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GENERIC DYAZIDE IS WORTH $145 MIL. IN MARKET VALUATION TO BOLAR: ANNUAL SALES ESTIMATES OF OVER $50 MIL. BALLOON INTO HIGH-FLYING PERFORMANCE

Executive Summary

Bolar gained almost $145 mil. in market value in the last five-and-a-half weeks of the third quarter -- from the date of the approval of its generic version of SmithKline's Dyazide through the Sept. 30 end of the period. Jumping almost seven points on the Aug. 21 day of approval, Bolar climbed to a high-point in mid-September, trading above 50. The issue finished Sept. 30 at 43-1/2, up 14-3/4 points from the last day of trading before the key generic approval, and up 19-3/4 points from June 30. The market's reaction to the Bolar approval for a generic triamterene/hydrochlorothiazide combo was dramatic from two perspectives: (1) the big jump more than doubled Bolar's market valuation from its closing at the end of 1986; and (2) the gains added a market valuation to Bolar equal to almost half of Dyazide's $300 mil. annual sales level in the U.S. Bolar's generic Dyazide ascent at the end of the third quarter propelled the firm to the position of the top July-September performer among the 47 companies tracked in the "F-D-C" Index. With an 83% net gain during the third quarter, Bolar surpassed large jumps by the New York-based Genovese chain (up 54%), Rorer (up 30%), Dow (up 23%) and Merck (up 21%). Exemplifying the rush to Bolar in late August, Bear Stearns analyst Barbara Ryan issued a strong buy recommendation soon after FDA approval of the Bolar product. Predicting "a dynamic and immediate impact" from the approval on Bolar's earnings, Ryan estimated that the product would add $5 mil. to the company's 1987 volume and $30 mil. in 1988. The added sales would contribute, in Ryan's view, about $2 mil. and $12 mil. in aftertax profits in 1987 and 1988, respectively. The Bear Sterns analyst's rosy earnings forecast for generic Dyazide was exceeded by Bolar, which two weeks later raised its annual sales estimate for triamterene/hydrochlorothiazide from $10 mil. to more than $50 mil. The new product, Bolar said, would raise the company's per-share earnings by $1 in 1987. In 1986 Bolar earned $10 mil., or $1.04 a share, on sales of $55.2 mil. Analyst Ryan also notes that Bolar has other strong positives: a healthy cash position ($6.7 mil. in cash and securities as of June 30); a move into generic injectables and transdermal patches; and a consistent operating record. Ryan also expects Bolar to soon receive the first generic approval for a version of Norwich-Eaton's Macrodantin; Ryan views that product as potentially a $4 mil. per year product for Bolar. Ryan's enthusiasm for Bolar is not shared be everyone on the "Street," despite the big market gains. A Drexel Burnham Lambert report issued at roughly the same time as the Bear Stearns analysis acknowledged that generic Dyazide would drive a 50% increase in earnings per share in 1988 but nevertheless recommended avoiding Bolar stock. "We believe," Drexel said, "the recent surge in Bolar's stock price has largely been propelled by a squeeze from the outstanding short position rather than from strong long-term fundamentals at the company." Drexel was particularly cautious about long-term prospects: "While a continued demand from short interest holders may propel the stock price in the near term, we would not be investors in the company at current prices given the uncertainty and risk associated with earnings from triamterene beyond 1988." Drexel is also cautious about Bolar based on SmithKline's potential response to the generic challenge. Drexel accepts the scenario of SmithKline winning an FDA approval, within a year or two, for a more bioavailable version of Dyazide, an event that would render the original Dyazide, and thus Bolar's generic version, obsolete. In addition, SmithKline could receive three year's of market exclusivity for the more bioavailable product, putting in question any Bolar estimates based on the generic beyond 1988. The possibility of a renewed proprietary position for a Dyazide brand in the future apparently helped to mitigate the market's fears for the effect of the Bolar approval on SmithKline. From the date of Bolar's approval to the end of the quarter, SmithKline's stock lost about 11 points. For the three-month period, June 30-Sept. 30, SmithKline was flat at 59-3/4. Over that period, the composite average of 20 pharmaceutical company stocks increased 7.3%. Another generic firm catching the Street's eye in the third quarter was Biocraft (up 4-1/8 to 23-7/8). During the last year, the generic antibiotics