesting merger ETF to consider in arbitrage.  It is the IQ Merger Arbitrage ETF (NYSE: MNA).  Unfortunately, it is very thin trading volume.

Keep in mind that there are no assurances that the DOJ, the FTC, nor other agencies will actually try to block this acquisition.  There are no assurances of approval either.  A chart of the spreads from Bloomberg has been shown below.

JON C. OGG

The companies we’ve included are Pfizer Inc. (NYSE: PFE), Merck & Co Inc. (NYSE: MRK), Bristol-Myers Squibb Co. (NYSE: BMY), Teva Pharmaceuticals Industries Ltd. (NASDAQ: TEVA), Amgen Inc. (NASDAQ: AMGN), and GlaxoSmithKline plc (NYSE: GSK).

Pfizer Inc. (NYSE: PFE) trades around $22.00 and the 52-week range is $16.63 to $22.00. With a $168 billion market cap, this one trades at about 15-times expected earnings and 9.5-times expected 2012 earnings. Thomson Reuters has a mean price target objective of $23.76, indicating implied upside of 8%.

Merck & Co Inc. (NYSE: MRK) trades near $38 and the 52-week range is $29.47-$39.00. With a $117 billion market cap, Merck trades at about 28-times expected earnings and 10-times expected 2012 earnings. The mean price target objective is $39.85, indicating a potential upside of 4.9%.

Bristol-Myers Squibb Co. (NYSE: BMY) trades near $34 and the 52-week range is $24.97-$35.44. With a market cap of about $58 billion, this one trades at about 17-times expected earnings and 17-times forward earnings. The mean price target objective is $32.91, indicating that shares are fully valued and upside potential has gone missing.

Teva Pharmaceuticals Industries Ltd. (NASDAQ: TEVA) trades at about $44 and the 52-week range is $35.00-$57.08. With a market cap of $39 billion, Teva trades at about 13-times earnings and 8-times forward earnings. The mean price target objective is $53.15, indicating an implied upside of nearly 21%. The company has also seen gains since disclosing a new CEO.

Amgen Inc. (NASDAQ: AMGN) trades at about $66 and the 52-week range is $47.66-$65.70. With a market cap of $58 billion, this one trades at about 16-times earnings and 11-times forward earnings. The mean price target objective is $65.45, and, like Bristol-Myers, Amgen is fully valued and there is no implied gain at the current price.

GlaxoSmithKline plc (NYSE: GSK) trades at about $44 and the 52-week range is $36.28-$46.50. With a market cap of $221 billion, this one trades at about 44-times earnings and 13-times forward earnings. The mean price target objective is $49.58, indicating an implied upside of 12.7%.

Only Teva and GlaxoSmithKline have double-digit upside potential percentage gains. Of the two, Teva’s upside potential is greater, largely because it just lost a patent dispute (which pushed the share price down) and gained a new CEO, an industry veteran from Bristol-Myers (which pushed the share price back up). The downside on the company is that it is trading down about -18% over the past 12 months, the only one of these six companies to show a loss for the period.

Glaxo is preparing a regulatory filing in the US with a replacement for the company’s Adair asthma drug which loses patent protection next year. Late-stage trials have been promising, and the stock could get a nice boost if the FDA grants approval. Glaxo also received three new drug approvals from the FDA in 2011,

Paul Ausick

The Seattle-based biotech announced sequential revenue growth for the fourth quarter ended December 31 of approximately 25% to $82 million, above the consensus estimate of $72 million. For full-year 2011, Dendreon said sales of Provenge (sipuleucel-T) would total approximately $228 million. Gold credited an improved Provenge reimbursement landscape and ongoing physician education initiatives for the stronger results.

Investors were initially bullish on the growth prospects  of the vaccine, which was approved in April 2010 for the treatment of advanced (hormone-refractory) prostate cancer. And with good reason: The first therapy in the U.S. designed to induce the body’s own immune system to attack prostatic tumor cells, Provenge’s side-effects are less toxic than traditional chemo-based treatments for advanced prostate cancer, such as Sanofi’s (NYSE: SNY) taxotere (docetaxel). And, unlike the plethora of drugs in the treatment paradigm for metastatic, castrate-resistant (hormone-refractory) prostate cancer, such as AstraZeneca’s (NYSE: AZN) Zoladex or Abbott’s (NYSE: ABT) wildly popular Lupron injection, Provenge does not focus on reducing testosterone levels, the male hormone fueling growth of tumor cells.

