Pharma Notebook: Warner-Lambert's Rezulin Holding Its Own

Plus, Biomatrix blames short-sellers for its declines; coming clean on J&J.
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Warner-Lambert

(WLA)

is set to report its quarter on Thursday, and the company will reveal something surprising: Diabetes drug

Rezulin

is holding up much better than Wall Street expected.

That's important because, with Warner trading at a healthy 36 times this year's consensus earnings estimate of $1.92 a share, it needs to be more than a one-product story. Multibillion dollar cholesterol-killer

Lipitor

already is carrying a big load, and the Street figured Rezulin was dead because it has caused liver failure and death in some patients.

In addition, Wall Street thought that doctors would turn to new drugs in the same "glitazone" class as Rezulin, such as the recently launched

Avandia

sold by

SmithKline Beecham

(SBH) - Get Report

and

Bristol-Myers Squibb

(BMY) - Get Report

as well as the just-approved

Actos

from

Eli Lilly

(LLY) - Get Report

and

Takeda

.

True enough, Rezulin's growth days are over, but this is no

Trovan

, the

Pfizer

(PFE) - Get Report

antibiotic that was severely restricted by the FDA and almost immediately went into a nosedive.

According to recent prescription data, Rezulin continues to have about 6.4% of the diabetes market, down just under one percentage point from where it was when Avandia was launched. Avandia has around a 3.2% share of the diabetes market, according to data from

ING Barings Furman Selz

projections using data from

National Data's Direct Rx

tracking service.

Of course, last week's approval of Actos will put more pressure on Rezulin. However,

Credit Suisse First Boston

analyst James Kelly writes in a Tuesday note that if doctors continue to sign new scrips for Rezulin and don't differentiate between the three diabetes drugs when it comes to liver side effects, the most pessimistic forecasts -- which have the drug going to zero in two years or so -- could be too grim. CS First Boston forecasts that Rezulin sales will be $640 million this year, falling to $530 million in 2000. CS First Boston rates Warner a buy; it hasn't performed underwriting for Warner.

Biomatrix

(BXM)

says it was baffled when its stock went down Tuesday after "meeting" earnings expectations.

A company spokeswoman, speaking to

Dow Jones News Service

, complained: "Truly it's confounding, because we hit every one of our targets for the quarter."

The report went on to posit that those nefarious short-sellers were at work in sending the stock down. It fell 6 1/4 to close at 23 Tuesday and then dropped another 3 1/4 to 19 3/4 Wednesday. The story said: "The direction of Biomatrix's stock has sometimes been dictated more by investors with short positions than by the company's fundamentals."

Sadly, there's a fundamental flaw in that analysis. For one thing, two hedge fund managers who can go short say that the stock is "hard to borrow." In other words, so much stock is held by investors who won't lend their stock or cannot (because, for instance, they hold it in cash and not in marginable accounts) that short-sellers can't borrow it and sell it, hoping to buy it back later at a lower price.

No, the selling Tuesday seemed to be due to old-fashioned longs not staying that way. And the reason they may have preferred to dump Biomatrix shares apparently was old-fashioned as well -- the company will have a hard time meeting the sales expectations for its knee injection painkiller in the second half of the year, according to three hedge fund managers, one who's short the stock and two who have been short but have covered their positions.

Rory Riggs, the company's president, didn't return a call seeking a comment.

Sure, Biomatrix reported second-quarter product sales of $18.1 million (slightly missing analysts' estimates of $18.5 to $18.7 million) and earned 15 cents a share, excluding a special item, topping the

First Call

consensus by one Lincoln. That was up from the first quarter's $16.5 million in product sales and 13 cents a share.

But longs are looking for two things with the company's knee-pain product,

Synvisc

: They want to see growth each quarter, and they want to see Synvisc on a

sendero luminoso

, or a shining path, to reach the estimates of end-user sales (sales to people like doctors who shoot up their patients) of around $150 million this year.

In the second quarter, Synvisc had end-user sales of $24.3 million domestically, according to

American Home Products

(AHP)

. AHP's drug division

Wyeth-Ayerst

sells Synvisc and pays Biomatrix, which developed the injection. That's only up from $22.6 million in the first quarter. (Wyeth also had $1.6 million in foreign sales, up from $800,000 in the first quarter.) So Wyeth will need sales of around $50 million in the next two quarters to get to $150 million this year.

That's going to be particularly hard, because now Wyeth has a quarter's worth of Synvisc inventory on hand, according to investors who listened to the Biomatrix conference call Tuesday. A big portion of the second-quarter sales to Wyeth went to building the inventory. That building process is over. Now, Wyeth just has to sell more.

"It's hard to believe they'll do that," says a Boston-area health care investor who has been short Biomatrix in the past but currently has no position. "If Wyeth would've sold around $35 million, it wouldn't be such a risk. But the quarter was essentially flat."

Meanwhile, the big bull on the stock, Wade King at

BancBoston Robertson Stephens

, on Wednesday cut his 1999 revenue number to $77.2 million from $87.8 million and reduced his 2000 revenue estimate to $113.1 million from $135.5 million. He also cut earnings estimates to 72 cents a share this year, from 89 cents, and to $1.25 a share in 2000 from $1.58. (Robbie Stephens hasn't performed underwriting for Biomatrix.)

All this means that Biomatrix, despite its two-day price decline, could be still vulnerable.

Centocor

(CNTO)

did it, saying Wednesday that it agreed to sell to

Johnson & Johnson

(JNJ) - Get Report

. Among other things, it means that

TheStreet.com

was wrong to be

dismissive and to focus chiefly on

earnings.

So, J&J will pay a lot: around 10 times projected 1999 sales. Hey, that means that

Agouron

sold itself on the

cheap to Warner when it went at around five times projected sales.