Wednesday, December 27, 2006

Vertex Pharmaceuticals (VRTX) stock likely to trade in a range.

It seems like VRTX is the subject of the majority of my articles (link one, two, three to past articles) and for good reasons. VRTX is looking to become one of the rare success stories in a very tough industry by launching a product with huge commercial potential against Hepatitis-C Virus which currently does not have great treatment and is a large epidemic problem.

The chart to the right shows the recent

resistance created at $45.00 which coincided with the release of interim safety updates from Phase II trials of Telaprivir.

Of patients who received the drug in clinical trials, 9% discontinued treatment due to side effects such as rash, gastrointestinal disorders and anemia, and 3% stopped treatment due to side effects that were considered serious. After 12 weeks, 65 out of 74 patients had undetectable levels of the virus, Vertex says. It should be pointed out that these patients are also taking the standard treatment of Ribavirin and Peg-Interferon (Placebo) which already have a bad side effect profile. The key is to compare the Telaprivir arm of the trial to the Placebo. From what I read, the number of patients in the Placebo arm are significantly less than the drug arm and therefore any safety assessments are premature. However, serious adverse effects in the Telaprivir patients that do not exist in the Placebo should be cause for concern. So far, I don't see any major and frequent side effects that would stop this drug from reaching the market. At the end, the overwhelming ( 88% )undetectable responders should be enough to advance this drug to the clinic unless some very serious unforeseen side effects show up in a larger study.

The news of advancement of the Aurora kinase inhibitor (really a multi kinase inhibitor) into phase II leukemia trials and receipt of a $25 million payment is a positive news but not one to move the stock significantly. I do not know the licensing arrangement between Merck and Vertex but I expect Vertex will receive about 10-20% of revenues plus upfront milestone payments. Overall, I think this product is worth about 200-500 million in market cap value which will not all be realized until the drug enters the market.

Also, the news of GSK dropping the HIV inhibitor partnership should not be cause for concern because Vertex is losing a few million in milestone payments and about 10% ( based on past HIV drug royalties) in sales at launch.

Bottom line:

The recent imperfect clinical updates have resulted in a pause of the rapid share price gains seen in 2006. The recent and forthcoming milestone payments should help with the cash flows and upside earning/share anouncements in 2007. I believe the stock is failry valued between 4-5 billion and any moves below this range, unrelated to the clinical data, should be purchased. For aggressive traders, selling $45 calls and $30 puts could add some additional cash to the portfolio. I expect Vertex to trade between $35 and $45 in the next 6 months. I recommend to accumulate shares currently around $37 with a price target of $45 this year. As Telepravir enters Phase III, I expect the stock to trade between 6-10 billion ( compareable to recent biotech companies who have launched successful drugs) the Ultimately, even with great clinical trial results of both efficacy and safety, market lanuch is not going to happen until 2009! I am putting a hold rating on this stock. If you already have some shares there is no need to increase or decrease your position at this point as I expect VRTX to trade in a range in the next few months.


Saturday, December 16, 2006

December Monthly Performance Update

The chart below shows my performance through December 15th.

One major missed opportunity was CELG. I sold CELG shares aournd 50 in addition to selling covered calls shortly after they were added to S&P 500 and announced good earnings (Link to that article). More recent news include potential generic competition to Thalomid in about 2 and a half years. I will watch and wait for CELG to come back down to a better valuation and a better buying opportunity.

I closed AKAM trade because it had a gain of over 20% in a couple of months. I will watch this great stock for an entry point later in 2007.

My sentiment for stocks going into 2007 is somewhat negative. I will remain on the sideline for better visibility into the economic outlook. I anticipate the first half of 2007 to show a significant reduction in GDP due to a cooling in housing. The Weak dollar may help the GDP numbers a little by boosting exports and may distort how bad the economy actually is.

Saturday, December 02, 2006

Amgen (AMGN)- Large cap biotechnology stock with growth ahead

One of the major attractions of investors to Biotechnology stocks is the promise of exponential growth. There are not many industries where a stock can go with no revenues for up to ten years and with a sudden FDA approval decision have the potential to have hundreds of million to billions in revenues.

One quick look at the large cap Biotechnology stocks reveals the past winners of this strategy including Genentech (DNA), Biogen-Idec (BIIB), Genzyme (GENZ) and the subject of this article, Amgen (AMGN). These companies have all had tremendous success by getting drugs into the market and have reaped the rewards in form of their stocks growing into billions of dollars in market capitalization. One of the downside of this large growth is that the growth rate diminishes over the years. The days of 100-200% earnings growth rates for these large cap biotech stocks has been replaced with 10-20% returns.

However, having consistent revenues and earnings in addition to product sales data allows investors to quantify the valuation of the company and assess whether a price is fairly valued.

Amgen is currently trading at $69.38 ( as of 12/1/2006) with a market cap of $81 billion and earnings of $3.93 per share in 2006 and expected $4.41 per share in 2007. This translates to an earnings growth rate of 12% and a PE ratio of only 15.7 going into 2007. PEG (PE to growth ratio) is at 1.3 which puts it in the inexpensive category. The PE in particular is very low compared to historical ratios for Amgen and for the industry and I anticipate the fair value PE to be around 25. Taking into account a 20% discount for unforeseen risks, I come up with a price target of $88.

