Thursday, December 13, 2007
Today Biogen-Idec announced that it did not find a buyer and it was going to continue as a stand alone company. BIIB shares lost about $20 and was trading as low as $54, much lower than its share price before all the rumors began when the stock was in the $60s.
I like BIIB once again based on valuations and oversold technical conditions. The company is expected to earn over $3 share in 2008 which puts the forward PE at a cheap 18. Tysabri, their expensive treatment for MS, will continue to gain momentum in 2008 and the company expects to have 100,000 patients enrolled by 2010.
Disclosure: The author has a long position in Biogen-Idec.
Sunday, November 25, 2007
Onyx's stock has been doing tremendously well. In 2007, it has raised more than 500% from about $10 to its current price of $53, but off of its 52 week high of $61.
But is this a good time to buy the stock?
Let's first look at the revenues and stock valuations.
In the third quarter, Nexavar achieved global net sales of $104.6 million (half to Onyx). This included approximately $41 million generated in the United States and approximately $64 million outside the US. This growth reflects a 26% increase over the previous quarter's US sales numbers and a 30% quarterly increase in sales throughout the rest of the world. The majority of this sales and growth have come from kidney cancer and this growth is expected to moderate due to competition from Pfizer's kinase inhibitor, Sutent. The company and investors believe China could be a great source of growth with its growing middle class population. They expect the Chinese to be able to afford a $4,000/month treatment. I am not sure I agree that there will be significant sales from china in the near term as I believe $4,000/month payment is hard for people who are the cheapest labor force in the world!
On the other hand, Onyx has the advantage of having a pipeline-in-a product. Nexava, a multi-kinase inhibitor of cell growth and proliferation, has been shown to be safe and effective in Kidney and liver cancers. The company is currently performing clinical trials to assess its performance in Small Cell Lung Cancer, Melanoma and Breast Cancer. Theoretically, a mutli-kinase inhibitor can slow down disease progression in all these disease if they rely on the same kinases for their growth as the ones inhibited by Nexavar.
Given its specific mechanism of action with flexibility to treat many types of cancer, Nexavar can become a huge blockbuster. However besides clinical challenges, the company may face increased competition from other companies. Almost every big pharma and many small biotechnology companies have been working on kinase inhibitors to treat cancer and immune diseases. Nexavar's success may have paved the way for the competition. Statins and HIV protease inhibitors come in mind as fields with many copy cat drugs.
In the short term , Onyx will be spending a lot of cash on all of these clinical trials to expand usage of Nexavar which will eat into its profits. Onyx has about $450 million in cash reserves and can afford to spend some money on these critical trials. I am guessing Bayer will pick up some costs as well. Onyx also has to share 50% of its revenues with Bayer which makes it more difficult to increase earnings per share. However, I believe the company has a great head start and will have market exclusivity for the next 3-5 years.
I believe the early surprise profits have attracted some hasty investors which has made ONXX overvalued in the short term with a market cap of $3 billion. In other words, the easy money has been made! The company will most likely post some losses in the coming quarters and we may see the stock drift lower. In addition of sales growth, the success of Nexavar in trials for treating other types of cancer will be a key to the stock movement in 2008. I would recommend to wait for a better buying opportunity in shares on ONXX.
Disclosure: The author does not currently have a position in ONXX.
Sunday, October 21, 2007
First of all, the size of this market (up to $4 billion annual estimated sales) makes competition less of a factor. Second, being first to market increases the probability of success of any product but it does not guarantee it. Third, the details of the Schering trial will make us realize that Telaprevir is still argubly the best product with most clinical data. For example, in the Boceprivir trial, patients were primed with Peg-interferon and ribavirin before the start of triple drug therapy. Also, no long term sustainability of response rates are available beyond the original 12 week data mentioned in the abstract. Finally, the drop out rates due to side effects, the unknown methodology for calculation of percent responders as well the higher minimum detection limit of the PCR assay used to determine virus levels makes me question the strength of these results.
