February Performance Update and reflections on past picks

Click on the image below to see a table that shows the returns or losses of my past picks.





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.

JMHO

Gilead (GILD) - Great Q4 Earning report is a Preview of Things to Come in 2007

Gilead (GILD) is a large biotech company with a portfolio of marketed products that include royalties from the blockbuster Tamiflu for treatment and prevention of influenza, as well as HIV drugs that are combination pills which makes them more attractive to patients because of easier dosing regimens.

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.

JMHO.