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BC Tracking Portfolio Series B
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GPCB
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S
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8/03/07
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13.41
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Open
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12.52
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6.6
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SPY
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L
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7/02/07
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151.79
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Open
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145.23
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-4.3
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* Price for Open position is price at close August 13.
August 14
Just a note on Series B. With the VIX still above 25 this is a dicey time to be trading, at least for me. I like all
the current open positions. Please note there are two entries for the short position on GPCB. After opening the initial
short the price took a large jump up which, based on what I wrote a few weeks ago, seemed completely irrational. Being convinced
the stock is still a good short I added more, and I think this was the correct decision. Hopefully the portfolio will go
green soon.
August 5
Russell Rebalancing Review
For the week ending June
8 I featured biotech stocks I thought would be added or removed from the Russell 2000.
The point of this was that according to researchers at the University
of Illinois at Chicago (Rev.
Quant. Finan. Acc. 2006, 26, 409–430)
for the years 1993-2000 stocks added to the Russell 2000 experienced a positive 7.6% abnormal return (i.e. above the broader
markets) for a period of two days before the announcement date to 20 trading days after the reconstitution date, and that
stocks dropped from the Russell 2000 experienced abnormal losses of 6.6% for the same time period.
I thought it would be fun
to see the progress of this. This year the Russell rebalancing was done June
22. My prediction was that AKRX, ALTH, ARQL, AXCA, BMTI, GNVC, HALO, IMMU, MDVN, NRGN, PDGI, SGEN, TRCA, VNDA, XOMA would
be added, and that ADLR, ANX, ANDS, AGIX, AVII, AVNR, BCRX, GTOP, GNTA, HNAB, NFLD, NUVO, RNVS, TRMS would be removed from
the Russell 2000. In the end the only prediction that was wrong was AXCA, which
was not added.
The rationale behind shifts
in price makes sense: upon addition to, or deletion from, the Russell 2000 index
mutual funds will buy or sell the stock. As well, stocks in a major index are
more likely to attract analyst coverage. But, would this have been a good trade
this year (at least in biotech stocks)? To check this I looked at closing prices
on June 20 (two days before) compared with prices on July 23 (twenty trading days after).
For further comparison I added closing prices on from last Friday (August 3).
Results are presented in the tables below.
So, was trading biotech based
on Russell rebalancing a good idea this year? Looking at the tables below it
would have been a disaster. From close on June 20 to July 23 the S&P 500
was up 1.9%. The average return for the added biotech stocks in the table above
was a loss of 9.8%. Only one of the stocks added to the Russell actually saw
an increase in price! As it turns out, the biotech stocks dropped
from the Russell 2000 faired better, only losing an average of 7.4%. Over the
same time period the AMEX biotech index (BTK) lost 1.2%.
I recall a finance professor’s
take on trading systems: “they work until they stop working”.
Biotech Stocks Added To Russell 2000
Biotech Stocks Deleted From Russell 2000
July 30
Portfolio Update
I mentioned on July 2 that
I was opening a position in ELN at 22.31. This proved to be a terrible move and
I closed this today at 17.35. My play was an FDA advisory panel would recommend
approval for Tysabri for the treatment of Crohn’s disease. While the panel
doesn’t meet until the 31st, Europe’s FDA equivalent on July 23 recommended against permitting this use. Also, on Friday the FDA released documents expressing concern over the risks associated
with Tysabri relative to the benefits for Crohn's patients. I still like the comany, and may look to get back in later. Obviously this isn’t the best way to start off a new portfolio, but that’s
investing.
Despite recent setbacks I
still like Savient (SVNT) even though it’s down a bit: biotech stocks are
not entirely immune to market upheaval so I’m not concerned just yet. In
addition, Cardiome Pharmaceuticals (CRME), a Canadian company I like, is trading at less than $9. As I’ve mentioned before they have a PDUFA date for their atrial fibrillation drug on October. I added this to the portfolio at 8.59 and would add more if it dips further.
In addition, based on last
week’s focus GPC Biotech (GPCB) I have opened a short position at 11.85.
As a comparison for Series
B I added a final row of the S&P 500 ETF SPY has been added.
July 27
GPC Biotech
GPC Biotech (GPCB) took a
big hit (the stock closed at $20.36 on July 24 and opened at $13.35 on July 25) on July 25 when an FDA advisory panel voted
unanimously to wait until a complete Phase 3 study of their drug Satraplatin is available. GPCB
had been trading at over $32 on July 19. Often this type of price decline can be a good buying opportunity. Or not.
Satraplatin looks like a promising cancer drug. It’s related to cisplatin, a platinum containing drug that cross-links DNA.
A big advantage of Satraplatin is that it’s taken orally, not an injection.
One important detail about Satraplatin: it was
initially being developed by Bristol-Myers, but they stopped a clinical trial after only 50 patients were treated due to “…low
commercial priority for this drug by BMS at the time.” This is a valid explanation. A large company like Bristol-Myers
just can’t make a big profit from a smaller drug such as Satraplatin. Sensing
opportunity, Spectrum Pharmaceuticals (SPPI) licensed the drug, and subsequently re-licensed it to GPCB.
Resistance to platinum drugs is
becoming a problem. In a study published in Biochem.
Pharmacol. (2007, 74, 20–27)
in vitro resistance to cells engineered to be resistant to platinum crosslinkers was nearly 5 times less for Satraplatin
than for either cisplatin or oxaliplatin. As both incidence of prostate cancer and resistance to Pt agents are rising, this
bodes well for future sales.
The drug actually looks promising. Results of a 950 patient Phase 3 study published in Lancet Oncology
(2007, 8, 290) as a second line treatment for hormone refractory prostate cancer (HRPC) were good. Six months
after treatment, 30% of the Satraplatin cohort and 17% of the placebo
group had not progressed: after one year these figures were 16% and 7%, respectively.
Regardless, the FDA still wants to see a more complete dataset.
So, a company selling at
steep discount with what looks to be a viable drug could be a bargain. Or it
could still be overpriced. The FDA’s decision pushes approval of Satraplatin
back to late 2008 in a best case scenario. According to GPC’s SEC filings,
the primary patents covering Satraplatin expire in 2008 and 2010 in the United
States, and in 2009 in most other countries. This
leaves a very limited time frame in which to sell the drug before generic competition forces the price down. The chemistry of making Satraplatin is straightforward, so generic competition is pretty much assured.
Now,
GPC can seek an extension of up to 5 years of patent coverage, but whether they obtain this or not is uncertain. Further, it remains uncertain even if the FDA will approve the drug after the final data is submitted.
Also, it’s unclear how robust sales will be. While I do believe an orally available cross-linker will be of benefit, this won’t necessarily translate
into sales. The company does have an antibody in a Phase 1 study, but that's
years from any payoff.
The
company has enough money to see them through the next couple of years. My take
is even at this steep discount this stock is dead money.
July 2
As noted in the Blog on June 26 all open positions in the BC tracking portfolio have been closed. As half the year is
over, this seems a good time. The average return on this "Series A" was 27.8%.
I was hoping for some weakness in ELN to buy back in in advance of an FDA advisory panel meeting on application of Tysabri
for Crohn's disease scheduled for July 31. This hasn't happened, so I will start "Series B" off with ELN at 22.31.
My guess, as was the case last time ELN had an advisory panel for Tysabri last year (for MS), is this is a "sell the
news" situation. That is I think this is a trade, not a long term hold. To be clear, I do like the company long term,
but I think the stock will take a 10-20% jump after the meeting and trend back down in advance of the FDA's actual decision
in October.
I also like SVNT, as mentioned a few weeks ago, and will add at $12.26 in advance of clinical results on Puricase. I
will update both of these in a table soon.
Another stock that will move in the next quarter is Biosante (BPA). Their drug Elestrin was launched by Bradley Pharmaceuticals
(BDY) a few weeks ago. The issue here is how much of the estrogen replacement market Elestrin can stake out. Results of
this will likely have to wait until BDY and BPA release Q3 sales data. Until then this will be a good chart to watch closely.
My guess is the stock will consolidate until this data is released, but any abnormal volume could be a predictor.
BC Portfolio
(Series A, closed June 26, 2007)
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Ticker
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L/S
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Date Bought
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Paid
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Date Sold
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Price*
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% Change
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INSM
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L
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11/20/06
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$1.40
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12/06/06
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$1.46
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4.3
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NPSP
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L
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11/27/06
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5.25
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12/14/06
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4.57
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-13.0
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IDEV
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L
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12/18/06
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7.25
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01/29/07
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6.26
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-13.7
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ENCY
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S
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11/06/06
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5.76
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12/29/06
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4.17
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27.6
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IMCL
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S
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09/25/06
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29.61
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2/28/2007
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29.08
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1.8
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QGQ OU***
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L
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01/26/07
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2.20
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3/8/2007
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4.20
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90.9
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NVD
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L
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11/13/06
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1.34
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3/23/2007
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1.28
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-4.5
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DNDN
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L
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4/2/2007
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14.00
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4/10/2007
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21.93
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56.6
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ELN
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L
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03/06/06
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12.68
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5/21/2007
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18.73
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47.7
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CRTX
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L
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5/14/2007
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2.56
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5/31/2007
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3.75
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46.5
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INO
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L
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2/26/2007
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3.25
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6/5/2007
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2.76
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-15.1
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LQH FK***
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L
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5/29/2007
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7.80
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6/5/2007
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6.70
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-14.1
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MGRM
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L
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6/20/2007
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1.80
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6/20/2007
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1.60
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-11.1
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HALO
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L
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08/21/06
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2.48
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6/26/2007
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8.60
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246.8
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YNN AH**
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L
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12/15/06
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6.80
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6/26/2007
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6.40
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-5.9
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CJBFF.PK
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L
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02/02/07
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0.68
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6/26/2007
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0.38
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-44.1
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BPA
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L
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2/20/2007
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3.60
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6/26/2007
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6.21
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72.5
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Average
Overall
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27.8%
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** AMLN JAN 08 40 CALLS
*** HEPH MAR 07 7.5 PUTS*** CELG JUN 07 55 CALLS
June 23
Should You Know Savient?
Savient pharmaceuticals (SVNT)
sells Oxandrin, a drug to promote weight gain in patients who have experienced some type of trauma, for example surgery or
a serious infection. A significant portion of sales of Oxandrin are to HIV patients. In December 2006 two generic versions of Oxandrin were launched. Savient is doing all it can to prevent this competition, and have been trying to stop sales of these by
both claiming patent infringement and petitioning the FDA to block the approval of these drugs. Savient reported Q1 2006 sales revenue of $9.5M: sales in
Q1 2007 were $6.4M. This isn’t the main value driver of this company.
With its days of unfettered
access to the market numbered, Savient knew enough to seek new products. They
are currently developing Puricase as a treatment for gout. Gout is an accumulation
of uric acid in joints and tendons, and can be quite unpleasant. Gout occurs
in about 1.4% of men and 0.6% of women (suffering from gout is one of the few things Benjamin Franklin and Bart Simpson share
in common). Puricase is a PEGylated form of an enzyme called urate oxidase which
metabolizes uric acid.
It is well-known that using
urate oxidase is effective in reducing blood levels of uric acid. Sanofi-Aventis
(SNY) sells Elitek, a recombinant urate oxidase from yeast, for the treatment of high levels of uric acid in pediatric patients
receiving chemotherapy. Cancer cells grow rapidly and thus synthesize more DNA: uric acid is a by-product of DNA synthesis.
In 2006 they sold less than $380M of Elitek. In clinical studies Elitek
was very effective at reducing levels of uric acid. It does have side effects:
among 347 patients, 50% experienced vomiting, 46% had a fever, 26% experienced headaches, and 20% diarrhea. A drawback of Elitek is that it must be daily administered by IV infusion over 30 minutes. While Elitek is only approved for cancer patients, it has been noted (Int. J. Med. Sci., 2007, 4, 83–93)
that the drug can also be used to treat gout.
Savient’s
drug is an improved version of this enzyme. By attaching poly(ethylene glycol),
or PEG, to the enzyme its degradation is dramatically reduced. This gives a substantial
advantage in that injection of the drug doesn’t need to be daily. In an
early Phase 1 study, enzyme activity was noted for up to 21 days after injection. Based
on another clinical study (Arthritis & Rheumatism, 2007, 56,
1021–1028) dosing every two to four weeks was suggested as effective: this
is a substantial advantage over daily! As well, in this Phase 1 study incidences
of adverse events were substantially lower than for the non-PEGylated version.
Current best treatment for gout flare ups are anti-inflamatory drugs. These
do not treat the underlying condition, however. Both Elitek and Puricase reduce
levels of uric acid to a significantly greater extent than do current gout treatments.
The last patient was enrolled in Savient’s Phase 3 study of Puricase in March 2007. Primary efficacy endpoints of the study are attainment of normal levels of plasma uric acid after 3 and
6 months. Results of this study should be released by the end of the year, and
the company plans to seek regulatory approval in early 2008.
From a financial standpoint the company is in good shape, with enough money easily for two to three years. SVNT’s chart is pretty impressive over the past year: the stock has doubled from November last year
to January of 2007. The stock has retreated a bit from its January high of $15.20
and trades now at just under $13.
Puricase is really just a reconstitution of an approved drug that is effective.
Results on reduction of serum uric acid levels from early stage clinical trials are impressive. There is no guarantee the Phase 3 results will also be good. Given the similarities in terms of mode of
action between Puricase and Elitek (an approved drug) I believe odds are good they will be, which will give a nice bump to
the share price. Given that administration of Puricase is easier for patients
than Elitek, there is the possibility of off-label use of the drug to treat the market served by Elitek. When the results are released is unknowable.
SVNT’s short term chart suggests caution. The stock traded down (along
with the rest of the market) Friday on three times average volume. This looks
like a good stock to watch over the next week and may be a good buy if it gets down near $11-$11.50 (based on the chart, if
it falls below $12.50 it may drop this far).
Week Ending June 22
Early Summer Speculation?
Monogram Biosciences (MGRM) is a microcap
biotech focusing on diagnostic tests. One problem with treating viruses’
is they are able to mutate and become resistant to many drugs. This is also a
big problem with antibiotics. Monogram’s products are designed to allow
physicians to determine if the disease causing species have become resistant to current therapy.
Monogram went public in the biotech boom at
the turn of the century. Their chart since then isn’t pretty, looking somewhat
like a cross-section of a black diamond ski hill—pretty much all downhill and quite steep in places.
In April an FDA advisory panel unanimously
recommended approval of Pfizer’s (PFE) HIV treatment Celsentri (maraviroc). Pfizer expects to hear from the FDA if this treatment will be approved in the next
two weeks. This drug is intended for patients with advanced HIV who are resistant
to current therapies. This is not a big market, and this ruling will likely not
have much effect on Pfizer’s share price. It could make for a fun trade
of MGRM, though.
Monogram’s test
to determine drug resistance was used by Pfizer in their clinical trials of Celsentri.
That is, the test is used to determine if the patient should receive the drug.
Pfizer is collaborating with Monogram to make this test available globally: they have also provided financing for Monogram.