I still believe Telaprevir is the front runner to hit the market before any other new HCV medications and will capture a good percentage of the world wide market thanks to its partnership with J&J.
VRTX stock is a great buy at these levels as I believe a blockbuster product in a multi-billion dollar market should value the company between $6-10 billion market cap once Telaprevir is in Phase III. Days like these, I am glad that the efficient market theory, which is taught at every fiance school, is somewhat flawed for smaller companies and individual investors can take advantage of under-priced securities. As retail investors, we should recognize and plan for these events.
I had previously owned stocks and leaps in VRTX. Given this recent movement, I have added some medium term calls 2-6 months, to take advantage of a possible run after the earnings report and the release of more clinical trial results in November. However, given the difference of opinion by analysts and other shareholders who have sold their shares recently, I am holding on to some puts as a hedge.
Bottom Line: Buy VRTX at these levels and hold for a long term for a possible 2-5 times returns in the next few years.
Disclosure: The author owns shares and options in VRTX.
Tuesday, October 16, 2007
Buying at these levels is definitely not recommended since the price is way too expensive based on fundamentals.
Disclosure: The author does not have a position in BIIB at this time.
Friday, October 05, 2007
This move was catalyzed by the October 4th vote by Bioenvision shareholders to decide the fate of the sale of the company to Genzyme.
In addition, on Friday, Genzyme announced approval of Elaprase, its enzyme replacement therapy to treat Hunter syndrome. The company is seeking approval in other countries as well.
I believe this latest strong should be considered a great buying opportunity. The stock has had a strong move this week and may move sideways for some time but the charts signal a break out and the stock should move towards new highs. I have previously mentioned the low historical valuation of GENZ which was trading at 15.9 times 2008 earnings (click here to see that article). I anticipate $80 price per share within 3-6 months.
Bottom line: Buy GENZ for the short and long term potential.
Disclosure: The author has a long position in this stock
Wednesday, October 03, 2007
Another reason why I like this company is its small size. The company has a market cap of nearly 300 million and any good data will make the stock move significantly. The company has 65 million in cash and Roche as a big pharma partner to take on the clinical costs. The stock had its IPO in April and has had almost a 50% rise.
I would recommend VRUS only as a buy with a long-term outlook. It will be very volatile but with patience and luck this stock could have significant returns in a few years.
Disclosure: At this time the author does not have a position in VRUS. The author has a long position in VRTX.
Monday, September 24, 2007
The first Poll question is a very general question regarding your sentiment on the Biotechnology sector in 2008. I happen to be very bullish (greater than 25% return). I am interested to see how the majority feels. Going foreword, I am thinking about asking questions regarding small cap or large cap biotech sectors and individual stocks.
Again, your feedback is extremely beneficial.
Saturday, September 22, 2007
But the macroeconomy is not the topic of this blog. I should instead talk about how this will affect Biotechnology and Pharmaceutical stocks. Since Biotechs in general have low amounts of debt, the effect of lower costs of borrowing on profit margins will be minimal. For Big Pharma however there will be significant increases in earnings due to lower costs of borrowing and a better foreign exchange rate due to weaker dollar. Biotech is still a product driven not a consumer driven industry so the impact of the rate cuts will be minimal to the revenues of this industry.
If I had to sum up 2007 ( to date) for Biotech Stocks in one word it would be UNEVENTFUL. Charly Travers from Motley Fool.com probably had the best prediction for Biotech stocks in 2007. I don't have the link but he basically predicted a flat year due to lack of important product launches. Indeed the story this year was that most Biotechs met their expectations but the lofty historical PEs has shrunk.
Last year, I had analyzed the PE to Growth ratios of some big Biotech names and identified CELG (Celgene) as the cheapest based on PEG analysis. It is interesting to visit those numbers again 12 months later to see if they tell a story. Click on the following image to see this analysis. The top table is the analysis done in 2006. The bottom table is the same analysis in 2007 and the colors show which stocks went up and down in that time.
