Sunday, October 29, 2006
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.
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
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 (
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
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.
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
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.