From a high of $42 a share in April 2011, the stock price tumbled more than 80% last fall after the company withdrew prior guidance of $400 million in annual sales, the result of prolonged delays in federal and private insurance reimbursements.

“It’s not what we don’t know that hurts us, it’s what we know for certain that just ain’t so.” ~ American author and humorist Mark Twain

Analysts attribute the dramatic spike in Dendreon’s stock price to the positive shift in insurance coverage — including a reduction in average time to payment of less than 30 days for providers. “We believe that this progress may help clear some of the fog surrounding the Provenge sales trajectory,” said Joseph Pantginis, Roth Capital Partners.

An oft-repeated tragicomedy that befalls investors is how the unabashed certitudes of Wall St. dissemblers result in trading losses for those of us who pile into stocks after the “good” news is out. Not to pick on Pantginis exclusively, but improving trends in reimbursement for Provenge is old news: In a 10Q Detective column posted last November, I noted that CEO Gold had previously mentioned that average (insurance) reimbursement times had fallen from “90 days down to 30 days.”

Though I do not doubt prescription uptake of Provenge by urologists and oncologists is trending higher (read my bullish article, posted on November 17, 2011: Dendreon Buyout, How Imminent?), more likely, the breathtaking climb in Dendreon’s share price was unintentionally engineered by short-sellers closing out open positions. According to NASDAQ, short interest in Dendreon common stock was 31.3 million (as of December 15), about 21% of the stock’s float.

Further exacerbating a combustible trading environment, days to cover had jumped to seven, from 3.9 the month prior.

Need more convincing evidence that Dendreon’s stock price overreacted to acknowledged “modest” growth expectations? On Thursday, January 5, approximately 44.9 million shares changed hands, a 700% increase over its 65-day average volume.

Looking to go long Dendreon stock? Free advice — stand clear, at least for now.

David Phillips

Related Posts:

Dendreon – Not Running Out of Cash

Dendreon Buyout, How Imminent?

After the first half hour of trading this morning, Marshall Edwards is up nearly 38% at $1.46. Volume has already reached about 7x the daily average. The development stage oncology drug maker has received a patent that will protect certain oncology drugs until 2027.

Canadian Solar is up more than 32% at $$2.92. Volume has already reached about 75% of the daily average. The solar panel maker has sold about 86 megawatts of generation to TransCanada Corp. (NYSE: TRP) for approximately $455 million.

Targacept is down more than -25% at $5.82 after posting a new 52-week low of $5.64 already this morning. Volume totals about 5x the daily average. The pharmaceutical maker’s anti-depressant drug, developed in conjunction with AstraZeneca plc (NYSE: AZN) has failed a late-stage trial.

Progenics is up nearly 23% at $7.96. Volume has already surpassed the daily average. The pharmaceutical company reported a successful test of a new drug developed in conjunction with Salix Pharmaceuticals Ltd. (NASDAQ: SLXP).

Cobalt is up nearly 21% at $12.17. Volume is nearly double the daily average. The oil & gas exploration company has signed a production-sharing agreement for a block offshore of Angola. Cobalt owns 40% of the project and is the operator.

Paul Ausick

While we are expecting a dividend hike again, it seems unlikely that the boost will end up being a large dividend boost.  Pfizer’s current $0.80 per year annualized payout compares to earnings estimates of $2.28 EPS for 2011 and $2.31 EPS for 2012.  In short, Pfizer is not quite paying out 40% of its normalized income.

Drug rival Merck & Co. Inc. (NYSE: MRK) recently announced its first dividend hike in years.  It was actually the first hike since the Vioxx scandal.  That should only keep pressure on Pfizer to go ahead and raise its dividend.

There is a history of its dividend hike coming this time of year, but the payout hike won’t be realized as cash in the bank for investors for another 60 days or so.  The dividend being raised was last announced on December 13, 2010 and previously on December 14 of 2009.