Interestingly, CELG is still the cheapest of these stocks with a PEG of 1.14. However, I am going with BIIB (Biogen Idec) and GENZ (Genzyme) as my picks for 2008 because they have a more diversified portfolio of products with revenues than CELG who is dependent on Revlimid for most of its revenue. One bad earnings quarter and CELG’s price could see a huge decline. I am most bullish on GENZ because they have consistently beat estimates but the stock is actually down from last year. So, If I have to make one pick for a large cap Biotech in 2008 it is GENZ. I also can not expect too many bad years from DNA (Genentech) so I will recommend that as well. I don't like GILD (Gilead), according to a PEG of 2.5, they are overpriced. Finally, AMGN (Amgen) had a tough year. They have a great pipleline and will make a come back but I am staying away until I see poof that things are better.
CELG is in interesting stock which affected the performance of my picks this year. The table below shows an update of my historical biotech and non-biotech picks.
I have highlighted some intersting results from the portfolio First, the overall return on the stock component is much lower than the two Biotech indices. In the past 12 months, my stock portfolio yielded a 10% return while NBI index had a return of 15% and the BTK (large caps) returned an impressive 25%. I blame all of this under performance on getting out of CELG too early. It was a rather costly mistake. One that I hope I will not repeat. I was also bady hurt by lack of performance in my small cap biotech names (Altus and Arena) but I like both in the long term. I should also mention that I stayed away from good small cap stocks such as ALNY (Alnylam) which would have been helpful to my returns.
On the bright side, the options helped me get some additional returns. In the past I was not able to quantify their impact. However, going forward I can accomplish this by calculating the return on underlying collateral required for a naked option. Trading wisely with options could improve any portfolio's return and protect against volatility so I am going to keep investing with both options and stocks.
The Non-Biotech stocks had a much nicer return for a few reasons. This was mostly due to the fact that I was not exposed directly to any sub prime stocks such as the investment banks, regional banks, construction or mortgage brokers. I was also helped greatly by returns in GME (Gamestop) and MA (Mastercard) which I still like going foreword. I will add shares of GOOG(Google) and (AAPL) for tech names as well as shares of TIE (Titanim Metals) and COP ( Conoco Phillips) to get exposure to commodities that get helped with weak dollar. Lastly, I like exchanges CME (Chicago Mercantile Exchange) and NMX( Nymex) as increased commodity and futures trading and volatility in addition to consolidation in the industry will help both exchanges.
Bottom line: 2007 was a lackluster year for biotech sector and I look forward to a better 2008 because of increase in product development. I expect GENZ, BIIB and DNA to outperform their peers. I am still very bullish on VRTX as well.
My goal is to improve on my picks and the timing of my trades in order to beat the Biotech indices in 2008.
Disclosure: The author holds long positions and actively trades in stocks recommended in this article and their options.
Saturday, August 18, 2007
Beside the subprime mess, there are signs of an economic slow down. Auto sales have been significantly down while retail sale have been just OK. The unemployment numbers are still low but are showing signs of deterioration. These are all good reasons to stick with large cap multi national companies of S&P and healthcare related stocks. Historically, pharmaceutical companies have been nicknamed defensive because their earnings are somewhat immune to economic downturns. I don't think this time around will be any different. I would recommend mixing a few good biotech names (CELG, BIIB, GENZ, AMLN) with good big pharma names such as (WYE, ABT, JNJ), maybe a good medical device company (ISRG, HNSN) and a couple of long shots (ALTU, VRTX, PDLI) into the Healthcare portion of any portfolio, which should be overweighted at this stage.
Those who like bottom fishing and have a long-term outlook should consider Amgen's (AMGN) poor performance this year as an opportunity to buy at good value. Despite problems with blockbuster Anaresp, the company is taking measures to sustain earnings with cost cutting measures and posesses a great pipeline of products in clinical stage.
