Tuesday, January 6, 2009

Is Schering-Plough a "Bust-Up" Play, at Present?


Earlier this week, there was some idle speculation that Schering-Plough (NYSE Symbol: SGP) might be a takeover candidate. In this clearly capital/capacity-constrained market? I think not. Here is a comment, followed by my dissection of it, over at the Yahoo stock chat-boards:

. . . .I agree that SGp is an obvious takeover candidate; they have one of the strongest pipelines in the business with 3 novel drugs currently under review by the FDA and another 5-6 in phase 3 clinical development. With a current market cap of ~$26B, there are a number of big players who could take them over, PFE being one, but companies like Novartis (also facing a bad patent cliff), LLY (facing a horrible patent cliff) and MRK would be obvious candidates. Also, Fred Hassan is no stranger to deals, having brokered the Pharmacia-Upjohn deal and the PFE-Pharmacia deals. I would not be surprised if SGP was taken over within the next 12 months, at least if their market cap stays low. I stay long on SGP, and believe that all long could be handsomely rewarded within the next 6-12 months. . . .

By: biotechbull

My answer:

Biotechbull -- the last part of your handle -- "bull" -- suits your above-comment, to a tee. Of the three to which you presumably refer -- one received a "non-approvable" letter from FDA (Sugammadex, in July 2008), and later, Asenapine was delayed for additional safety data, at FDA in the fourth quarter of 2008.

So much for that vaunted near-term pipe. I will grant you that Schering has some interesting possibilities in the 2012 to 2014 time-frame. But they are only possibilities at this point. With this management team, I am sure they'll find a way to screw up the studies/approval process.

That out of the way -- as to the recent SGP share price action -- I think it increasingly clear that Schering is a potential "bust-up" play, at present.

But where is a player to get the deal done? The old-line investment banks don't even exist any longer. And the capital markets are looking for sure things, not "maybes" -- some three to five years, from now.

Schering-Plough -- intact, and "as is" -- is very-likely worth less than the sum of its parts. Look -- it runs an animal health (Organon) business -- being dragged about by an OTC consumer health (Coppertone) segment. . . being lugged along by an aging straight pharma pill (Vytorin) portfolio. . .

No biotech, no bio-equivalent emerging business -- no strategy for self-branded generic capabilities -- in short, no forward momentum, in these cost-constrained times, and segments.

SGP does generate decent cash, and as such, a savvy, very deep-pocketed capitalist, with a three year horizon, could split the parts -- selling each off -- and net a potentially very nice return. Again, where is that capitalist? I dunno.

In any event, current CEO Hassan is, in my opinion, plainly not the man to preside over an auction. He is far too myopic, and ego-invested in his false vision of an "intact Schering" health conglomerate/synergy play.

If it hits $19, I'll likely go short again. It will likely fall again, when December (and year-long) 2008 Vytorin/Zetia scrips data are released by IMS -- and reported by SGP -- in the third week of Janauary 2009. Look for that, in an SEC Form 8-K, probably on a Friday night, if Schering's law department holds true to form.

[Later I added this:]

Schering's psycho-tropic drug candidate, Asenapine, has been delayed by FDA, late in 2008, for additional safety study data.

As the erstwhile Salmon would likely inform us, were he present, now -- Asenapine is a drug that a few other pharma companies spent several years, and several hundred million dollars on, in the last decade, only to abandon it outright over safety (and other) concerns.

Yet Schering persists. Yes, three of CEO Hassan's "five stars" -- from the Nov. 24, 2008 R & D Day Webcast Conference -- are significantly "off-track", with FDA.

For additional clarity: I was not blunt enough about a "bust-up": usually, only a small portion of the "unlocked" value -- from a bust-up -- ever reaches the shareholders of the combined entity -- here the current SGP shareholders. True, one or two units may be spun-off -- as a stock for stock dividend, but most would be sold for cash, to pay down the immense debt Schering took on, when it bought Organon for over $15 billion, in late 2007. A goodly-chunk of that comes due in late-2010.

Namaste.

5 comments:

Anonymous said...

Salmon erstwhile?

Yes. I'm afraid you're right. However Salmon did leave quite a few tidbits.

