Biotechnology Stock

Decoupled moves in Biotech indices highlight opportunities and challenges

2009-07-25T12:23:00.018-04:00

The chart below shows returns for the last 6 months of the two Biotech indices that I follow: BTK and NBI.

After a significant and equivalent downside move in March, both indices have turned positive with an explosive move since middle of July. I speculate that the March downside move was a response to concerns over Obama's health care proposal and its impact on Medicare. However, upon further examination, the adjustments in Medicare rebates would translate to no more than a double digit change in revenues. Moreover, the biotech story is in large a product story where launch of a new product has a much higher impact on revenues than any adjustments in rebate system which can be overcome with cost and price adjustments and while keeping healthy profit margins.

The explosive returns in July are rather interesting and may be indicative of things to come. The divergence in the charts of two indices (35% return for BTK vs. 12% for NBI) underlying story of the biotech industry. This trend indicates a value disparity between mid-large cap biotechs and smaller companies. The BTK move can be contributed to recent earnings and product advancement reports coming out of Celgene (CELG), Gilead (GILD), Amgen (AMGN) and other pharma companies that highlight decent earnings growth despite a challenging environment in addition to value added product development successes.

The M&A activity over the last few quarters have just contributed positively to perceived value of these stocks as the recent acquisition of Medarex (MDRX) highlights a larger trend of big pharma acquiring biologics assets and capabilities. This has resulted in speculative run-ups in shares of other companies such as Elan(ELN) and Seattle Genetics (SGEN) who have biologic portfolios. This trend, however, could reverse as rapidly if no new deals are announced in the next few months.

The muted returns in the NBI index highlights the financing concerns that still remain for smaller companies which may cause a wave of consolidations, bankruptcies and asset sales at depressed values.

My favorite large cap names are Genzyme (GENZ) and Amgen(AMGN) and Biomarin (BMRN) and Vertex (VRTX) among mid-sized companies.

Disclosure: The author has no direct stock or option positions in any of the stocks mentioned in this article.

Rigel's Phase II Rheumatoid Arthritis drug data are good but financing remains a challenge

2009-07-11T13:10:00.010-04:00

On July 9th, Rigel Pharmaceuticals (RIGL) announced the results of TASKi2, a 457 patient Phase IIb Rheumatoid Arthritis study that in most part showed R788 ( a Syk kinase inhibitor) has efficacy similar to existing injectable anti-TNF medications (although it was not a head-to-head comparison). There were some safety issues associated with neutropenia that were somewhat expected and transient.

Despite multiple multi-billion dollar products on the market (Enbrel, Remicade and Humira), there is still room for products that are easier to use and have better efficacy/safety profile. R788 has addressed the ease-of-use problem by being an oral therapy; giving it a large competitive advantage. The pending Taski3 study may shed some light on whether Syk inhibition, with a mechanism of action that is more upstream than Anti-TNF therapy, can be proven to be efficacious in patients who do not respond to Anti-TNFs. This is a large hurdle to pass. Inhibiting Syk enzyme, an intracellular signal transduction enzyme, may affect many inflammatory pathways and may result in a more potent response, however for the same reason, it may me more toxic.

There is low probability that Taski3 data will be overwhelmingly successful. Given the patient population and existing safety issues of the product, it is more prudent to expect a mixed set of results. The results of this study should be considered an upside option on the product. Even if it is not succesful, R788 has a clinical path to market (perhaps a less expensive one!).

Financing is a big hurdle that Rigel and other biotechs are facing this year. With less than one year of cash on hand ( about $100 million with a $100 million plus burn rate and increasing!), the company has to either partner or raise capital through equity offering. The company has already disclosed willingness to partner the product. However, this will most likely not happen until Rigel has met with FDA in october regarding its Phase III clincical trial plans.

So who are the most likely parnters? Amgen (AMGN), J&J (JNJ) and Abbott (ABT) seem obvious as they have existing products in this therapeutic area ( mentioned earlier) and have exisitng sales force serving the physicians and plenty of cash to fund the trials.