manufacturer has reduced the importance of penicillin products to its corporate profile with the introduction of generic cephalosporins. While broadening to cephalosoporins, business with Lederle continues to be a solid foundation for Biocraft. Lederle still respresents an 11% share of Biocraft's business. Merck (up 36-3/8 to 206-7/8) and Squibb (up 13-1/4 to 100) continued to show why they carry the Value Line investment survey's highest rating for both safety and timeliness. In September, Merck became the first to the market with a new class of cholesterol-lowering agents, HMG-CoA reductase inhibitors. The company's launch of Mevacor (lovastatin) within nine months of applying to FDA for approval confirmed in many observers eyes the company's image as a smooth navigator of the regulatory process. FDA Com. Young has gone as far as to publicly call Merck the current "gold standard" in preparing NDA applications ("The Pink Sheet" Oct. 5, p. 2). Merck experienced its first Mevacor market correction at the beginning of October, losing seven points on Oct. 6 when a National Heart Lung & Blood Institute panel released a draft report on high serum cholesterol treatment. The report rated Mevacor as a second-line drug treatment, based on the newness of the drug. The report, however, supported increased awareness of cholesterol levels. Squibb, which has been going head-to-head with Merck in the ACE inhibitor class and plans a similar fight in the cholesterol-lowering market with its own HMG-CoA reductase inhibitor pravastatin, is prospering in the competitive spotlight. Squibb's ACE inhibitor Capoten (captopril) could generate worldwide sales approaching $700 mil. in 1987. Capoten is also on the agenda of an upcoming FDA Cardio-Renal Advisory Committee meeting to upgrade its use for congestive heart failure from secondary to initial therapy. Former Merrill Lynch drug analyst David Paisley, featured in a recent Forbes story on drug breakthroughs, expressed high expectations for Squibb's cholesterol-lowering product. Paisley distinguished the Squibb drug from the first-generation Merck product: "Lovastatin shuts off cholesterol biosynthesis in a nonspecific way . . . Pravastatin shuts off synthesis only in the liver and gut." Rorer's increasingly aggressive marketing of ex-Revlon products like Lozol, and the firm's persistence in the Robins merger offer continue to make the company an attractive Street item. In the third quarter, the issue gained a net 13-3/8 points to 57-3/8. For the year, the issue was up 18-1/2 points at Sept. 30. Lilly's fluoxetine reached the "approvable" stage at FDA in mid-September. The market's reaction to the antidepressant (tradenamed Prozac) was anything but prosaic. Lilly gained 10 points the day that the drug's nearness to the market was made public. Lilly's stock gained a net 2-3/8 points during the third quarter to close at 96-1/4. For the nine months of 1987, Lilly is up 22 points, or approximately 30%. An antidepressant product, Prozac is also being studied for anti-obesity and other eating disorders. Market investors fattened up on Lilly's potential with a major retail product. Lilly has not really had a new retail entry since the Oraflex introduction and withdrawal at the beginning of the decade. Lilly is also closing in on an H[2] antagonist, Axid, which received an advisory committee recommendation for approval on Sept. 10. Overall, however, the drug stocks cooled somewhat during the three-month period compared to the rest of the market, and to their performance earlier in the year. After outperforming the market in general in each of the first two quarters of 1987, the "F-D-C" Index Composite (up 5.9%) lagged behind the Dow Jones (up 7.3% to close at 2596.28). The Pharmaceutical Component increase matched the Dow. Warner-Lambert (up 11 to 72-1/4) was among the Diversified Component's top gainers. Sales of Warner-Lambert's cholesterol-lowering drug Lopid, which were up 60% in the first half of the year, might get an added boost if results from the recently completed Helsinki Heart Study show that the agent materially lessens the risk of heart attacks. W-L is fighting a major private interest effort in D.C. to get five more years of exclusivity for Lopid. In the retailer component, the Long Island chain Genovese broke out of a market doldrum and climbed 7-1/2 points and more than 50% during the third quarter. At the beginning of September, Genovese announced an Oct. 6 3-for-2 split. Net profits have also more than doubled in the first half of fiscal 1988 -- up to $1.8 mil. from $800,000. Chart omitted.
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