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 28^th) 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.

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 20^th, 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!

Vaino’s Biotech Corner: Breathing in the Relief

Novadel Pharma (NVD) got some good news on November 3^rd 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 Oct. 6

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.

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 10^th 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.

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.

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.

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 9^th 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 3^rd 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.  

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 7, 2006

Vaino’s Biotech Corner: An Iliquid Idea – Short Metabasis (MBRX)

I’ve been stuck trying to find a biotech stock I like this week.  Neurocrine (NBIX) has gone from bad to worse, and has destroyed almost two billion dollars of market cap in the past two months.  I still believe NBIX will get back to the $25–30 range, but it won’t be anytime soon. 

Anadys pharmaceuticals (ANDS) saw its stock price cut in half on the announcement they were suspending a Phase I clinical trial of their lead HCV drug.  The announcement two weeks prior that their CEO was resigning, which may or may not be related, didn’t help investor confidence.  ANDS was trading above $15 back in April, and closed mid-week below $4.  Oddly, it was an examination of preclinical data that lead them to suspend the clinical trial.  They did the right thing by stopping the study, but I can’t help but wonder why this preclinical data hadn’t been analyzed pre-clinical trial.  You really do have to be careful in biotech.

After suggesting that Sangamo (SGMO) was overpriced a few weeks ago, I bit the bullet and shorted this illiquid biotech.  I’ve lost my aversion to shorting this type of stock. The stock went from a high of $7.95 on June 5^th to $6.03 last Wednesday (June 28).  SGMO was showing strong technical signs, but just didn’t have the pipeline to back it up. 

As an occupational hazard, I usually end up thinking of most things in terms of chemistry and physics. For this reason, I would never invite more than three chemists to any social event:  they make economists seem fascinating by comparison. 

To me, technical analysis is kinetics (the rate at which reactions occur) and fundamental analysis is thermodynamics (the driving force behind reactions).  The comparison between science and stocks isn’t perfect. In theory, the technical attributes of a stock are composed of all the information (including fundamentals) about the issue.  Trouble is, having all the information is very different from understanding all the information.  I’ll stop here before going on about “apparent equilibrium constants”, but suffice it to say kinetics without thermodynamic backing isn’t going anywhere for long.

Okay, so now I’ll get to the stock pick at hand: Metabasis Therapeutics (MBRX) has gone from $2.45 in May 2005 to close to $9 last week.  The stock is showing strong technical signs.  That is, kinetically, it looks favorable. 

Metabasis has 95 employees.  Of these, eight are vice president or higher.  If we conservatively assume one director per executive, then almost one employee in five is a manager.  I don’t believe this is efficient.  This is entirely anecdotal, but I think over-managed small biotech companies are a recipe for disaster. 

Anadys has 92 employees and at least 8 VPs.  Sangamo has 62 employees and, coincidentally, eight VPs or above.   Viropharma (VPHM) whose stock plunged from over $20 in February to below $9 has five VPs and above for 48 employees.  I would never suggest management is a bad thing (there’s a reason I have an MBA) but too much management is a burden on cash flow and can result in inertia.

It would be foolish to suggest shorting a company based solely on the number of VPs.  MBRX has been around since 1997.  Their two most advanced clinical candidates, pradefovir (partnered with Valeant Pharmaceuticals) and CS-917 (partnered with Daiichi Sankyo) are, respectively, meant to treat hepatitis B and diabetes.  In addition to these two compounds, they also have a Phase I/II clinical trial underway on a liver cancer therapy (MB07133) and a clinical trial on a potential treatment for diabetes (MB07803).  The MB07133 clinical trial has been ongoing since September 2003.  I was unable to find any press release on the status of this clinical trial.  After two and a half years this makes me very suspicious.

Metabasis was notified by partner Daiichi Sankyo that serious adverse effects due to excessive levels of lactic acid had occurred in two patients in a Phase I clinical study of CS-917.  Excessive level of lactic acid had previously been noted in preclinical studies.  Three previous clinical trials of CS-917 have already been discontinued due to serious adverse events.

Metabasis’ core technology, treatment of liver disease, is clever – it relies on activation of prodrugs in the liver by elevated levels of the enzyme cytochrome P-450.  However, it’s not novel:  the drug cyclophosphamide works the same way and has been around for decades.

Metabasis’ financials are strong enough to see them through a couple of years.  Based on clinical problems CS-917 is risky, and the lack of any information about MB07133 troubles me.  Even if CS-917 does make it past Phase III, the diabetes market is going to get very crowded in the next six months, with new drugs by Novodisk, Novartis, and Merck expected.  My play will be to wait and see if the technical strength of MBRX pushes the stock up a bit more and then open a short position.