So what should we expect of a partnership deal? Given Rigel's cash position, it will not be able to spend much money on development costs and therefor should expect to give most of the sales revenues away. Recent deals involving phase II/III products imply an upront cash payment of $50-100 million, with additional $100-400 milion in development milestones and double digit tiered royalty. The payments may be significantly larger if the deal includes all possible indications (other inflammation, cancer?) and geographic territories. This may sound like a great deal but it may not be a home-run most investors are expecting. A large value builder would be a deal, or a series of deals, that would result in large profit shares in the future.

Eariler, the company had announced a decrease in work force and programs. I consider these annoucnements as events that lower value as they most often mean that the company can not sustain its investments in multiple programs and is relying on one drug to make it. But this potential partnership deal would add to Rigel's cash position and would verify R788, and syk inhibitors, as a credible commercial drug. And if you believe R788 is at least a billion dollar drug, it would result in a few hundred million in revenues.

One point of caution is competition; although I am not aware of other syk inhibitors in the clinic, this data may result in more competition from this and other kinase inhibitors. There are also many injectable and oral RA products in development.

In summary, R788 Phase IIb results are impressive and Taski3 may provide an indication for this drug with limited competition. With a recent restructuring, it is obvious that the future of the company now solely rests on success of R788. The stock will have volatility depending on Taski3 results and a lucrative parntership deal in Q4. I would recommend to buy RIGL shares, trading around $13 , considering the speculative nature of the impending binary events, and to take profits within a year or if the company's valuation significantly advances beyond $750 million as I still see development and financial risks to the company and do not see much value in earlier pipeline program without further funding and partnerships. I would not be surprised if the company announces dilutive financing through offering shares in Q4 2009 or 1H 2010.

Disclosure: The author does not have any positions in RIGL.

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Celgene (CELG) is a bargain once again

2008-09-18T21:35:00.002-04:00

The latest crash of the financial markets has created some great buying opportunities in the health care sector. You can almost pick any Biotechnology or Pharmaceutical stock and be guaranteed that it is undervalued today. The sell-off was steep and broad and took down good stocks with the bad. It certainly felt like some hedge funds were desperately liquidating anything in their portfolio. The financial stock selling was only exasperated by a crash in commodities to create a avalanche effect that may not be over yet.

This has created a great buying opportunity in names such as Amgen (AMGN), Genentech (DNA), Genzyme (GENZ) and Celgene (CELG) to name a few.

Celgene recently reported great earnings report highlighted by a higher than expected sales from its Multiple Myeloma drug, Revlamid. Sales were up 80% from a year ago and translated to a very nice 26 cents per share earnings or double last year's numbers. This was slightly unexpected as analysts were widely expecting to see some signs of weakening of sales due to competition from Velcade from Takeda Pharmaceuticals ( acquired through purchase of Millenium Pharmaceuticals). The company also raised its full year guidance to $1.5 /share from $1.45.

More recently, Celgene announced that its Small Cell Lung Cancer drug, Amrubicin was given fast track status by the FDA. Amrubicin is being currently tested against GSK's Hycamtin in patients with refractory SCLC.

But, the news have not all been positive for Celgene. The FDA recently published a report that Revlimid may have an association with Stevens Johnson. Stevens Johnson has been on the label of Thalidomide as a potential issue and since the two drugs are of the same class, having that warning added to the label should not cause drop in sales specially considering that Multiple Myeloma is a deadly disease.

Celgene is trading at $64.3 with a market cap of about $29 Billion. It recently hit a high of $76 in August. The recent sell off due to the FDA warning and the financial crisis has created a great buying opportunity for a stock that can trade into the $80's next year.

Disclosure: The author has no positions in CELG stock or options.

Byetta may not be the cause of recent deaths, stock reaction unjustified

2008-08-27T09:09:00.003-04:00

On Tuesday August 26, Amylin (AMLN) and its partner Eli Lilly (LLY) announced that four patients had died while on diabetes treatment Byetta.

