Those wondering about the direction of
shares should wait to see just how good
is at hoop-jumping and palm-greasing.
Late last month, Glaxo filed for Chinese approval of what could be a blockbuster treatment for hepatitis B,
, developed by Biochem Pharma. Wall Street -- and probably Glaxo itself -- doesn't know how hard it will be to get approval from the Chinese government, to arrive at a price, to sell it across the country and to protect its patent position. It's the first time a major pharmaceutical company has tried to launch a drug in China first, without having sold it elsewhere.
Indeed, even Biochem's CEO, speaking after the company's presentation Tuesday at the
Montgomery Securities Growth Conference
, said he wasn't sure what to expect.
"It is a huge market, China, but until you go there and start the sales, you cannot tell how big it will be," says Francesco Bellini, president and chief executive of Biochem.
What is clear is that the opportunity in theory is gargantuan. According to Glaxo's figures, there are 300 to 350 million chronic sufferers worldwide of hepatitis B, a viral infection of the liver that can be fatal, mostly in China and the rest of Asia. The disease causes 1 to 2 million deaths a year, the company says.
While Lamivudine is important for the British drug giant, which is trying to dull the impact of a loss of patent protection for ulcer drug
, its success is crucial for the Laval, Quebec, biotech that receives slightly under a 14% royalty on its sales outside the U.S.
Biochem's high valuation is largely predicated on the explosive potential of the hepatitis drug. At its Tuesday close of 31 5/8, Biochem sells for about 58 times this year's earnings of 54 cents a share and about 37 times the 1998 estimate of 85 cents a share, according to
Hambrecht & Quist
estimates. (H&Q has an investment banking relationship with the company.)
Biotech analysts, in particular, are relying on Glaxo's might in pulling this off. The bull assumption is that Glaxo will sign a national distribution deal with the Chinese government, which will buy the product in bulk quantities and distribute it through national health programs. And there will be protection, somehow, from piracy.
"Glaxo's not stupid," says Mike King, an analyst for
of Chicago. "One hand is going to grease the other." Vector does not have an investment banking relationship with Biochem.
Also, analysts point out as evidence of the large potential of the market that
are also developing oral hepatitis B drugs. The two are racing Glaxo to be first on the market, though it appears Glaxo is ahead for now. The company has said it expects to launch the drug early next year.
Others assessing the situation and its difficulties have decided that Biochem's $3.5 billion market value is too rich. The company has attracted the attention of short-sellers, most recently after a 98% run-up in its stock since late April.
"Fundamentally, it's hard to justify the valuation" for Biochem, says Edmund Debler, an analyst for boutique research shop
Mehta & Isaly
, which is not recommending either Biochem or Glaxo. "It's palatable at 20 and it gets expensive at 30."
Company skeptics have argued perennially that Biochem is overvalued. It used to be that 3TC, Biochem and Glaxo's hit drug for AIDS, wasn't going to go anywhere. In the second quarter, 3TC sold $193 million; Bellini predicts sales will exceed that in the third quarter. Then the argument was that
patent suit over the drug -- which is pending -- would cut into Biochem's royalty. That didn't hurt the stock significantly. Then it was that 3TC sales would dry up. So far no, but company critics say stay tuned.
But in the case of Lamivudine, it may be different.
Mehta & Isaly's Debler says that trying to figure out how much Lamivudine is going to sell isn't too easy. "In that first strange year, we don't know what the pricing will be," he says, or how or widespread uptake will be. After all, the entire prescription market in China is hard to get a fix on, with guesses ranging from $1 billion annually to $10 billion. Imports account for a fraction of that.
Debler thinks that Lamivudine will sell $200 million next year, mostly in China and the rest coming from sales in other Asian countries. For 1999, he predicts sales of $500 million. He thinks the drug eventually gets to a billion worldwide at peak, but that's far less than estimates of most biotech analysts, who think the drug's potential is twice that or more.
And then there is an ongoing debate about the quality of the data surrounding Lamivudine, with the shorts contending that there are potentially serious side effects when patients are taken off Lamivudine and Biochem saying that they are misinterpreting data. That probably doesn't matter for China, analysts say, where the approval process is not as rigorous as in the U.S.
But next year, the two companies will file for approval in the U.S. (a far smaller market). Then, the shorts predict, the side-effect and relative-efficacy issues will come to the fore.
Cory Johnson contributed to this story from the Montgomery Conference in San Francisco.