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Biotech Roundup: Pfizer's Lipitor, Dendreon's Big Day, Biogenerics


Is March 29 here yet?


Lipitor fives steps up, one giant leap back

Pfizer (PFE) provided some good news to its shareholders by announcing that the FDA approved Lipitor for five new indications. This excellent drug now reaches across a variety of lipid and cardiac disorders, proving why it is arguably best in class. However, patients do not always need "best in class". A very large percentage of patients don't need the power Lipitor has to lower their bad cholesterol levels. They can make due with lesser drugs.

Washington State and Regence BlueShield, Washington's second largest insurer, will start forcing patients in March to take two generics and one branded drug first. They will only allow them to move to Lipitor if the cheaper drugs don't work for them. Patients who are already on Lipitor and refuse to switch will have to pay a higher co-pay. Lipitor is the biggest expense for the Washington's public employee health plan and the fifth largest drug expense (behind four psychiatric drugs) for Washington's Medicare program.

Regence, a private insurer, already made this change for Oregon, Idaho, and Utah customers. To get reimbursement for their patients, docs will need to submit the patient's bad cholesterol level and their target goal. Patients will have had to fail two generics and either Crestor or Vytorin before being approved to be on Lipitor. (FWIW, I doubt only a tiny number of patients will ever get to Lipitor under this scheme given Vytorin as a specified prior option). Washington Medicaid approaches statins in a similar fashion.

This is exactly what I said would happen as Zocor went off label. This is also something those who invest in any mass-marketed product will need to factor into their financial models. Unless there are obvious side effect and efficacy benefits, insurers will want to put patients on cheaper versions first before stepping up to the expensive brands.

Dendreon's Big Day is March 29

Dendreon (DNDN) may have caught a break when FDA leadership decided to keep Provenge within the CBER division and assigned Provenge to CBER's Cellular Therapy and Gene Therapy (CTGT) Advisory Panel. By not going through the Office of Oncologic Drug's ODAC advisory panel, Provenge is more likely to be in an environment that resembles what an advisory panel should be instead of a panel designed to help career bureaucrats score points off drug manufacturers.

I strongly suggest you look at this story. With something over 20 million shares shorted (around 30% of its entire float) and the majority of its call options sold by those who short the stock, one would presume by looking at Mr. Market that there is zero chance Provenge will be approved.

That's utter nonsense for a number of reasons. Dendreon bears like to point to precedents where the FDA rejected other applications also based upon successful secondary endpoints after the primary endpoints failed. The problem with this is the secondary endpoint that succeeded in the Provenge trial was survival – the only endpoint that matters for cancer drugs. There is, in fact, no FDA precedence for the Provenge application. It is new ground, which makes the certainty of the bears all the more puzzling.

So what chance does Provenge have in front of the panel? What are the odds? I have been telling our clients for months there is no way to tell until we know who is sitting on the panel – both voting and non-voting members as non-voting members often skew panel discussions in unexpected ways. We'll know that on March 27 or 28. Even then, small group dynamics make predictions uncertain.

There is no doubt the odds are better than zero, however.

This one is not for the faint of heart and anyone sinking their life savings (or any significant portion of their portfolio) into this one without a workable hedge should have their heads examined. If the panel doesn't vote favorably on March 29 and/or the FDA issues an approvable letter on May 15 requiring Dendreon to wait for the results of a larger Phase III trial due towards the end of 2008 or early 2009, the stock will retrace 50% or more to under $2.

If the panel sees reason, which there is some chance above zero as I indicated above, then the stock should perform very well. Fair value for Dendreon, given Provenge's capability to sell well over a billion dollars a year at maturity, is easily above $20/share. Bears who are this certain of failure, however, can stay in denial for some time and sink their teeth into a story. Call it conservatively, then, a double after a positive panel on March 29 and FDA approval on May 15.

$4 stock, 50% downside risk and 100% (minimum) upside potential. While we don't do recommendations here on the 'Ville, I humbly suggest you at least plug those numbers into your risk analysis and see what tumbles out. Please note I am speaking to those with no Dendreon in their portfolios. Those who have substantial amounts need not apply as you've already placed your bet.

As you all probably know, I do have a position in Dendreon and have had one for a number of years. All BSR staffers are locked out of trading in the stock until after the briefing papers are released on March 27 or 28. BSR has been covering Dendreon for over six years, so our research archives are loaded with details on the company if you want to dig into the story.


I receive the occasional question about "Is the threat of biogenerics already priced in to biotech stocks?"

I always shake my head at this one. If the question is specific to the biopharma companies like Amgen (AMGN) or Genentech (DNA), my answer is that I have no idea.

If the question is more about the development-stage biotech companies I cover, my answer is that the biogeneric issue is a figment of the imagination. In a world with or without biogenerics, a company who successfully gets a drug on the market is an easy 2x, 3x, 5x, or whatever 'x' from where they are trading now. That number will never change because biogenerics are allowed. I know of no full-time dev-stage biotech investor who sees biogenerics as a legitimate threat to valuations.

Bottom line, don't let the biogeneric news flow scare you away from dev-stage companies.
Position in DNDN

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