July 1 is Canada Day, the national celebration of Canada’s birth as a nation in 1867.  Aside from being, as many of my American friends like to point out, “America’s goody-two shoes little brother,” Canada is  also America’s largest trading partner.  Here’s a particular trade you might want to ponder: 

Cardiome Pharma (CRME) is a Canadian biotech company focusing on heart disease.    Cardiome’s lead clinical compound is the sexily named RSD 1235.  It is used to treat atrial fibrillation (abnormal heart rhythm), and it has undergone two successful phase three clinical trials.  Both studies were for administration via IV injection.  The drug works by regulating the sodium and potassium channels that control contraction of the heart.

On news that the FDA rejected their filing (with partner Astella) of a New Drug Application (NDA) the stock dropped from over $11 the last week of May, and is now trading just above $8.  The important aspect here is that the rejection of the application was not due to clinical issues, but rather with problems in the submission itself.  That is, there were inconsistencies between patient records in different parts of the filing. 

To be clear, this type of error is stupid carelessness that should never happen.  It’s a shame that the efforts of, likely, hundreds of scientists were devalued by the inattention of the regulatory affairs department.  Regardless, this type of mistake has happened before and will happen again.  While this is a setback, it doesn’t negate the beneficial effect of the drug. 

In data from the phase three study, IV formulation of RSD 1235 was found to return 52% of patients suffering atrial fibrillation to a normal heartbeat as compared to 4% of the placebo group.  The drug works, but getting it to market is going to be slowed down.  CRME also has an oral version of this drug in a phase two study. 

The stock dropped because investors panicked at bad news.  This is what most investors do.  My take is this creates a buying opportunity.  From a technical point of view the moving averages are (obviously) bearish, but MACD and stochastics are bullish.  The drug will be approved and the stock will go back up, eh.

Vaino’s Biotech Corner: Livin’ La VITA provechosa

Orthovita (VITA) is a rapidly growing biomaterials company.  The stock has been showing strong technical signs, and is backed up by good science.  Biomedical devices and biomaterials are the hottest ticket in the healthcare sector right now.  Think back to the 25 billion dollar deal for Guidant a few months ago.

Orthovita has two products, Vitoss and Cortoss.  Vitoss is basically a malleable form of calcium phosphate.  It looks like a sponge and is surgically molded into bone defects.  The material is slowly eaten away by the body, but the calcium has been demonstrated to help in bone regeneration.

Orthovita also makes Cortoss: a mix of polymers that can be used in place of bone grafts.    Most current synthetic bone grafts are simple poly methylmethacrylate (PMMA).  VITA’s stuff is a bit more flexible.  They added glycol spacers to the polymer.  It crosslinks easily, meaning that basically it reacts with itself to form a denser network.  The mode of application is simpler for physicians, i.e. there is no premixing  required.  In fact, it’s actually mixed together as you apply it, sort of like an epoxy gun from Home Depot – what engineers refer to these as static mixing chambers. 

Cortoss is sold in Europe and Australia.  VITA has an ongoing clinical trial in the U.S. for Cortoss that, if successful, will permit them to sell it here.  If they hit here,  it will be big.  The FDA recently permitted them to reduce the number of patients in their final clinical study.  I think this is a very good sign.

In addition, there is a third product Vitagel, which is used for controlling bleeding during surgeries.  Vitagel is a combination of bovine collagen, a biopolymer composed of amino acids that forms connective tissue in mammals, and bovine thrombin, a protein that enables blood clotting.  It’s basically a super-effective “liquid bandage” that surgeons can use for procedures where substantial bleeding is common.  On Friday, the FDA gave it approval.  Orthovita has already prepared batches of Vitagel, and will begin selling it immediately.  The stock jumped to 56 cents to a 52-week high.

VITA has a decent size sales force (50 direct reps and 40 independent).  Year over year sales have been increasing by at least 50% since 2001.  It should be noted that operating expenses have been increasing at the same rate and they are not yet profitable.  This is understandable in a fast growing company.    I think there are some parallels here with Integra Lifesciences (IART), a biomedical device company that was trading at $3 in 1999 and is now flirting with $40.

I think the science is good.  The stock has been moving sideways over the past two years and now looks like it is breaking out.

Vaino’s Biotech Corner: EPIX dude!

Epix Pharmaceuticals (EPIX) published a study in the June 1^st edition of The Journal of Medicinal Chemistry about the discovery and development of their lead compound PRX-00023.  The drug is an agonist of a receptor called 5-HT_1A.  Currently, only one other such drug is available in the US: Buspar, sold by Bristol Myers Squibb (BMY).  EPIX was showing strong technical signs early this week.

A bit of background for you bio-geeks.  Serotonin is a neurotransmitter.  Neurotransmitters are how the brain sends messages to its various parts.  Serotonin is neurologically associated with feelings of well-being.  Most current anti-depressants, for example Prozac, work by blocking the removal of serotonin from the brain -- selective serotonin reuptake inhibitors, as my friends with wallet-sized Periodic Tables would say.  PRX-00023 is a bit different in that it causes the 5-HT_1A receptor to release serotonin.