So, while approval for Celsentri is not a guarantee, it may give a substantial price boost to MGRM. While the FDA usually follows the advice
of advisory panels—and this panel’s recommendation, unlike for Dendreon’s Provenge, was unanimous—it
doesn’t always
Of course, there is a
catch. In their 2006 10-K Monogram disclosed that it had been informed
by Bayer Diagnostics that they believe Monogram is infringing on their intellectual property and may require Monogram to enter
into licensing agreements. Monogram counter-asserts that Bayer may be infringing
on their IP. It does not appear that any litigation has been filed. Presumably Bayer is waiting to see if the Pfizer application is approved and if the sales of the tests
generate enough revenue to make a lawsuit worthwhile.
So, while this legal uncertainty
adds risk this may still make for a fun but highly risky speculative trade. The
stock closed on June 19 at $1.76. I wouldn’t suggest holding this stock
too long after the FDA decision. Monogram’s balance sheet is not the best
and the uncertainty with future litigation with Bayer makes for more risk, but for anyone looking to speculate before Canada
Day this could be some fun.
Week Ending June 15
After a bad week for biotech
stocks in the BC Tracking portfolio, the harshest loss of all was the Ottawa Senators losing the Stanley Cup in five games
to the Anaheim Ducks.
Elan Pharmaceuticals: Back To The Well
One of the first stocks I
wrote about, in March 2006, was Elan Pharmaceuticals (ELN), when it was trading at $12.68.
After a recent run-up (which was predicted very nicely by the chart!) I wrote in The Blog on May 21 that I had sold
(@ 18.73) but that I would happily get back in at some point in the future. I
missed the recent peak of just over $20 on June 1, but that’s OK. The catalyst
for the recent run-up was an announcement that ELN will begin a Phase 3 clinical trial (with Wyeth) on their AAB-001 antibody
to treat mild to moderate Alzheimer's disease earlier than expected.
On May 29 Elan announced
the FDA would convene an advisory panel to make recommendations about application of Tysabri to treat Crohn’s disease
on July 31st. The Market seems to have been little impressed by this,
as the stock closed Friday (June 8) only a penny higher than on the 29th.
On
June 7 Abbott (ABT) announced that their arthritis drug Humira had been granted approval in Europe for the treatment of Crohn’s
disease. The FDA had approved Humira to treat moderate to severe Crohn’s
disease in February. Remicade is also used to treat Crohn’s.
Crohn’s
disease afflicts an estimated half million people in the US,
and is a particularly unpleasant disease. There is currently no cure. At any given time half of patients with Crohn’s do not experience symptoms. Typically by ten years after diagnosis, 24% of patients have had a colectomy.
Results
of a pair of clinical trials evaluating the efficacy and safety of Tysabri for Crohn’s disease were published in The New England Journal of Medicine in 2005 (2005,
353, 1912–1925). The study was
done in two parts. In the first study, 905 patients received either placebo or
Tysabri for ten weeks. In this trial the Tysabri groups had only a marginally
better response rate than did the placebo group. The second trial was composed
of the 339 patients who had responded to Tysabri (as 181 of the 905 patients received placebo this amounts to 47%). In this trial 61% of patients experienced a sustained response (as compared to 28% on the placebo) and
44% experienced remission (26% placebo). While these responses aren’t high,
they are significant for patients suffering a debilitating incurable disease.
Another
study on Tysabri as a treatment for Crohn’s (NEJM, 2006, 354, 899–910), using a different endpoint, found that responders
experienced 92% fewer lesions of the GI tract than did those in the placebo group over two years.
In
a clinical study on application of Humira to Crohn’s (Gastroenterology, 2007, 132,
52–65), 50% of patients receiving the drug responded. In this case after
26 weeks 47% of responders receiving the drug weekly experienced remission, as did 40% of patients receiving a dose every
second week. Only 17% of patients on the placebo were in remission. After 56 weeks 36% receiving the drug weekly were in remission as were 41% of those receiving biweekly. At this point 12% of placebo patients were in remission. Statistically there was no difference in response in the weekly versus biweekly administration. Tysabri was administered every four weeks..
Looking at differences in safety, with both drugs roughly twice as many patients on placebo withdrew
due to serious adverse events as did patients on the drug. The mechanism of the
two drugs is different: Humira binds to TNF while Tysabri is an integrin binder.
So, from an efficacy and safety point of view I am confident the FDA advisory panel will recommend Tysabri
for treatment of Crohn’s disease. The 600 lb gorilla in the room, however,
will be the reason for the withdrawal of Tysabri from the market (it is prescribed for MS) in 2005: out of 3300 patients in clinical studies of Tysabri three
cases of progressive multifocal leukoencephalopathy (PML) occurred. Now clearly
the 1 in 1100 risk is small, but the downside (death) is severe. It should be noted
no incidences of PML have been reported since, and the initial deaths were quite likely due to interactions with another drug.
While this remains a concern, that the FDA permitted the drug's reintroduction suggests the benefits outweigh the risk.
In
the end an FDA panel unanimously recommended the drug be put back on the market to treat MS.
Tysabri was reintroduced in July 2006 and, while sales were initially slow to pick up, based on SEC filings they are
increasing quarter over quarter dramatically.
Now,
Tysabri is currently on the market to treat MS. About 400,000 people in
the US have MS, so greater than doubling
the potential market size is substantial. In addition, use of Tysabri to treat
a second indication may prompt more MS patients to take the drug, as they may view it as safer.
My
take is the FDA advisory panel will recommend approval of Tysabri to treat Crohn’s, which will give a boost to the share
price. With the uncertainty in the Market this past week (the VIX closed at 14.8
on Friday) I think ELN will be a good stock to get into once the VIX gets closer to 12 or 13.
Another
possibility here is to buy call options. Time decay of options increases dramatically
as expiry approaches. As July 31 is getting close to expiry of August options, buying longer term options will minimize losses
due to time decay. JAN 08 15 ELN calls are currently trading at an implied volatility
(IV) of only 58%. For a company anticipating an event that could double the market
size of its major product this seems low to me. My guess is that this IV will
increase significantly as the end of July approaches, which will boost the call price.
To be clear, trading options is much riskier than trading stock and should not be done without an understanding
of options.
Week Ending June 8
Biotech Russell Rebalancing
I watched the first bit of
Jim Cramer’s Mad Money on Thursday.
His shtick for the show was the impending rebalancing of the Russell 2000 index.
The Russell indices are rebalanced once a year. That is, companies whose
market caps have fallen below a minimum cutoff are removed, and companies that have increased their market cap are added. The clear benefit of being added to an index such as this is that mutual and exchange
traded fund managers are required purchase these stocks for their funds. The
stocks also benefit from greater analyst coverage.
I was initially skeptical
that this was a viable way to make money. Cramer made it seem that one could
make money just by correctly guessing which stocks will be added to the Russell 2000 this year.
Turns
out, there is something to making money off of this rebalancing. A study published
by Hsiu-Lang Chen from The University of Illinois at Chicago (Rev. Quant. Finan. Acc. 2006, 26,
409–430) found that for the years 1993-2000 stocks added to the Russell 2000 experienced a 7.6% abnormal return (i.e.
above the broader markets) for a period of two days before the announcement date to 20 trading days after the reconstitution
date. As well, he found that stocks dropped from the Russell 2000 experienced
abnormal losses of 6.6% for the same time period. According to Russell.com they
will add:
“…lists of probable additions and deletions
to its website, www.russell.com/Indexes, after the markets close on Monday, June 11. Final index membership will take effect on Friday, June 22 and remain in place
for the ensuing 12-month period.”
So, with this in mind I set
out to look for biotech stocks that were not last year included in the Russell 2000 but, based on increases in market cap,
are likely candidates to be added this year. Cramer cited a report by Prudential
suggesting the cutoff this year will be a market cap of $233M (if I recall correctly).
I used $300M as a cutoff for moves up and $200M as a cutoff for moves down as it’s impossible to know how accurate
the $233M figure is.
I came up with 15 biotech
stocks that I think are likely to be added (AKRX, ALTH, ARQL, AXCA, BMTI, GNVC, HALO, IMMU, MDVN, NRGN, PDGI, SGEN, TRCA,
VNDA, XOMA) and 14 (ADLR, ANX, ANDS, AGIX, AVII, AVNR, BCRX, GTOP, GNTA, HNAB, NFLD, NUVO, RNVS, TRMS) that are likely to
be removed. I think shorting any of the stocks on the way out is a bad idea. These
stocks have already been hit pretty hard and, for the most part, are just languishing until they run out of cash: they’re also highly illiquid, so shorting them just isn’t worth the risk.
Of the stocks to be added
I particularly like Arqule (ARQL). Arqule started off as a “molecule mill”: basically a company that would produce libraries of compounds for other companies,
in 1993. This business model was popular at the fin de siècle, but in the past five years—due in large part to competition from China
and other low wage countries—has proved to be unprofitable. Offshoring
of biotech research to China was the subject
of a recent op ed in the San Diego Union Tribune (http://www.signonsandiego.com/uniontrib/20070509/news_lz1e9navarro.html). Arqule has recently shifted its business model to pursue its own proprietary drug
discovery efforts, and discontinued their chemistry services operations in May 2006.
Arqule’s lead compound
is ARQ 501 which, in a Phase 1 study presented at last year’s ASCO meeting, demonstrated good tolerability and even
hints of efficacy. Note, the number of patients was small. ARQ 501 is currently being evaluated in three Phase 2 clinical trials. The company is scheduled to present
data from two of these clinical trials at the upcoming ASCO meeting. Good results
will move the stock completely independently of any bump from joining the Russell 2000 (which is not a sure thing), but an
extra 7% in a month doesn’t hurt anyone.
Of the other companies I
think will be added I am leery of ALTH and IMMU and a fan of TRCA and especially HALO.
Week Ending June 1
Super-Celgene?
No matter how many times
I look at Celgene’s (CELG) multiples (trailing P/E = 223 (!), P/S = 24, P/B = 11) and think it’s overpriced, the
stock always moves up. This company has done phenomenally well. Initially Celgene
had the foresight to develop Thalidomide (a sedative that caused birth defects)
as a treatment for cancer. Celgene’s follow-on compound, Revlimid, is even
better.
Celgene has been doing a
great job of growing revenue and profit over the past five years. Revenue has
nearly doubled each year since 2002: the company is set to easily surpass one
billion this year. Operating income has doubled each year since they became profitable
(2004). Clearly, Celgene can’t continue to trade at the premium it is forever,
but for now it’s a good ride.
The American Society for
Cancer Oncology (ASCO) has its conference later this week in Chicago, and Celgene will be presenting new clinical data
on the efficacy of Revlimid both on its own and in combination therapy. Historically
CELG has always done very well as a result of the ASCO, and I think it’s safe to assume it will this year as well. To take advantage of this, and a slight softening in share price over the past week,
I think this could be a good time to look into (still quite speculative) June in-the-money calls.
GO SENS
While investing in biotech
can be fraught with risk, it’s clear to me that the NHL’s Stanley Cup Playoffs, which begin May 28th
in Anaheim, are a pretty safe bet. Specifically, the Ottawa Senators will have no trouble defeating the
Anaheim Ducks in five games.
Week Ending May 25
Next Week
Couple of interesting events
on tap for this week.
At a conference in Spain, Phase 1 data using Innovio’s (INO) electroporation
technology for treatment of prostate cancer and for melanoma will be presented. These
trials focused on use of their technology for DNA delivery. Last Wednesday
(May 16) the company announced it had raised $16.2M by selling shares at $3.52. That
the stock price is back up above $3.70 is, I think, a good sign. Phase 1 data
typically doesn’t move stock price as much as later stage data, but if the results are good it certainly won’t
hurt.
Elan Pharmaceuticals (ELN),
a company I’ve liked for some time, may finally be set to go somewhere next week.
The company, which comarkets Tysabri with Biogen Idec (BIIB), announced in early May that since reintroduction of the
drug last July no new confirmed cases of the rare brain disease progressive multifocal leukoencephalopathy (PML) had occurred
as a result of treatment with Tysabri. This is good news both for MS patients
and ELN investors. As of q1 of 2007, over nine thousand patients were receiving
Tysabri and another three thousand more have entered the program to receive the drug.
The roll out after reintroduction has been slower than anticipated, but looks as though it may be gaining steam. Elan also has an antibody treatment for Alzheimer’s, Bapineuzumab, which could
yield promising results by the end of the year.
Despite what I perceived
to be potential in ELN, the Market has been profoundly disagreeing for the past six months.
The stock has been consolidating between ~12.20 and 15.50 since last November.
After a promising start to the week ELN finally took off on Friday closing at $16.60, 8% above the previous close,
on 3.5 times average volume. I’m not a great chartist, but this seems to
me a decisive move which will hopefully run a bit more next week.
Week Ending May 18
Another Company In “Less Crowded Water”
Nothing really beats finding
a tiny company with great potential that not too many people seem interested in. Halozyme
(HALO, nee HTI) was trading at $2.48 when I mentioned it last August and is now over $10.
Biosante (BPA) is another excellent example, up over 100% since mentioned in February.
A
perceptive reader emailed me about Critical Therapeutics (CRTX) a small company that sells Zyflo, a pill that inhibits 5-lipoxygenase
inhibitor (5-LO). 5-lipooxygenase is responsible for the conversion of arachidonic
acid to leukotrienes, which can cause constriction in the lungs. Other potential
applications of a 5-LO inhibitor include vascular disease, stroke, and even pancreatic cancer. Zyflo is sold as a treatment for asthma. Seventeen million
Americans have asthma, and this number is increasing.
Now, one of the problems
with Zyflo is that is has to be taken four times a day. Ideally this means every
six hours. Since people generally like to sleep at least eight hours, this is
a drawback. To improve on this CRTX adjusted the formulation of Zyflo such that
it can be dosed twice a day. They used technology developed by Skyepharma’s
Geomatrix technology. This technology uses solid forms of the pill that erode
at different rates to control release of the drug over different periods of time. CRTX
is also evaluating an injectable form that could be used in emergency settings.
This treatment is not perfect. In a clinical trial of 5000 patients just over 3% developed increased levels of the
liver enzyme alanine transaminase. This is not ideal, but it can be tested for. Potential difficulties with liver enzymes hasn’t derailed sales of Lipitor.
CRTX has been selling Zyflo
in Q4 of 2005. Quarter over quarter sales of Zyflo have been increasing steadily
since its launch. The more convenient controlled release version should provide
a boost to sales. The FDA has told CRTX they expect to reach a decision on the controlled release form by May 31. The stock is currently trading at less than $1.75. Approval,
which I consider highly likely, should give this stock a boost. The company just
released the 10-Q and, while not rock solid, they aren’t in bad shape.
Sales have been increasing
steadily and the long release form, if approved. will improve this even more. My
take is this is a low price, low volume (avg volume is 229K) stock with a substantial near term potential.
Week Ending May 11
Dendreon, A Biotech Gift That Keeps On Giving!