Pfizer noted last year that the move to $0.20 from $0.18 per quarter was roughly an 11% hike.  Pfizer also has a game of catch-up to play as its dividend used to be much higher at $0.32 per quarter before the recession caused many companies to lower their very high yields and before its most recent large M&A deals.

Merck’s dividend hike was 11%.  We will make a prediction for the coming hike: ).22 or $0.23 per quarter.  That will translate to a 10% hike or a 15% hike to the dividend payouts.  The current yield of Pfizer is 3.91% based on a share price of $20.45.  Merck’s dividend was raised to $0.42 from $0.38 per quarter, and that translates to a dividend yield today of 4.72% based upon a current price of $35.55.  The old yield at Merck based upon today’s price would still be 4.27%.

The Merck hike alone will have put pressure on Pfizer to hike its dividend.  A 10% hike to $0.22 would generate a dividend yield of 4.30%.  That would have caught it up to the old Merck payout.  A hike to $0.23 per quarter would generate a current dividend yield of 4.5%. If you follow cause and effect theory, or action and reaction theory, Pfizer’s hike is a must.  The boost would still be under or close to 40% of expected income from operations per share to be paid out.

Are there some risks that Pfizer might not raise its dividend?  Yes, but they are just unlikely to matter.  After Merck made the first jump in its dividend in years, Pfizer almost has to follow suit.  Watson Pharmaceuticals, Inc. (NYSE: WPI) is the local outfit which wins from the recent patent expiration of its blockbuster statin Lipitor, and Teva Pharmaceutical Industries Limited (NASDAQ: TEVA) is set have a generic version of Lipitor after this coming May.  While Pfizer’s market share on the entire Lipitor market may only be 40% of the past, this patent expiration date had been known for years.

Perhaps the biggest risk to ongoing dividend hikes is not just the endless restructurings of Pfizer, but its major acquisition trail.  That effort has been almost endless.  Its acquisition efforts have also given the company a very wide moat of a drug pipeline ahead and it has insulated its share price from the patent cliff.

At $20.45, Pfizer’s market capitalization rate is $157 billion and its 52-week trading range is $16.59 to $21.45. Merck’s $35.55 price generates a market cap of $108.2 billion and the share price compares to a 52-week range of $29.47 to $37.65.

JON C. OGG

Large pharmaceutical companies like Johnson & Johnson (NYSE: JNJ), Pfizer Inc. (NYSE: PFE), AstraZeneca plc (NYSE: AZN), Bristol Meyers Squibb Co. (NYSE: BMY), and Merck & Co. Inc. (NYSE: MRK) are also spending less in developing new drugs and there have been calls within the industry to share more information, especially on drugs that have failed trials. High development costs join pricing pressure in Europe, a lack of urgency on this year’s flu season, lower rates of prescription writing, and more competition from generics to weigh on drug company revenue and profits.

We’ve looked at the price targets for J&J, Pfizer, AstraZeneca, Bristol Meyers, and Merck with an eye toward trying to detect value opportunities. All data from Yahoo! Finance, with current prices gathered about noon today.

Johnson & Johnson (NYSE: JNJ) has a median price target of $72.00 from 13 brokers. The current price is $63.03, for a potential upside of $8.97, or 14.2%. The company pays a dividend yield of 3.6% and its forward P/E is 12.02. J&J’s share price has fallen about -2% since our last look at these companies. The company’s list of missteps and mishaps in the past year or so is long enough to have mortally wounded just about any other company. The company has been found liable for some $750 million in health care fraud claims, it has paid a $70 million fee to settle a foreign bribery case, the factory that makes many of its popular over-the-counter brands has been shut down, and it is being sued for selling a faulty hip-replacement device. Despite all that, J&J continues to make a profit, and its median target price rose from its October level of $70.