Serotonin is actually a common name for 5-hydroxy tryptamine (5-HT).  Our bodies make serotonin from the amino acid tryptophan.  If you’ve ever had a glass of warm milk to help you sleep at night you were just trying to get typtophan.  Milk has 14 milligrams of the tryptophan per ounce:  warming it doesn’t actually increase this, but it’s nice with cocoa and a splash of Kaluha.

PRX-00023 was actually discovered by another company, Predix Pharmaceuticals.  Epix had been trying to in-license a drug candidate since 2003. A few weeks ago Epix announced a merger with Predix.  In addition to the Phase 3 study, Predix also had two other clinical trials, for Alzheimers and pulmonary hypertension.  I’ve written before that I think growing a biotech company by acquisition is the best way to go.

According to an industry survey from The Pharmaceutical Research and Manufacturers of America (PhRMA), on average it takes 10,000 compounds and six and a half years to get a drug to a Phase 1 clinical trial.  About ten percent of Phase 1 studies are successful.  Predix was able to start from scratch and get their drug to Phase 3 in less than two and a half years.  Based on experience, the “00023” probably means it’s the twenty third compound they tested.  There’s always an element of luck to drug discovery, but I’m still impressed.

But there’s more to this Epix tale.  Epix also designs compounds for MRI visualization (called contrast agents).  It’s a pretty cool idea.  Basically these are compounds that interact with a specific problem area, for example blood vessels.  Epix’ lead MRI contrast agent, Vasovist, reversibly binds to the human blood protein albumin, allowing imaging of the blood vessels for about one hour after use. This can help physicians detect vascular disease. 

Vasovist has not been approved in the US.  Epix has received two approvable letters from the FDA for Vasovist.  The drug has been approved in Europe, and is on-target to be launched this year by Schering AG (no relationship to Schering-Plough [SGP]).  A caution here -- two of the key patents on this technology expire in 2006.

Epix is also developing another MRI contrast agent, this time to detect blood clots.  The cool thing here is that using an MRI machine, physicians will actually be able to watch the clots move in (almost) real time.  A phase 2 clinical study of this is underway.

EPIX’ market cap, with a drug in phase 3, an MRI contrast agent soon to be sold in Europe, and a total of 4 other clinical trials, is just under $84M.  The company I wrote about last week (SGMO), with a single drug about to enter a Phase 2 clinical trial, has a market cap of almost $240M.  This is clearly out of balance.  EPIX is a small stock, so it might take a while for the Market to notice, but it I think it will. 

This is a risky play in the short term.  EPIX will announce phase 2 results on PRX-00023 at a conference on June 13.  I have no clue if they will be good.  Patient enrollment for the Phase 3 study is already complete.  The FDA has to approve protocols for all clinical trials before they begin.  My bet is the FDA thought Phase 2 results were good enough to permit the Phase 3 trial.

NBIX: I wrote a few weeks ago suggesting Neurocrine Bioscience (NBIX) was trading too high in the low 60s.  Two weeks ago, after the stock dropped below $50, I sold my puts and was happy about it.  Note, I am deliberately avoiding any trite aphorisms about barnyard animals and profits.

On the assumption that NBIX’s drug Indiplon would be approved on May 15, I speculated and picked up some May 55 calls.  I lost that bet and gave some of my winnings back. 

Indeed, when I looked at the Market Tuesday morning I was flabbergasted.  NBIX had dropped $32!  Over a billion dollars of market cap evaporated overnight!  The FDA had given NBIX an approvable letter for two of the lower doses of Indiplon even as it said a higher dose was not approvable.  That is, it said it would accept the lower doses if more data was provided. 

According to the AP: “The agency (FDA) said it did not have a chance to review all the information submitted by the company.”  What!?  The FDA destroyed a billion dollars of capital because it didn’t get around to reading the whole application?  Now, I’ll admit to skimming over parts of student essays I mark, but this is ridiculous.  I’m not suggesting the FDA made a bad decision.  At least they didn’t claim their dog ate the application.

In my first NBIX column I did mention I thought NBIX was a good company that was trading too high.  I still like their pipeline and believe at least the lower doses of Indiplon will be approved.  My take is that the Market has over-reacted and the price will bounce back.  The stock isn’t going back to $60, but $30-35 is a safe bet, I think.

LCBM: Investing in biotech these past few weeks has been as fun as a trip to the dentist.  So, starring at the ceiling as my dentist drilled into my teeth last week I remembered a little company I like that I now think might be a safe harbor.  Lifecore Biomedical (LCBM) isn’t a big flashy biotech company, but they do a very nice job of using biomaterials for surgical and dental applications.

LCBM sells hyaluronic acid.  This is a carbohydrate polymer used in cataract surgery, bone regeneration, and for coating other medical devices.  They also sell an innovative system of dental implants. 

The company has been around since 1965.  LCBM is a good solid company; it has a decent balance sheet and has been reporting consistent increases in sales.  LCBM took a hit in the market crash of 2001, but not a severe one.