Dendreon (DNDN) is really
a biotech gift that just keeps on giving. In advance of an FDA advisory panel
a few weeks ago I was mildly bullish Provenge would be recommended for approval, and suggested a prudent play would be a bullspread. This turned out to be a good play. I
suggested after approval that the inevitable short squeeze that had to occur (short interest on DNDN was 25%) was a good buying
opportunity, and was happy with the 56% return in just over a week (I wrote in The Blog on April 10 that I thought it was
time to sell) this afforded. Now, with the FDA set to rule on whether Provenge
should be approved by May 15 there’s yet another opportunity to make some money from Dendreon. It just doesn’t
get any better than this!
There’s no shortage
of opinion about whether or not Provenge will get approval from the FDA. Arguments in favor of approval are based on survival
benefit and recommendation of the advisory panel. Arguments against approval
are based on less than straightforward statistics that were used to establish the survival data.
I think both opinions have
merit and that it’s far from clear what the FDA will decide. My guess is
odds of approval to an approvable letter are about three to one. Please note,
I use the term ‘odds’ as this is still very much a gamble. Given
that the market had written Provenge off barely a month ago, there isn’t as much downside to an approvable letter as
there is upside to outright approval. With the FDA advisory panel having said
the drug is both safe and effective, I would expect a drop to no lower than $10 to $12 on approvable. Upside on approval will be at least up to the 30s, probably higher.
DNDN has really been a fun
stock since March 30th. For example, DNDN has a float of 81M shares. In the 23 trading days since March 29th (when trading was halted in anticipation
of the FDA advisory panel recommendation), 768,229,500 shares of DNDN have traded: that is, each stock has been traded almost
ten times. The average daily fluctuation in price of DNDN for the past 23 days
has been 7%. The same average for the S&P 500 has been 0.4%. In the past week the stock is up 22%. Looking only at stock
price it almost seems the market is convinced Provenge will be approved.
Options, on the other hand,
suggest any such clarity is misplaced. Implied volatility for May in-the-money
options is approaching an astronomical 450%(!). If the stock market is saying
the drug will be approved, the options market isn’t as convinced. This
high implied volatility makes a straddle unfavorable.
I’m more bullish on
DNDN than I was before, but I’m still not 100% certain. Again, in cases
like this a bullspread (simultaneously buying a call and selling a call at a higher strike price) can be a good play: I’d go with options expiring later than May for more breathing room. I particularly like the August 17.5/30 bull spread. While
May 15 is the stated “deadline” for the FDA’s decision, a ruling could come earlier or, as was the case
with NRMX a few weeks ago, the FDA could announce they will delay.
With implied volatility so
high, I also like covered calls. DNDN closed Friday (May 4) at $19.39. Ask for May 20 calls was $5.60. So, buying the stock and selling
the call gives an automatic profit of 32% if Provenge is approved: 32% profit really isn’t that bad for eight days. In the event the drug is not approved outright, and the stock price falls, well, then
your cost basis is only $13.79, and you have the stock if and when Dendreon complies with whatever the FDA requests. I do believe Provenge will eventually be approved, and this will still be a good buy. If the FDA decides it needs more time (trading in anticipation of this is unwise)
you get to keep the $5.60 and you still have the stock.
The stock will be highly
volatile over the next week, so timing will be important and impossible to gauge perfectly.
I would look to enter on weakness Monday or Tuesday. For those seeking
more adventure, perhaps using some of the profit from past DNDN trades (?), straight calls or May bullspreads are good but
riskier plays. Dendreon is definitely going to be a fun stock!
Week Ending April 27
Short Squeezing
I like to short as much as the next investor.
Not only is there a palpable frisson in taking a strong position against
what the majority of the market thinks (I have seen very few stocks where short interest was over 50% of the float) but, if
played correctly, there can be lots of money to be made. In connection with a
side project, I came across a paper from UMass Amherest on how capital markets respond to successes and failures of biotech
companies (J. Prod. Innov. Manag., 2004,
21, 297–308). Looking at abnormal
returns after both positive and negative FDA rulings the authors concluded that the magnitude of price decline on bad news
was greater than for positive news. The best explanation for this is that as
humans we react more strongly to negative events than to positive.
While I’m happy to make money on the short side, I also like to make money
by taking advantage of large short positions that don’t work out for the bears—the short squeeze. Biotech stock prices are relatively uncoupled to broader market conditions, and strongly levered to science. That is, biotech stocks make major moves based on discrete rational events.
The past couple of weeks have provided a couple of exceptional examples of short
squeezes in biotech stocks. On a positive recommendation of an FDA advisory panel,
shares of Dendreon (DNDN) went from $5.28 on March 28 to $12.93 on March 30. Short
interest on DNDN was over 30% prior to this event. The short squeeze raged for
another week, with the price peaking just over $25 seven days later. Similarly,
Avanir Pharmaceuticals (AVNR) a company I was happy to short (quite successfully) last October announced on April 18 positive
news from a phase 3 study on a treatment for diabetic neuropathic pain.
Prior to the 18th the stock was trading at $1.27 with short interest of 20%.
After announcement Wednesday morning the price kept going up all day, finally peaking Thursday morning at over $6.50.
So, buoyed by this I went looking for other possible short
squeeze biotech plays. Using a stock screener I selected biotech stocks with
short interest over 20%. From this list I looked at each stock to see if there
was a significant clinical event expected in the near future. In many cases,
for example a company releasing results of a phase 3 study, there may or may not be a predefined action date, as there would
be for an FDA decision. To get a better handle on time frame in these cases I
looked for a sharp drop off in open interest for options. I included implied volatility, as this gives a measure of the degree
of market’s uncertainty in the outcome. Of the initial list of 30 companies the ones that showed particular promise,
in my opinion, to foment a short squeeze are listed in the table below. Data
for short interest (# shares short divided by float) are from nasdaq.com from March 15.
“Date” refers to expiration month of peak option open interest. Implied
volatility was calculated using the options calculator provided by the CBOE.
A good play on these stocks might be to create a watch list and to sit back and watch for press releases. With the high degree of short interest on these stocks, a positive clinical outcome will start a short squeeze
as shorts scramble to cover. This is clearly a short term play, maybe as short
as a day or two, but it should be good fun. In cases were the shorts have it
right and the news is bad, well, as long as nothing is bought prior to any news, no money is lost.
|
|
|
|
"Date"
|
IV
|
|
|
|
|
July
|
88%
|
|
|
|
|
N/A
|
N/A
|
|
|
|
|
May
|
95%
|
|
|
|
|
June
|
177%
|
|
|
|
|
May
|
40%
|
|
NRMX
|
35%
|
Phase 3
|
August
|
186%
|
|
PPCO
|
26%
|
Phase 2
|
June
|
80%
|
Week Ending April 20
FDA Extensions
I was eagerly awaiting a
decision on Arpil 16, the date by which the FDA had committed to rendering a decision on whether to grant approval to Canada’s
Neurochem (NRMX) for Kiacta, a compound to treat AA amyloidosis (a serious kidney disease).
While Kiacta will serve a limited market, I believe it should provide proof of concept for Alzhemed, their phase 3
candidate to treat Alzheimer’s disease. On April 11 the FDA announced it
needed more time, and pushed back the date of the decision by three months, to June 16.
To be clear, I had the good
fortune to have done my Ph.D. work at Queen’s University in the laboratory of Professor Walter Szarek. Aside from being a world leader in carbohydrate chemistry and, I can say from personal experience a fantastic
teacher and advisor, Prof. Szarek is one of the founders of Neurochem. While
I was working in this lab when the company began I did not then have, nor have I ever had, any insider information about
this company.
On news of the delay the
stock took a dive, and NRMX was down almost 12% for the day. The FDA is usually
pretty good at sticking to their deadlines. If, however, the FDA decides it needs
more time to reach a decision it is in its power to take this extra time. The
mission of the FDA is protect the health of the public first and foremost.
So, I thought it would be
interesting to look at other cases where the FDA issued extensions. My initial
assumption was that this is always bad news. I found eleven other cases in which
the FDA had taken more time to reach a decision than they initially committed to.
I had hoped to find some
glaring pattern as to whether the FDA seeking such an extension had any predictive value on eventual acceptance and was disappointed. To be clear, a sample size of eleven is far from large, but these events also don’t
occur often. Of the eleven extensions, six were later approved, three received
approvable notices (one of these was later approved), and two were not approvable.
As well, there was no clear
correlation between percent change in price (adjusted for Market shifts) and eventual approval. So, while I had hoped that news of this type of extension of the FDA review process would be a good signal
on which to trade, I ended up disappointed.
As for what will happen with
NRMX, right now I think it’s too tough to say which way it will go, and I currently have no position in this stock. The next few months will be interesting, though, as they are expected to release results
of a phase 3 study on Alzhemed.
Week Ending April 13
A Quick Portfolio Update
There have been some substantial
moves in the BC tracking portfolio of late that I feel bear mentioning.
Clearly Biosante (BPA) has
done well and is up 61%, though I am starting to wonder if it’s time to take profits here. I still like Halozyme (HTI), up 240%. The stock has come down
a bit the past few weeks but I still like it long term and don’t see any need to sell.
The Amylin 40 calls (YNN AH) are under water but, again, I like this company long term and am not worried about this. Innovio (INO) is up a bit. This stock
isn’t exciting me, but I think the company has potential and see no reason to sell.
Dendreon (DNDN) did exactly
as I predicted last week and is up 29%—not bad for four days. The stock took off
further Monday morning and is now trading above $20. I'm not sure how much of this is shorts covering and how much is
hubris: either is working for me! To be safe I would put in a stop sell order at $20, this locks in a nice 42%
profit.
Conjuchem (CJBFF.PK) took a big hit (down 25%) on results of a phase 1/2 clinical study of their diabetes treatment. Their PC-DAC form of Exendin-4 did produce relevant reductions in blood glucose levels,
but at the highest dose 1 in 5 patients experienced nausea. This adverse event
caused some analysts to suggest that the PC-DAC Exendin-4 would not be able to compete with Amylin’s long release form
of Byetta.
For right now I’m not
convinced this result is that bad. The diabetes market is huge and, thanks to
excessive intake of carbohydrates since the mid 1980s, is growing fast. For a
stock trading at 50 cents Conjuchem won’t have to take a huge slice of the diabetes pie to justify doubling or tripling
in share price, and I see this as a buying opportunity.
Week Ending April 6
Right on, Dendreon!
I really can’t think
of anything to say about Dendreon (DNDN), the company I wrote about last week. Moves
like this make investing in biotech such fun!
Dendreon’s drug Provenge
went before an FDA advisory panel on Thursday. These panels provide guidance
that the FDA considers in deciding whether or not to give the drug final approval. The
date of final approval has been set as May 15.
In anticipation of wild trading
in the stock on Thursday, trading of DNDN on the NASDAQ was halted. My recommendation
of last week, which was highly speculative, was a bull spread created by buying Jan 08 2.5 calls and selling the 7.5 calls. As I mentioned, I was mildly bullish on this stock and the bull spread, I thought,
was a prudent play.
Dendreon had been beaten
down in the past year based on Phase 3 clinical data of its drug Provenge (to treat hormone refractory prostate cancer) that
did not demonstrate any benefit measured by time to progression of the disease. Average
survival time of patients on Provenge, however, was increased by 3-5 months. As
well, there were some potential concerns over the safety of the drug: a small
number of adverse cardiovascular events occurred.
In the end, the FDA panel
voted unanimously that Provenge was safe, and found by a vote of 13-4 that it was effective.
This was good news for DNDN investors. The stock was trading as high as
$18 this morning, a staggering increase of 344% over Wednesday’s close of $5.22.
Trading volume was also off the chart, with nearly 75% of the entire float having changed hands by noon. The stock closed at $12.93 on a volume of 92M.
Now, in reaching its final
verdict the FDA usually follows the recommendations of the advisory panel, but not always.
There are certainly a lot of remaining questions on Provenge, which will provide another round of fun as the May 15
decision date approaches.
The next few days should
be interesting for Dendreon. DNDN has a float of 81.5M shares, of which 26.4M
were held short as of March 2007 (according to Nasdaqtrader.com, Yahoo finance shows 20.3M shares short). So, a lot of people were betting against this stock and, it turns out, they bet wrong. These investors, I assume, will be looking to cover over the next few days.
My guess is this stock will trend up for the next few days as investors jump in and shorts try to jump out.
Week Ending March 30
Deadline for Dendreon
I wrote on November 3rd
about Dendreon (DNDN) a company trying to get Provenge approved as a treatment for hormone refractory prostate cancer (HRPC),
that is, prostate cancer than doesn't respond to standard therapy. They announced on January 16th that Provenge had been granted
priority review status by the FDA.
According to the FDA, priority review is granted if: "The drug product, if approved,
would be a significant improvement compared to marketed products [approved (if such is required), including non-"drug"
products/therapies]
in the treatment, diagnosis, or prevention of a disease."
According to a January 2006 study by Booz Allen Hamilton,
62% of drugs with priority review received approval in the first cycle, compared with 34% of drugs that were subject to normal
review. To be clear, the sample size in this study was small, a total of 77 applications, of which only 26 were priority review.
As well, 62% is still far from a sure thing. For example, for the week ending October 14 I wrote about Avanir Pharmaceuticals
(AVNR). Avanir's drug Neurodex had priority designation. My suggestion was the drug would not be approved and that shorting
AVNR was a good investment. In the end, Neurodex was not approved and AVNR, which was trading at almost $9 that week, is now
at less than $1.50.
A FDA advisory panel will discuss Provenge on March 29th and issue recommendation for or against
approval. While this doesn't guarantee marketing approval (DNDN should hear about this on May 15) outcomes of these advisory
board meetings are often good gauges of what the FDA will do.
Whether Provenge is approved or not is very speculative.
Results of a Phase 3 study published in The Journal of Clinical Oncology last July showed that the difference in
time to progression of the disease was statistically the same as a placebo, which is not encouraging. However, patients taking
the drug lived, a statistically significant, 20% longer (3-5 months) than those receiving the placebo. Now 3-5 months isn't
long, but it's a lot longer than 0. So, I'm mildly bullish that this drug will be approved.
It should be mentioned
that DNDN's technicals are not favorable, and that short interest on this stock is 25%.
Clinically Dendreon has nothing
else going for it. One way or another this stock is going to move next week. A prudent approach to this can be an option straddle.
Implied volatility on April options is well in excess of 250%, so a straddle with a $5 strike isn't that favorable.
As
I said, I am mildly bullish on this stock and I like to speculate. So, putting this together with a dose of prudence
(I'm a chemist, not a fighter pilot) and we end up with a bull spread: that is simultaneously buying a lower priced call option
and selling a higher price one. Mathematically, being both long and short derivatives of the same underlying equity reduces
implied volatility and time decay. The use of spreads is a lower-risk/lower-reward position.
