Merck Has Room to Fall

4/29 - "Unlike small drug developers that typically try to reassure investors that they'll be able to take care of FDA issues, a big pharma tends to give no explanation. That was the case with Merck's announcement yesterday: The company didn't give investors a clue about what the agency didn't like about the drug. Merck only said it would "submit additional information to enable the agency to further evaluate the benefit/risk profile" of the drug."

"The imminent European approval is certainly good news for Merck, but the U.S. market is much larger and clearly the not-approvable letter will hurt its earnings in future years.

Until investors get more information, it's anyone's guess if this is a six-month or six-year delay in getting Merck turned back in the right direction. My best guess is that the reason the FDA is worried about the flushing inhibitor is that not much is known about its long-term safety. That could result in a very restrictive label -- limiting sales to only patients with very high cholesterol levels -- or more clinical trials, which would mean a lengthy delay."

4/29 - "Abbott Laboratories (NYSE: ABT) shares are trading higher after the Food and Drug Administration denied regulatory approval for Merck & Co.'s (NYSE: MRK) cholesterol drug Cordaptive. The Merck drug would have directly competed with ABT's own cholesterol drug. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on ABT."

"For a bullish hedged play on this stock, I would consider a June bull-put credit spread below the $50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 13.6% return in just seven weeks as long as ABT is above $50 at June expiration. Abbott would have to fall by more than 6% before we would start to lose money."

4/30 - "Last week the Committee for Medicinal Products for Human Consumption (CHMP) of the European Medicines Agency (EMEA) recommended approval of Tredaptive (formerly Cordaptive), Merck’s combination extended-release niacin with a novel flushing inhibitor (a prostaglandin D2 antagonist). However, FDA issued a Not Approvable, likely owing to safety concerns with the product; we are therefore reducing our estimates."

"Niacin-based therapies have been available for some time as both a food supplement and an ethical pharmaceutical, but their utilization remains marginal compared to other lipid therapies (2.8% of the market), largely owing to tolerability issues. Tredaptive attempted to address one of those issues—flushing—but did not eliminate it, and still had other concerns, such as potential blood sugar and liver enzyme elevation. Given the recent approval of an Abbott niacin-based combination therapy without outcomes data (and a very clean label for a niacin-based therapy), we believe safety was likely the reason for the FDA action for Tredaptive."

"We now forecast sales for the Tredaptive franchise from 2008-1012 of $10mm, $50mm, $90mm, $205mm, and $545mm, down from $60mm, $220mm, $550mm, $810mm, and $1.13B, respectively (see below)."

"We value MRK shares at 16x our 2008 continuing operations EPS estimate of $3.35, giving us a 12- month price target of $54 per share...We see the 2H08 improving for MRK shares, with a bolstering of Gardasil owing to seasonal effects and a label expansion, along with solid data upcoming for MK-974 for migraine; we rate MRK shares OUTPERFORM."

4/29 - "The non-approval of Cordaptive is good news for ABT’s niacin franchise. Since our forecasts did have Cordaptive getting approved we are raising our estimates for ABT’s Niaspan and Simcor...While we had forecast most of the growth of Cordaptive coming from new patients (that had troubles with niacin flushing), we did assume some share erosion for Niaspan in 2008 and Simcor in 2009. We are now expecting Niaspan to grow at a 12% 2008-12 CAGR (up from 7%) and Simcor to grow 18% up from 13%. These changes up our 2009 and 2010 estimates by $0.04 each."

"We rate the shares of Abbott Laboratories Sell/Medium Risk (3M). Even with the recent addition of Guidant's vascular business, Abbott still generates the majority of its profits from pharmaceuticals, which has recently been under pressure due to generic competition and failures in the new product pipeline. Abbott continues to face several threats on this front, including: 1) generic competition to Ultane, Biaxin, Omnicef (2007), and Depakote (2008); and 2) new competition to Humira, which is Abbott's fastest-growing drug...It is also important to note that we also see several risks to the prospects for the Xience V platform, including US launch timing that is at least six months later than the Street estimates."

"We arrive at our $50 12-month target based on: 1) a 13x P/E off our 2009 estimate; 2) a TEV/EBITDA of 9x; and 3) a 10-year DCF analysis."