According to SEC filings, LCBM acquired two smaller companies over the past couple of years.  This approach to research, i.e. cherry-picking research from other companies once it has been proven, I think is the best way for R&D companies to operate.  Big pharmaceutical companies are moving toward this type of outsourcing.  I wouldn’t be surprised if within a decade companies like Pfizer and Merck abandon all internal R&D in favor of acquiring small biotech companies for their technology.  Biotech companies are more innovative than the Big Pharmas and their cost per employee is lower.  It won’t be good for my students, but it will be good for the companies.  I’m impressed that LCBM has the sophistication to grow this way.

This stock definitely has some macrowave elements to it.  Biomaterials is one of the fastest growing segments of the healthcare market.  Also, teeth and eyes wear out as we age.  The baby boomers are getting older, and companies like LCBM will benefit from this.  Maybe a visit to the dentist isn’t so bad every now and then.

One last cautionary note: The average daily volume on this stock is abysmal so liquidity is an issue..  Plus, it’s undergoing some technical deterioration.  Start perhaps with this on your watch list and time any entry well.

WEEK ENDING May 5, 2006: DSCO Inferno

Discovery Labs (DSCO) had some problems last Tuesday.  On news of manufacturing issues for Surfaxin, a protein–surfactant hybrid designed to treat respiratory distress syndrome (RDS) in premature infants, DSCO went from a high of $4.77 to close at $2.20.  This reminded me of Zdeno Charo, of my beloved Ottawa Senators, taking out Tampa’s Vince Lecavalier in the NHL playoffs last Tuesday night.   The stock closed at $2.91 Friday.

RDS occurs in about half of babies born between 28 and 32 weeks. Incidence of RDS approaches 100% in babies born at 26 weeks or less.  According to a 2004 study in the journal

Neuroendocrinology Letters, the rate of premature births is increasing. Current therapies to treat RDS are derived from animal sources, specifically, cows and pigs.  These both have their own processing issues.  Also, it won’t take too many more cases of mad cow disease for these to lose appeal.

In addition to Surfaxin, DSCO has three Phase 2 studies and one Phase 1 study on application of their surfactant technology to other respiratory ailments.  Not a bad pipeline.

DSCO’s finances are adequate.  At the end of 2005 they had $51M in cash and a burn rate of almost $60M per year.  They just completed a $50M financing round which gives them some breathing room.

DSCO has orphan drug status for Surfaxin in the US, and also the equivalent from the Commission of the European Communities.  This gives them near monopolistic access to the market for the next six or seven years.  This isn’t a huge market.  But DSCO is not a huge company, and it’s a growing market.

This isn’t the first time DSCO has had manufacturing issues with Surfaxin. In February 2005 they received an Approvable Letter from the FDA.  An Approvable Letter means the FDA is ready to approve the drug subject to certain conditions. In this case, the FDA had concerns about manufacturing controls.  Importantly, no further clinical studies were required.  Simply put, the FDA is convinced the treatment is valuable but they wanted stricter controls on the manufacture of the drug itself.  Surfaxin is a hybrid of peptides and various surfactants.  These are challenging to manufacture.

DSCO’s current trouble stems from problems with drug stability.  Specifically, batches set aside for stability studies did not meet specifications.  I listened to DSCO’s conference call last Wednesday.  They have no idea why the batches failed and are thoroughly investigating.  It was pointed out that they have previously manufactured many batches without problem.  All in all, this is at least an eight month setback.

Here’s where it gets interesting.  Until December 2005, DSCO had been outsourcing manufacture of Surfaxin to Laureate Pharma.  The batches that failed were manufactured prior to this.  Last December they bought the manufacturing facilities from Laureate.  From my experience with outsourcing the manufacture of pharmaceuticals, I know that even the best relationship with an outside vendor doesn’t afford the same degree of control and oversight you get internally. 

DSCO has already demonstrated that Surfaxin works, and the FDA has said it is worthy of approval.  My take is this: Fixing chemistry manufacturing control issues is a LOT easier than finding a treatment that works.  My crystal ball isn’t any more accurate than anyone else’s.  Still, I think DSCO will overcome these manufacturing problems, especially since they now have a much greater degree of control. 

Therefore, I think this is a stock worth buying.  At less than $3 there’s definitely more upside than downside.  Of course, it’s important to realize that any biotech stock, particularly when the company has no products, is risky. I’ve noticed in a couple of other “biotech bounce back plays” (distressed biotech stocks that I thought would rebound) that the prices tended to go up a bit, retrace, and then go up for real.  I’m not good enough at technical analysis to make any convincing arguments about support, resistance, or W patterns, so I’ll leave it at my, admittedly limited, observations.  I’ve already opened a long position on DSCO, and will scale up on any dips in the next few weeks. 

