|
Industrial-strength quackery —
Make 52% in two months when MedCo meets St. Peter
by Christian DeHaemer
Gene splicing, laser scalpels, virtual robotic microsurgery, rabbits that glow with the phosphorescence of a jellyfish, bitters, elixirs, vermifuges — the healing arsenal of today's medical science verges on science fiction or alchemy. There are now, or soon will be, miracle cures for cancer, HIV, Hepatitis C, piles, rickets and warts.
Over the past few years, modern medicine has finished sequencing the human genome, Pfizer put out a cure from erectile dysfunction and Pepcid AC cured heartburn.
Medical and scientific revolutions have happened before. In the golden age of discovery, Edison, Bell, Marconi, Curie, Becquerel, and Tesla created new wonders never before thought possible.
From the turn of the century until about 1920, radium was supposed to be the answer to all our aches. Dubious cures were unleashed on a hayseed public unaware that Madame Curie's fingers had fallen off from radiation poisoning before she died. Steel magnate Eben MacBurney Byers, who boasted that he had drunk 1,400 bottles of "curative" radium water in two years, died when his jaw dropped to the floor — literally.
You need that like a hole in the head
Don't get me wrong. I'm not shredding the amazing benefits of mapping the genome, or the wonders of bionic limbs. I'm simply reminding you of the basic elements of human nature. Where science goes, pseudo-science is not far behind. After all, this is the world that has brought you www.trepan.com.
And given today's networked world of global pharma voodoo, bureaucrats, politicos and Wall Street-spawned hype, it's a wonder that any truth can be found amongst the spin.
It is at this crossroads of money, greed, and fame that we have found ourselves, dear reader. Let me present to you a shell of a company. An amalgamation of analysts, doctors and obfuscation. A brain trust set up to sell shock stocks to the unwary.
The medicines company
If the name of The Medicines Company (MDCO:NASDAQ) itself wasn't enough to clue you in — the drug pipeline would be. But let me step back a bit.
 This is the goal of MDCO, as stated by the company's president and taken from the minutes of an FDA presentation in October of 1998: "The Medicines Company is a young company with the mission of bringing drugs to patients which might not otherwise get there, particularly drugs which are not considered sufficiently large to warrant the attention of larger pharmaceutical companies."
"We acquired the drug bivalirudin from Biogen in March of 1997 after Biogen decided to discontinue their investment in this program for business reasons."
Bad business plan
In plain English, MDCO's business plan is to buy late-stage drugs from large pharmaceutical companies. And take them public. This makes me wonder why big pharma would sell a perfectly good drug — unless it thought that said drug didn't work or was economically unsustainable.
In the traditional pharma business, a company spends tons of money on a number of new drugs. Some percentage of these makes it through the expensive clinical and FDA trials. A smaller number have enough proven benefit that they are accepted by doctors and HMOs. These enjoy long patents and high margins, and become cash cows for the companies that developed them.
MDCO has neither the R&D to produce a blockbuster drug, nor the marketing infrastructure in place to sell marginal drugs, nor the chance of purchasing a blockbuster at an affordable price.
Drug salvage
MDCO's stated goal is to take three drugs to market. They hope that these drugs take no more than four years and cost less than US$60 million. The company's CEO has admitted that if they only have the capital resources for three drugs, then the first drug must be a success. The other drugs in the pipeline are a number of years away from entering the market.
The Medicines Company purchased their first drug, called Hirulog, from Biogen (BGEN:NASDAQ) for US$30 million in 1997 — after Biogen stated that it wasn't worth bringing to market ("not economically feasible"). Biogen is a large, successful drug company with an US$8 billion market cap and almost a billion in annual sales. They
know what they're doing.
As of 9/30/00, The Medicines Company had not yet realized any revenues. Net loss totaled US$79.5 million. They did receive US$100 million from their IPO in August 2000. Given the current investment environment, I doubt they will receive further financing without a secondary. And without a viable revenue stream, a secondary offering on the open market could prove elusive.
Angiomax — the make-or-break drug
MDCO bought Hirulog in 1997. This is a blood thinner based on leech saliva that directly blocks thrombin, a substance in the body that creates blood clots. It is to be used in angioplasty surgery — where the doctors stick a balloon in your heart to prevent future "cardiac events." The drug Hirulog aims to replace is called Heparin, which in the U.S. alone is used in more than 5 million patients a year.
Heparin is generic and manufactured by a number of different companies, has been used reliably in the vast majority of patients, and has the added benefit of being cheap. Biogen had hoped that the new drug would stop the more serious effects of hemorrhaging. After studies weren't as strong as anticipated, the drug was sold to MDCO. Analysts following Biogen at the time said that they didn't think it was going to be a huge drug and that the problem is price.
