There's a good chance investors in The Medicines Co. ( MDCO) will be left with a bad taste in their mouths after what could be a difficult 2007. Consider the peculiar goings-on lately. Shares of Medicines got whacked on Jan. 16 after the company announced a 6 million-share offering and raised its expense guidance. Counting the additional 900,000 shares that the underwriters would have been allowed to purchase, Medicines' share count was set to increase 14%. At the same time, the company predicted that this year's research and development costs would be $77 million to $81 million vs. the consensus target of $74 million. Sales, general and administrative expenses are likely to be $88 million to $92 million, again ahead of expectations, which had been $87 million. Following the announcements, Morgan Stanley's Steven Harr slashed his earnings-per-share projection to 51 cents from 86 cents, which was the average estimate. (Morgan Stanley doesn't have an investment banking relationship with Medicines.)
Bad NewsFast forward eight days, when the company issued a mysterious press release. Management said it was canceling the stock offering because of "some administrative activity" that may occur in the near future. One analyst, who requested anonymity because he hadn't been cleared to discuss the issue, expects the developments to be negative. "The one thing these companies want is cash," he said. "If they're close to getting it, they're not going to give it up." However, another sell-sider, who also didn't want his name used, believes it will turn out to be essentially neutral. "My sense is that the lawyers were simply erring on the side of caution," he said.
To try to guess whether the unspecified event will be regulatory, legislative or something else is speculation. The company is saying little, even to some of its staunchest supporters, and it hasn't returned several phone calls from TheStreet.com. It's hard to quantify at this time, other than the stock's 4% decline Wednesday, but it appears as if the announcement shifted sentiment to the negative. Investors are wondering why, if the news is benign, the company is being so cryptic. Even if the developments do turn out to be neutral, the bungled handling of the offering seems to have rattled investors' confidence.
Bad CounselingAngiomax, The Medicines Co.'s lone approved product, has a patent that is set to expire in early 2010. Companies are usually able to extend their patents by the amount of time it took to develop the drug, by filing an application with the U.S. Patent and Trademark Office (USPTO). However, The Medicines Co.'s attorneys missed the deadline and filed a day late, causing the USPTO to rule that the patent could not be extended. So The Medicines Co. did what any business with a wad of cash would do -- hired lobbyists to try to change the law. They almost succeeded as the House of Representatives passed a bill that would have granted the USPTO the ability to consider applications filed after the deadline.
The Senate, however, refused to vote on the bill, labeled, S.1785. Like much legislation, the one pertaining to The Medicines Co. was slapped onto the end of a bill that had nothing to do with the issue. "The Vessel Hull Design Protection Amendments of 2006" had previously been passed by the Senate in November. But when lobbyists attached an amendment that would have granted The Medicines Co. the ability to extend the Angiomax patent, it was opposed by several senators who refused to grant the company any special privileges. But it seems as if Wall Street still expects legislation favorable to The Medicines Co. to be passed this year. In December, before the Senate shot down the bill, Pacific Growth Equities analyst Liana Moussatos wrote that even if the bill does not pass, "we believe the arguments made are compelling and eventual passing of S.1785 is likely." Pacific Growth Equities has an investment banking relationship with The Medicines Co. As Dana Carvey, playing John McLaughlin used to say, "Wrong!" It is quite unlikely that even a pork-loving Senate will pass this bill. Look at history. In 1999, Schering-Plough ( SGP) spent more than $9 million in an unsuccessful attempt to push through legislation that would have allowed it to extend its patent on blockbuster Claritin. One could argue that Schering is better funded and has more political clout than The Medicines Co. and that it had a better argument than the alarm clock didn't go off/the dog ate my homework.
Morgan Stanley's Harr agrees. "Investor expectations have increased for an Angiomax patent extension, and with many competing priorities for the 110th Congress, 2007 may not be the year," he wrote in a recent report. It's important to keep in mind that even if a bill was passed authorizing the patent office to reconsider The Medicines Co.'s application, it doesn't mean it has to approve it. The patent office still could determine that there was no valid reason for the late application. The company has just two drugs in the pipeline. However, both of those are in phase III trials and there are some expectations that Angiomax could expand its label in the near future. Furthermore, the cash raised in the stock offering could have been used to acquire new compounds. That said, investor expectations for the next year or so are likely too high. Even after the stock's sharp selloff due to the offering/non-offering, there seems to be a lot of room left between current prices and a possible floor.