I’m hard pressed to find any biotech stocks I’m excited about right now.  Barron’s had an article last week touting a couple of stocks, namely, CV Therapeutics (CVTX), Celgene (CELG), Genentech (DNA) and Medarex (MEDX).  I wrote about CELG last week, and even though it’s down a smidge since Monday I still really like it and increased my long position as it dipped below $37. 

 I bought some MEDX for my portfolio.  Not having anything on the market, it’s a bit on the risky side.  However, their pipeline is phenomenal.  I also think the other Barron’s touts -- CVTX and DNA -- are good companies, but I’m ambivalent about their stock.

I like to keep a positive spin on things.  But, if you can’t make money running with the bulls, maybe it’s time to hang out with the bears for a while.  So, with the UMaine Black Bears recent loss to Wisconsin in the NCAA Div 1 hockey semi final still fresh in my mind, I think there are definitely some biotech stocks out there that are trading way too high.

Exhibit A: Neurocrine Biosciences (NBIX).  This is a really good company.  They have a decent pipeline.  They are on track to launch (with Pfizer) a pretty impressive sleeping pill later this year, and they have four ongoing phase 2 clinical trials and two phase 1 clinical trials.  Right now, most of the value of this stock, which is trading in the low $60s, is derived from their insomnia treatment Indiplon, a drug they licensed from Dover Pharmaceuticals (DOV) in 1998.  (DOV had licensed the drug from Wyeth.)

Insomnia is a good market, about $2.5 billion a year.  Trouble is, there are lots of sleeping pills out there.  Indiplon will be a good drug, but not that good.   A recent Barron’s article suggested that Sepracor’s sleep aid Lunesta could well wrap up half the market.  Also, popular sleeping pill Ambien will go generic next year.  With the current state of pricing pressure in the drug industry, generic Ambien will be viewed very favorably by insurers footing the bill. 

My bottom line: Insomnia treatment is a good, but crowded, market.  To justify it’s $60 stock price, NBIX  is going to have to capture a big chunk of the market and not have any more run-ins with the FDA (there have been some issues in the past).  Also, bear in mind that revenue from Indiplon is being split with Pfizer and DOV.  I think with a flat to bearish Market outlook on the whole, this stock is going to come down some, and there’s some money to be made when it does.

NBIX will announce Q1 results after the Market closes on Monday the 24^th.  The FDA has committed to rendering its approval or disapproval of Indiplon by May 15^th.  I don’t know what they will report on Monday, but I do know they have already amortized almost all the upfront money they got from Pfizer.  I think the drug will be approved, but that the Market will realize it won’t generate the earnings needed.  I’m going short on NBIX.  I prefer using derivatives to outright shorting, and am looking at November 55 puts.

Vaino’s Biotech Corner:  Spherix (SPEX) – How Sweet (and Risky) It Is

I like any stock that shows good  technicals and has compelling science to back it up so when Spherix (SPEX) came up last week on the radar screen as a recent Market Edge Long I thought I would take a look.  

My first impression is that this is bit of a strange company.  Their business encompasses both IT consulting and biotech.  Well beyond that, SPEX was involved with the 1976 Viking mission to Mars.  Here on Earth, SPEX’s biggest hope for the future lies in biotech.

Late last year SPEX announced completion of a Phase II study on the use of D-tagatose (marketed as Natrulose) for treatment of diabetes.  A Phase III study is being planned. 

Results of an early study in 1999 by Donner et al. demonstrated that tagatose, taken prior to eating, reduced blood glucose levels after sugar ingestion.  The study also noted that there were some significant “gastric issues” at higher dosing levels.  This is not surprising as digestively tagatose acts like fiber.

Aside from the gastric side effects (which all diabetes treatments are subject to in varying degree) there are compelling reasons why tagatose could be a viable treatment.  For starters, apples are almost 0.5% D-tagatose, so the stuff’s pretty safe. 

Second, tagatose can be administered orally, and this is a huge advantage for a diabetes treatment.  Even better, it can be used as an artificial sweetener:

Third, D-tagatose is not only 92% as sweet as normal sugar.  According to a 1996 study by Livesy and Brown in the Journal of Nutrition, it actually has a net negative caloric value.  In other words, it takes more calories to digest it than it provides!  Pretty cool, huh?

Now here’s the bigger demographic and macrowave picture.  And do the math with me as we go along. 

Diabetes takes 15-20 years to develop.  According to the US Department of Agriculture, sugar consumption, which is a major risk factor for diabetes, started to increase dramatically around 1985 in the U.S.   In addition, people are more likely to suffer from diabetes as they age.  It should follow then that the combination of a greater sugar intake and more aging baby boomers is going to cause a large increase in the market for diabetes therapies.  This has to be a big plus for a company like SPEX.  That American waistlines are expanding also suggests a bigger market for new artificial sweeteners. 