Both Amylin (down 12%) and Lilly (down 1%) sold off in after hours following repeated headlines saying Byetta responsible for death.

The truth is no one knows what caused the death. The information released mentioned severe pancreatitis as a cause. Needless to say it is possible that pancreatitis, which happens with higher frequency on diabetic patients, was not caused by Byetta. Over a million patients have taken Byetta since it has been launched and the product has a good safety profile.

One patient was morbidly obese while other patients had major other complications such as surgeries.

I had previously recommended not to buy Amylin due to the lackluster uptake of Byetta and the inability of the management to manage expectations and earnings.

This is yet another case of a panic driven sell-off with incomplete set of facts. Once the dust clears, there is a very good chance that Byetta will be cleared.

I am recommending a short term long position in shares of Amylin (AMLN) which could be trading 10-20% higher in the weeks to come.

Disclosure: The author does not have any positions in AMLN of LLY.

Performance of Biotechnology Stock Blog Portfolio

2008-08-12T21:16:00.000-04:00

Analyzing the performance of my previous picks is by far my favorite part of writing this blog. It has on many occasions allowed be to learn from my mistakes.

I have moved the numbers to Google docs so that they are easier to read. Here is a link to that spreadsheet.

The bottom line return for this portfolio of picks is 14%. This is the average of all the picks assuming one would have invested equal amounts. This is not the greatest return over almost two years but here is how I plan to improve on that:

The biggest mistake I made in the past two years was not being in two "HOT" stocks , Celgene (CELG) and Alnylam(ALNY). My reasoning for Celgene was valuation, which was true for some time but I failed to realize the latest recovery to M&A activity.

ALNY was a tougher call to make as I was waiting to see more proof that their technology was going to work. Their recent successful partnerships have shown that other companies are interested in their antisense technology and the stock has seen a significant increase.

In the buy-high-sell-low category, Amylin (AMLN) was a big disappointment. I have learned my lesson about calling winner products before the game is over.

Another more general mistake is the lack of trades during obvious times of bottoms and tops. The remedy for this problem would require me to take time from other activities but I will try to make time to be more diligent on this.

Finally, I have learned that small cap biotechs kill returns. Therefor, in real life, it is best to allocate a smaller investment size to small caps and pick more than one or two of them in case most fail to create any returns. My model portfolio gets hurt due to the equal weighting of all of the stocks.

For the remainder of the year, I am continuing to be bullish on biotechnology and pharmaceutical sectors. I am adding Alnylam (ALNY), Amgen (AMGN), Seattle Genetics (SGEN) and Rigel (RIGL) to my model portfolio and I will write more about them in the future.

Panic selling in Biogen-Idec and Elan represent great buying opportunity

2008-08-09T08:54:00.004-04:00

In July, Biogen-Idec and Elan, who co-market the multiple sclerosis drug Tysabri, announced two new cases of PML a potentially deadly side effect. The stocks sold-off almost entirely. Biogen-Idec lost about 30% of its market share while Elan has lost over two thirds of its value.

I had previously recommended shares of Biogen-Idec right after the buy-out rumors vanished and the stock was trading around 54. I had based that recommendation of the potential success of Tysabri.

In August, both biotech companies announced no plans to take Tysabri off the market and I don't anticipate that FDA will force them to do so. Tysabri was voluntarily taken off the market in 2006, when the first case of death from PML became public. This resulted in an investigation and a strong warning label in addition to physician training to look for signs of PML.

Today, more than 30,000 patients are being treated with Tysabri with no better options. This however may change in the future as other companies, including Genzyme have MS products in the pipeline.

Until then, both Elan and Biogen-Idec will continue to profit from Tysabri and their shares are undervalued at this time.

Disclosure: The author does not have any positions in either Biogen-Idec or Elan.

Biotechnology sector has a rare explosive day

2008-07-08T21:32:00.006-04:00

Tuesday July 8, 2008 marked one of the most explosive upside days I have seen in the Biotechnology sector in quite some time. It comes at a great time when market sentiments are very negative and could lead to a little summer rally.