Amgen has launched many new products in the last few years including the latest, Vectibix to treat colon cancer (will compete with Erbitux from Imclone at 20% priced discount) and more product progression updates to come in 2007.

Some of the risk to Amgen include competition to its best selling drug Epogen and a law suite from J&J. I will not go into details with the law suite but Amgen has a very good chance of winning this case which would remove some risks and push the stock higher.

Bottom line: Amgen is a best of breed large cap biotechnology stock which can add significant stability and decent growth to any portfolio. When it's price drops due to market conditions and when this drop is clearly not based on company's fundamentals it should be considered under valued.

I recommend buying at $69 ( and more aggressively at lower prices) with a 12 month target of $88.


Saturday, November 25, 2006

Amylin gets approval for Byetta in Europe

Amylin Pharmaceutical's(AMLN) stock continued the recent weakness despite announcing European approval of it's diabetes treatment Byetta. I have previously written about Amylin and had recommended to wait for a better entry point ( click here to see that article).

Some of this recent weakness could be due to some expected competition form the strong launch reported by Merck of it's diabetes drug, Januvia and the anticipated launch of Glavus by Novartis in 2007. Both Glavus and Januvia are from the same class of small molecules known as DPP-IV inhibitors. Byetta affects the GLP-1 pathway and thus provides a different means of controlling blood sugar in patients with diabetes.

It is too early to tell whether the DPP-IV drugs will dominate the market. It is most likely that the addition of all these new treatment options will provide different solutions to different patients. I believe that all these new products will increase the awareness of different treatment options. I also think that Byetta will continue to enjoy good market uptake because of an early launch and a different and unique mechanism of action.

I recommend addition of AMLN at current level of $41 or below.


Altus Pharmaceuticals (ALTU) - Long Term, Buy

Company History:

Altus Pharmaceuticals (ALTU) is a biopharmaceutical company engaging in the development and commercialization of oral and injectable protein therapeutics for chronic gastrointestinal and metabolic disorders. It's platform technology includes a proprietary protein crystallization technique, which allows for better understanding of the structure of function of the molecule. The company's lead product candidates include ALTU-135, a phase II completed orally-administered enzyme replacement therapy for the treatment of malabsorption; and ALTU-238 used for the treatment of growth hormone deficiency in adults which is in phase II clinical trials. It's pipeline of pre-clinical candidates includes ALTU-237 for treatment of hyperoxalurias, and ALTU-236 for phenylketonuria.

Market potential:

The list of Altus' the potential drug candidates include novel biologic therapies geared at niche diseases. For example- ALTU-135 is an enzyme replacement therapy geared to treat certain aspects of Cystic Fibrosis in addition to other pancreatic diseases. If proven to be better than existing treatment, this product would have a dominant market position in a relatively small market size as far as the patients but a one that could be financially rewarding. This model closely resembles what made Genzyme a success story in the 90's.

Recent Problems Causing Delays:

There has been some manufacturing delays due to some problems in the assays used to test the quality of manufacturing materials. The management took the correct course of action by delaying the start of the trials until a correct process is in place. Even tough this results in a few more months of delay, the consequences of going into a phase III trial with poorly characterized material would have been disastrous. Furthermore, this delay allows the company more time to partner with a big pharmaceutical company to assist in execution of the trials both with funding and with expertise.

The Stock:

The stock, which started trading earlier this year, has had a wide range ( IPO at $15, high of $25 and low of around $11). This volatility is expected of a small cap biotech company with a market cap of about $430 M given the bad news that came out earlier and the biotech sector slump this summer.

The stock has made a strong move above its 200 moving average and it looks like the 50 and the 100 day MVA are soon to follow.

I think with a partnership agreement this year and with two late stage products with visible risks and rewards, ALTU is undervalued at $430 M or $18.7 /share. I expect this company to trade significantly higher in the next 12 months given a favorable partnership and no more additional clinical trial risks besides the normal uncertainties associated with any well designed trial. Of course, the stock price movement also depends on how the biotech index does in the same time frame.

Bottom Line:

I like ALTU for the long haul. Any pull backs unrelated to a fundamental issue should be considered a buying opportunity. ALTU is a good biotech long term investment with profatibility being at least 5 years away. However, patience could be rewarding and this stock could result in a 5-10X return.


Tuesday, November 21, 2006

VRTX a great company but the stock is overvalued

The charts show clear signs of short term correction. The stock price has appreciated 29% since end of October. The 50 day and 200 day moving averages are at 37 and 35.5 respectively. There is a lot of room for correction here. The good news from positive mid trial updates have been priced in. The only other piece of news that may move this stock is some toxicology results that are due to come out.

At 5.7 billion market cap and about 2 years removed from launch, I think it is a good time to unload more shares and options and wait for a better buying opportunity. I plan to purchase January $45 puts at $3.5 and wait for stochastics to signal oversold before going long with calls again.

I addition Susquehanna started coverage of VRTX with a negative rating that may weigh on the shares.