Looking at possible bull
spreads for DNDN options I like the combination of buying a 2.5 call and selling a 7.5 call. One of the nice aspects of using
spreads is time decay is greatly reduced: using Jan 08 options is not significantly more expensive than April options. The
spread price (Jan 08 calls, long 2.5 short 7.5) at 11 AM Friday was $1.10. So, the maximum loss is $110 per contract and the
maximum benefit is $390 per contract. As long as the price stays above $3.60 there shouldn't be any loss. The 2.50/10 bull
spread is also a good option. Open interest on both is fairly robust, and the bid-ask spread is ok.
To me, given the
uncertainty surrounding Provenge this seems like a favorable trade, but not one that should be entered into without understanding
the mechanics of the bull spread and that it is highly speculative. As this is highly speculative I would not invest as
much I normally would, and would not include this in the BC Tracking portfolio.
Week Ending March 23
Encysive
On a few occasions in since last November I wrote how I thought Encysive pharmaceuticals (ENCY) was a good short. Encysive
had been having some problems getting their pulmonary arterial hypertension (PAH) treatment Thelin on the market in the US.
So far they have only received approvable letters from the FDA. That is, the FDA wanted more data. Encysive's CEO stated
that there was one issue the FDA still had a problem with, but wouldn't specify what that issue was. While the CEO stated
the issue had been addressed, I was mistrustful of his lack of transparency. The Monday after I suggested shorting the stock
(November 6) it was at $5.76. The stock closed today (March 16) at $2.77, a 52% decline (note, in the BC tracking portfolio
I covered on December 29 at $4.17, a gain of 27.6%: I guess bulls make money, bears make money, and chemists cover too soon!)
So, while I clearly had no respect for ENCY in the past, I think the stock has been beaten down enough that some money
can be made going long. Encysive expects to hear from the FDA on June 15 about their application for Thelin. There is no
guarantee it will be approved, and, indeed, I wouldn't even count on it. The drug has, however, been approved in other parts
of the world, and has been launched in the UK, Germany, and Australia. So, even without the US market they will be selling
to a combined population of over 160 million. To be clear, pricing controls in these countries does diminish the attractiveness
of these markets.
Now, a kicker in all this is that Gilead (GILD) expects to hear from the FDA about their PAH drug Ambrisenstan (acquired
when they purchased Myogen) on June 18, three days after Encysive should hear about Thelin.
Clinical results for both Thelin (J. Am. Coll. Cardiol, 2006, 47, 2049) and for Ambrisenstan (J. Am. Coll. Cardiol, 2005,
46, 529) have been published. The primary endpoints for these studies was improvement in 6 minute walking distance (6MWD,
a benchmark for cardiopulmonary function) after 12 weeks. In the Ambrisenstan case, on average patients displayed an improvement
of 40m in the 6MWD test. The Thelin study reported an improvement of 25m. In another publication about Thelin (Journal
of Heart and Lung Transplantation, 2007, 26, 63) one third of patients experienced improvements of >15% on the 6MWD. As
the baseline value was 325m this represents an improvement of 49m.
While Ambrisenstan does appear to have greater efficacy, differing safety profiles for the two drugs means there is still
a place for Thelin. For example, in the clinical trials mentioned above 13 of 64 (20.3%) patients taking Ambrisenstan experiencing
clinical worsening, compared with only 4 out of 61 (6.5%) patients taking Thelin.
Encysive also has a phase 2 study underway, on BC3711, to treat resistant hypertension. While good results from this
trial might push the stock up a bit, most of Encysive's value is in Thelin.
The other issue facing Encysive is their extended FDA plight has seriously strained their balance sheet. In releasing
the 2006 10K they expressed potential difficulties in continuing as a going concern---never a good thing. This also raises
the possibility of further dilution.
My take is ENCY has been beaten down to a point were it may be worth a buy. To be clear, this is still highly speculative,
and I still wish management were more transparent about Thelin's FDA troubles. The launch of their product in a market of
substantial size is encouraging. While Ambrisenstan does appear to offer greater efficacy, differing safety profiles may
mean some patients will respond better to Thelin. At a price of under $3, even modest revenue for Thelin will afford a rise
in price.
I don't recommend buying ENCY until the VIX decreases a bit and until its technicals start to improve. The stock just
broke through support at ~$3.30 and could keep falling. If it hits $2.50 I'd consider buying.
Week Ending March 16
Buying Low
I posted a note about Hollis Eden's (HEPH) demise last Wednesday (March 7). The stock is still dropping, and I sold my
puts too early. Still did ok. If only they rang a bell at the bottom.
Stock price is really just future returns divided by risk. Risk associated with biotech stocks is, for the most part,
based on science---not economic externalities. While overall market risk may have changed in the past week, specific risks
associated with biotech stocks has not.
With much of last week's fear leaving the Market (the VIX is way down from Monday), I thought it would be useful to look
at biotech stocks that got whacked last week and still haven't recovered. I screened my favorite biotech and pharmaceutical
stocks, and selected those stocks that fell with the S&P 500 but still haven't recovered. Please note that in screening
only my favorite stocks this list is hopelessly biased and contains not even a shred of objectivity.
The stocks I came up with were: Amylin (AMLN), Cardiome (CRME), Elan (ELN), Halozyme (HTI), Novadel (NVD), Celgene (CELG),
Biogen-Idec (BIIB), Amgen (AMGN), Genentech (DNA), Genzyme (GENZ), and Eli Lilly (LLY).
Most of these stocks are technically weak right now. The parameters used to evaluate the technical prowess of stocks
are all, fundamentally, indicators of price momentum (volume times price rather than mass times speed). The various indicators
(MACD, MFI, RSI, Stochastics) are differently time sensitive. It stands to reason that after a major Market-wide sell off
most stocks should be technically weak. Technical analysis is really just Newton's first law applied to stock prices.
My take is the stocks above fell more than the market as a whole for reasons inconsequential to the specific stocks themselves,
and are likely to rebound if the Market rebounds from last week's "correction". I'll revisit in a few weeks to
see if these stocks do, in fact, outperform the S&P.
Week Ending March 9
Biotech As A "Safe" Sector
Biotech is supposed to be insulated from the business cycle as a whole. Theoretically, biotech stock prices ought to
reflex clinical successes and failures, rather than trends in future economic expansion.
Looking at the Markets this week, both the AMEX biotech index (^BTK) and biotech ETF IBB (more diversified than BBH) plunged
in lockstep with the broader markets, even falling a bit extra. In the long run, stocks of biotech companies with good pipelines
are insulated from movements in the Market as a whole. So, when a big decline in biotech stocks occurs for reasons beyond
science it can be a good time to buy.
As "mere anarchy was loosed on the world" this week I was watching for good biotech stocks to fall. Cardiome
(CRME) a Canadian biotech I like, and wrote about last Canada Day, has taken an 11% dive since Tuesday (as of close Thursday:
I will be traveling on Friday and unable to check prices). I don't believe this is warranted.
I wrote in July that Cardiome had fallen due to the FDA rejecting their NDA filing for an IV form of their drug RSD1235,
which treats atrial fibrillation. A paper in 2004 published in the Journal of the American College of Cardiology on a Phase
2 study of this drug was very encouraging. The rejection had nothing to do with the science but merely with careless paperwork.
As well, they announced good clinical results for an oral formulation of this same drug in September. The stock had a good
run after I mentioned it, going from $8 to $14 and is now below $11.
Cardiome announced two weeks ago that the problems with the NDA filing above have been resolved, and the FDA has accepted
their application. Please note, this does not mean the drug has been approved, only that the application has been accepted.
I think this stock fell too far for reasons having nothing to do with science, and that the stock is now undervalued.
To be clear, the so-called "fear index" (VIX) remains (as of close March 1) almost 50% higher than it was on
Monday, and more trouble could be on the way. Once the dust settles I think CRME will be a good stock to buy.
I also like Amylin (AMLN) at theses prices, especially on news last week that the FDA will require further testing on
Novartis' (NVS) diabetes drug Glavus. Hopefully things will not fall apart, and the center will hold.
The Never Ending Story: Hollis Eden
This coming week promises to see some fun volatility as Hollis Eden's (HEPH) "tentative date" for an award under
Project Bioshield on March 7th approaches. As I've mentioned, I think this company has a weak pipeline (loads of preclinical
studies, but, according to the FDA [clinicaltrials.gov], nothing currently in Phase 2) and sinks or swims based on this award.
Now, this stock didn't move as I though it would after announcing the January 31 "tentative contract" award
date had been pushed back to March 7. I wrote in the Newsletter the week before January 31, that open interest on February
options was very low, while open interest on March options was decent. Open interest on March options remains acceptable
(not high, it's a nano cap stock after all), and open interest on April options is negligible. I think this portends a strong
move one way or the other.
As I mentioned last month, my bet is on no contract and I bought March 7.5 puts (QGQ OU). For low price volatile shorts
I think the safety of options, as opposed to outright shorting, is worth the premium. To be clear, this is highly speculative.
We'll see if I'm right next week. In any case, as with past "tentative award" dates last January, November, and
September, there will be some fun volatility for day traders.
Week Ending March 2
Getting a Charge Out of Inovio
Inovio Biomedical (INO) is a small San Diego company seeking to improve chemotherapy in a shocking way. The chemical
basis for Inovio is electroporation. In essence electroporation provides an electric pulse that disturbs the cell membrane,
basically creating openings, through which a drug that would not otherwise be able to diffuse through is able to get inside
the cell.
Inovio calls their treatment SECTA, short for Selective ElectroChemical Tumor Ablation. The idea has been best demonstrated
using the chemotherapeutic bleomycin. Application of the electrical charge directly to the tumor---the technique is particularly
amenable to skin cancers---greatly enhances the amount of bleomycin taken into the tumor, providing greater efficacy. This
has the added advantage of reducing side-effects of the drug on healthy tissue.
The results of Phase 2 studies on head and neck cancer are impressive. Comparing efficacy of bleomycin along with bleomycin
and electroporation, the number of complete and partial responses was signficant. To be clear, the number of subjects in
these Phase 2 studies was small (total of 54 patients in 3 studies) and in only one of the three studies (of 25 patients)
was control data with only bleomycin presented. According to the National Cancer Institute, annual treatment costs for head
and neck cancer in the US is $3.2B. Inovio is currently pursuing two Phase 3 studies on head and neck cancer that are expected
to be complete (according to the FDA) by August 2009 and November 2009, respectively.
Inovio (then Genetronic) published in 2005 results of a small (19 patient) clinical trial, in the journal Melanoma Research,
in which the combination of electroporation with bleomycin was found to be beneficial in treating skin cancer. Pre-marketing
approval for the treatment of skin cancer is being pursued in Europe. Though the thinning ozone hasn't lately been receiving
the same press as greenhouse gases, it remains a concern. According to a study published in 2005 in the British Journal of
Dermatology, researchers expect the incidence of skin cancer even in The Netherlands---hardly a tropical paradise---to increase
dramatically over the next decade. Inovio is also enrolling patients in a Phase 1/2 clinical study to treat breast cancer.
Inovio is using their technology to delivery DNA vaccines. Through Swedish partner Tripep they expect to begin a Phase
1 study on delivery of a DNA vaccine to treat hepatitis C early in 2007. They have also licensed this technology for DNA
vaccine delivery to Wyeth Pharmaceuticals (WYE), and have licensing agreements with Merck (MRK) and Vical (VICL).
So, I really like the science behind this company, and they are pursuing good sized markets. I think the clinical results
in oncology are encouraging, and the DNA vaccine delivery is an added bonus. The company's financial situation isn't too
bad. Their most recent SEC filing (Q3 2006) had them with $6.3M net current assets and a burn rate averaging $3M per quarter.
Since filing they completed a $15.25M round of financing, received $1.1M from the Department of Defense, and $4.5M from Wyeth.
A more complete picture will be available when they file their 2006 10-K in a couple of weeks, but they are not in current
danger of running out of money.
To be clear, this is a highly illiquid stock: market cap is barely over $100M and average (3 month) volume is 96K, so
volatility is to be expected. My take is this is a good speculative stock. With big pharmaceutical companies on the hunt
for biotechs, to me this seems a possible acquisition. Recall that back in October Pfizer purchased PowderMed, a private
UK company that had developed a way to deliver DNA by precipitating it onto gold particles, for an undisclosed sum.
BC Portfolio Update
No big changes. Novadel down a bit but, as mentioned in Blog on Wednesday, I'm not concerned. ELN off a bit from last
week but am still confident Tysabri sales will exceed expectations and upcoming Alzheimer's treatment will pay off. Conjuchem
(CJBFF.PK) behaving nicely, as it last week's stock Biosante (BPA). Not expecting anything interesting from HEPH puts until
their fifth "tentative date" for a Project Bioshield procurement on March 7th. Positions have been updated on Biotech
Corner page. Current holdings are up on average 43%.
Week Ending February 23
Biosante!
An insightful reader emailed me (which I highly encourage!) last fall suggesting I look further into Biosante (BPA), a
small company devoted to improving drug delivery. This is an excellent example of a missed opportunity by me, as the stock
is up more than 50% since then.
Biosante is a tiny (according to their most recent 10-K they have fourteen employees) company working on transdermal delivery
of hormones. In December of last year they received FDA approval to market Elestrin, an estradiol gel designed to be rapidly
absorbed through the skin. It is meant to be applied daily to the arms, shoulders, abdomen, or thighs. A gel or cream is
less invasive than a patch that needs to be worn continuously.
In a Phase 3 study Elestrin demonstrated significant decreases in incidence and severity of hot flashes in menopausal
women, but at a substantially lower dosing level of estradiol. Lower estradiol levels can decrease undesired side-effects
in hormone replacement therapy. Elestrin will be marketed by Bradley Pharmaceuticals (BDY). A launch is expected in mid-2007.
Bradley Pharmaceuticals has experience selling specialty pharmaceuticals, so this is a good way to market their product.
In addition, Biosante recently announced they had begun a Phase 3 clinical trial of a similar product, to deliver testosterone,
to treat female sexual dysfunction (FSD). There is precedent in the scientific literature that administering testosterone
indeed treats FSD. They also announced positive preclinical results on delivery of a vaccine to prevent bird flu. While
both these products have potential (I’m not overly impressed by preclinical data), I think the main value-driver
of this company is Elestrin.
As an aside, there are 493 literature references to clinical trials for FSD on “Pub Med” (a website
that searches the medical literature) compared to 1,121 for erectile dysfunction in men.
In an article in “The Motley Fool”, Brian Lawler questioned just how much of the estrogen market Elestrin
will actually capture. This is a critical issue. Novavax (NVAX) sells Estrasorb, also a transdermal estradiol delivery system,
and has not gained any real traction in the market.
Novavax published data from a Phase 3 study in the journal Menopause. The lowest daily dose of Estrasorb was 8.6 milligrams
of estradiol. By contrast, according to Phase 3 clinical data, dosing of Elestrin was found to be effective between 12.5
and 64 micrograms. For readers less conversant in the metric system, there are 1000 micrograms in a milligram. That is,
the amount of estradiol dosed with Elestrin is a tiny fraction of that dosed in Estrasorb. Given there are known health risks
associated with estradiol, the ability to give a significantly lower dose, I believe, makes for a superior product that should
gain market share.