For the short term traders, the following chart shows a strong correlation between MACD and price movement of the Nasdaq Biotech index (^NBI). In April oft this year and August of last year, when MACD histogram turned positive and the short term MA line crossed over the long term, it signaled a buy. I would watch for this in the next few weeks as a good signal to get in. It looks like the index is now roughly half way between 860 (resistance) and 760 (support). Unless the index crosses over resistnace, there is significant chance of sideways or a down side move.
Bottom line: Lack of panic selling in small, mid and large biotechs may indicate that momentum players and value players are lining up to buy these stocks in anticipation of a minor to severe downturn in the economy. It is perhaps a good time to overweight this sector in your portfolio.
Thursday, May 31, 2007
Altus Pharmaceuticals (ALTU) is a small cap (~$400M) market cap biopharmaceutical company with a unique crystallization technology that amongst other things allows for better purity and longer half life for other wise rapidly broken down proteins and enzymes. This technology is very difficult to master and creates a natural barrier to entry even beyond patent expiration. I have previously written about ALTU when the stock was trading around $18 back in November 2006 (link).
Since then Altus has signed a development and commercialization agreement with Genentech (DNA) (link) for ALTU-238 a longer acting version of human growth hormone currently in phase II clinical trials with a $2 billion market.
On May 10th, Altus announced initiation of a phase III clinical trial for ALTU-135, an enzyme replacement therapy for Cystic Fibrosis. To fund this large and expensive trial, Altus had a stock offering earlier this year which raised about $89 Million dollars.
Altus' pipeline contains other promising pre-clinical products including ALTU -237 (oral)for kidney stones and ALTU-236 (oral) for phenyloketonurea.
Altus has a high probability of success mostly because of their first two products are improved versions of existing products, which lowers the degree of difficulty because they do not have the burden of a proof-of-principal that a novel medicine must overcome.
For some strange reason, Altus' financials do not reflect the new money raised through public offering. The correct balance sheet cash should be closer to $200 million. The company is undervalued with a market cap of only $413 million at $13/share with about $6/share in cash, a partnership with Genentech and two products in or near phase III. I expect the stock to rise to $20-25 by year end as more clinical trial data becomes available or a new phase III is started
Disclaimer: The author has an investment position in ALTU.
Wednesday, May 16, 2007
The results look impressive as they show a rapid response in Telaprivir treated patients vs. plaebo in the first 4 weeks. However, the interpretation of results at 12 weeks becomes questinable due to lack of statistical significance. Analysts were focusing on a small subset of 20 patients who were to receive the Vertex drug for just 12 weeks and then be checked 20 weeks later for signs of relapse. Here is the quoted text from the press release regarding those 20 patients:
"Analysis of PROVE 1 Patients who Finished All Treatment at 12 Weeks. Seventeen of 175 patients received at least one dose of telaprevir in “Arm D” of the PROVE 1 study (telaprevir + peg-IFN + RBV). According to the study protocol, patients in Arm D were eligible to stop all treatment at week 12 if they met on-treatment criteria, including the achievement of RVR (<10>The one obvious conclusion that can be made from looking at this data is that the number of patients are too low to make any extrapolation on percent responders. The other conclusion is that 12 week therapy may not be sufficient to reach undetectable levels in a significant portion of the patients. However, the fact that more patients respond to longer periods of treatment with standard of care ( SOC is Interferon + Rivbavirin) suggests that patients on SOC + TVR may also benefit from this increase. The company has already started Phase II ( Prove 2 and 3) trials with larger number of patients with regimens of at least 24 weeks. This means longer clinical trials, higher costs of trials and lower chance of a quick approval and launch in 2009. This would explain lack of a upward stock movement after the release of the results.