Friday, November 10, 2006

November Performance update

The image below shows a summary table of my performance to date. Since I do not buy and sell the stocks all at once, it is difficult to measure an accurate return but I am lisitng the prices as accurately as I can around the dates I buy and sell. Also, the total size of each trade as a percent of the portfolio is not the same. So, the true total portfolio return can not be measured. For example, the options that I trade end up being a very small fraction of my total portfolio ( less than 1%). I also keep a good portion 20-30% (sometimes higher) cash reserve.

I also added three new names to the non-biotech list. Toyota ( the most profitable company in Japan) China Medical Tech to get more Asia exposure in addition to Mastercard.

This month was a good month for the market in general. I expect the next few months and all of 2007 to be very challenging since the economy is expected to cool down significantly! Therefor I will shoot to increase my cash balance to at least 50% going into 2007.

Click on the image to see larger version.

Sunday, October 29, 2006

Vertex Pharmaceuticals (VRTX) update

Vertex recently announced interim results of VX-950 clinical trials for treatment of Hepatitis-C. Here is the link for the news release. 24 of 26 patients on VX950 and existing treatment of Pegylated Interferon and Ribavirin showed no detectable of Hep-C virus after stopping the therapy. Furthermore, the therapy was well tolerated which is almost as important as been efficacious.I have previously written about this stock link and think the company has a great future. After the latest anouncement, the stock soared by 17% as shown below in the chart.
I think the gap seen in the chart will be filled. I recommend selling January $45 calls which are now trading at $2.35. Selling calls has lower risk profile than buying either calls and puts but it does have a disadvantage that you are obligated to a potential trade until they expire. To hedge this risk, you can buy some January $50 calls with a portion of the proceedings in case the stock continues to go up.

Bottom line: I expect VRTX trading down or sideways for the next couple of months. You can take advantage of this highly probably scenario by either selling calls, buying puts or selling your shares and buying at a lower price. Either way, I don't think the stock could continue to go up in this market given that profitability is uncretain and still years away.


Celgene (CELG) Q3 earning update

Celgene just reported a great Q3 earings report which included strong sales form both Revlimid and Thalidomide. I have previously written about this company and previous earnings and valuations which can be viewed here.

After the great earnings report the stock gapped up to $47.5 and has climbed to $50.5 since as the chart shows. The recent run up may have been too much too fast. As the chart shows, the 50 day moving average is under $44. This would be a good time to take profits or make some money from selling calls. My strategy is to write covered calls at $50 strike price for January ( currently at $3.7. It is highly probable that CELG may even test its 200 MVA in the next two months which would make for a great buying opportunity.


Sunday, October 22, 2006

Some non-biotech suggestions

So the name of this Blog is Biotechnology stocks and I will stick to that theme. But just like any other investor, I realize the importance of diversification and I would like suggest some non-Biotech stocks.

The following are some stocks I like for the next 6-9 months. I will add these picks to my performance summary sheet.

Adobe (ADBE) : $38.2. Its Acrobat line of software has a domninant market position. Its Macromedia devision should benefit from populatirty of You Tube (now Google) and their streaming videos. Target $45.

Akamai(AKAM): $46.19 Dominant market position when it comes to making the internet run faster. I like the stock since it made a 13% correction and is at its 50 day moving average.

Gamestop(GME): $51.25. I sold this stock earlier in the year (took profits) and was watching the development of the new consoles. This video game retailer should benefit from the next cycle of game hardwares (XBox360, Sony PS3 and Nintendo). Target $60.

Coach(COH): $35.27. I like this maker of hand bags and accessories. It looks like they have the right products and the right price and should have a good holiday season. Targget $45.

Shinhan Financial Group (SHG) South Korean Bank $89.52. I like the chart and owning the stock also gives international diversification. Target $100.

Blackboard(BBBB). $27.62. They increased their revenue estimate but the stock has been flat due to a patent dispute. Blackboard is a dominant provider of web based educational software for academia. Target $35.

No hurry to buy a lot of these shares but looking to be opportunistic during pullbacks.


Saturday, October 21, 2006

Phase II results suggest Lorcaserin is an effective and safe weight loss treatment - Arena Pharmaceuticals (ARNA)

Arena Pharmaceuticals, Inc (San Diego, California) is a biopharmaceutical with five clinical stage candidates addressing four large disease indications including: obesity, cardiovascular diseases, insomnia and diabetes. Arena utilizes a proprietary technology platform, called Constitutively Activated Receptor Technology (CART) and Melanophore, to develop orally available small molecule candidates directed at modulating G protein-coupled receptors (GPCRs). GPCRs are a class of receptors that mediate the majority of cell-to-cell communication. GPCRs are well validated, as a large percentage of prescription drugs target one or more GPCRs. This reduces some of the development risks associated with the company and its drugs. Arena’s lead candidate, Lorcaserin, is entering Phase III trials for the treatment of obesity. Lorcaserin, previously APD356, may provide efficacy equivalent to one of the most effective and popular treatments for obesity, fenfluramine, without the cardiac toxicity profile. In addition, APD125 utilizes a unique mechanism of action as a treatment for insomnia. This compound is in Phase II development and modulates the serotonergic pathway.