As the list below shows, both the BTK and NBI indices both had about a 3.8% increase in volume with convincing volume in the big biotech names. If a 3% down day is conisdered a crash, a 3.8% up day could qualify as an explosion! Some of these stocks went up even much higher thatn the average for the sector!

BTK, NBI, BBH, DNA, AMGN, GENZ, GILD, BIIB, AMLN, CEPH

In addition, there was quite a nice move in a lot of small and mid cap biotechs as well. The list below shows some of the names that I follow. I would be a little more careful about some of these smaller cap names as they could easily and quickly give back the gains they made today and more.

VRTX, HGSI, GNBT, IMCL, ALNY, PTIE, SGEN, VPHM, VRUS, RIGL.

Of course, one day does not make a trend. I am puzzled at the cause of this rather massive one day move in this sector. A short squeeze move is unlikely because the sector has not been down relative to other sectors. It is more likely that a sector rotation among big institutions has made investors realize the fundamental value that existed in the Biotech sector which I pointed out in my previous articles that can be found here.

Either way, this move could easily reverse itself unless we see more conviction via a sustained upward move over a longer period.

Bottom Line: Despite a potential profit taking sell-off in the next few days, this rally could have some potential to get the biotech sector to new highs.

JMHO.

Disclosure: The author has a long position in the biotech sector and therefor some of the stocks mentioned in this article.

AMAG Pharmaceutical's Ferumoxytol meets Phase III clinical trial end point

2008-06-29T22:17:00.001-04:00

On May 31st, AMAG Pharmaceutical announced results from a randomized phase III study of Ferumoxytol, an intravenous (IV) iron replacement therapy, in 31 patients with chronic kidney disease (CKD) stages 1-5 with functioning kidney transplants. The primary endpoint was the mean change in hemoglobin from baseline at Day 35.

The following results were obtained (copied from business wire press release at Yahoo.com)

For the primary endpoint, the mean change in hemoglobin from baseline at Day 35, there was a statistically significant greater mean (± standard deviation) increase in hemoglobin in patients receiving ferumoxytol compared with patients receiving oral iron (ferumoxytol 1.45 ± 1.27 g/dl vs. oral iron -0.09 ± 1.47 g/dl, p=0.035). There was also a statistically significantly greater mean increase in hemoglobin from baseline at Day 21 in patients receiving ferumoxytol compared with patients receiving oral iron (ferumoxytol 1.04 ± 0.97 g/dl vs. oral iron 0.23 ± 0.52 g/dl; p=0.035). A higher proportion of ferumoxytol-treated patients compared with oral iron-treated patients achieved a 1.0 g/dL or greater rise in hemoglobin at Day 21 (47.8% vs. 12.5%; p=0.108) and Day 35 (60.9% vs. 25.0%; p=0.113).

These results may look good at first glance but there may be some analysts argue that the limited number of patients as well as lack of long term follow-up data and overall trial not representing actual clinical use patterns may cause FDA to ask for more data before approving the drug.

Nevertheless, the company has signed a development and commercialization agreement ganting 3Sbio the rights to the Chinese market for $1 Million upfront payment and double digit royalties, tiered up to 25%.

Interstingly, two analysts have "Buy" ratings and price targets of $99 and $80 on shares of AMAG. There is definitely a large world wide potential market for Ferumoxytol, however had the company designed the pivotal trial differently, it would have increased its chances of approval. Right now It is prudent to consider a higher chance for the FDA to ask for more data.

Financially, the company is in decent shape with over $200 million in cash. It is noteworthy to mention that the company has had significant losses in its auction rate security portfolio that may or may nto continue to hurt its liquid assets.

Shares of AMAG have been trading as low as $34.10 or a little over twice the amount of cash on hand.