Since the release of earnings and clinical trial results the stock has been trading between $30 and $32. I waited a few weeks before writing this post to see the reaction of the market to the data. The reaction of investors since then has been of cautious optimism. The stock seems to have found a support at $30, but if there is a large sell-off in the market, VRTX will see more volatility than stocks with earnings. The data has clearly shown that Telaprivir is safe and is an improvement to existing therapy, giving it a high probability of becoming a blockbuster. The rest of Phase II data, which are scheduled to be released in November will determine the inevitable path to market. The stock should end the year higher than these levels and has a minor probability of a significant downside given the size and unmet need of HepC market.
Wednesday, April 04, 2007
GILD and CEPH are clear winners and should be held (let the winners run!).
AMGN at $55 is a notable disappointment but I did declare a sell recommendation at $60. Also, ARNA and ALTU, both small cap biotechs, have been serious under-performers. If you look at the differences in the performance of BTK ( mid to large cap biotechs) vs. the NBI ( all biotechs) the under-performance of the small caps become evident ( click here for a previous article on these indices). The NBI lost 6% since February while the BTK gained a couple of percentage points. I do plan to keep both ARNA and ALTU since there has not been any negative fundamental news. I also missed out on Dendreon's (DNDN) great jump ( over 2 fold rise overnight). I, much like most investors, thought it was a very risky proposition given the novelty of their prostate vaccine. I will keep DNDN on a watch list.
One stock to keep an eye on is Vertex Pharmaceuticals (VRTX) on Apri 13th they will announce updates to a clinical trial done with 2o patients comparing their HepC drug Telepravir with standard of care therapy ( gamma interferone and Ribavirin) with SOC alone. Investors are looking to see how many of these patients achieved undetectable viral levels and how fast as well as the level side effects and drop out rates in these patients compared to control. I believe these results, even if not perfect, will remind us that this product has a place in improving the lives of these patients and other existing larger trials with hundreds are patients will give us better statistical data. The fact that these clinical trials have had no adverse outcomes (yet) is a good sign and I think the stock has some upside potential from these levels in the short term. So a short term small long call option position may be a good insurance against a large upside pop. VRTX is also a great story for the long term investors.
I have also been happy with my options strategy to take advantage of the volatility and mis-valuation of biotech stocks. Most of my put and call writing have resulted in gains and caused a small boost to portfolio earnings. I think 2007 will be a decent year for Biotechs since the revenues on these companies are not directly related to the macro economy and therefore not as sensitive to a slowdown. Going forward I am looking for opportunities for writing puts (partially hedged) on companies with great earnings and momentum. This strategy will work on most scenarios except a large down move of the stock, which I think is not very likely in this sector. But to be conservative, one should look into three months out and at least strike prices at least 10% below current levels. However, one must be careful as this strategy has unlimited upside risk! So these open positions must be monitored carefully and hedged properly based on the size of the position and acceptable risk levels for each investor.
Disclosure: my holdings are all included in the table above.
Thursday, March 15, 2007
All this causes volatility which has made biotech famous (or infamous!). During these sell-offs, mid-size companies with no revenues tend do get hurt the most. If you have invested in these stocks, you should have expected and prepared for such a day. In the remainder of this post, I will review what has happened to my portfolio and what I intend to do with each position. The dominant theme is to wait until the summer.
AMGN: $60.11 , Market cap = $70 B , My rating: Sell
The FDA ruling that their anemia drugs at high doses are dangerous in cancer patients will have direct impact on sales. The effect of this is uncertain, but until then, the stock will go down or sideways. Although, there is a chance that most of the bad news is already priced in at these levels, but I just don't see any near term catalysts to make up the lost revenues.
CEPH is expected to earn between $3.3 and $4.2/share in 2007 which puts its PE between 15 and 19. The stock is very cheap at these levels and should be considered a gift.
CELG: $51.5, Market cap = $19.4 B My Rating: Neutral
Back in December, I thought CELG was too expensive. After a 15% correction, it is still trading at about 25X earnings. I think CELG will have a difficult time breaking the $20 Billion market cap barrier unless they get approval of Revlimide in other indications. The company may have competition for Thalidomide in the near future. I would consider buying it below $45 if the fundamentals are still good.