The outcome for of Arena, as a company and as a stock, depends heavily on success of Lorcaserin as an obesity drug. The market is undeniably huge and lack of good existing treatments allows for rapid market share gains. There may be future competition in form of late stage drugs in the clinic. (Sanofi’s weight loss is also in Phase III). Lorcaserin works by selectively inhibiting a serotonin receptor. I like GPCR as a class of drugs because their therapeutic and toxicityt characteristics have been well studied in the past from other drugs that have made it to the market. The phase IIb clinical trial results were quite impressive. In order to keep this article to a manageable size, I will discuss only the highlights. The attached image (click the image to enlarge) shows the efficacy results of Lorcaserin at different doses and dosing schedules compared to Placebo in a Phase II clinical trial. The drug exhibited a dose response curve (higher results at higher doses), which were significantly better than the Placebo affect. Also, once the patients discontinued the therapy, they gained some weight. This has significance because it is another proof that the results are based on the targeted action and not due to a side effect. Furthermore, chronic dosing brings more sales to the company. There were no signifant side effects or cardiovascular toxicity issues that have plagued other weight loss drugs in the past. Besides Lorcaserin, Arena has other clinical candidates (Insomnia, Diabetes) that add value to the company.

By the end of this year, Arena is expected to have around $200 million in cash. Lorcaserin is not scheduled to be on the market until 2010 with expected revenues of $200 million in that year based on royalties from sales and anticipated milestone payments from a partner. With an 7X multiple, the valuation should be around $1.4 billion in 2010. Discounting this value by 30%, I get a valuation of about $800 million. I add about $400 million to valuation for it’s pipeline and cash on hand to get a valuation of $1.2 billion in 2007 or $26.1/share. Today, the stock is trading at $17.39 at a valuation of $823 million which is 50% below my estimated 2007 target. I am going to begin opening a position in this stock immediately! Of course, with the recent run-up there is a risk of a pull back which should be aggressively bought as well.


Sunday, October 15, 2006

Amylin Pharmaceuticals (AMLN) - Byetta should pave the way to profitability, but not anytime soon

Amylin Pharmaceuticals, Inc. currecntly has two marketed products, BYETTA and SYMLIN, both injectable products to treat diabetes. Symlin is a synthetic analog of human amylin which is a naturally occurring hormone. Symlin and insulin work together with glucagon, another hormone, to maintain normal glucose concentrations. It is important to note that Symlin is co-administered with insulin. However, since insulin alone is sufficient in treating most patients, the addition of Symlin is not necessary in most cases. The breakthrough for treatment of diabetes would be a drug that replaces insulin, because insulin has lots of other side effects and is also very strong and may cause hypoglycemia if misused.

Byetta on the other hand has a different mechanism of action. Its active ingredient, Exenatide, is a synthetic exendin-4 peptide made of 29 amino acids. It is a long acting potent agonist of the glucagon-like peptide q (GLP-1) receptor which acts by regulating gastric emptying, insulin secretion, food intake and glucagon secretion. Byetta is used in treating type II diabetes in patients who are taking metformin and/or sulfonylurea, two common oral therapies, but have not achieved adequate glycemic control. This combination would spare the patients from using insulin. However, Byetta is not perfect and requires 2-3 daily injections, similar to Insulin. The company in partnership with Ely Lilly and Alkermes are working on a once a week injection of Exanatide which would be much more convenient if it is shown to control blood glucose levels as well as existing treatments. The company is conducting a phase III trial and does not expect to launch the product until 2009. Amylin has another partnership with Nastech Pharmaceuticals to develp intranasal version of Exanatide which may be launched by 2009.

In the first half of 2006 Amylin recorded $17.9 million in sales from Symlin (33% quarterly growth rate) and $166.8 million in sales from Byetta (45% quarterly growth rate). The company also had $15.8 million in collabortion agreements. For Byetta, Amylin shares revenues with Lilly. Amylin gets 50% of US sales and 20% of sales outside of US.

My estimates for Q3 2006 sales are about 170-175 million (assuming a minimum of 45% average growth). These sales growth numbers are not enough to get Amylin to profitability any time soon. Sales form Byetta are therefore considered to keep the company around until Exanetide LAR gets to the market. That is the blockbuster that the company needs to launch it into the upper echelon of bitoech sector. The company recently raised enough capital to ensure that it will get to that point ($850 million in cash on balance sheet)

The company is expected to record about $500 million in 2006 with a loss of about $1.88 per share and loss of $1.1 per share on about $800 million revenues in 2007. The stock currently has a market cap of $6 billion and is trading at $48.17.

Bottom line: Byetta is not the blockbuster to propel Amylin stock price to double in value, specially since they have to share revenues with Lilly. I don't see any catalysts to cause a significant increase in share price of this company. This company could trade side ways for the next few quarters and perform up and down based on the market and the sector. At $6 billion, Amylin seems to be fairly valued. I would recommend buying at or below $45(given no bad news). Depending on good sector performance and lack of bad news, it could trade as high as $64 (8 billion market cap) but not anytime soon.

