The $100 Million Lottery Ticket
By George Huang, editor, S&A FDA Report
May 30, 2008
In 2007, the Maryland lottery had a record year.
It pulled in more than $1.5 billion of revenue... $50 million went toward running lottery operations, $110 million to retailers, $500 million to the state, and winners collected the remaining $900 million.
That $900 million prize pool might sound like a lot. But as a whole, ticket buyers are basically trading in dollar bills to get $0.60 back. That doesn't sound like a good trade to me. And when you throw in the odds of any particular individual winning – from 1 in 9 on the best scratch-offs to 1 in 175 million on the Mega Millions – the prospect looks even worse.
To consistently make money, the key is to risk capital only when the odds and payouts properly compensate you for the risk you take. The risk of losing your money on the lottery is so great, even huge jackpots don't adequately compensate you.
Don't think just because you don't play the lottery you aren't taking on those odds... Right now, buying into one industry is like putting your retirement on the Mega Millions...
As my colleague Rob Fannon has mentioned, the world's largest drugmakers are about to lose billions in sales as their big-name drugs go off patent. So now, instead of streamlining their own research operations and rebuilding their pipelines, Big Pharma is buying up "lottery tickets," hoping for a quick fix.
Let me show you what I mean...
Last week, Lundbeck, a large Danish drug company specializing in brain diseases, bought a $100 million lottery ticket from U.S. biotech Myriad Genetics. The name on that ticket is Flurizan, Myriad's Alzheimer's drug.
Lundbeck agreed to pay Myriad $100 million upfront, $250 million in milestone payments, and 20%-30% royalties for the European rights to sell Flurizan. That's nearly twice what any other pharmaceutical company has paid for worldwide rights on a similar drug.
Flurizan isn't even approved for commercial sale. In fact, so far the drug has practically failed its clinical trials...
In a Phase II trial of approximately 200 Alzheimer's patients, Flurizan was marginally better than the sugar pills used as a control. But Myriad sliced and diced the data and found in mild Alzheimer's patients, Flurizan outperformed the placebo. Scientifically speaking, this interpretation is hogwash.
But it was enough to prompt Myriad to go straight into two large Phase III trials. The data from one of those trials is due.
Essentially, Lundbeck gave Myriad $100 million on the off chance the Phase III trials turn out to be positive next month.
Lundbeck's shareholders should be outraged. My calculations show the Flurizan trial has less than a 30% chance of success... 50% if you want to be very generous. On top of that, for the bet to pay off for Lundbeck (after subtracting expenses and more payments to Myriad), Flurizan needs to generate more than $1 billion in sales. That's unlikely considering the marginal benefits Flurizan has showed so far.
Judging from those odds, Lundbeck is likely out its $100 million.
Lundbeck isn't alone. As Rob explained, just about every Big Pharma company is willing to throw millions around, buying rights to drugs with slim chances for success and hoping to hit the billion-dollar jackpot. But if you've ever bought a lottery ticket, you know how this story ends...
Some of these biotech "lottery tickets" will turn out to be winners, but most of them will turn out to be foolish bets by desperate players. If you're investing in Pfizer, GlaxoSmithKline, Merck, AstraZeneca, or their peers, you should know they're playing the lottery with your money, taking on way too much risk for the potential reward.
But there is an upside... Maryland lottery retailers, remember, made $110 million taking on absolutely no risk. Even when Flurizan fails, Myriad Genetics has a healthy diagnostics business it can fall back on... plus Lundbeck's $100 million in the bank.
So my advice is to buy the lottery ticket retailers – biotech companies with drugs in late-stage trials. They make money no matter the odds on the tickets... And judging by the Myriad deal, ticket prices just went up.
Good investing,
George Huang