Two final remarks: I initially thought that since tagatose is naturally occurring, Spherix can’t possible have any patent protection.  Not so.  The trick here is obtaining the pure sugar in sufficient quantity; and  Spherix has patented a method to convert readily available lactose to tagatose enzymatically.  That’s the good news.  The bad news is that the patent protection on the method of manufacture will last only until 2011 and their patent for its use as a diabetes treatment lasts only until 2014.

All this said, SPEX is a risky stock.  It has a market capitalization of less than $32M, making it a nano cap.  It’s not a very liquid stock, with a three month average daily volume of less than half a million, and a float that is less than ten million.  Also, its balance sheet is less than overwhelming.  Regardless, I like this stock and have bought it for my own portfolio.  At less than $3 there’s a lot of upside and little downside.

Vaino’s Biotech Corner:  Risk, Reward, and Buy What You Know

The reason I like investing in biotech is that most investors don’t know the difference between a chromosome and a chromaphore.  I don’t mean this disparagingly:  I don’t know the difference between a gibibyte and a gigabyte.  This probably explains why I got burned on both Lucent and Nortel during the tech bubble.  Indeed, I avoid so-called “high tech” stocks like the plague.

Note, however, that investing in biotech can be very risky business.  But exactly how risky is it ?  To better understand this, I calculated the beta coefficients, b, for two biotech exchange-traded funds, IBB and BBH, as well as for PPH, which is the Big Pharma ETF.  Note that b is a measure of return of an investment compared to the market as a whole.  The closer b is to 1 the more like the whole market the investment behaves, and the less “market risk” is associated with the stock.

As noted in last week’s column by Matt Davio, BBH is really only three stocks.  However, unlike BBH, IBB is a well-diversified biotech ETF; it is a weighted index based on biotech shares in the Nasdaq. 

As for PPH, 65% of it is comprised of just five stocks -- JNJ, LLY, MRK, PFE, and WYE.  By the way, this is understandable as there are fewer major pharmaceuticals companies than biotechs.  The first table illustrates the results of my beta calculations as of March 1^st while the second table calculates the rates of return for the three instruments.   

Note that IBB is the most volatile and therefore the most “risky” of the three instruments – with also the most prospects for rewards.  Note also that while the S&P 500 has gained 11.45% over the last five years, PPH has actually lost 15.52% while despite its volatility, IBB had only a 6.24% return over the five years.  That’s not quite the end of the story.

Dividing return by risk gives an idea where your investment is most efficient.  The chart below shows return divided by risk for IBB, PPH, and the S&P (b = 1).  I excluded BBH from this comparison as it’s really only three stocks. 

The point of all this?  This historical data illustrates, at least, that you more likely to lose more money investing in the supposed ‘Blue Chip’ big drug companies than in the mercurial biotechs.  Moreover, you can miss out on a whole bunch of profit. 

Bad News Bears

Invariably, when a little bit of bad clinical data gets reported investors panic, and prices drop.  This can be a great time to buy.  In this regard, two biotech companies I’ve been following announced bad clinical data over the past couple of weeks. Idenix Pharmaceuticals (IDIX) dropped almost 30% on March 23 after an announcement of bad results from a hepatitis B clinical trial.  Similarly, Encysive Pharmaceuticals (ENCY) fell nearly 50% from March 24 to 27 on negative clinical data.  My initial hope was that both of these were buying opportunities, so I looked at both companies. 

Here’s my take: IDIX has nothing on the market, and ENCY only receives a small revenue stream from sales of Argatroban.  ENCY’s news, an ‘approvable letter’ from the FDA wasn’t that bad, and I think there is a decent  chance the stock will rebound.  Also, at less than $5 there’s not a lot of downside.  However, at the moment I am holding off on buying ENCY, and I will stay clear of IDIX. 

Vaino’s Biotech Corner:  A VRX and INSM Followup or Foul-up?

It’s never great to start the day seeing one of the stocks you recommended (and own a bunch of) at the top of the list of NYSE losers in The Wall Street Journal.  That’s what happened to me last week with Valeant Pharmaceuticals (VRX), a company I recommended in this column two weeks ago.  VRX dropped from a close of $18.86 on March 20 to as low as $15 on March 21.

VRX dropped due to the announcement of the failure of its hepatitis C drug, Viramidine, to meet one of two clinical endpoints in one of two separate Phase 3 clinical trials.  While Viramidine did exhibit much less toxicity (specifically anemia) than did current therapy Ribavirin, it did not match Ribavirin’s efficacy.  VRX explained the result in that Viramidine’s response rates were hurt by low dosing with respect to body weight and statistically inconsistent results outside of North America and Europe.  In a conference call following the market debacle, VRX said it has filed clinical data with the SEC to support the above claims.

