Thursday, March 15, 2007

March Madness may continue into April and May!

They say be careful what you wish for because it may just come true. I had previously (and repeatedly in December, January, and February ) said the market is due for a correction in first half of 2007. Well, I got my wish. The sell off has been linked to many triggering events. The rise of interest rates in Japan leading traders to close positions that they had opened with borrowed Japanese Yen (carry trades) may have been the first event. However, since then, the sub prime lending meltdown and global market sell offs have caused a liquidity fear. The potential and the severity of a slow down in US economy will be the next shoe to fall. I am not alone in thinking that this correction is far from over. In the past, the bottoms usually take a few months to form and are quite painful. The recent drop has been modest and short and I expect this to continue into the summer. A correction followed by a recovery is however only an optimistic view. There are theories of an outright recession in second half of 2007 caused by large drops in housing prices and a credit crunch if the fed does not lower rates. In this case, the correction will get deeper and will last much longer.

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: $65.5, Market cap = $4.3 M, My Rating: Buy (Aggressively)

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: $11.2, Market cap = $650 M, My Rating: Buy

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!