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.