Point of sale
On October 23, 1998, MDCO failed to win the backing of a Food and Drug Administration (FDA) recommendation panel for Hirulog. They neglected to disclose this in their IPO prospectus (granted, I may have missed it in between all the begats). The FDA said it was not sufficient for approval but came close.
In May 2000, MDCO put out a press release stating that they had received an "approvable" letter from the FDA for the drug now named "Angiomax." I'm not exactly sure why they did this except to obfuscate the truth and launch a successful IPO.
In all fairness, let it be noted that the drug was approved in New Zealand in July. Furthermore, it would seem there is a chance that it will be approved in this country. And after the failure of Hirulog it would appear that MDCO successfully isolated a specific desired bioactive fragment.
To judge by studies published on the New Zealand website, the drug looks pretty good. I'm not a doctor, and I don't play one on TV, but there is the possibility that the earlier problems with Hirulog resulted from the size and instability of the molecule, as well as toxicities resulting from fragmentation. MDCO seems to have solved those problems. What they haven't answered is the question of economic viability.
I'm not saying that MDCO is an abject failure. Nothing is black and white. I am saying that The Medicines Company looks like a stock-selling, money-burning risky scheme with a lot of downside in the share price.
High valuation
As I write this, MDCO is trading at US$26 with a market cap of US$800 million. They have no sales and few prospects of sales anytime soon. MDCO has US$100 million in cash from their IPO, minus their burn rate (guesstimate: US$65 million remaining). The underwriter put revenue estimates at US$91 million in 2003 and profitability sometime thereafter. That seems a long way away given a burn rate of over US$100 million a year.
By way of comparison, Aviron has a market cap of US$1.4 billion with current sales of US$10 million and cash of US$121 million. Aviron is also near approval of FluMist, which is expected to be a US$500 million drug in its second year.
| EARNINGS PER SHARE |
| Quarters |
1999 |
2000 |
| MAR |
-21.09 |
-32.91 |
| JUN |
-25.61 |
-68.65 |
| SEP |
-19.21 |
-0.67 |
| DEC |
-13.89 |
n.a. |
| Totals |
-79.8 |
-102.23 |
Regeneron Pharmaceuticals (REGN:NASDAQ) is a US$1.3 billion company in terms of market cap, had US$59 million in sales last year and has US$117 million in cash. Both REGN and AVIR have a significant number of drugs in the R&D pipeline. They don't buy failed drugs from other companies that create them; they aim to create blockbuster drugs of their own.
By the way, these two companies are favorites of Brian Hicks, who sits next to me and crows all day long about how he got into AVIR at US$13 and REGN at US$7. (You can find out about his latest pick at www.cuttingedgeonline.com.)
Leech saliva and yeast infections
MDCO's plan was to purchase three drugs, and according to its CEO the first drug must be successful. At this point Angiomax is an open question. The second drug was a nasal spray for treatment of migraine headaches. It ran into problems and its development was halted. The third product is a naturally occurring lactobacillus in late-stage clinical testing for the treatment of a common gynecological infection known as bacterial vaginosis — yuck!
In the end, the bullish argument is that this company can ramp up sales of Angiomax — assuming it is approved before it runs out of cash. It's possible, but not worth a risk premium. In this case, the price to book ratio is almost 9. It has no price to earnings, nor a price to sales. It is trading at 12 times 2003 sales — so MDCO has that going for it.
The high valuation is due to our old friends and stock manipulators — the underwriters, otherwise known as the 7.5% club. Two months ago, CIBC World Markets put out a Strong Buy, JP Morgan rated it a Buy, and Roberston Stephens gave it a Buy as well. I love it when these guys pump up my shorts.
Can't fight the tape
And as if a high valuation and a miserable product lineup wasn't enough reason for you to short this company, know this: There is a frightful new supply of stock coming down the pipes for this company. On February 3rd, 2001, 23 million shares of MDCO currently held by insiders will become eligible for sale. That represents 77 percent of the shares outstanding, and a 388 percent increase in supply over the 4 million shares currently on the market. Given recent daily volumes, it will take more than 250 days to soak up the excess shares — ouch!
Short The Medicines Company above US$26. It might jump above US$30 on a reiteration of buys and the January effect. If it does, short it again. Plan to cover on or about February 8, 2000. The short position is relatively small (currently only 2% of the shares), so you should be able to borrow some.
Contact: One Cambridge Center, Cambridge, MA 02142, phone: (617) 225-9099, fax: (617) 225-232, IR website.
In addition to his duties at Taipan, Chris DeHaemer is the editor of The Hammer.
|
