Shorts Find Themselves Knee-Deep as Biomatrix Prospers

Despite a drop in the stock today, Biomatrix is making its detractors unhappy.
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The shorts are feeling so much pain on

Biomatrix

(BXM)

that it's too bad the company's knee-pain injection doesn't work better.

The stock has risen more than 50% this year in the face of heavy skepticism, but the shorts are finally getting a little relief. One long-time bull,

Prudential's

David Lippman, Wednesday cut his rating to accumulate from strong buy on valuation worries, knocking the stock down 6 1/2, or 7.2%, to 83 1/2. (Prudential has participated in underwriting for Biomatrix.)

Still, the bulls think the company's

Synvisc

product is growing strongly midway through its second year on the U.S. market. Even Lippman expressed confidence in Synvisc's growth prospects. Bears aren't so sure. Synvisc is sitting in warehouses of Biomatrix's marketing partner,

American Home Products

(AHP)

, says one West Coast short-seller. As the stock goes up and Biomatrix's market capitalization bounces around a cool billion, prescriptions for Synvisc, a synthetic version of hyaluronic acid -- a natural fluid that binds, lubricates and protects joints -- have fallen this year.

What's striking is the familiarity of the Biomatrix story. It hauntingly reminds the West Coast short-seller of

Vivus

(VVUS) - Get Report

, which sells the Muse suppository for impotence and Scud missiled in late 1997.

Both companies launched physically invasive products to hot demand. Both quickly said they were unable to meet demand. When the prescription trends turned negative, the Vivus bulls impugned the data; as Synvisc prescriptions have turned ugly this year, Wade King, an analyst and big supporter from

BancBoston Robertson Stephens

, wrote on April 6, "We believe that monthly pharmaceutical scrip estimates are much less reliable indicators of Biomatrix's sales of Synvisc" because the injection is sold and administered primarily in doctors' offices, so no prescription is written. (Robbie rates the stock a buy. The firm has not performed underwriting for the company. King didn't return several calls for comment.)

The parallels go on. Just as both Vivus and Biomatrix got new manufacturing plants onstream, competing pills arrived. In Vivus' case, the pill was, of course,

Viagra

; with Biomatrix, the pills are the COX-2s, namely

Celebrex

from

Monsanto

(MTC) - Get Report

and

Pfizer

(PFE) - Get Report

. Biomatrix says Synvisc doesn't compete with Celebrex.

Another similarity is that neither product is spectacularly effective. When Muse hit the market, it helped fewer patients than the clinical trials indicated. With the Synvisc data, analysts are lukewarm. "The clinical data are not very compelling," says Jim Flynn, a pharmaceutical analyst from

ING Baring Furman Selz

who rates American Home a buy and doesn't cover Biomatrix. "The product definitely has a place in a specific niche. But does this drug cure knee pain? I really doubt it. Maybe it gives temporary, mechanical pain alleviation."

Criticisms and parallels aside, Biomatrix says Synvisc is undergoing a renaissance. The product stalled in last year's second half only because of the company's capacity constraints. Rory Riggs, Biomatrix's president, says Synvisc was relaunched in early February. Now that its new plant is up and running, Riggs says that

Wyeth-Ayerst

, the drug division of American Home that hawks Synvisc, has started to offer commissions to its salespeople when they make a sale. A consumer ad campaign will start late this summer.

Since the

American Academy of Orthopedic Surgeons

meeting in February, "We've seen a material increase in weekly order rates," says Riggs. However, that effect won't be felt until later this year.

"I'm not expecting dramatic growth first quarter over fourth quarter" of last year, he says. "I'm not expecting growth to drive us until the third and fourth quarter."

The West Coast short-seller thinks that growth is unlikely. Synvisc sales appear to have peaked in September at $9.5 million, according to data from

IMS Health

(RX)

. In December, total sales were $9 million. They fell to $5.9 million in January and then were flat at $5.8 million in February.

Biomatrix says orders were up substantially in March, but the company wouldn't comment on sales, citing its quiet period before its earnings release, set for April 20. However, data from

DirectRx

, the prescription service of

National Data

(NDC)

, suggest that even if orders are up, sales aren't. The average weekly scrips rose less than 2% from February to March. In the first two weeks of April, scrips dropped sharply.

Synvisc orders are rising, say the bulls, but it sure ain't showing up. -- J.E.

Source: DirectRx, a division of National Data.

Course, the bulls say the scrip-monitoring data are incomplete and can't track all the appropriate sales channels. The West Coast short-seller responds that the data tracked over 85% of the sales from each quarter of last year. But he says that even if they are inaccurate, the data are nevertheless consistent and showing that "end-market demand is drying up."

If the demand is down, and yet Biomatrix is seeing orders rise, where is the extra product? The short-seller thinks that Wyeth is stocking a whole heap of the stuff. The short-seller says that according to a Wyeth source of his, the big company had 90,000 Synvisc syringes in stock in the first quarter, up from 69,000 at the fourth quarter's end. At the sales pace of the first quarter's first two months, that appears to be over two months of stock. Doug Petkus, a Wyeth spokesman, says that while he cannot comment on specific inventory levels, that "sounds about right." Biomatrix says Wyeth is finally able to stock up, in order to fulfill orders quickly.

Biomatrix records sales when it ships to Wyeth, so a lot of inventory will make the small company's top line look good initially. But if Wyeth cannot unload the new inventory quickly, revenue at Biomatrix will be hurt down the line.

Synvisc had sales of $86.4 million last year, $33.6 million of which went to Biomatrix. Wyeth expects Synvisc sales of $145 million in 1999, according to Biomatrix spokeswoman Anne Marie Fields. That would give Biomatrix $75.2 million in Synvisc sales, estimates Robbie's King. King thinks the company will earn $1.70 a share this year, up from $1.02 a share last year. At Tuesday's close of 90, that gives Biomatrix a 1999 price-to-earnings ratio of 53 -- but who looks at that tired stuff anymore?

The case of Biomatrix brings up a truth not often acknowledged in the world of biotech: If you want to know how much a development-stage company's product is going to sell, ask an analyst of the big pharma marketing partner. That offers a sense of how successful a product the big company foresees.

Jeff Chaffkin, a drug analyst for

PaineWebber

, says, "Honestly, Wyeth has not talked a lot about it. Wyeth views this as a niche product. If not for the interest in Biomatrix, I'm not sure I'd put it in my model." (PaineWebber hasn't performed underwriting for either company.)

Chaffkin says he is modeling about $100 million in total Synvisc sales this year, but as he looked at the scrips, he reflected that his estimate might be high: "The product looks like it hit a peak."

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