There also remains some risks with at successful phase III trial of Exanatide LAR in addition to risk from competition including inhaled insulin being developed by Lilly. Another minor risk is approximately $375 million in convertible bonds that may get converted ar about $34/share and would be dilutive.

If you are tolerant of these risks and are willing to wait until 2009 to see any significant earnings you could start investing in AMLN. Personally, I am placing AMLN on my watch list.


Charts show money flowing into Biotech sector

Sector rotation is something all investors need to consider in order to manage their portfolios. Earlier this year, we saw a rotation into commodity and consumer product stocks in addition to the energy sector which was driven by speculation. Now, at the beginning of Q4, there seems to be a new set of leadership stocks. Dow jones industrials have been getting the bulk of the headlines followed by big Nasdaq names such as CSCO, MSFT, ORCL and GOOG. Also, it is easy to speculate that there will be a year end rally in retails stocks.

Biotech stocks have quietly made a nice move in the past couple of months. There are some scientific conferences schedules in Q4 when news releases may cause some stocks to move, but I think most of this momentum is based on the upcoming earnings season.

Just to recap, the chart to the right shows the NBI index ( Nasdaq Biotech Index, click here to see why I chose to follow this index ). For 2006, ithas a performance of slightly below 0%. That in itself may not be a good reason to buy but fundamentally most biotech companies have done well within this sector. Yes, the big biotechs are no longer growing at 50 to 100% pace but their earnings will be growing in high double digits, which is very impressive. (Click here to see a table of expected growth rates).

Even though NBI has seen significant and rather quick bounce of 14% from 2006 lows, it is still 10% off from it's highs in March. More importantly, the NBI index has crossed above an important resistance of 760 and closed above a 200 day moving average. Because this sector has had a rapid ascent to these levels, I expect a short term correction which should be used as a buying opportunity.

This recent move does not mean anyone should jump into any biotech stocks and open a huge position. The following are some trading recommendations.

If you bought at higher prices, you should have already been averaging down by systematically picking up cheaper shares. If you have not done so, think about picking up some shares here if you have a long term outlook. If you are a short term trader or want to trade with options I would wait a little. You should wait until slow stochastics and williams %R indicators show over sold levels (both are overbought now) or if the NBI reaches the 50 day moving average currently at $745. If you do not own any shares you could either wait for a correction or buy a little now and decide to sell or to buy more after further movements in either direction. Either way, it is necessary to be disciplined and have a strategy and price points for both buying and selling.

Bottom line: Technical indicators show money rotating into the volatile Biotech sector and may be just the beginning of a long term ( few months) bull market. Invest selectively and wisely by being disciplined and patient and you can make some good returns in the next few months. Do some homework and stay away from companies with poor historical performance like MLNM or NTMD.


Wednesday, October 11, 2006

Alnylam (ALNY) -unproven technology years away from the market

Alnylam (ALNY) is a super-innovator in a sector of innovators. I love the company but I dislike the stock for the reason that they are developing an unproven technology. Alnylam is one of the few biotech companies working in the newest and most challenging class of therapeutics; RNAi. Unlike small molecules and protein therapeutics, RNAi based drugs work at the gene level and have the potential to be more potent and more specific. Its principal drug candidate comprises ALN-RSV01, a phase I clinical stage product for the treatment of lung infections caused by respiratory syncytial virus. The company also engages in the research and development of other drug candidates for the treatment of various diseases, including pandemic flu, cystic fibrosis, neuropathic pain, spinal cord injury, Parkinson's disease, Huntingto's disease, ocular diseases, and other diseases. Alnylam Pharmaceuticals has alliances with Merck & Co., Inc.; Novartis AG; and Medtronic, Inc. for the development and commercialization of various RNA interference system products. It also has a cooperative research and development agreement with the U.S. Army Medical Research Institute of Infectious Diseases to discover RNAi therapeutics targeting viral organisms, including hemorrhagic fever viruses. The company has collaboration agreement with University of Texas Southwestern Medical Center at Dallas to evaluate approaches for reducing LDL-cholesterol levels using RNAi therapeutics directed to a disease target, called proprotein convertase subtilisn/kexin type 9. Alnylam also has collaboration agreement with Inex Pharmaceuticals Corp. for the systemic delivery of RNAi therapeutics; and with Biogen Idec, Inc. to develop a treatment for neurological disorders. The company was founded in 2002 and is headquartered in Cambridge, Massachusetts.

I don't see a blockbuster in the RSV product. Alliances with other pharmaceutical companies are nice but those companies could withdraw at any point. The biodefense contracts are there only to provide some cash to support the rest of the business and should not be considered a continued source of funds.The company has approximately $115 million in cash and valued at $530 million. The stock is trading at $16.5, near an all time high. With the uncertainty around its technology and its only clinical candidate in early phase I, it is highly probable that the company will need to raise cash in the future again. At this point, ALNY is very speculative and will be volatile for many years. I have it on a watch list and recommend a "Don't buy" at this point.

Saturday, October 07, 2006

My monthly Performance Report

Here is how my picks have done so far.

I compared my average returns to NBI (Nasdaq Biotech Index), BTK (Amex Biotech Index) and Nasdaq.