Current U.S. estrogen therapy sales are estimated at $1.3B annually. Transdermal delivery accounts for about $250M, so
it’s definitely a big potential market. According to the US Census Bureau, total US population should still hit
almost 400M by 2050, and, the median age of that population will be older. As estrogen therapies are targeted at 50+ women
(also according to the US Census there are more 50+ women than men) the potential market is increasing.
Now, Biosante’s balance sheet is troublesome. As part of their deal with Bradley there are to receive $10M within
the year. In addition, terms of the deal call for milestone payments and royalties. Triggers for sale-base milestones,
which can reach $30M, have not been disclosed.
While I would prefer more transparency in Biosante’s deal with Bradley, I do think they have a good product
in a growing market. As always, proof will be in the execution and this certainly is not risk-free. This is a nanocap stock
with a small (<20M shares) float and will be subject to volatility. While numbers like $1.3B are pie-in-the-sky, this
is a small company. Even capturing 5-10% of the estrogen replacement market will send the stock skyrocketing.
Week Ending February 9
Conjuchem
Conjuchem Biotechnologies (CJB.TO) is a Canadian penny stock, and trades on the Toronto Stock Exchange. Your broker can
obtain these stocks for you, though you may need to press. The stock also trades on the Pink Sheets as CJBFF.PK. The TSE
shares are preferable, in my opinion, as they are more liquid. Average volume on the TSE is about one million shares per
day and on the Pink Sheets just under 200K. Bear in mind they use the metric system in Canada.
To be very clear, this is the riskiest stock I have recommended. The stock trades at less than a Canadian dollar.
ConjuChem is currently conducting a randomized, double-blind, multiple-dose Phase I/II study looking at safety and tolerability
of Exendin-4 (a glucagon-like-peptide) bound to the human albumin protein. Exendin-4 (Amylin's Byetta) acts to lower blood
glucose levels and is useful in controlling diabetes.
Type 2 diabetes develops over 15-20 years and can result for high sugar consumption. According to the US Department of
Agriculture, US per capita consumption of sugar has been increasing dramatically since 1985. Incidence of type-2 diabetes
in North America has already started to increase, and will continue to increase at a faster rate going forward, making a great
market for diabetes treatments.
Now, the drug itself is a peptide and, like all small peptides, suffers from rapid degradation in the body. By attaching
the peptide to a huge molecule like albumin (Conjuchem refers to this as a 'Drug Affinity Complex, DAC')the metabolic destruction
of the peptide is reduced. One could draw the analogy of a school kid walking beside his big brother to avoid getting beat
up.
Attaching a drug to a protein requires walking a fine line between preventing degradation by keeping catabolic enzymes
away and still permitting the peptide to interact with its desired receptor. Conjuchem published a very nice paper in Bioorganic
& Medicinal Chemistry Letters in 2004 describing some of their work in optimizing this combination. While the conjugate's
activity is in all cases lower than for the free peptide, through judicious optimization they were able to still retain substantial
activity together with a conjugate that was stable for 24 hours in the presence of enzymes that degrade the peptide.
Clinical results in humans demonstrated that the drug had a half life of approximately a week. Being able to control
diabetes with a single weekly injection is impressive. The clinical data also showed good regulation of blood glucose levels.
A randomized, double blind Phase 1/2 study is underway, and preliminary results are expected this quarter.
In addition to this work on diabetes Conjuchem has published papers (in J. Endocrin. Metab. and in Endocrinology) applying
this technology to delivering human growth hormone releasing factor. This could also be a big product.
According to recently released results for their fiscal year which ended October 31st, they were burning over $40M annually.
On November 28th they announced they had raised an additional $120M through an equity financing round. This gives them some
breathing room
This is clearly a very risky play and the stock will likely be subject to high volatility---definitely not a stock for
the faint of heart. I really like this idea, and I see much potential for this stock. I already own Conjuchem stock, and
am buying more.
WEEK ENDING DEC 22, 2006
Indevus Pharmaceuticals
(IDEV) just announced it was purchasing Valera Pharmaceuticals (VLRX). News of
the $120M acquisition sent IDEV down 7%, and pushed VLRX up 60%. VLRX is a much
smaller company, with a float of only 4.8M shares.
Indevus’
business model focuses on acquiring and marketing products from other companies, in particular urology products. In essence, this is the model Pfizer and other so-called big-pharma companies are adopting to an increasing
extent.
Indevus receives
royalties from Lilly for Sarafem, prescribed to treat symptoms associated with pre-mentrual syndrome, and copromotes (with
Espirit) Sanctura to treat overactive bladder. In addition, on December 13 they
filed a New Drug Application (NDA) for an extended release form of Sanctura. They
expect to file early in 2007 a NDA for Nebido to treat male hypogonadism, and have a Phase 2/3 study underway for an agent
to prevent STDs, including HIV.
Valera is working on a cool polymer based drug delivery system called
Hydron. Basically, Hydron is a flexible polymer that is implanted directly into
the body and allows the drug to diffuse out. In theory, it’s possible to
design such a device to continuously deliver a drug for years.
Valera also sells
Vantas, a 30 X 3.5 mm polymer cylinder that slowly leaches Histrelin acetate, a luteinizing hormone releasing hormone (LHRH),
as a treatment for prostrate cancer. The implant is put in non-surgically, and
can stay in for up to a year. In July 2006 they submitted a NDA for Supprelin
to treat precocious puberty based on the same technology. They also have clinical
programs underway to treat drug dependence. Like Indevus, Valera has sales but not profit.
Now, urology
doesn’t have the same cachet as does treating cancer or heart disease, but it is medically important. While this may not afford them as much visibility as the Amgen’s of the world, I really like Valera’s
drug delivery technology, and think both Valera’s and Indevus’ earnings are set to grow over the next couple of
years as more products come online.
On a portfolio
note, I’m still holding companies as last mentioned two weeks ago except NPSP.
NPSP has now gone down 13% so I sold and took the loss. I picked up AMLN
Jan 08 40 calls (@$6.80) as I think this stock has gone down too far.
WEEK ENDING DEC. 15, 2006
Vaino’s Biotech Corner: Hedge for Halozyme
There’s
pretty much no way I can top the performance of my pick Halozyme (HTI, up > 130% since first mention) last week, so I’ll
just mention that I think the same magnitude jump will occur with Novadel (NVD, up ~30% since mention) within a year.
Anika
Therapeutics (ANIK) is a company that sells the biopolymer hyaluronic acid. In
some ways, it could be considered the opposite of Halozyme---whose main focus is enzymes to degrade hyaluronic acid. If the idea of hedging existed in chemistry, this would be it. Anika recently took a 25% flyer on news their application to sell a “treatment” for wrinkles
had been given conditional approval by the FDA. Anika expects to have the product
on the market by mid-2007. The product is pretty cool. It’s an injectable form of hyaluronic acid that essentially fills in the tissue underneath the wrinkle
leading to a smoother appearance.
Now,
this isn’t a Dexy’s Midnight Runners type of company, though I’m
certain Dexy’s is set for a new hit any day now. Anika sells a variety of other forms of hyaluronic acid, for example, Othovisc for treatment of knee pain
in osteoarthritis patients, and Hyvisc for treatment of joint dysfunction. They
also sell ophthalmic products based on hyaluronic acid. Sales for these products
aren’t stellar, but the company is profitable.
In
a demographically aging society that worships youth, being able to actually “treat” wrinkles is a fantastic market. Once Anika starts selling their “wrinkle cure”, earnings, the stock price,
will jump. Other possible applications include enhancing lip size.
One
of the major competitors of Anika’s product will be botox. Recall, there
were some recent toxicity problems in certain Botox products: it’s worth
bearing in mind that the “tox” of botox stands for “toxin”.
Chemically, hyaluronic acid is a carbohydrate polymer. That is, it’s
(literally!) sugar. I believe most people would rather inject sugar to get rid
of their wrinkles than, well…poison!
Now,
the day of the conditional approval announcement (November 28th) the stock jumped from $11.62 to above $15. The stock is now trading at just under $13. Technical traders won’t like this
stock at all. Right now the stock is stochastically oversold. Short term MACD is bullish, and a couple of days of price increase will turn long term MACD bullish. To be fair, neither, MFI, OBV, or RSI look appealing right now, and, given the disparity
in the volume on the stock’s rise compared to its recent decline, there will be substantial resistance around $14.50--15;
this still leaves some comfortable profit, however.
So,
while I don’t think ANIK is necessarily a great buy right now, I would definitely keep an eye on the chart.
Week ending Dec. 8
Vaino’s Biotech Corner: Test Day
I’ve been
writing about biotech stocks since March. So, given I just gave a test to evaluate
the performance of my sophomore organic chemistry students, I thought this might be an opportune time to look back on how
these stock picks performed. Note, this is in no way procrastinating from marking
90 plus exams.
In retrospect
I see that a major shortcoming has been not mentioning when I felt stocks should be sold.
I’m certain everyone reading this Newsletter recognizes that selling is as important as buying in making money
from stocks.
In all I’ve
recommended about 40 stocks. In a couple of cases I’ve suggested stocks
more than once. For example, Diversa (DVSA) has been a very nice stock, opening
at $8.55 the Monday after I recommended it, and going as high as $11.60 two months later.
I recommended DVSA again at $9.11 the week of August 20th, and DVSA is now nicely above $11. To be fair, the stock dipped as low as $6.50 in September.
Some of my initial
picks didn’t perform too well. In fact, of the first six stocks I recommended
(ELN, TRCA, INSM, VRX, DVSA, and SPEX) four lost money within the next two weeks, two of them more than 10%! I’m not one to keep poorly performing stocks around. I
think IBD’s advice about selling stocks after a loss of 8% is a pretty good suggestion.
Finally, beginning
in July things started to look good. I’m sure some of this is luck and
some of this is my having learned a bit about more technical analysis. Of the 15 stocks I’ve recommended in the newsletter
since the first week of July (pick was CRME, up 60% two months after my recommendation) all but four are in the black (I’ve
dumped EXEL, now down 16%, but am holding my short position on ENCY, off 3%, my short on IMCL, and will keep NPSP a bit longer,
even though it’s down almost 10%).
Of the remaining
eleven picks (note, conditional picks or picks involving options were disregarded) three afforded profits of greater than
50% (CRME, INSM, and AVNR short), three afforded profits of greater than 25% (MBRX short, SRA, and NVD), and five (AXCA, DVSA,
HTI, HEPH short, and CRDN) provided profits of greater than 10%. Average return
for these positions since July is 19%. If any hedge funds are looking for a biotech
analyst, please contact me. Now that’s pretty shameless!
My short positions
in MBRX, AVNR, and HEPH have all been covered. I have also taken profits from
AXCA, CRDN, CRME, DVSA, and SRA. I’m holding my IMCL short (@ $28.38, but
may reconsider if the stock doesn’t begin to drop soon) and my ENCY short (though this will be gone one way or the other
next week). On the long side I’m holding INSM (I have a stop order in at
$1.50), NVD, HTI, NPSP (for now), and ELN.
In the next week
I’ll be looking at two of my favorite stocks, Amylin (AMLN) and Celgene (CELG).
Amylin’s been taking a beating lately but the fundamental value of their diabetes treatment, I believe, will
see it turn around soon. Celgene has been flying like Icarus, but, I think, the
stock may just have gotten too high, and may consider a short position in CELG (note, this will be Market dependent). Don’t get me wrong, I think Celgene is a fantastic company, but they’re
really going to have to keep posting some unbelievable numbers to justify a P/E ratio of 400, P/S of 25, and P/B of 23—Benjamin
Graham would be apoplectic!
WEEK ENDING DEC 1
Vaino’s Biotech Corner: NPS
NPS Pharmaceuticals
(NPSP), which was trading as high as $15 earlier this year, has taken two major hits recently.
In March the stock dropped a third when they announced a delay in getting their Preos osteoporosis drug on the market.
The stock then dropped by almost a half, to $5, in May when they announced that
the FDA had recommended a new clinical trial. They have submitted to the FDA
a clinical protocol for a 12 month NDA enabling study to meet this requirement.
Now, a new clinical
trial is a major setback, but I don’t think it’s anywhere near a death knell.
The company’s net current assets will see it through a couple of years.
It is worth noting that Preos was approved for sale in Europe in April. With an aging population,
demand for osteoporosis drugs is only going to increase.
In addition to
Preos, NPS licensed Cinacelcet HCl from Amgen. This drug is marketed in Europe and the US for hyperparathyroidism in patients requiring dialysis, and for patients with
parathyroid carcinoma. While revenue from Cinacelet isn’t great, it does
demonstrate they know how to sell drugs.
NPS also has
a Phase 3 study underway on Teduglutide, a treatment for patients with short bowel syndrome (the drug acts to make absorption
through the smaller length of intestine more effective). Results of this study
could be available early next year. This drug has also shown potential in Crohn’s
disease, and a Phase 2a study in support of this has been completed. If NPS is
able to gain marketing approval for Teduglutide there will be nothing to prevent physicians from prescribing it to patients
with Crohn’s disease. While this “off-label” prescribing is
not encouraged (and companies can’t market the drug for off-label use) it does occur frequently.
NPS has been
dealt a couple of setbacks. There will always be uncertainty in any clinical
trial. My take is a stock trading in the $5 range, with two late stage clinical candidates and an enterprise value $200M more
than its market cap seems like a pretty good deal.
Vaino’s Biotech Corner: Does
Momenta Have Momentum?
I like technical
stock analysis, I really do. I spend money every month subscribing to a website
that provides, what I think is, excellent advice on technical analysis. I’ve
been pretty happy with it, all in all. But, just as I mistrust theoretical calculations
in chemistry in the absence of experimental data I also mistrust technical analysis of stocks in the absence of fundamental
value.
Case in point. Yesterday the technical stock service to which I subscribe suggested that, technically,
Momenta Pharmaceuticals (MNTA) was a buy. This particular stock seems to have
the technical analysts bedeviled. To wit, on October 3rd the stock,
trading at $13.05, was downgraded to neutral from long. After climbing to $14.30
on October 5th it was downgraded all the way to avoid and promptly continued rising to $15.56 on October 19th
when it was upgraded to neutral from avoid. With this upgrade the stock then
fell back down to $13.59 on November 3rd before starting to move up again.
It closed at $16.47 yesterday and has been upgraded to long.
Momenta’s
financials look pretty good. Current assets have been increasing steadily for
the past few quarters, and they are as secure as any biotech company. They recently
signed a major collaboration with Novartis (NVS) that gave the stock a spike.
I think Novartis
has some great scientists working for them (in case my buddy Andreas is reading), but I’m not so sure about their acumen
at making deals with biotech companies. Idenix (IDIX) was purchased by Novartis
and was working on developing hepatitis drugs. Their stock plummeted 60% in March
after a clinical failure. Novartis also signed a deal with Anadys (ANDS), also
for hepatitis. Anadys plunged 70% in June of this year on a clinical failure.
After Novartis inked a deal with SGX Pharmaceuticals (SGXP) to develop some kinase inhibitors the stock fell 60%, again on
a clinical failure.