The Phase 3 study did provide positive proof of a weight-dependant dose response to Viramidine.  In 218 patients in North America and Europe weighing less than 75 kg 62% of patients on Viramidine had no detectable HCV compared to 60% for Ribavirin.   In 271 patients in North America and Europe weighing more than 75 kg, the success rate for Viramidine was 42% compared to 53% for Ribavirin. The anemia rate for those taking Ribavirin was 24% and only 5% for patients on Viramidine. These data clearly indicate that while Viramidine is much safer than Ribavarin its efficacy is dose-dependent.  From a medicinal chemistry point of view, this should be obvious.  However, it is not clear to me why this wasn’t taken into account in the trials.

 More broadly, VRX has clinical data showing it can safely dose Viramidine at higher levels.  VRX is still confident it can obtain FDA approval for Viramidine late next year without completing another clinical trial.  I think this is possible, at least for a second-line therapy, but not a slam-dunk. 

VRX does have compelling clinical data.  In patients weighing less than 75 kg the drug is a safer alternative to current treatment.  I believe the FDA would approve Viramidine for patients under 75 kg,  but it’s unclear if they would permit such a label.  In a worst case scenario the FDA will require an additional clinical study which would delay approval.

I think there are some parallels here with Amylin Pharmaceuticals (AMLN), which had some clinical setbacks in getting its drugs Byetta and Smylin approved by the FDA—both were approved this past year.  AMLN was trading near $15 last May, and is now in the $45 range.  As a former shareholder (I think AMLN’s tapped out at $45), but I’m pretty happy with AMLN over the past few years.

My last take on VRX is this: Unlike many biotech companies, VRX is not a one-trick pony: it has actual sales. I still believe VRX is a good company.  Their financials are stable, and they were not depending on this approval for their survival. My own response to Tuesday’s downturn was to increase the size of my holding.  VRX ended the week close to $17, so I think this was a good call. It may take a bit longer than I expected for this stock to pop, but I still think it’s a good stock to own.

I also noticed another stock I recommended, Insmed (INSM), announced its auditors had expressed doubt the company could continue as a going concern.  The auditors report doesn’t take into account the $42M the company raised by a sale of stock on March 15, nor does it take into account expected sales of INSM’s recently approved IPLEX. I re-bought INSM after it completed this secondary sale of stock on March 15 and have no immediate plans to sell below $3.

“Ultra-Thin” enzyme is a novel, next-generation alpha amylase enzyme designed to offer ethanol producers superior liquefaction performance. It works in concert with other enzymes to efficiently convert the starch present in corn into sugars that can then be processed into ethanol or other value-added products such as high fructose corn sweetener. Ethanol producers have traditionally used other alpha amylase enzymes that operate at a sub-optimal pH, requiring costly process changes to adjust the pH of the production process. Because “Ultra-Thin” enzyme is capable of operating robustly at pH 4.5 – the same pH of the production process – it can help producers to lower their operating costs significantly. This enzyme has received FDA approval for use in ethanol and sweetener production as well as additional applications.

Diversa Corporation

I really like enzymes.  They are Nature’s catalysts; and in my work, I spend most of my days thinking of ways to make enzymes better.  So do the folks at Diversa (DVSA).

“Any trader or investor who ignores the power of macroeconomics over the world’s financial markets will, sooner or later, lose more than they should—and if they are trading on margin, perhaps more than they have.” --If It Rains in Brazil, Buy Starbucks

DVSA started out in 1992 with a clever idea, to seek out enzymes that function under extreme conditions, for example hot springs in Yellowstone, and see if they could be applied to industrial processes (enzymes can be finicky and often won’t work in a non-aqueous environment or outside of a narrow temperature or pH range). 

DVSA had timing on its side; they went public in February 2000 and raised $200M.  The stock did pretty well, closing at nearly $150 two weeks after its IPO.  Unfortunately, with all the hubris associated with the biotech industry at the turn of the century, a lot of newly public companies started believing their own press and got greedy – and DVSA was no different. 

In this instance, DVSA decided that it wasn’t just good at engineering enzymes.  It was also good at drug discovery.  So DVSA set up a drug discovery effort and even licensed-in an anti-fungal lead compound from GSK.

The Market punishes such arrogance, and DVSA went on a severe, multi-year  downward slide.  Indeed, just six months ago DVSA was trading for a measly five bucks, 97% lower than its exuberant peak. 

Now, the stock has bounced back to the $8 range these last few weeks, and I think with good reason.  DVSA’s CEO resigned late last year under pressure, and the company is finally restructuring, getting out of businesses it never should have gotten into in the first place. 

DVSA also recently announced FDA approval of their “Ultra-Thin” enzyme.  As the introductory excerpt from the corporation, this is an amylase or digestive enzyme that will make creating ethanol a lot easier and cheaper.

“Timing is everything.  In love and war, most certainly.   But certainly also in managing the business cycle.” --The Well-Timed Strategy

Diversa should, then, be able to leverage the current oil situation and the President’s calling for greater use of ethanol as fuel to its advantage.  GM’s “Live Green-Go Yellow” ad campaign to sell its flex-fuel vehicles that can run on either gasoline or ethanol can’t hurt either. 