BIIB: $44.3, Market cap = $15 B, My Rating: Neutral
Tysabri sales growth is the only near term catalyst for BIIB. I have been bullish about it's prospects but until revenues are released later this year, I would stay away. Still, it is hard to not to own a company with $3 billion in revenues and lots of cash considering CELG is trading higher with much less revenues.AMLN: $38.5, Market cap =$5 B My Rating: Buy
I still think Byetta will be a success story. I think the fears of competition from newer drugs are overblown. The chart shows nice support around $35.
VRTX: $27.8, Market cap = $3.4 B My Rating: Buy
(VRTX is a great example of a stock not to own during a market sell off. It looks like it is headed to $25 or even lower. When wall street collectively decides to fly to safety, stocks with no earnings get hammered. With the case of VRTX however, this is way overdone (almost a 50% drop in three months!). The catalyst for this stock is the release of clinical trial updates which is less than a month away. If the results are good, the stock will take off and end the year around $40. If you have access to options, it would be a great idea to hedge the position by purchasing some puts. I liked this stock at $35 and I like it even more here at $27. Given the possibility of further declines, I would save some cash to buy lower or hedge with puts. In the longer term, this is my favorite biotech company as I anticipate that they will dominate the HCV therapy market for years to come with Telapravir and the second generation product! I also like VPHMViropharma) because they have a complementary product ( polymerase inhibitor) that may be used in a cocktail with Telepravir to make the treatment more effective. Of course the clinical trials are years away.
ALTU: $13.7, Market cap = $350 M, My Rating: Buy
ALTU has two promising Phase II products and Genentech as a partner which will pick up the cost of Phase III trials for Growth Hormone product. The stock may be very volatile this year but it should trade in the $20's by the end of the year of the phase II trials are successful.
ARNA recently announced initiation of a Phase II clinical trial for an insomnia drug. They are already in a lengthy and expensive Phase III trial for an obesity drug. The additional costs may force ARNA to sell more shares to raise money which would be dilutive and lead to lower prices. However, I believe ARNA will announce a partnership with a big pharmaceutical company before year's end.Bottom Line: I would not recommend to go an d buy any of these stocks until this summer. If had to buy any biotech stocks today it would be CEPH. For the rest, you can be patient and wait for the overall market to improve!
Sunday, February 11, 2007
Looking back, I am still happy with the picks I have made so far. ALTU, ARNA and VRTX are obvious laggards but I think 2007 will be a good year for all of these good small and mid sized biotechs as clinical trial results become available.
What stands out was the good decision to get out of CELG and VRTX based on valuations. I still don't like CELG at $54 but at $32 I like VRTX a lot and I am waiting for a better buying opportunity around $30. Meanwhile, I am selling more April $20 puts to take advantage of time decay of option values since there is not going to be much news announced in the next two months. I believe VRTX stock is being punished because the management has decided to release already available clinical data in April at medical conferences. Investors, being a paranoid bunch, have decided to sell the stock and wait for those results before making up their mind about this product and the company. I think those results will be positive and VRTX will end up moving much higher. I will start to buy both shares and long-term options in VRTX in the coming weeks.
As far as the rest of the market, I anticipate a correction of 5-10%(which probably just started) in the first half of this year due to lower anticipated earnings and uncertainties around oil prices and inflation. So, I am a bit bearish with most of stocks out there. This summer should bring a much better buying opportunity. I am particularly interested in tech names that I do not own such as BRCM, AAPL and GOOG as well as some financial and energy stocks.
Friday, February 09, 2007
Earlier this year, Gilead reported 4th quarter 2006 financial results that were quite impressive. Here are some highlights:
- Q4 and FY2006 sales of $900 million and $3 Billion respectively ($437 million from royalties from sales of Tamiflu).