Maybe on Sunday when I have some time I'll comment on the timing of Fred's spring 2008 $2 million stock purchase, a few of Salmon's previous comments, and some other observations.

Pheonix

Anonymous said...

Interesting article just posted on CNN Money about about Zyprexa and release of material information.

http://money.cnn.com/news/newsfeeds/articles/djf500/200901081634DOWJONESDJONLINE000944_FORTUNE5.htm

This is interesting in light of Fred's actions last year and Former FDA Assoc Commish Peter Pitts' (Drugwonks/CMPI) Dec 24th article.

Pheonix

Anonymous said...

Condor,

I will start with a commentary on Peter Pitt's most recent article. This should be taken entirely as opinion. I will then come back later with some observations and inferences on public information from the FDA and elsewhere. You may need to repost this to make it more legible. The following includes the entire article interspersed with commentary.

Salmon

Asking the Right Questions on FDA Reform by Peter Pitts of the Center for Medicine in the Public Interest

http://blog.pharmexec.com/2009/01/07/asking-the-right-questions-on-fda-reform/

When it comes to reforming the (FDA),if you don’t ask the right questions, you won’t get the right answers. Look at the recent media coverage of the agency’s 2008 drug approval numbers.

Last year, the FDA approved more “first-of-their-kind” drugs (21) and instituted fewer “black box” warnings (46) than it did in 2007 (18 and 62, respectively). So what do these numbers mean?

Some see them as a sign that the FDA isn’t as concerned with safety as it was 12 months ago. More drugs approved? Fewer black box warnings? These same FDA watchers wonder, isn’t the agency’s Division of Drug Marketing, Advertising and Communication (DDMAC) sending out more warning letters to curb the abuses of pharmaceutical marketing—particularly for off-label prescription drugs?

And these are the media-friendly questions, the public hearing questions, and the trial lawyer questions. In other words, the “politics before public health” questions.

For those of us in the know, there is a different set of questions. Namely: Why did the FDA miss review deadlines for at least 15 drugs? Why are a growing number of complete response letters sounding more and more like the old-style, not-approvable variety?

(Commentary - Where did PP get the numbers for missed review deadlines? FDA typically doesn’t release this data and thus it’s not FOIable. No single company could have this type of data and I’m unable to find any public source for the numbers including the FDA website. Plus how could PP possibly know the contents of multiple complete response letters. To know this he would have to get the CR letters from multiple sponsors plus he would need to have seen nonapproval letters in the past. How would he have access to old nonapproval letters? Even when he was associate commissioner for external relations he probably would not have had access to this information as it’s only available on a need to know basis. So even if a sponsor were to challenge a nonapproval it would not go the associate commissioner of PR it would go to the Director of Medical Policy or the Center Director or associate center director in CDER, or even the Ombudsman, so there’s no reason he should have ever seen them in an official capacity.)

And why are more and more complete response letters requesting information that was never discussed during the review process or the advisory committee meetings? Savvy pharmacenti also want to know what exactly is going on with “early safety” communications and signal-to-noise ratio issues.

(Commentary - How would PP know what was discussed during the review process? As for what was discussed during AC meetings, how does he know this? Did he attend every AC meeting? Who are the ‘Savvy pharmacenti’ that’s he’s talking about? Could these unnamed sources have an ulterior motive. What’s an early communication? My understanding working as a reviewer is that it’s telling the company about major findings that could effect approval during the review process so as to give the sponsor a chance to address them, IF THERE’s TIME. Or so that they can start working on a response that may take longer than the review cycle and would be submitted after nonapproval or approvability. This however is not supposed to occur if the findings are major and are not detected until late in the review cycle. They are instead supposed to be communicated in the decision letter. In my mind this whole process of early communications raises questions about providing material information during the deliberative process to the sponsor and which could be abused for insider trading. In contrast revealing this type of information to Congress is something that FDA managers have argued is something that a reviewer would be prohibited from doing, and in my opinion this was in the face of abuses of power and potentially criminal activities occurring. I have been told by a congressional office that FDA management even went so far as to threaten congressional staffers with violation of the trade secrets act for receiving such reports.