Click on the image below to enlarge it.

Wednesday, September 27, 2006

Biogen-Idec(BIIB) The bar is set low for Tysabri

Tysabri was first launched in 2005 as a revolutionary treatment for Multiple Sclerosis, an autoimmune disease affecting the central nervous system. Tysabri, a biologic co-developed with Elan (ELN), showed great success in clinical trials. It was really a miracle drug that helped many patients live pain free lives for the first time.

Then there were a few cases of complications and deaths from Tysabri. Although, these cases were rare and occurred in patients with complicated cases often on many different therapies, Biogen-Idec voluntarily took it off of the market to access its safety. A year later, Tysabri is back on the market and many feel that it's image has been tarnished.

I beg to differ. Tysabri meets my blockbuster criteria ( see my other article where I explain my success criteria for biotech companies link). It is truly a novel medication in a disease that has been poorly treated to date and has a huge market size. One of it's negative attributes is that it is a biologic and must be injected in a physician's office. This is actually not a bad trait since it helps minimize mid-dosing problems. There are a few successful injectables on the market such as Enbrel).

I also think the delay has had operational and logistical benefits for Biogen-Idec. The company has had more time to optimize its launch strategy and will be simultaneously launching in Europe. Also, it is not a cheap drug. At about $20K per year it could quickly add to the bottom line.

Yes physicians and patients as well as Biogen-idec employees will be very careful to look for signs of complications, but the positive aspects of this drug is too good and should help overcome these challenges. Another positive is a lack of hype for this drug. I don't believe the upside has been captured here. This very important because most companies with blockbusters have so much anticipation built into them that any slip up will cause the stock to tank.

I expect a modest upside surprise in Tysabri in Q3 but definitely expect an increase in estimates in Q4. Today BIIB closed at $44.6 and trading at about 18.5 times 2007 earnings a very low multiple for this type of stock (link to chart). 2007 is only a few months away and historically these stocks trade at about 30-35X current year. At 14.9 billion in market cap it is a very cheap biotech stock. Biogen-idec has a lot of cash and has been investing heavily to boost it's pipeline. I think BIIB should be accumulated at these levels with intentions of selling in the 60's in 2007. The price increase will be supported by increased earnings as well as increased in PE ratios paid for this company. The chart will not give a strong buy signal until the stock crosses above it's current 200 moving average of about $45. But I am a buyer at any level below here.


Thursday, September 21, 2006

Vertex (VRTX) has the right formula for success

The recent slump in most Biotech names would make you believe that the industry is in trouble, but this may be a just a great opportunity to buy shares of great companies at a discount. One of the main attractions of this industry is the patentability of their products. The others are pricing power, high profit margins and relative immunity to economic conditions. They are however affected by political events and changes in regulations. But what attracts me the most is the virtual monopolies that some biotech companies enjoy. This virtual monopoly is a result of the extremely difficult challenges facing these innovative companies. There is a good amount of luck that is behind some of the great successful stories like Genentech (DNA), Amgen (AMGN), Biogen-Idec (BIIB) and Genzyme (GENZ). But what they all have in common is that they have a dominant product in a disease area with significant unmet medical need. This is what I look for when I try to find the next successful company. Who is going to come up with the next treatment for a disease that currently does not have a great therapy and also is coupled with a large enough market? This link to the also provides a great set of rules for investing in Biotechnology stocks.

Vertex Pharmaceutical (VRTX) has this success formula in their late stage product VX950 for treatment of Hepatitis-C. It has all the characteristics of a blockbuster that could propel Vertex into the category of a great biotech company.

First the market; Hepatitis-C is a devastating infectious blood born disease that could get transmitted by blood or sexual contact. It can survive outside the human host for up to a week and was not discovered until early 90's. Some think the whole US blood supply was contaminated with this virus in the 80's since there was not testing done yet. What makes this virus more dangerous is the fact that it has a dormant period of up to two decades. This means that we may have not even begun to see this epidemic yet. It is estimated that about 4 million people in the United States are infected with hepatitis C, which is about 2% of the population. The number of patients with chronic Hepatitis-C is expected to increase to 10.8 million in the next 10 to 12 years. Each year, there are about 35,000 cases of acute hepatitis C.

The treatment is difficult since by the time most people have found out they have Hep-C, their liver is severely damaged. The standard therapy is Pegylated-Interferon alpha, a protein that non-specifically increases the immune response and Ribavirin an antiviral. Unfortunately, this combination is not very effective. Last time I checked, the response rate was around 50%. Furthermore, the side effects are almost impossible to handle. I personally know someone who took these medications and he complained of having bad flu like symptoms every day for a year. This treatment is so bad that most people can not finish the 12 month duration and some become suicidal.

VX950 has shown tremendous efficacy with minimal side effects in early clinical trials. A phase Ib trial showed most patients responding very after a couple of weeks of treatment and in some cases the virus was completely gone which lead to the FDA granting fast track status. What makes VX950 special and hard to copy is that Vertex was a pioneer in this field. They were the first company to solve the 3D crystal structure of the protease protein that VX950 inhibits (they also did the same for HIV protease which revolutionized treatment of HIV). I don't want to get into the science but solving this structure and finding a molecule to specifically inhibit it that is safe and gets absorbed by the body is next to impossible. They have a huge head start and have solved some incredible problems. Even if someone wants to imitate this molecule, its chemical structure is so complicated that it makes manufacturing process development very difficult. VX950 is a direct result of huge perseverance by Vertex scientists and management mixed with some good luck.