To be clear,
Momenta is a different company. Their technology involves identification of sugars
in complex carbohydrate drugs. Their most advanced drug candidate is M-Enoxaparin,
a generic version of the anticoagulant heparin derivative Lovenox. Using their
technology Momenta was able to identify the structure and produce a generic version of Lovenox.
Momenta has filed
an Abbreviated New Drug Application, where an ANDA is equivalent to a NDA for a new drug with the FDA. If the application is accepted they will be able to sell the drug.
Trouble here is it’s a generic. Now annual sales for Lovenox are close to $3B, which is appealing. But, as a generic competitive, threats are almost assured. An
inviting aspect of pharmaceutical research is the patent protection that provides twenty years of monopoly. This doesn’t exist in the generic market. Viropharm
(VPHM) found that out earlier this year when their stock plummeted on rumor another
company was going to introduce a generic version of their drug Vancocin.
But it gets worse. Not only is their sole near-term product likely to be subject to competition (they
just started a Phase 1 clinical trial on another drug), but there is some uncertainty as to whether they will have the right
to sell it at all. Rights to low molecular weight heparin are the subject of
a patent dispute between Sanofi-Aventis and both Amphastar Pharmaceuticals and Teva Pharmaceuticals, both of whom have submitted
ANDAs on similar generics. In June 2005 a District Court ruled that Sanofi-Aventis’
patent was unenforceable. An appeal is set to begin in December. If the Appeal Court overturns the district courts ruling, commercialization of M-Enoxaparin
would be further delayed even with FDA approval. Given that the basis for the
ANDA is cutting edge technology this could present difficulties with an organization as conservative as the FDA. Worse yet for Momenta, it means there are other generic drug makers out there with whom they will likely
have to compete. Competition is great for a lot of things, but a profit margin
is not one of them.
I think the science
behind Momenta is excellent, and carbohydrates will be the drugs of the future. But,
aside from a single generic drug, whose prospects are far from certain, I don’t see any possibility of a product for
years. Once the market stops booming, I think this will be a good short candidate
Vaino’s Biotech Corner: Breathing in the Relief
Novadel Pharma
(NVD) got some good news on November 3rd when the FDA approved their version of inhaled nitroglycerine (Nitromist)
to treat angina. Rights to this product have been licensed to Par Pharmaceuticals
(PRX). Novadel will receive a milestone payment as well as royalties.
Novadel’s
business model is to apply their inhalation technology to deliver existing drugs. The
two main benefits of inhaled drug delivery are avoiding the metabolic destruction of the digestive system and faster absorption
into the body. That is, an inhaled drug starts to work faster than a pill.
Novadel’s
pipeline is surprisingly robust, particularly for a company whose stock trades at less than half the price of a Big Mac and
has a market cap of only $65M. In addition to the recently approved Nitromist,
they have submitted a New Drug Application (NDA) to the FDA for an inhaled version of Glaxo’s anti-nausea drug Zofran. Also, they are on track to submit NDAs in 2007 for inhaled versions of the popular
sleeping pill Ambien and of migraine treatment Imitrex.
Novadel has already
licensed rights to inhaled Zofran to Hana Biosciences (HNAB) and will receive royalties if the drug is approved. While licensing to other companies means they share revenue, it also gives them a ready-made sales force. This is critical for such a tiny company, with fewer than 25 employees.
The Market either
didn’t notice or was little impressed by Nitromist’s approval. To
be clear, Novadel is a penny stock. It trades a bit over $1.25 with average
daily volume just over 100,000.
Nitromist is
bound to be substantially more expensive than nitroglycerine tablets, so it’s hard to say if sales will be substantial. I think the important point is that Nitromist’s approval bodes well for the
rest of their pipeline in that it proves they can get their technology (and they’re
not selling new drugs, they are selling a technology) through the FDA.
In particular,
I really like the inhaled form of Zofran. Glaxo reported 2005 sales for Zofran
of about $1.6 billion. Now, as I see it, one of the problems with administration
of Zofran is that it’s done orally. Think about it: A patient is having
difficulty keeping anything in their stomach and you want to treat them by putting a drug in said organ? I’m not a real doctor, but that just doesn’t make sense to me.
The inhaled form not only gets the nausea medication into the body faster, but it doesn’t further upset the stomach. That’s just smart. Getting relief
faster from migraine headaches (which often cause nausea as well) and falling asleep faster also sound like good ideas.
Penny stocks
are always risky but the more I learn about
NVD, the more shares I’m buying. It is illiquid and may be subject to drastic
price swings. While FDA approval of inhaled Zofran is not assured, I think their recent approval for Nitromist strongly improves
the odds. If they can get the second approval next year and file another NDA
this stock could easily be trading above $10 in a year or two.
WEEK ENDING NOV. 10: Pardon Me While I Change My Mind
A couple of times
in the past few months I’ve been asked about Dendreon Pharmaceuticals (DNDN).
Each time I’ve demurred from suggesting it was a good investment. Over
the past month, the stock has taken a nice jump from $4.40 to as high as $5.50.
Dendreon recently
completed a Phase 3 study on Sipuleucel-T, a treatment for hormone refractory prostate cancer (HRPC). HRPC is prostate cancer than doesn’t respond to standard therapy.
The drug works by enhancing the immune system. Currently, Taxotere is
the only approved treatment for HRPC. Dendreon’s drug gives rise to fewer
side effects that does Taxotere.
I initially didn’t
like Dendreon based on results of a Phase 3 study published in The Journal of Clinical
Oncology in July. In the Phase 3 study, the difference in time to progression
of the disease was statistically the same as a placebo.
Now, any biotech
stock trading at less that $10 is risky, and this is no exception. I was
not overly impressed that the Phase 3 study missed its endpoint, and I’m also a bit concerned with the status of Dendreon’s
FDA filing, in this case a biologics license application (BLA, similar to a NDA except for biologics). According to an August press release, only two of three parts of the BLA have been submitted. They haven’t yet submitted the chemistry and manufacturing controls (CMC) part. The CMC section deals with assuring the FDA that they can safely and reproducibly manufacture the drug. Discovery Labs (DSCO) got into some trouble a few months ago due to CMC issues.
The stock’s
technicals are now strong, so maybe this is worth a second thought. While the
Phase 3 study did not meet its clinical endpoint, it did increase survival. Patients
on their drug lived, a statistically significant 20% longer (3-5 months) than those receiving the placebo. While this doesn’t sound like a long time, given the alternative it’s—quite literally—a
lifetime.
Dendreon’s
balance sheet is strong enough to see them through at least the next year and a half.
My take is this stock will jump ten to twenty percent when they submit the last third of their BLA. What the FDA does, however, is a tough call. Treatment options
for HRPC are limited, and this drug does extend life. My guess is either the
drug will be approved or they will get an approvable letter.
Encycsive Pharmaceuticals: Stay the Course – And CRASH?
I just listened
in on Encysive Pharmaceuticals (ENCY) earnings call. Encysive took a plunge a
few months ago after receiving a second approvable letter from the FDA for their drug Thelin, a treatment for pulmonary arterial hypertension.
They announced on Thursday that they submitted to the FDA a response to the approvable letter. The stock jumped 10%. This drug has been approved in Europe.
It may have been the CEO
saying (and I’m not making this up) “stay the course” a couple of times, but I think something is up. As in the conference call I listened
to a few months ago, the CEO gave no information on what the FDA had a problem with, except to say the one remaining issue
had been resolved. Several direct
questions were asked, all were stonewalled, wouldn’t even give a broad hint as to what area (efficacy, safety, CMC)
was involved. If it really was an easy to fix problem, why wouldn’t he
say so?
They should hear back from
the FDA within 30 days. My guess, and it is only a guess, is the FDA will
reject and the stock will crash.
Week Ending Nov. 3
Vaino’s Biotech Corner: A Break From Organic Chemistry!
Medicinal chemistry (on which the Biotech/Pharma
industries are based) is just a subset of organic chemistry. Organic chemicals
are derived from living organisms. One of my pet peeves is the misuse of the term
“organic food”. ALL food, except for salt and water, is organic.
So, needing a break from marking dozens of
sophomore organic chemistry midterms, I thought I would write about a company based on inorganic
chemistry. Ceradyne (CRDN) sells composite materials for an array of applications.
Ceradyne’s best-known product is bulletproof
armor made of boron carbides. This material is the lightest, strongest material
known, and, as CEO Joel Moskovitz is fond of saying: “it stops bullets too”. Ceradyne
also sell ceramics for industrial, dental, and automotive applications. Last year 66% of their revenue was from the sale of
armor.
But Ceradyne has another product I think will
be even bigger. One of the cool properties of boron is it stops neutrons too! Nuclear waste is radioactive due to decomposition of uranium into other transuranic
elements, a process which emits a neutron, or a beta particle. In this country
20% of electricity is generated by nuclear power each year. A total of 50,000
tons of nuclear waste are being stored in temporary facilities across the US in anticipation of the US Department of Energy opening a permanent
facility at Yukka Mountain in Nevada in 2017.
Ceradyne announced in June that they were
collaborating with Alcan to build a facility to manufacture a boron carbide aluminum metal matrix composite for nuclear storage. The plant will be located in Quebec
to take advantage of cheap electricity. Last month they announced they had received
their first order for this, and expect to ship in Q2 of 2007. My take is this
will be even bigger that their body armor.
While simply storing nuclear waste isn’t
an ideal solution, storing it in armor that also absorbs neutrons is pretty smart. Ceradyne
has already demonstrated an ability to obtain government contracts, so dealing with DOE shouldn’t present a problem.
Now, Ceradyne has had some “issues”
with option backdating. With this sort of accounting tomfoolery is not meritorious,
it’s also, unfortunately, not uncommon. Ceradyne announced on Oct 23rd
they had completed their backdating investigation and, with the appropriate mea culpas,
filed their Q2 10-Q to become compliant with NASDAQ regulations.
I think is this is a good company whose stock
has taken a hit, and is now set for growth. Once the true potential for their
nuclear fuels protection system is realized the stock will skyrocket.
Ceradyne’s quarter over quarter profit
has been increasing for the past six quarters. They will announce Q3 earnings
on November 1.
Week Ending Oct 27: Vical and a Cardiome Update
My focus this
week is on a company called Vical (VICL). It has developed a very interesting
way to deliver DNA into muscle tissue. Their focus is on so-called DNA vaccines.
A vaccine acts
by exposing the immune system to low levels of pathogens, to which are generated antibodies that remove the interloper. Even after all the protein is gone, the antibodies persist, sometimes for decades. This means that subsequent exposure to the pathogen will be harmless (or less harmful)
as antibodies are already present to remove it.
In DNA vaccine
therapy, a modified form of pathogenic DNA is injected, typically into muscle tissue, where it begins forming the pathogen’s
proteins in small doses. The immune system does the same job of creating antibodies
against the pathogenic proteins. A particular advantage of DNA vaccines is they
are much cheaper to produce, are easier to store, and may last longer.
Two weeks ago
Pfizer announced it had agreed to purchase PowderMed, a private company, for an undisclosed sum. PowderMed has figured out a way to deliver DNA by precipitating it onto gold particles and, literally,
blasting it through the skin. It’s pretty cool. It’s also broadly similar to what Vical does.
Vical has a pretty
decent pipeline of clinical trials. Its most advanced product is a Phase 3 study
on a DNA construct (not strictly a vaccine, but same idea) to generate angiogenic growth factors that should have application
in the treatment of arterial disease. In addition, they have three other Phase
2 studies and nine Phase 1 studies underway. This is a less than mature pipeline,
but the stock is trading in the low single digit range.
Vical announced
on Friday (October 20) that it had demonstrated the efficacy of a DNA vaccine to treat avian flu in ferrets. This prompted a lemming-like surge of buying that pushed the stock price up as high as 22%: the price retraced, but still closed up almost 10% on the day.
I’m not
usually overly impressed with preclinical studies, but this caught my eye—and it’s not that I’m a big rodent
fan. I like the simplicity of the technology, and I like the breadth of Vical’s
pipeline. To be fair, revenue from any of Vical’s products is years away, but my guess is they’ll be able to generate
enough interest that they’ll be bought out or will enter into a substantial partnership within the next year.
While the company
is risky, I do think Vical’s drugs show promise. The share price will wind back down in the next week or so, and when
it gets back to $5.50 I think it will be a good buy.
Canadian Cardiome Carries On
I mentioned Cardiome Pharma (CRME) in celebration of Canada Day in July. The
stock took a nicer flyer after that, jumping from the high $8s to just above $14 in early September. The stock had tanked due to the FDA rejecting their NDA filing for an IV form of their drug RSD1235, which
treats atrial fibrillation. A paper in 2004 published
in the Journal of the American College of Cardiology on a Phase 2 study on this drug was very encouraging. The rejection had nothing to do with the science but merely
with careless paperwork. While this is a stupid mistake, it’s easier to
fix than a drug that doesn’t work.
Cardiome announced positive Phase 2a data for an orally available form of RSD1235 on September
13th. The markets response after “buying the rumor” was
to “sell the story” and the stock dropped almost 25%. The stock is
also off a bit more on announcement of a shelf-registration to sell up to $150M of stock.
My take is this makes for a good entry point. This stock will get a bump
when they refile the NDA for IV RSD1235, and when they initiate a larger Phase 2b study for oral RSD1235. I think this is
a good buy, eh.
WEEK ENDING OCTOBER 20, 2006
It’s All About the Pipeline
Look at the performance
of the biotech exchange traded fund BBH – its underperforming the S&P by about 10% in the past year – and
you might wonder if investing in biotech is even worth it. Fortunately, the past
few weeks have demonstrated why investing in biotech can be exciting. On September
25th Acorda Therapeutics (ACOR) announced positive results of a Phase 3 study, one of two studies the company is
completing in advance of filing a new drug application on an multiple sclerosis drug called Fampridine-SR. The stock closed at $2.22
on September 22nd, and was trading as high as $17.50 on October 13th.
Not bad.
In a similar vein, New
River Pharmaceuticals (NRPH) closed at $26.21 on October 6 and closed just under $46 on October 13th, also an OK
return. In this case the jump was on the announcement that the FDA had granted
conditional approval for a drug to treat ADHD.
Now, to be fair, there
have been some pretty good free falls the other way in the past few months: Neurocrine
(NBIX) went from a high of $63 in mid-April to as low as $9 and Anadys (ANDS)
dropped from over $16 in April to the $3 mark. Of course, these would have been
good short plays.
The trick to
biotech investing is finding companies with good pipelines. There, that should clear things up!
More broadly,
there will always be a substantial element of risk in biotech investing. Clinical
trials can be difficult to predict, making stock prices volatile. I usually prefer
investing in companies with the bulk of their pipeline in Phase 3, but sometimes there are companies with good pipelines that
are mostly Phase 2 candidates. I think Exelixis (EXEL) is one of those companies.
Exelixis is a
San Francisco-based biotech that has amassed a pretty good pipeline. The stock
took a, predictable, beating over the summer as they announced a follow-on offering of stock.