What is signal to noise? If a reviewer sees an adverse effect such as coughing up blood and dying does this mean that it’s just a coincidence or is it a harbinger of a much more serious underlying toxicity for the drug that maybe other apparently unrelated side effects might be related to such as right bundle branch block, or shortness of breath.)

But the most important question we should be asking is: Why is ambiguity trumping predictability in the regulatory process?

(Commentary - What ambiguity and predictability is he talking about? When you submit a drug for approval you should expect that you may not get an approval especially if you’re hiding safety information. Does this mean there was an understanding or a fix in? Or does it mean that ‘savvy pharmacenti’ were told things that led them to make some stock trades and then reviewers pushed back about the apparent railroading through of an approval or approvable letter and this effected the values of the stock trades? For example predictability may mean that based on the Memos of Understanding (MOU) mentioned in PDUFA IV and knowing that you will get the approval or approvable letter 2 months in advance of the PDUFA due date when the legally mandated labeling negotiations begin or even earlier when a phone call is made a couple of weeks ahead telling you no one caught anything yet. Thus potentially giving a heads up that might allow insider trading. Or it could refer to the early communications agreements mentioned above, or even both. Now I’m assuming that the dates for these ‘early communications’ could be found in the MOU’s referred to in the Food Drug and Administrations Act of 2007 but to check this I would have to physically go the FDA’s public reading room as FDA does not provide this information on the web.)

This is a key issue that must be addressed by the new FDA commissioner. If the FDA keeps siding with the precautionary principle and doing nothing until it knows everything, the pharmaceutical industry will almost certainly respond by dialing back R&D into new drugs.

(Commentary - Isn’t the opposite of the precautionary principle simply assuming everything is OK and only doing recalls when a problem develops postmarketing? Thus isn’t the precautionary principle enshrined in the Food Drug and Cosmetics Act which requires a nonapproval if information is not provided that is needed to assess safety. Now you don’t need to know everything about safety but I believe you should make a reasonable effort. Not only based on standard practice but especially if there is reason to believe based on prior knowledge that a specific safety problem may be present. Thus wouldn’t getting away from the precautionary principle mean not looking for any safety signals at all).

The industry needs clear, predictable rules. But right now the FDA is a bureaucratic kulturkampf. Regulators need to shift from the vague regulatory definitions they’ve employed in the past to a system of bright lines and clearly demarcated rules.
(Commentary - Consider this in light of my prior comments. This could be interpreted to mean ‘you will meet timelines and follow guidances no matter what, even when this will result in a major public health crisis. Based on my experiences in FDA I believe this is exactly what this means. In my opinion PP’s position will thus prevent anything more than a superficial review and overlooking blatant safety signals.)

This kind of change will require a commissioner who can seek out career officials within FDA who are smart and gutsy enough to embrace new ways of doing business. The commissioner needs to find people within the agency who support clear rules over draft guidances, and pragmatism over dogmatic doctrines.

(Commentary - Under Von Eschenbach, who PP likes, FTEs were pulled off of review work to work on developing drug disease models to help industry develop drugs quicker. In my experience some draft guidances were written in such a way as to give a particular pharmaceutical company a pass on a major safety issue that subsequently resulted in numerous deaths. Another company then came along with an even more dangerous drug, but the same draft guidance even though in general was too lax was still strong enough that the second company couldn’t meet the proposed requirements and which they likely didn’t want to as it may have exposed the toxicity.)

I know from personal experience that there are many FDA staffers who are excited about the possibility of an FDA that leads rather sways with the political winds.

(Commentary - Who are these staffers and where are they leading? To helping drug companies by developing drug disease state models, or by harassing and eliminating ethical reviewers? What political wind is he referring to, perhaps Rep. DeLauro’s Nov 2007 letter to Dr. Von Eschenbach about the lack of oversight of the proposed Reagan-Udall Institute on the FDA campus and the possibility that it will be used for industry to impose its will on FDA and the fact that she mentioned ex-industry VPs in the Office of Translational science. When the only person this could possibly refer to is Bob Powell one of Fred Hassan’s ex-VP’s and an architect of this institute.)

