New drugs move stocks, whatever might come next

Months ago at an investor day, a Wall Street analyst in the audience during the question-and-answer portion of the event, told Merck & Co. CEO Ken Frazier that he liked what Merck was doing, but that he really, really, really wished Frazier would give some fresh, positive news on a drug - any drug - so the analyst could have a reason to tell clients to buy Merck stock.

The analyst was doing his job, but the conversation and the last few days point to one of many diametrically opposing forces in the pharmaceutical industry.

Even when put on what companies call a fast track, drugs take years to produce. And when a big pharmaceutical company strikes a deal with a start-up because the latter has a molecule in early phase trials, nobody can say for sure what profit will come of the arrangement years into the future.

But the stock market spins daily, with second-by-second changes, and the ups-and-downs of that could be seen this week with two Big Pharma companies and two of smaller stature.

Theravance, Inc., is a small company based in South San Francisco. On Thursday, the company's web site listed only one drug that it currently has on the market, Vibativ, which is a injectable drug for the treatment of "adult patients with complicated skin and skin structure infections (cSSSI)" caused by a set of very specific things that dermatologists and infectious disease specialists might understand.

But before the NASDAQ market opened Wednesday, trading in Theravance (THRX) was halted because an FDA advisory committee was to meet Wednesday to give an opinion on the company's drug-inhaler product called Breo Ellipta, which is to designed to be used once a day to treat chronic obstructive pulmonary disease. The stock had surged earlier in the week after the FDA staff assessments were posted online.

GlaxoSmithKline is Theravance's largest shareholder, with about 27 percent of the shares, according to Bloomberg, and there are market murmurs about a full takeover. When the panel voted to recommend approval of the drugs, shares in both companies surged upward Wednesday and then again on Thursday.

Theravance stock rose 16 percent to $32.56 at Thursday's close, its highest price since July 2007.

GSK is based in London and its stock rose to its highest price in 11 years on Thursday. Its American depository shares closed in New York at $50.39.

Meanwhile, Elan Corp., presents a slightly different situation.

Elan officially is headquartered in Dublin, but has facilities in the United States.

The somewhat funny thing about Elan is that its web sites says, "Elan does not currently support any marketed products." It's also had some regulatory issues.

So why would Royalty Pharma offer $12 per share for Elan?

Because Elan made good cash from selling some of its products to other drugmakers, it is scheduled to get royalty payments from some of those drugs, and it has stakes in other drugs under development.

Royalty Pharma originally offered $11. Elan then conducted a so-called Dutch auction tender offer, which allowed current shareholders to say a range of prices at which they would sell their shares back to the company. Elan was willing to pay between $11.25 and $13 per share in this auction, which ended Thursday.

Elan said only 6 percent of shareholders offered to sell for less than $12. That was seen by some as a sign that Royalty Pharma would have to offer more.

But how does this connect with a Big Pharma company?

The 6 percent of Elan shareholders who were unwilling to sell for less than $12 did not include one very big shareholder: Johnson & Johnson.

J&J said Thursday morning it sold its 17.9 percent stake in Elan, amounting to 82 million American depository shares that were held in its Janssen subsidiary, at $11.25 per share. J&J reportedly paid $8.25 per share in 2009. J&J said in the statement that it estimated the after-tax income from the sale would be $213 million.

J&J probably figured a $213 million sure thing was better than the uncertainty that might spin out of a successful purchase by Royalty. J&J reported Tuesday that its first quarter profit fell 10 percent from a year earlier, in part because it set aside $600 million to cover future litigation costs and the integration of Synthes.