NYBOT recently introduced futures and options trading for sugar-derived ethanol and CBOT will follow with futures contracts for corn-based ethanol later this year.   From a practical point of view, ethanol won’t even make a dent in our oil consumption: but that doesn’t matter. 

The politics of ethanol will give members of congress from Iowa and Nebraska the ability to get huge ethanol producing plants built in their states.  New ethanol plants will want to use the best catalysts possible, and, right now, I think DVSA’s Ultra-Thin is it.

In the Biotech Corner With Andrew Vaino – Old Drug, New Trick

Valeant Pharmaceuticals (VRX) is anticipating results from a Phase 3 study on Viramidine.  This ia a clever treatment for Hepatitis C, and the drug should be released by mid-year. 

VRX also recently received FDA approval for a less restrictive label for Tasmar as a treatment for Parkinson’s disease (together with L-Dopa).  Put simply, a less restrictive label increases the number of patients eligible to receive the drug. 

Note that neither Viramidine nor Tasmar are entirely new drugs.  Viramidine is a prodrug form of Ribavirin that is metabolized in the liver. Tasmar is a novel formulation of an old drug called tolcapone.    In clinical studies both these drugs were effective, and both represent advances in the standard of care.  Demographically, the number of patients seeking treatment for Parkinson’s disease will rise as the baby boomers age.  As well, incidences of Hepatitis C virus infection are also increasing rapidly.

Note that VRX isn’t just a two-trick pony.  In addition to these two new therapies, VRX has a cadre of other products and has reported revenues of above $200 million for each of the past three quarters.  Should Viramidine meet it’s clinical endpoint, VRX’ sales will sky-rocket next year.  Note, however, they will still have to file a New Drug Application or NDA. 

VRX also pays a dividend which is delightful surprise for a biotech; it was about 8 cents a share for Q4 2005.  My bottom line is that I think VRX is a good company, and I have had built up a substantial long position in my own portfolio for the past six months:  right now I’m loading up on June and September calls.

3/6/06

Show Some Elan

Elan Pharmaceuticals (ELN) has been on a rollercoaster the past few years.  The stock went from $60 per share in 2001 to $2 after negative clinical data on some Alzheimer’s drugs in 2004.  The stock recovered to nearly $27 in February 2005, then tanked to $3.24 the following month on word of two deaths linked to its Tysarbi MS drug.  ELN’s drop was a market overreaction, and the stock has climbed as high as $16 in recent weeks. 

Even without Tysarbi, ELN has an acceptable pipeline. Last Tuesday, ELN dropped $1.25 after release of a Piper Jaffray survey that a majority of physicians think it’s too early for Tysarbi’s return to the market.  The Piper Jaffray survey is rife with inconsistency and should not be taken seriously (three, peer-reviewed, papers detailing clinical studies of Tysarbi’s benefits appearing in the New England Journal of Medicine {N. Engl. J. Med., 2006, 354, 899, 911, and 924}, however, should be taken seriously).  Tysarbi is also in late-stage clinical trials as a treatment for Crohn’s disease and rheumatoid arthritis—both huge markets.  The FDA will meet March 7^th and 8^th to discuss Tysarbi’s return to the market, with an announcement expected by the end of the month.  (Note, trading in ELN shares will be suspended during this review).  The FDA two weeks ago announced it would permit a further clinical safety study of Tysarbi, strongly signaling it will let the drug back on the market.  With Tuesday’s irrational pullback now may be a good time to load up on ELN.

Tercica (TRCA) and Insmed (INSM) Pharmaceuticals have both received orphan drug status for treatment of childhood endocrine deficiencies causing stunted growth and cardiovascular problems.  I don’t think either TRCA or INSM are great companies, but owning both stocks may be a smart move.  TRCA is a one-hit wonder which didn’t even discover their drug—they purchased the rights to Increlex from Genentech.  INSM has a better pipeline, but an ugly balance sheet.  They are both competing for a small (~60,000 cases per year in Europe and North America) market, but that’s ok—they’re small companies.  TRCA and INSM combined have fewer than 150 employees.  With their orphan drug status, they have exclusive access to the US market for the next seven years.  TRCA launched Increlex in January, and INSM will follow soon with IPLEX.   TRCA is the surer bet (based on predicted, easier to do with orphan drugs, annual sales over the next seven years of $200M TRCA stock has a conservative PV of $8.64, 10% higher than it currently trades), but INSM provides a nice hedge and, at less than $3 there’s little downside.  That INSM also has a pipeline doesn’t hurt.  As mentioned above, INSM is short on cash and filed with the SEC to sell up to $75M worth of stock, which they need to do: look for an announcement of this very soon.   When the stock price drops I will be buying INSM.  TRCA will rise after they release Q1 sales results.

With biotechs like ANDS, REGN, and ARNA trading in the teens with no hope of a product on the market for years, ELN, TRCA, and INSM are very attractive.