While they have a Phase 3 clinical trial underway, on a drug to treat bile duct tumors, I think their most exciting
product is XL999. XL999 works by inhibiting kinase enzymes: it’s mode of
action is similar to Novartis’ successful Gleevec. The past few years inhibiting
kinases has been all the rage, similar to the situation a decade ago when everyone was inhibiting proteases.
Results of a
Phase 1 study, presented at a November 2005 conference of the American Association for Cancer Research were very encouraging. Currently XL999 is being evaluated in six different Phase 2 studies to treat colon, ovarian, non-small cell lung cancers, renal cell carcinoma, AML, and multiple myeloma. In addition to the clinical studies for XL999, Exelixis also has Phase 2 clinical
trials underway with other, similar, molecules to treat diabetic kidney disease and papillary renal cell carcinoma. They also have three Phase 1 studies underway.
Exelixis is technically
strong, though the stock is stochasitically (and by MFI) overbought. Positive
results on just one of the Phase 2 studies will give the stock a nice boost.
Week Ending Oct. 14, 2006
Vaino’s Biotech Corner: The Future
of Avanir
Readers conversant
in French will, hopefully, appreciate the pun in the title. Avanir Pharmaceuticals
(AVNR) started out as Lidak pharmaceuticals in 1988 and, unlike most biotechs, has an over-the-counter medication (Abreva
for treatment of cold sores, rights to which were sold to GSK). Aside from Abreva,
they’ve had almost two decades of frustration.
For a while Avanir
was developing vaccines against cancer, but that didn’t quite work out. They
tried antibodies to treat asthma, but they didn’t really pan out either, so they looked to cough syrup. Yes, cough syrup.
Turns out, dextromethorphan (DM) is a noncompetitive N-methyl-D-aspartate
(NMDA) antagonist that has potential neuroprotective, anticonvulsant, and antinociceptive activity. Trouble is, DM is rapidly metabolized to another species (demethylated to give dextrorphan, in case anyone
was wondering) that does not have neurological activity. Avanir’s approach
is to coadminister the drug with another drug, quinidine, that is known to inhibit this demethylation. A 2004 study in The Journal of Clinical Pharmacology showed
that quinidine inhibited DM metabolism. They call the combination of these two
ingredients Neurodex.
In 2001 Avanir started a Phase 2/3 clinical trial on the use of Neurodex to treat emotional liability for patients
suffering from ALS (Lou Gehrig’s disease). About 10-15% of ALS patients
(according to the ALS Association about 30,000 Americans have ALS) suffer from this condition, also known as Pseudobulbar syndrome: it’s not a big market. The phase 2/3 study did show that Neurodex was statistically superior to either DM or quinidine alone. In late 2002 a Phase 3 study was initiated.
The results were published in a 2004 paper in the journal Neurology and
a 2006 paper in Annals of Neurology, and indeed
the drug seemed to effectively treat Pseudobulbar syndrome.
The drug is not without side effects (25% of patients discontinued the study in the first month) and was the subject
of a commentary in the journal Neurology.
In addition, a 2005 paper in Lancet Neurology also expressed concern
about side effects of Neurodex.
In June 2005 Avanir submitted an NDA for Neurodex to the FDA.
Also in June 2005, a phase 3 study examining the application of Neurodex to diabetic neuropathetic pain was initiated.
This trial is expected to be completed in 2007.
The FDA asked for more data on Neurodex, and this was completed in January 2006. In April the company announced that the FDA was expected to take action by July 30. In June, the FDA decided it needed more time, and a decision has been put off until October 30, the day
before Halloween: talk about a witching hour for Avanir.
It’s impossible to gauge exactly how the FDA will rule on Neurodex. My guess is the combination of doubt cast on Neurodex in the neurology literature, combined with the FDA
first asking for more information and then saying it needed more time to reach a decision means the drug will not be approved. Avanir has weak balance sheet and, based on their burn rate, will have to raise additional
capital within the year. This may or may not be before the results of their other
phase 3 clinical trial are released.
I think a straddle with November options is a good move.
Given the decay of time value of options (theta) there’s no advantage (and, in fact, a disadvantage) to opening
this position early. I’d wait until the 29th of October to open
a straddle. But here’s a twist. The
FDA is pretty good at providing its decisions when it says it will. One way to
tell whether the decision is negative will be if there is no press release by the company that the drug has been approved. No press release early in the day often, but not always, a sign the drug has
not been approved. Now, the stock
will move regardless of whether the decision is positive or negative. But, a
bonus play will be to wait until 2 or 3 in the afternoon on October 30th.
If Avanir has not released a press release by then, you can be pretty certain the drug has not been approved and the
stock will tank. Given AVNR’s history, it will tank hard.
East of Hollis-Eden? (or, Hollis Eden: Paradise Lost?)
A few weeks ago I wrote suggesting a straddle to take advantage of volatility in Hollis-Eden Pharmaceuticals (HEPH). HEPH was waiting to hear from the US Government (HHS) as to whether or not they’d
get a contract on a drug to potentially combat acute radiation syndrome (ARS). HHS
had said they would render a decision around September 15. Well, September 15
came and went with no announcement. To be clear, a look at intra-day charts the
last two weeks of September shows substantial volatility. Closing the Oct 7.5
straddle at the right time on September 26 would have been a good move. Implied volatility for Nov 06 HEPH options is an impressive
93%!
On September 26 HHS announced they had asked HEPH to extend until November 30 its offer to provide HHS with their
drug. Novelos Therapeutics (NVLT.OB), who is also competing for this procurement
received the same notice. I still think this is a good volatility play, as the
company either sinks or swims based on this procurement and a straddle with December options is a good play. Now that the stock price is closer to $5, I would go with $5 strikes.
For those looking to speculate, toward the end of November I think HEPH will be a great stock to short. My take is the
same will happen November 30 as happened on September 15, that is, no announcement and the stock will take a huge plunge. Myself ,I also picked up some NVLT.OB----a purely speculative and highly illiquid
play, but I think they have as good a shot at the HHS procurement as HEPH and the stock is less than a buck.
Week Ending Sept. 29, 2006
Imclone Implosion?
Trading Imclone
(IMCL) stock ended up buying Martha Stewart a trip to the Big House a couple of years ago.
Imclone sells Erbitux, an antibody that has proven highly effective in helping to treat many forms of cancer.
Erbitux has been
approved for use in combination therapy (with irinotecan) to treat colon cancer and also to treat squamous cell carcinoma
of the head and neck. Erbitux works by binding to epidermal growth factor receptors (EGFr), which inhibits tumor growth. Currently Imclone
is conducting over a dozen Phase 3 clinical trials to expand uses of Erbitux in oncology.
This is a good product. In addition, Imclone also has four early stage
clinical trials of different potential drugs underway.
Now, Imclone
receives pretty much all of its revenue from the sales of Erbitux. The drug itself
is distributed through Bristol-Myers (BMY), and Imclone receives 39% of annual net sales in North America. In 2005 this amounted to $161M. For sales outside of North America, they receive revenue from Merck KGaA, which in 2006 is expected to amount to 6.5-7.5%
of net sales.
Erbitux represents
at least two thirds of Imclone’s revenue. While they do have other drugs
in development, in a best case scenario they will not see revenue from them until at least 2010.
Note that IMCL
dropped 13% on August 10th when plans for a sale of the company were scuttled.
According to their interim CEO (their previous CEO was fired in November 2005 after just over a year on the job): “The board concluded that the alternatives available, including bids received
for the acquisition of the company, did not match the value potential of ImClone Systems as an independent company." Or maybe those bidders saw trouble down the line.
Here’s the trouble:
Last Tuesday
(Sept 18), a judge in Manhattan ruled that the Erbitux patent
is owned by some Israeli scientists from Yeda Research, I expected the stock price to plummet.
After all, losing patent rights to your major revenue stream has to be a serious blow.
However, the stock is down less than 3% since then. I find this surprising.
Imclone does
have a few choices in the wake of the decision.. It can appeal. However, the
judge ruled that the plaintiffs claims were well-documented and that Imclone’s witnesses were less credible that those
of Yeda. How much impact the incarceration (on an unrelated matter) of Sam Waksal,
the former CEO and founder of Imclone, may have had on this credibility issue is hard to say.
It is difficult to say how successful an appeal might be.
Imclone could
also seek to invalidate the patent, but that’s a tough road to take. Another
possibility is to try and enter into a licensing agreement with Yeda. That makes
sense to me. It would cost Imclone a few percent of revenue, but they would still
be in business.
Imclone is also
being sued by MIT, which alleges that Imclone copied a cell line to produce Erbitux.
In denying Imclone’s petition for summary judgment the judge noted “There is a gaping hole in Imclone's
argument.” According to Imclone, this matter will now proceed to trial.
I have to admit, I’m a bit confused reading the case. The judge (2006 U.S.
Dist. LEXIS 52600) granted MIT’s motion for summary judgment, which, it is my understanding, should end the proceedings. This could also be very bad news for Imclone
My confusion
is that all the above scenarios ought to decrease the stock price. A stock price
is expected earnings divided by risk. So if they license from Yeda, earnings
will decrease (note, Imclone already shares a good portion of revenue from Erbitux so even a few percent will be significant)
and the share price should drop. If they litigate, this increases the risk, which
should also cause the price to drop. Neither of these has happened. The stock is essentially flat. I think this has to change.
Now, news that
Carl Icahn (who bought 14% of the company) had been elected to the board of Imclone may have helped buoy the price---he does
seem to be good at investing, and is seeking some changes in chairmanship of the board.
I’m not sure changing Captains after The Titanic hit the iceberg would have helped much.
This is where
it gets interesting. In 2005, Amgen (AMGN) initiated a Phase 3 clinical study for treatment of colon cancer by Panitumumab,
an antibody that does the same thing as Erbitux. They will likely file an NDA
soon. Further trials, to treat the same indications for Erbitux, are either planned
or underway. Erbitux is the only realistic competitor for Panitumumab.
On the same day a judge awarded sole ownership of Erbitux patent rights to Yeda, Amgen announced it had licensed the rights to this same patent from
Yeda. What this says about Imclone’s potential to extract any licensing rights from Yeda is speculation. It would certainly be in Amgen’s interest to prevent this, and I’m pretty certain this was
not lost on the lawyers in drawing up the contract.
My take is that Imclone is entering a world of hurt.
Once the market realizes it (84% of the stock is held by institutional investors) the stock will be bear food.
Week ending Sept. 22, 2006
Vaino’s Biotech Corner: Some nice shorts for Indian Summer
With the weather
reports here in Maine warning of frost for the weekend, I thought this might be a good time to get out in
some shorts before it gets too cold. I am baffled that Alnylam Pharmaceuticals
(ALNY) is trading as high as it is. The stock is trading at $14, giving a market
cap of $450M. I am at a loss to understand how a company whose product pipeline
comprises a single drug in a Phase 1 study (Phase 1!) can be valued so highly. To
be clear, I am familiar with the idea that a stock’s price represents the market’s expectation of future earnings
divided by risk, but I think this is way out of balance.
The science behind
Alnylam’s drug (and future drugs) is pretty cool. It’s a technology
called RNAi (short for RNA interference). In the body, RNA acts as an intermediary
in the synthesis of proteins directed by DNA. Now, most diseases stem from the
generation or misregulation of a protein. So, being able to shut down a specific
protein has the potential to afford a safe treatment for, theoretically, almost any disease.
It is really a cool idea.
Alnylam was founded
in 2002 and can in some ways be considered a spin-off of Isis Pharmaceuticals (ISIS).
They licensed about 75% of their patents from Isis.
Isis’ technology is based on so-called “anti-sense” therapy. From a chemical point of view, I really don’t see any difference between RNAi
and anti-sense. The compounds themselves are analogous, and the idea is the same: basically mess with RNA before it can make proteins.
I like Isis as an instrument company (recall their “Tiger” technology), but not so much as a drug
company. Their only success in getting a drug to market has been with Vitravene,
a treatment for CMV retinitis. Isis does not
report sales for Vitravene in their recent 10Ks, and states that it’s “distributed on a limited basis” due
to a decline in the incidence of the disease.
What has hampered
Isis’ drug development efforts has been pharmacokinetics, that is, the reactions drugs
undergo in the body. These anti-sense, or RNAi, drugs get degraded rapidly. In fact, degradation of Vitravene is so fast it has to be injected directly into the
eye. Ouch.
Now, new technology
has been created that stabilizes RNA, , for example short hairpin RNA (shRNA) ---which was what has hampered Isis. Alynlam has completed a Phase 1 clinical trial whose intent was, according to their
April 30 press release, “… to evaluate the safety, tolerability, and pharmacokinetics of ALN-RSV01 in healthy
adult volunteers”. In a subsequent press release the drug was reported
to be safe. There was no mention made about the big issue here, that is pharmacokinetics. This makes me suspicious. I tried contacting
Alnylam seeking clarification on Wednesday, and still have not heard back.
A Phase 2 study
is planned for the first half of 2007: this delay also makes me suspicious as their financial position is strong and wouldn’t
preclude them from starting earlier. I guarantee they had a protocol for the
Phase 2 study planned probably two weeks after the Phase 1 study started.
I think Alnylam
is going to hit the same problems that scuttled Isis’ drug discovery programs. For me this is an obvious short. The
trouble is, the stock is inflated based on hype surrounding RNAi. Once the market
realizes it’s just hype, the stock will crash. In situations like this
I think the technical analysis will show the way, and I will be waiting to see when ALNY’s technicals (which are looking
sharply up right now) start to deteriorate strongly.
Week Ending September 15, 2006
Ligand Pharmaceuticals
(LGND) is one of the oldest San Diego Biotech companies. The term “ligand’
is used in chemistry to describe molecules that bind, or hold on, to other molecules.
From recent events, I’m wondering if Ligand is in a real bind and planning on letting go.
In fact, Ligand
has had a bit of a stormy history. A few years ago they got into trouble with
investors for stating that they expected to become profitable “next year”. They did this twice. According to their
10Ks they have never been profitable. Their best year was 2002 when they “only”
lost $32.6M.
Ligand has also
had some accounting “issues”. They have only recently been relisted
on the NASDAQ after having to restate past financial statements to do with revenue recognition irregularities. Last month, their CEO resigned “to pursue other opportunities”. I’ve never understood why boards can’t come right out and say “he
was fired”.
Last
week, Ligand announced they had sold rights to their pain treatment Avinza (a slow release form of morphine developed by Elan)
to King Pharmaceuticals. Ligand will receive $313M in cash plus royalties. Under the terms of the agreement, which still has to be approved by shareholders,
Ligand will receive a 15% royalty on Avinza sales for twenty months. They will
continue to receive royalties on a sliding scale until 2017. If annual sales
are less than $200M they will receive a 5% royalty. According to LGND’s
latest 10K, sales for Avinza were $16M in 2003, $69M in 2004, and $113M in 2005.
