Wall Street's vetting of FaceBook may have removed much of the perceived investment risk, but it also added the unforeseen risk of "paying too much" as evidenced by its precipitous fall in only one week.
The story for Merck (NYSE:MRK) may sound different than FaceBook, but it is really the same. Merck and other big pharma companies are "overpaying" for licensing rights to new drugs and "overpaying" when buying out companies because their risk management structure is still underdeveloped and is based on an over reaction to their old riskier model of R&D.
Developing new drugs is clearly a very risky business. It can take over ten years and 4 billion dollars to develop just one single drug, and the risk of failure is a staggering 85%. This exceptionally high risk has caused Merck and most other big pharma companies to shift their strategy away from risky R&D and toward acquiring the rights to drugs from other companies that have already mitigated the risk by gaining approvals.
This shift in strategy is the first step in the right direction, but it has gone too far and is causing Merck to pay too much for its drug opportunities. There is a better solution and it only requires taking on just a little bit more risk in exchange for far better pricing. Merck could identify opportunities before FDA approvals for a fraction of what they would pay for a fully approved drug and contract to option them based on milestone achievements. This would result in far greater profits to Merck's shareholders.
One of the obstacles for Merck and the other big pharma companies attempting to better manage their risk/reward ratio is their business development structure. Today's Big Pharma business development leadership is usually very closed minded to discussing a potential new drug for consideration unless it is introduced by somebody who is already in their circle and who they know well. The problem with this structure is that they miss out on many opportunities and don't even hear about them until they are too far along and too expensive to pursue.
Another obstacle is that they may have a competing drug and react by closing the door to speaking with a potential competitor instead of graciously opening the door and inviting discussions that could be beneficial for all parties if done properly. Remember the old saying, "keep you friends close, but keep you enemies even closer".
It's really not that difficult to establish guidelines for a filter to quickly screen opportunities so they are not missed, but to do so, management will have to step up and change course. Management will have to train its business development people how to be more objective and receptive to unknown people making unsolicited introductions to new opportunities and how to quickly screen out those that are not worthy or ready yet.
An example of one such opportunity available to Merck, or even to its shareholders as individual investors is a small, unknown, but extremely exciting company named, Ampio Pharmaceuticals (NASDAQ:AMPE). Ampio is in the enviable position of owning not one, but 3 potential blockbuster drugs, plus a revolutionary diagnostic device, all of which are very close to FDA and other governmental approvals and licensing deals.
Close inspection of Ampio's clinical trial data for Ampion, Optina and Zertane points to expected successful outcomes because of unusually high safety and efficacy results to date. Considering the nature of these drugs, it's highly unlikely that there will be any negative surprises in upcoming FDA trials.
A stunning example of the efficacy of Ampion is this amazing short video clip of Norm Johnson showing his miraculous recovery from extreme knee pain where he found it very difficult just to walk and almost impossible to go up and down stairs. Norm was in so much pain that he was resigned and ready to schedule knee replacement surgery ... until he joined a clinical trial and received a single injection of a new wonder drug called "Ampion" into each knee. Within one hour after receiving the injection, his pain was completely gone and he was able to walk pain free. Six months later and he remains pain free and you can even see him climbing up and down a steep ladder. Mr. Johnson cancelled his plans for knee replacement surgery.
Ampio has fewer than 31 million shares outstanding that are trading close to their lows for the year. Regardless of their low share price, just pennies below $3, Ampio finds itself having more than a tiger by the tail ... they have a handful of tigers by the tails. Ampio is indeed the most exciting buyout or licensing opportunity that is just waiting to be discovered!
Another example is a very small and unknown company called Catalyst Pharmaceuticals (NASDAQ:CPRX). Alcohol and drug abuse is rampant in our society and there have been no effective treatment or treatment programs. Catalyst Pharmaceuticals is developing 2 drugs that are so promising for cocaine addiction and perhaps even for widespread alcohol addiction that the National Institute for Drug Addiction is supporting their current clinical trial. If results are in line with expectations, the value of their drugs CPP 109 and CPP 115 will skyrocket because the need is so great and the market is so large. CPRX is at its all-time low of only $.56/share and will probably not remain here for long.
It would be very simple and inexpensive for Merck, or any of their competitors to investigate the validity of Ampio's high-powered portfolio and if confirmed, make an offer for their drugs or even for the entire company that would be incredibly cheap even if they wound up paying $50/60 a share for the whole package, that would still be less than half the cost to develop just one drug let alone 3. That could be far more cost effective than the current low-risk model used by Merck. Actually, it could be an incredible steal. A milestone-based agreement would cover most risk and Merck's shareholders might get the deal of the century. The same may be true for Catalyst Pharmaceuticals. All it requires is a serious look with an open mind.
If Merck does not act, there is a large field of competitors with a huge appetite that will be more than happy to throw their hat in the ring at much higher prices as the approvals and licensing deals get closer and start falling into place. It will then be just like another FaceBook IPO pricing or just like another disappointing Remicade buyout ... or it could be a grand slam home run for Merck and its shareholders. All Merck, or its competitors, have to do is take a close look at this baby giant and others like CPRX and if it makes sense, lock them into a milestone agreement and buy them out before they get too big and too expensive. Ampio has never said they want to be acquired, but money definitely talks and a player like Merck or J&J (NYSE:JNJ), or any of their competitors, can be quite persuasive if they see a fit.
Mitigating risk is clearly essential, but the pendulum has swung too far in the direction of overpaying for risk mitigation and this is hurting the bottom line so much now that it is clearly time to increase profits by taking just a little more risk and managing it with a well thought out plan. Not a lot of risk ... just a little, because it can dramatically increase returns when it is done properly.
It will not be surprising if there is a very loud response from management objecting to this article in an attempt to justify their actions, but remember, "actions speak much louder than words". It also will not be surprising if Merck or one of their competitors see the light and wind up saying ... "Thank you for sending us this valuable information".
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.