Because of all these reasons, I believe VX950 will make it to the market and will be a multi billion dollar product with limited competition for a long time. The product is not expected to launch until late2008 (aggressive timeline) but at $3.5 billion market cap it has lots of upside movements left as this product moves through clinical trials. I expect Vertex's market cap to be around 7-10 billion right around the launch time and I will be aggressively buying dips from now until then. In addition to VX950, the company has products in trials to treat inflammatory diseases such as a p38 inhibitor which could be the first oral RA medication. They have a partnership with Merck to develop a kinase inhibitor for treating cancer and they have the first and second ever compounds in clinic to treat Cystic Fibrosis. Vertex should be admired for its science and should be a core holding in the biotech portion of any portfolio.

As of the posting date of this blog, Vertex is trading at $33.25 and should be accumulated aggressively. It has been consolidating since making its high of about $44 for a 25% correction and has found support at $30.

During this time, VRTX has made a partnership with J&J for distribution of VX950 outside US worth about $545 million while keeping sales in US. They have also raised $300 million in a public offering and have retired some convertible debt. These activities should provide enough cash for VRTX to get this product to the market and become a success story.


Wednesday, September 13, 2006

Know your Biotech Index

Find the right Biotech Index

They say that sector movement accounts for about 50% of a stock’s increase or decrease. Thus, in addition to performing fundamental and technical analysis on a stock one should also take a look at the overall sector. Usually, this task is accomplished by looking at an index of stocks that are in the same business. In addition to sectors and industries some indices also consider the size of the stocks (the Russell 2000 is a small cap index whereas S&P 500 is comprised of large cap stocks).

The two most well known biotech indices are BTK (Amex Bioteck Index) and NBI ( Nasdaq Biotech Index). In addition to these two I also look at BBH, Merrill lynch biotech HOLDERS which is a tradable basket of biotech stocks. Today, I looked at each one of their performances year-to-date and I was quite amazed at the differences between the three.

The following link shows a Year-to-date chart of the above mentioned indices. Overlay chart
Although the direction of the moves of each index tracks with others, the magnitude and recent divergence has made me want to look more closely at them. Since January, BTK is down about 3% while NBI and BBH are down 6% and 13% respectively. Furthermore, in the last week BTK and NBI have been moving up while BBH has been trending downward. Personally, I have been using the BTK to assess the sector movement of my biotech stocks and after seeing this difference, I was not sure if I was using the correct index.


The BTK (Amex Biotechnology Index) is an equally weighted index of the following stocks:


They all have about a 5% weighing which gets reset every quarter. This is a drawback as it puts equal weight in smaller companies and a few bad performers could have a large impact on the performance of the index. Another drawback of this index is its narrow focus. There are only 20 companies represented (There where 17 in 2004). This list also includes companies that are not drug companies. These include AFFX, CRA, IVGN which sell products or services to the biotech industry. They sell either instruments, technology or raw materials and tend to have lower profit margins, lower growth potential as well as significant amount of competition. IVGN (Invitrogen) for example has been a flat stock since 2000. In my opinion these companies should not be placed in an index of biotech drug manufacturers. Instead, I would like to include ALKS, AMLN, SEPR, CBST, OSIP, RNAI, ALNY or any other biotech company that is trying to market pharmaceutical products which are usually patent protected and have very high profit margins and outstanding market potential.

I do like the fact that the BTK is not weighted by the size of the companies and not dominated by DNA and AMGN.


The NASDAQ Biotechnology Index (NBI) contains about 170 Nasdaq listed biotechnology and pharmaceutical companies and is calculated using a modified capitalization-weighted methodology. The capitalization weighing however could be counteracted by the number of companies present in this index. This link shows the companies that make up the NBI.

BBH (click on the image to see a list of the stocks in BBH)

The Merrill Lynch Bitoech HOLDERS is a basket of stocks. When you buy a share of BBH, you own a piece of each of the companies. As you can see from this table, this basket is heavily weighted to the large cap compankies such as DNA, AMGN, GILD and GENZ. Interestingly, MLNM (which I think is one of the worse companies in this sector and I will be sure to write a blog entry about it) has a relatively high share. No sign of VRTX, AMLN, PDLI,CEPH or RNAI. This is probably the weakest of the three indices because it has a limited number of company and it is biased towards large cap stocks.

Bottom Line

After analyzing the three indices, it is my opinion that NBI is the most relevant index unless you own DNA or AMGN then I would use the BBH. BTK has an advantage because it is equal weighted but it does not have enough of relevant biotech stocks to make it a good index. You could make your own basket of relevant equally weighted 50 biotech stocks (all in the same growth stage) that would be better than any of the above indices but who has time for that?