-Q4 and FY2006 earnings per share of $0.78 and $2.52 ( both beating consensus estimates partly due to a lowered tax rate).
- Atripla and Truvada (both HIV treatments) showed no signs of canibalization which should continue in 07.
- In 2007, Gilead is planning to launch products acquired through purchase of Corus and Myogen in 2006. In addition to revenue growth, expansion into other therapeutic areas (respiratory/pulmonary) will diversify Gilead's portfolio, strengthening the company against competition in infectious disease areas.
As of 2/10/2007, GILD stock is trading at $71.16 or 25X this year's earnings of $2.9/share and 20X next year's estimated earnings of $3.6/share. This gives Gilead a PEG of around 1 and puts it in a fair valuation category. If the company delivers as expected, I believe the fair value of GILD shares towards the end of 2007 should be around $80 (25X 3.6 and a subjective discount factor).
There are however some risks to consider. Gilead recently terminated a HepC product that was in Phase II clinical trials, hurting the value of it's pipleline. Also, the success of Gilead in new therapeutic areas is uncertain.
As far as Biotech stocks, GILD is a relateively safe play specially in case a bear market breaks out. The company is expected to generates $1 billion in cash flows in 2007 and given it's strong growth potential, it should have a floor of $60 even in worst market conditions. Given recent bad news about HepC trials, I would wait and buy this stock below $70.
Sunday, January 07, 2007
ARNA and AMLN remain the two negative open positions but I still think 2007 will be a good year for both of these stocks.
CELG has outpaced my expectations but I am still holding on to covered calls and I think the upside is limited for this stock in 2007. January 60 calls should make up slightly for the January 50 calls I had sold earlier.
I have added VRTX and CEPH based on valuations. I have also sold some VRTX April $20 puts which are way out of the money but have some value due to historical volatility of VRTX.
Of the non-biotech stocks. I have closed the ADBE (6%) and COH (25%) . I just don't like the chart of ADBE which looks like a resistance is being formed. Coach has had a nice run during the holidays but I am closing this great retailer. The rest of my non-biotech stocks all have international exposure and should withstand the expected upcoming slowing in the US economy. I am still holding a large cash position and expecting a correction in first half of 2007.
In December biopharmaceutical company Cephalon Inc. made the announcement that it has reduced its debt levels by exchanging a combination of cash and stock for $337 million in convertible notes. Cephalon exchanged $161.6 million of its zero coupon convertible subordinated notes due June 2008 and $175.4 million of similar notes due June 2010 for $101.6 million in cash payments and 4.3 million common shares.
The company expects to book a related $20.8 million charge in its fourth quarter.
As a results of the transactions, Cephalon reduced its 2007 outlook for basic adjusted income to $4.15 to $4.25 per share.
The company said its 2006 earnings and sales outlook remain unchanged, as does its 2007 sales forecast. In November, Cephalon projected 2006 sales of $1.66 billion to $1.68 billion and basic adjusted income of $5.10 to $5.20 per share. Sales in 2007 should range from $1.68 billion to $1.73 billion.Also, Cephalon announced in December that FDA would likely delay a final approval decision on its drug Nuvigil for excessive sleepiness while the agency continues to investigate a case of a potentially serious skin rash seen with a related medicine. The company however reiterated it's sales forecast for 2007 and do not expect a significant effect from this delay since they expected to have a "modest" launch of Nuvigil which is expected to replace Provigil once it's patent expires.
Cephalon has done a great job of managing its product life cycle by developing Nuvigil and launching it before Provigil patent expires.
CEPH stock is currently at $69.75 and trading at about 15X 2007 expected earnings and well off of it's 52 week high of $82.92. I consider this level a great value and opening a position at these levels. The chart to the right shows a down side risk to $55 where the stock would be trading at Dirt Cheap prices. I think given the relatively safe earnings prediction as well as the new capital structure the stock has little risk of down side move given the overall sector does not take a major hit.