FDA’s Critical Path initiative indicates the agency’s desire to change. Going forward, FDA stakeholders will be looking for other “surrogate markers” to gauge the agency’s willingness to continue the McClellan era’s commitment to the protection and advancement of public health.

(Commentary - Take a look at this article about McClellan in businessweek http://www.businessweek.com/magazine/content/03_24/b3837039.htm. It’s the same things we’ve been hearing over and over. The very real problem I see is that in fields like psychiatry where very dangerous drugs have the potential to be used in healthy people and especially children who don’t really need them, you could induce long term toxicities, e.g. neurologic, diabetes – Zyprexa, or even worse lethal cardiac toxicities, that will need treatment with other drugs and several years down the line. At that point the sponsor could also say but we now have a genetic test to predict who might be more likely to get sick and that would also extend the patent life. However revealing this genetic test might occur several years after you already knew this but you didn’t reveal the information to the reviewers during development because under the FDA’s Voluntary Genomic Submissions Guidance and the FDAAA 2007 you had a ‘safe harbor’ that excused you from providing all safety information as required by the FD&CA.)

Despite recent attempts to clarify regulations, determining what is “in compliance” remains more art than science. Right now the industry is confused, and, as a result, the public health is not being served. What’s needed to resolve this problem is forward-thinking leadership that rises above the bureaucratic ambiguity that currently characterizes the FDA.

(Commentary - Yes we need to clarify regulations but which way will the clarification go? Will we have preemption? Will we throw out the precautionary principle and let out anything on the market and then the companies can sell treatments later to those maimed?)

Creating change won’t be easy for the new commissioner. But if that person communicates this philosophy honestly, leads by example, and empowers change agents within the FDA career staff, the tide will turn.

(Commentary - Based on recent developments such as many of the things occurring with Grassley’s investigations of eminent psychiatric opinion leaders such as Biederman and Nemeroff and also some of the rumblings about him going after cardiologists, and the 9 CDRH reviewers coming forward yesterday the tide is turning. Does this mean PP wants the tide to turn back the other way?)

Anonymous said...

Condor,

I may wait to post about Fred's stock purchases until after the inauguration. You never know what late minute pardons Bush may want to give especially to loyal government employees.

That said believe I want to comment on two points in your blog post.

First is your comment that
"asenapine was delayed for additional safety data, ...in the fourth quarter of 2008." I haven't seen that. Could you provide a source.

Second is biotechbull's statement: "that all long could be handsomely rewarded within the next 6-12 months."

This is interesting. Now if an approvable letter for asenapine was issued (in a complete response) I imagine the stock price could go up.

Alternatively if the letter was already issued and SP provides some data requested an excuse could be found to give an outright approval. The review clock on a resubmission is 6 months and for an nonapprovable action the typical delay for approval is just under 12 months from the original PDUFA due date, although depending on the circumstances the letter may have been delayed say 6 months from the original PDUFA due date.

You should also note that FDA has a history of collaborating with sponsors, harassing reviewers, then forcing them out or firing them for inappropriate conduct when the stress gets to them and thereupon approving unsafe drugs, e.g. John Gueriguian.

Thus if a reviewer working on asenapine were forced out or fired in this manner the obstacle would be removed and would allow a delayed approval or approvable letter but would avoid a nonapproval.

Thus we would expect that positive news on asenapine would coincide with the time frame suggested by biotechbull.

Unfortunately this might not bode well for longer term investors. As I recall the company that made thalidomide eventually came out and thanked Francis Kelsey the reviewer who stopped it because otherwise the company would have been bankrupted by lawsuits.

Salmon

Condor said...

Phoenix and Salmon -- more news, finally, out of Kenilworth, and FDA, on the Asenapine delay, here. . . .

Schering had said, in Q&A, on the Q3 2008 Earnings Conference Call, that the Asenapine filing had been the subject of a request for additional safety data, by FDA -- and only that Schering was "working with FDA" to resolve the issues -- no time-line.

This morning, Schering said it was hopeful that Asenapine would still launch in Q1 of 2009.

I now think that is overly-optimistic.

We'll see.

Namaste -- and looking forward to that post-Inaugural explainer, Salmon! I'll see it when I return from DC, late next week.

Yes. We. Can.