Pfizer Inc. (NYSE: PFE) has a median price target of $23.00 from 17 brokers. The current share price is $19.02, for a potential upside of $3.98, or 21%. The company pays a dividend yield of 4.1% and its forward P/E is 8.24. Pfizer announced today that it would pay $60 million in the same foreign bribery investigation that cost J&J $70 million last Spring. The company recently got some good news when UnitedHealth Group Inc. (NYSE: UNH) announced that it would charge a lower co-payment for the Pfizer’s Lipitor than it would for generic equivalents. Pfizer lost patent protection on the drug this month, jeopardizing $10.7 billion in revenue from sales of Lipitor. Trying to buy market share by lowering the price of Lipitor might make up some of the loss, but it’s hard to see all the revenue being replaced this way.

AstraZeneca plc (NYSE: AZN) has a median price target of $52.25 from just 4 brokers. The current share price is $44.05, for a potential upside of $8.20, or 18.6%. The company pays a dividend yield of 3.8% and its forward P/E is 7.03. The company’s Crestor drug competes with Pfizer’s Lipitor, but has patent protection until 2016. Crestor also recently bested Lipitor in a trial at the Cleveland Clinic. While Crestor did better at lowering cholesterol levels, the two drugs performed equally on reducing atherosclerosis and clinical events like strokes and heart attacks. Whether that will be enough to justify the hefty cost premium for Crestor over Lipitor and its generics remains to be seen. Adding to the company’s challenges, an anti-depressant jointly developed by AstraZeneca and Targacept also recently failed a late-stage trial.

Bristol Meyers Squibb Co. (NYSE: BMY) has a median price target of $33.50 from 18 brokers. The current share price is $30.29, for a potential upside of $3.21, or 10.6%. The company pays a dividend yield of 4.3% and its forward P/E ratio is 15.08. A diabetes drug jointly developed by Bristol Meyers and AstraZeneca was denied US FDA approval due to increased cancer risk among those involved in the trial. If the FDA doesn’t reverse itself, the fallout from this decision would also likely hit Pfizer, J&J, and other companies working on a similar diabetes drug. The global market for diabetes treatment will nearly triple, to $114.3 billion in the next five years, so there is a lot at stake here.

Merck & Co. Inc. (NYSE: MRK) has a median price target of $40.25 from 16 brokers. The current share price is $34.11, for a potential upside of $6.14, or 18%. The company pays a dividend yield of 4.3% and its forward P/E is 8.91. Merck received 5 approvals for new drugs in 2011, has hopes for 8 further approvals in 2012 and 2013, and claims to have 19 more in late-stage testing. The company already has the best-selling diabetes drug and it continues to work on more diabetes combination drugs as well. The company is still hampered by claims against it for its Vioxx painkiller, which was found to cause heart attacks.

Big pharma faces some big issues, but chief among those is reining in the development costs for news drugs. The company that appears to have done the best job of that, to date, is Merck. Provided that Merck can steer its new drugs through the approvals process, then those efforts at cost control could pay off nicely for investors.

Paul Ausick

Consensus on Wall Street is that Dendreon will need to launch Provenge (sipuleucel-T) successfully before any buyers come knocking at its door. To the contrary — Approved in April 2010 for the treatment of advanced (hormone-refractory) prostate cancer, Provenge is the first therapy in the U.S. designed to induce the body’s own immune system to attack prostatic tumor cells. Its side-effects are less-toxic than traditional chemo-based treatments for advanced prostate cancer, such as Sanofi’s (NYSE:SNY) taxotere (docetaxel). And, unlike the plethora of drugs in the treatment paradigm for metastatic, castrate-resistant (hormone-refractory) prostate cancer, , such as AstraZeneca Plc’s (NYSE:AZN) Zoladex or Abbott’s (NYSE:ABT) wildly popular Lupron injection, Provenge doesn’t focus on reducing testosterone levels , the male hormone fueling growth of tumor cells.

Acquiring Dendreon offers a better-capitalized pharmaceutical company an opportunity to buy control of a potential blockbuster drug (on the cheap); mitigate potential revenue shortfalls going forward from patent expirations in their own portfolios;  gain access to lucrative new technology platform (targeted immune-cellular therapy could have applications beyond current labeling); and, cost-efficiently broaden existing oncology portfolio pipeline.

