Alza: Who Needs Blockbuster Drugs?


By Amy Tsao Alza Corp. has a potent arsenal of revenue-generating drugs -- and a healthy range of products for a midsize pharmaceutical company. But until recently, its share price, which had hovered near its 52-week high of $47, gave many investors vertigo. As the broader market retrenched, the stock (AZA) has dropped this year to the more reasonable level of $30 a share. Its price-to-earnings ratio has been reduced to 28, lower than that of some of its peers.

Given such figures, many analysts saw Alza stock as a buy opportunity. So apparently did Johnson & Johnson, which made an offer on Mar. 26 to acquire Alza for $10.5 billion in stock. Alza shares jumped more than 25%, to around $38 a share, on rumors and subsequent confirmation of the offer, which pushed J&J shares 6% lower, to around $82. But Alza shares may still be attractive to some investors. Based on the stock-swap buyout, in which each Alza share would be exchanged for 0.49 of a J&J share, investors could essentially get pricier J&J shares at a discount by buying Alza.

TRANSFUSION. Acquiring Alza would be J&J's biggest deal ever, and it would fill a gaping hole for the diversified health-care giant. Like many big pharmaceutical companies, it's in dire need of new drugs. The Alza deal is seen as a way for the 115-year-old company to get back on track after a series of recent setbacks, including last year's withdrawal of the ulcer drug Propulsid because of an alleged link to serious side effects.

J&J could also use some of Alza's drug-delivery systems, such as transdermal patches or implants. And analysts predict that Alza's techniques could extend the life of some major products J&J will lose to competitors or patent expiration in the near term. For example, Procrit, J&J's blockbuster product for boosting red blood cells, could get new life from an Alza drug-delivery technology just as it faces losing share to a much-anticipated, longer-acting anemia drug from Amgen.

The details of such projects have yet to be worked out, but once the deal closes -- likely in the third quarter of 2001 -- J&J would be able to add Alza's product revenue to its top line. "Basically if Alza's [incontinence drug] Ditropan and Concerta [an attention-deficit-disorder drug] continue to do very well, the transaction could pay off," says Michael Krensavage, an analyst with Raymond James & Associates. "However, the price that is being discussed [to acquire Alza] seems to me to leave little room for error."

STARTING FROM ZERO. Alza, which is headquartered in Mountain View, Calif., first attracted attention for its innovative drug-delivery technologies, which help make medicines more effective or easier to take. Then, in 1993, it brought in as its CEO Ernest Mario, formerly CEO of the British drug giant Glaxo Holdings (now Glaxo SmithKline), to shift its focus into the higher-margin business of developing and marketing its own drugs.

Under Mario, the company steadily pushed into developing and marketing its own drugs. Indeed, revenues of Alza's drug portfolio have gone from zero to a projected $725 million or higher in 2001, more than half the company's total. And, says Chief Operating Officer Bruce Cozadd: "We're very early on in the product life cycles for each of our key products. You can see it won't be long before we have a $1 billion in revenues from our own products."

Alza's strategy is to fill niche markets, developing medications large pharmaceutical companies won't go near because the markets aren't blockbusters. With a market cap of $8 billion, Alza is a top specialty drugmaker in a group that includes respected midsize companies Forest Labs and Elan. Such companies "are very happy with a $100 million drug," says Don Ellis, an analyst with Thomas Weisel Partners.

SHORT-TERM "PAUCITY." In 2000, Alza earned a healthy $223.3 million, or $1.03 per share, on revenues of $988.5 million. The company recently said it expects earnings per share and revenues to increase by 20% in 2001, close to Wall Street's consensus estimate. Alza has plans to pour more money into its drug pipeline, boosting its research and development budget 26%, to $240 million, in 2001. But from now to mid-2003, when it hopes to launch E-Trans fentanyl, an acute-pain product, Alza had planned to rely on existing products, manufacturing fees, and royalty payments to drive revenues. "They've got a pretty full pipeline for 2004, but there's paucity" in the meantime, says Prudential Securities analyst Timothy Anderson.

The company's most exciting new prospect is Concerta, a gradual-release version of Ritalin for treating attention-deficit-hyperactivity disorder, which mainly affects children. Launched in August, 2000, the drug is expected to add $200 million in revenues this year. But Alza faces a barrage of competing products from the likes of Celltech, Shire, and Novartis with its partner Celgene. "They're not likely to be as good as Concerta, but invariably they'll pick up market share," Anderson says of the other drugs. Alza's biggest-selling drug, Ditropan XL for incontinence, is also feeling the heat of competition from a similar drug launched by Pharmacia.

J&J isn't the first to make a bid for Alza. Rival Abbott Laboratories tried to buy it in 1999 for $7.3 billion, but the deal was nixed because of antitrust concerns. Such issues shouldn't stand in the way of a marriage with J&J, says Alza spokesperson John Liu. In the meantime, it's not too late for investors to take advantage of Alza's strengths. You can buy the stock, and you'll also be buying a share of J&J -- at a discount. Tsao covers biotechnology for BusinessWeek Online in New York


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