If you want to track the performance of biotech companies that are not large cap such asDNA, AMGN, GENZ, BIIB, you can use the difference between NBI and the BTK. The comparison between BBH and BTK could be used to determine the effect of weighting. BBH, the weighted index of 17 stocks is down 13% YTD while BTK the equally weighted index of similar 20 stocks is down only 3% YTD.

To me this suggest that the large cap biotechs have been hurting the most in this sector. In fact if you look at my CELG article , you can see a table that shows relatively low PE and relatively low expected growth rates for the large cap biotechs. The 2007PEG(PE07/growth ratio) for these stocks is between 1.42-1.93, which makes them fairly valued. Historically, these companies have had higher PEs and PEGs and as sector rotation puts Bitoech back in favor, I expect these stock prices and PEs to increase. Of course, this assumes no changes in the companies’ businesses going forward. As new products are launched or mergers occur, these companies could take off.


CELG still has upside potential

CELG is one of the few profitable biotech companies in the middle of a growth phase. I first discovered this growth stock in March of 2005. Since then the stock has more than doubled and split once. In this article, I will present some arguments why it is an attractive stock to purchase.

CELG's products ranked by revenue are Thalomid(Indications: Multiple Myeloma,ENL), Revlimid(Multiple Myeloma, MDS), Alkeran(Multiple Myeloma and Focalin(ADHD). Revlimid
and Tholomid are from the same class of immunomodulary drug(IMiD). Revlimid is the newer generation with a better drug profile (better potency and toxicity).

Most recent Revenue and Earnings

Here are the sales numbers for CELG's major products for the last three quarters ( in million dollars)


Obviously, growth for CELG has been driven by Revlimid. In addition to sales in MDS, Revlimid has been cannibalizing Thalomid sales in Multiple Myeloma. Since CELG pays 1% in royalties for Revlimid compared to 10% for Thalomid, the cannibalization is actually boosting the profit margins of CELG. Another concern is the RevAssist program. Since Revlimid is a new product, the company is providing free samples to new patients and patients that have received this product during a clinical trial. According to the management, this represents 20-25% of the prescriptions. This may be a short term concern for revenues but in the long term it will allow more patients to try Revlimid and become paying customers. This practice is very common in the pharmaceutical industry. During the conference call, the management expects this percentage to drop closer to the industry average of 3-5%.

In addition, last quarter saw a decline in Alkeran. In the conference call, the management addressed this as issues with reimbursement and in manufacturing. They think the sales for Alkeran will recover but they want to be conservative about it.

Stock movement

After a seemingly unstoppable run that started last year and saw the stock price more than double, CELG has been off of it's all time high of about $49 back in July to as low as $41. Part of this is attributable to inflation and recession fears in the market. This profit taking is normal and has coincided with the summer months that historically see low volumes and high volatility.

At $41 it is trading at about 80X 2006 earnings (0.51/share estimated) and 38X 2007 earnings (1.09/share estimated). This transaltes to a PEG of about 0.7 (using current PE of 80). To put this in perspective, I have made a table of the same data for other large cap biotech stocks:
Click on the image to enlarge.

These data suggest that CELG is the most expensive stock in that group according to 80 PE but has the highest growth rate at 114%. In fact, if you combine the PE and growth rates in form of PEG, it has the best value with a PEG of 0.71 in this group.

Other factors to consider

CELG is applying for approval of Revlimid in Europe. if approved, this should add significantly to the expected revenues and earnings. The cost of this expansion into europe is already priced in because the company has announced the costs of regulatory filings and has already put into place sales and distribution channels.

In addition, Revlimid is in clinical trials for treating Chronic Lymphocytic Leukemia(CLL) and aggressive non-Hodgkin's lymphomas (NHL) as well as non-deletion 5Q MDS. These, if successful, can add significant revenues in the coming years.

Bottom line:

CELG enjoys a monopoly in blood related cancers with its successful pipeline of IMiDs. Cannibalization of Thalomid by Revlimid is actually good for CELG as it causes profit margin expansion. Additional approvals in Europe and in other diseases would add significant upside potential to current estimates. Downside risks include changes in reimbursement from government or insurers as well as if Revlimid does not get necessary approvals in above mentioned trials. In the long term, CELG has some interesting small molecule kinase inhibitors and other immunomodulators that could allow it to expand into other therapeutic areas including other immune related diseases such as Psoriasis.

As far as trading CELG. I am waiting for the stock price to reach the 200 MVA which is currently around $37. This does not necessarily mean that I am waiting for the stock to drop. The stock could remain above $40 while the MVA moves up over time. I think the third quarter earnings will not be as disappointing as the last one. At $49 CELG's valuation was getting ahead of its earning. But a good Q3 and announcements regarding EU approval and clinical trial developments could send this stock towrds $50 where I think this stock will end up at the end of this year.

Disclosure: As of Sept 13, I own option positions in CELG. They inclue April 2007 $40 call options priced around $7 partially hedged by October$37.5 put options priced around $1. The stock price was around $40.5 when these positions were opened. The goal is to close these positions if CELG moves towards $50 in the near term for a gain of at least %40, or if there is a sharp decline towards $37.5 with a loss of about 10-20%. This will depend on the timing of the move and other outside factors such as volatility.