Granted, Dendreon is unlikely to command a premium it might have been offered a year ago. Nonetheless,  given the company’s over-dependence on Provenge and a dearth of late-stage prospects in its drug pipeline, any attractive offer would be worth pursuing.

Appealing White Knights

1. London-based AstraZeneca is facing a patent precipice: Anti-psychotic Seroquel, which generated worldwide sales of $5.3 billion in 2010, or some 16 percent of company drug sales, falls off the patent cliff come April 2012. Additionally, the company has hit rough waters looking to expand beyond its current portfolio of prostate-cancer treatments (such as Zoladex). In February 2011, management announced it was suspending regulatory exercises for its once-promising drug for hormone-refractory prostate cancer, an endothelin pathway blocker called zibotentan, due to lackluster efficacy.
2. With the U.S. patent on its blockbuster drug Enbrel expiring in October 2012 (albeit a generic has yet to be approved stateside due to moiety issues), Amgen’s (AMGN) business model going forward speaks to a strong push to become a leader in oncology-derived product sales. Sales for Vectibix (panitumumab), approved in 2006 for metastatic colorectal cancer that has progressed after treatment with other chemotherapy, however, continue to disappoint  – and management is desperate to find a new drug to anchor its oncology franchise. So much so that the company paid $1 billion this year to acquire BioVex for its late-stage OncoVex cancer vaccine (utilizes “oncolytic” viruses – imploding the tumors from within).
3. A leader in immune-oncology, Bristol-Myers Squibb (NYSE:BMY) continues its hunt for oncology “pearls.” And the U.S. pharmaceutical powerhouse isn’t afraid to lay down the cash to land a potential winner: In August 2009, BMY spent $2.9 billion on Medarex to acquire rights to its investigative melanoma drug ipilimumab (approved in March 2011, trade name Yervoy). Analysts are forecasting U.S. sales for Yervoy in melanoma of $925 million by 2017. That said, BMY continues to be highly dependent on Plavix (clopidogrel), having derived some 50 percent of stateside sales of $3.5 billion from this blood thinner last quarter. With the drug facing patent expiry next year, the hunt is still on for the next oncology blockbuster to take its place. Given BMY already has a well-entrenched U.S. oncology sale force, Provenge just might look appealing to senior management.
4. Celgene (CELG) leads with its multiple myeloma drug Revlimid (sister drug to the once notorious thalidomide). However, the company in recent years has been looking to expand beyond blood cancers into other oncology fields. In 2010, Celgene purchased Abraxis BioScience for $2.9 million – a huge premium spent specifically for Abraxane, a chemo-drug indicated for breast cancer (with trailing 12-month sales of $315 million). Having digested that purchase, Celgene is likely on the prowl once again.

Change in Control – Executive Employment Agreements

A review of regulatory filings suggests that insiders would be well-served financially to sign-off on a merger agreement, assuming the takeout “price was right.” For example, in the event of termination following a buyout, chief executive officer Michael Gold and chief financial officer Gregory Schiffman would receive lump sum payments equal to 200% of base pay and 150 percent, respectively, and 100% of targeted annual cash incentive awards: As of December 31, 2010, Gold and Schiffman would each get cash payments of $2.35 million and $874,000. In addition, each executive would receive full acceleration of all stock options and restricted stock awards (albeit stock awarded in last 24-months is currently underwater, having been issued at strike prices ranging from $26.64 to $37.36 per share).

What is Dendreon worth in a buyout?

In assessing the potential worth of Dendreon, there are several valuation methodologies investment bankers could decide between, from the Cost Approach (replacement cost of tangible and intangible assets) to an Income-based Approach (not applicable) to Sales Comparables. Given that the launch of Provenge occurred less than 18 months ago, premising valuation on a multiple of trailing revenues would be a reasonable exercise.

Based on a review of comparable biotechnology companies (similar stage of development), acquisitions made in the last two years suggest a multiple of five –to- ten times trailing twelve-month (TTM) sales would represent fair value. On the high-end – with a built-in assumption that an experienced sales force could turn around moribund growth – a fair valuation price for Dendreon would be $1.65 billion, or about $11 per share, a 47% premium to the current trading price.

Related Posts: Dendreon – Not Running Out of Cash