As
part of the press release announcing the sale, they stated that they “are evaluating a distribution of a majority of the cash proceeds from this and any future asset
sales (which are expected to be shielded by our remaining tax loss carry forwards) to shareholders in the form of a special
dividend.”
Thursday night
Ligand issued a press release that they had sold the rights to their oncology products to Eisai for $205M. Interesting. The company has now sold the rights to all of
their products that generate revenue. In March 2006, according to their latest
10Q, Ligand covered 67 of their “key employees” with employee retention
agreements. Hmm….
Ligand’s
stated objective is to “become a dynamic and highly-specialized R&D and royalty company”. I thought that’s what they were trying to become before they sold off their revenue streams. It’s not as though they have an impressive pipeline or a track record of creating
great drugs, and their projected royalty stream is weak. In a December 2005 article in Mergers & Acquisitions
Report it was reported that the hedge fund Third Point LLC had been pressuring
Ligand to sell itself. Indeed, Ligand retained the investment bank UBS as financial
advisors.
Ligand has been
around since 1987 and has yet to turn itself into a profitable company. My take
is their current investors realize this and want their money back. Ligand has
scheduled a conference call for 11 am (EDT) on Monday the 11th. A
big dividend will mean a drop in the stock price (ex dividend), and an increase in put prices.
This is a highly speculative play, but I think Feb 07 puts might be a good buy.
Week Ending Sept. 8, 2006: Might as Well Go for a Serono! |
For readers less familiar with obscure 1980s Canadian
pop music, “Might as well go for a soda” was a big hit for Kim Mitchell in the late 80s in Southern Ontario (note, this is
nowhere near LA’s third airport).
Serono (SRA)
is decent sized Swiss biotech company, with a market cap of $12B and about the same size as Biogen-Idec or Celgene. On speculation of an acquisition of Serona late last year the stock price was bid up to the low 20s. When it became clear in January that no such deal was going to happen, the stock reconsolidated
to its pre-hubris price range in the high teens.
Serono has over
a dozen marketed products. Its biggest products, Rebif with sales of $1.2B last
year and Gonal-f ($500M in sales), are for the treatment of MS and infertility, respectively.
With the reintroduction of Elan’s Tysabri, Serono will face some competition on the MS front. As I mentioned two weeks ago in discussing Halozyme, reproductive health is a growing and profitable field
right now.
In addition to
their marketed products Serono has a pretty good pipeline of drugs in development. They
recently presented positive results from a Phase 3 study for the treatment of HIV-associated Adipose Redistribution Syndrome
(HARS). HARS, which occurs in HIV patients taking the current HIV nucleoside
therapy, causes abnormal fat accumulation and may be accompanied by other metabolic problems.
While the number of AIDS deaths has been decreasing in Europe and North America, it’s
been because of this type of nucleoside cocktail and the number of patients living with HIV is still substantial. There is no current treatment for HARS. Serono has submitted
a New Drug Application to the FDA. In
addition, they also have five other Phase 3 clinical trials ongoing, four Phase 2 studies, and a handful of Phase 1 studies. All in all, this is a pretty impressive pipeline.
Fundamentally
the stock is solid. While SRA’s (price/earnings) X (price/sales) wouldn’t
make any watch list of Benjamin Graham’s, of current biotech companies, SRA would be his favorite. Technically the stock
is a buy, though stochastics indicate the stock is overbought. Aside from the
speculative bump in anticipation of a takeover noted above, SRA has been in a consolidation pattern since June of 2005. With MACD and OBV looking bullish, some volume—perhaps catalyzed by some good
news—could cause a break out when trading begins in earnest after Labor Day. Just
be careful – average daily volume is below 100,000 shares so liquidity is an issue.
Week Ending Sept. 1, 2006: It’s good to have options
Hollis-Eden Pharmaceuticals
(HEPH) has been around since 1992. Their chart looks like it would be at home
on Coney Island:
a definite rollercoaster. To be clear, I would never suggest owning HEPH stock. For a company that’s been around almost fifteen years, they have little to show
for it.
Their lead compound
is called Neumune. It prevents loss of white blood cells (neutropenia), loss
of platelets (thrombocytopenia), and loss of red blood cells (anemia). This drug
has been demonstrated safe in several Phase 1 clinical trials. The biggest indication
for Neumune is protection against acute radiation syndrome (ARS). Having ARS
as an indication makes for interesting clinical development as it isn’t possible to evaluate the drug’s efficacy
in humans (it would require exposing humans to unsafe levels of radiation). In
cases like these, the FDA permits data to be obtained from other animals such as monkeys.
In studies with monkeys, the drug was shown to decrease some of the damaging symptoms of ARS. They have also completed a Phase 2 trial on another drug, Immunitin, to treat infectious diseases such
as HIV and malaria. According to their website, no further clinical trials are
underway to advance this drug.
Now, here’s
what I think is interesting. HEPH announced in late July that the US Department
of Health and Human Services is considering stockpiling Neumune (as part of Project BioShield) to prevent ARS. The stock is up 65% since then.
Hollis-Eden has
a weak pipeline and a weak balance sheet. As I see it, this procurement is the
company’s only hope. I have no insight as to which way the decision will
go. I expect any decision to be as much politics as science. If the U.S. government decides to stockpile the drug, the price will
jump: if they decide not to, the stock will crash. Buying stock in such a company
is more like a trip to Vegas (minus the free drinks) than an investment.
So what options
are left to biotech investors? Well, options!
Straddles, that is. To wit, simultaneously buying both a call and a put
at the same strike price results in a position that makes money as long as there is a big move in the stock, as there will
be in this case.
Here’s
a sticking point. One of the characteristics of options is their value decays
exponentially as expiration approaches. So, using September options results in
a more favorable position than using October options. But, according to the Associated
Press, a decision is expected BY September 15; according to MarketWatch, September 15 is the ESTIMATED date of the award. As September options expire the next day, this is critical. The Government’s
fiscal year ends September 30, I assume this means any award will be made by then.
I think a straddle
with a $7.5 strike is worth buying. September 7.5 calls are selling for $0.75
and puts for $1.40. Now, to be clear, open interest on the puts is low which
could be a problem. Open interest on $5 puts is pretty high, but a straddle at
$5 doesn’t look good to me—not a lot of payoff on the downside. The 7.5 straddle pays off as long as the stock
moves out of the $5.35 to $9.65 range. Using October options reduces the risk
about the timing of the award. The same position with October options is profitable if the stock moves out of the $4.70 to
$10.30 range. The ranges will narrow as we get closer to the respective expiration
dates, and I will be keeping an eye on this.
Beware, dealing
in options can be much riskier buying stock and is not for the faint of heart.
Week Ending August 25, 2006: Fishing in less crowded water
Halozyme Therapeutics
(HTI) is a tiny San Diego biotech —call it a nanocap— that, I think, has a lot of promise. This is a stock that is not on anybody’s radar screen. As best I could find, only four analysts even cover the stock. And
it is a tiny stock. Halozyme’s market cap is less than $150M, and the stock
is highly illiquid, with an average three month daily volume of less than 70,000.
In fact, if you
type ‘HTI’ into sites like Marketedge.com or Tradingmarkets.com you’ll see that the stock isn’t even
covered. As many of you will recall from classes in Statistical Mechanics, small
populations of data can behave idiosyncratically, foiling technical traders. Heck,
they’re so small they don’t even file 10-Ks. Instead, they file 10-KSBs.
Small illiquid
stocks are definitely risky. HTI’s chart shows a decided spike last March
followed by the air slowly being let out of the stock. Looking at the company’s
press releases, the best reason I can find for this spike was initiation of a clinical trial for bladder cancer. Why the stock has been on a slide is unclear to me. That’s
one of the problems with thinly traded stocks.
But here’s
why I like Halozyme anyway. Their technology revolves around using enzymes (humanized
hyaluronidases) to break down hyaluronic acid, a carbohydrate-based polymer that acts as an intracellular space filler. Breaking down this tissue makes it easier to get a drug to its site of action, which
may then improve the efficacy of the drug. Chemophase is currently being examined
as a treatment for bladder cancer in conjunction with mitomycin, a common chemotherapeutic.
They also have a clinical trial underway to use the same technology to enhance the efficacy of protein therapeutics. Positive results from these clinical trials will be big news. That is, if they prove efficacy in these clinical trials it is highly likely this approach will be successful
in a range of diseases.
But there’s
more to this story. Halozyme has an approved product, Cumulase, which is a form
of hyaluronidase used in in-vitro fertilization (IVF). In a study published last
May in the Journal Fertility and Sterility, Cumulase was found to be up to 20%
more effective in IVF than the currently used bovine enzyme. Now, 20% in itself
is substantial but, for an issue as emotional as pregnancy there is no doubt in my mind couples will pay a premium to get
that 20% edge.
But it gets better. According to the US Center for Disease Control (National Vital Statistics Reports, Dec. 2002), the median age at which women gave birth in 1970 was 25.4. This
had increased to 27.1 in 2000. Biologically, it’s more difficult for women over 35 to get pregnant. Women over age 35 are the fastest growing group of women giving birth.
It’s not entirely clear to me why the CDC keeps statistics
on pregnancy. But with more women waiting longer to have kids, the market for
services like IVF is only going to get bigger. From a demographic point of view,
the states having the highest increase in median age of pregnancy were also the most affluent (coastal states and Illinois). To my mind
this is a great macrowave play, a growing, affluent, market seeking an edge at one of (if not the) most important events in
life.
Currently, Halozyme
is trading at about $2.50. It’s illiquid, and its balance sheet would probably
fall over in a bad storm (fortunately they’re in San Diego). Stochastically the stock is overbought, but the MACD looks promising. For me, this stock doesn’t trade enough to have any confidence in the technicals. My take is Halozyme has a great product waiting to be discovered, and a pipeline with lots of potential
to boot. But just remember, the pioneers are often the ones with the arrows in
their backs.
Week Ending August 18, 2006: Making ethanol is just good chemistry
My advice on
Diversa (DVSA) back in March was to buy and then sell in advance of Q2 and Q3 earnings.
I did this myself and was really quite happy with the undulations of this stock.
The stock, which was hovering above $10 for a while, is back down to less than $9.
I think maybe this is a stock worth buying again.
What I liked
about Diversa back in March was their “Ultra-Thin” enzyme. This enzyme
makes it easier for industrial plants to convert the starch in corn into simple sugars which are then fermented to ethanol. The advantage of Diversa’s product is that it allows the manufacturing plants
to use more extreme conditions and produce ethanol more efficiently.
An article in last week’s Barron’s on ethanol for fuel rekindled my interest in Diversa. In
particular, the article noted that US consumption of fuel ethanol could hit 8 billion
barrels this year, double what it was last year. In an article in the August
9th Kearney (Nebraska) Hub,
Congressman Tom Osborne said he “is
a bit concerned at the rate in which (ethanol) production plants are popping up across the state.” He further went on to say, “one of my fears is that we don’t keep up with bioscience”. I’ll drink to that. According to
the Nebraska Ethanol Energy Board, there are plans to build 23 ethanol plants in the state.
Twelve plants are currently running. That’s a pretty significant
increase in capacity.
Oil prices dropped after events in the UK on Thursday.
It’s clear to me the expectation of decreased demand that may have caused this drop was irrational. The decrease in supply, however, from the closure of much of BP’s Alaskan oil field is very rational. It will be interesting to see just how many pipes they need to replace. Bottom line, oil prices aren’t going down anytime soon, making fuel from ethanol more attractive.
So here’s where it gets interesting. Since January, the price of a barrel of ethanol has increased from $2.00 to $3.80. The price of a bushel of corn has gone up from $1.87 in March to $2.40. A dry summer in the Midwest is creating concern that the price of corn
could increase further. So, if ethanol plants can use corn more efficiently their
margins will increase. That’s why I think demand for Ultra-Thin will grow
stronger.
Through their partner, Valley Research, Ultra-Thin
has been tested in ten plants to date, and more efficient throughput of corn has been seen.
Another ten of these “plant trials” are expected to be done this year.
Now, technically
DVSA isn’t a buy, but the charts show signs of improvement. And, to be
clear, Ultra-Thin so far hasn’t lived up to Diversa’s expectations. In
their March earnings call, they were predicting $20M in sales for this year and said they thought they would be profitable
in 2007. In their earnings call on August 3rd they were figuring sales
for Ultra-Thin would probably be less than $5M for the year. They also pushed
back their expectation of profitability until 2008.
My take is their
predictions were overly ambitious, but that they still have a good product. Once
they’re able to run some more “plant trials” hopefully they will demonstrate Ultra-Thin’s advantages,
and sales with explode like an Appalachian still.
Week Ending Aug. 4, 2006
Vaino’s Biotech Corner: Hewers of wood, haulers of water, and makers of drugs?
Canadian
biotech stocks don’t get the attention of their American counterparts: there
simply isn’t a critical mass north of the border. So, while escaping the
heat on the shores of the picturesque Bay of Fundy in Digby, Nova Scotia, (home
of the world’s largest scallop fishing fleet), I went looking for underappreciated Canadian biotechs.
Axcan
Pharma (NASDAQ: AXCA) is a Montreal-based company that’s been around since 1982.
Their business model, acquiring and developing drugs to treat gastro-intestinal ailments is sound, and they’re
profitable. AXCA took a dive in February when a Phase 3 clinical trial of ITAX,
a drug to treat functional dyspepsia, failed to meet its endpoint. Functional
dyspepsia is a poorly understood disease that accounts for up to 5% of all visits to primary care physicians in North America.
ITAX
is a dopamine agonist that is currently in use in Japan. Results of a clinical study, published
in May in The New England Journal of Medicine, showed the drug to be effective
at reducing gastric pain in patients. Gastric pain isn’t as dire as many
other diseases, but, if you suffer from it you want to get rid of it.
AXCA’s
financials are strong and they are profitable, though not spectacularly so. Despite
the failure to meet its clinical endpoint, ITAX is a useful treatment. I expect
Axcan will submit a New drug Application in the near future to permit it to sell this drug in North America. If they are successful it will be the only drug on the market to treat functional
dyspepsia. There’s nothing like being the only product on the market to
sooth an upset investor.
Aside
from ITAX, Axcan has three other drugs in late stage clinical trials. Their clinical
trial on Viokase, a pancrease enzyme replacement therapy, is on a drug currently being sold by Axcan: the clinical trial is the result of an FDA rule that all pancreas enzyme replacement drugs (they help to
breakdown lipids) must have passed clinical trials by 2008 to remain on the market.
Axcan
is safe financially and, if an NDA for ITAX is filed, the stock will jump. AXCA
is stochastically overbought right now. My play will be to wait for a pullback
and scale in over the next few weeks.
Week Ending July 14, 2006
Vaino’s Biotech Corner: INSM and
TRCA – Fighting Like Two-Year Olds
Even
with the VIX finally moving again, biotech stocks have been pretty quiet. The biggest biotech story of the week, for me at
least, was announcement on Wednesday that a patent dispute between Insmed (INSM) and Tercica (TRCA) would go to trial. I have written about these stocks before, and sold off TRCA in June’s
market plunge. I still liked INSM so I kept it.
Both
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