Disclosure: The author has no positions in AMAG

Exanatide's convenience may not be enough in a tough Diabetes market place

2008-06-23T12:10:00.003-04:00

Diabetes is a tough market to compete in for any company. Insulin is the standard therapy for most patients with severe Diabetes. It is a naturally occurring hormone and it exists as both short acting and long acting therapy. It requires close monitoring as it may have dangerous side effects. This is the hurdle that any product entering the market has to pass. The new product would have to be safer and more efficacious than insulin to get wide acceptance. One of the serious side effects of any potent therapy is the drop of blood sugar levels below safe levels or hypoglycemia. If a product is equally safe and efficacious, it will have a tough time beating Insulin unless it is more convenient. This is an over simplification of the many problems these patients face but it may be useful as a set of guiding principles when picking a stock.

In 2006 I suggested buying shares of Amylin Pharmaceuticals (AMLN) because I thought Byetta with its unique mechanism of action would result in a good alternative to insulin. Here is a link to that recommendation. The price then was around $40 a share. After three years on the market, the product has not helped the share price and the stock is trading today around $26. Some of this lack of performance could be the management's inability to turn a profit.

In June, Amylin announced widely anticipated results of its long acting version of Byetta called Exanatide. After one year of treatment, patients saw a significant drop in blood sugar levels and in weights. Analysts are applauding this result and despite heavy competition from Roche are recommending investing in Amylin at these levels.

When I began writing this article, I was tempted to recommend shares of Amylin at these levels based on the potential of Exanatide to be a multi billion dollar product. Also. the recent failures of inhaled version of insulin removed some potential competitive factors. However, given the risks of competition from other similar products and regulatory hurdles involved, I will hold off on recommending investing in AMLN unless it is done with speculative money. I have learned over the last few years that large institutional money flows into Biotechnology stocks only after uncertainties and risks are removed. Just because a stock is cheap does not mean it will move higher any time soon.

Another reason I am holding off on AMLN is the management factor. At some point, you just have to consider that great products are necessary but not sufficient in producing profits and therefore stock price gains. The promise of Byetta (whether imagined or real) never came to fruition. It is hard to identify the factor or factors that lead to these results, maybe the recommendations where made too early and could be filed under irrational exuberance. It is OK to try to hit home runs with stock picking if you realize that you will strike out a lot. Therefor, I recommend waiting until a winner emerges in this battle. By then, the results may be a single or a double but the higher probability of success would make it an investment grade decision instead of speculation,

Diabetes is a tough market!

Disclosure: Author does not have any long positions in AMLN.

Despite a slow start, strong fundamentals will supprt the Biotech Sector

2008-06-11T20:59:00.004-04:00

Back in January, I wrote an article predicting a good year for the Biotechnology/Biopharma sector based on early performance vs. major indices. Here is a link to that article.

Five months have passed since that post was published and I have written very few articles since. The markets have had a roller coaster ride. An ugly February-March period was rescued by Fed intervention and a short term rally that followed proved short lived.

But enough with pointing out the obvious. It took a lot of discipline not to trade the short lived rally and I hope those who bought this rally locked in their gains before the sell-off. Desite this correction, I do not see any reasons to jump into this market with both oil prices and unemployment increasing.

I still remain optimistic that Biotechnology and Pharmaceutical stocks will have good returns in 2008. The ASCO Cancer conference came and went with no major surprises. Both AMGN and DNA showed some good results. On valuation basis, I still Like GENZ as their diverse pipeline and solid track record puts fair value above $70. On the product side, I like VRTX's chances of turning Telepravir into a blockbuster drug in the near future. I expect Q2 earnings from most biotech companies to come in at or higher than expected due to solid sales and help from weak dollar.

My view is still very negative on the broader market. I expect the CPI numbers in July to be near or higher than 4%. With short term interest rates below 3%, it does not give investors any reasons to invest in US markets while they can get real returns in Europe where interest rates are higher than inflation. This lack of capital flow into US may partially explain the poor performance of the Biotech sector despite decent earnings. If the Fed starts to acknowledge the real inflation problem in US (which I believe started sometime around 2003 with real estate prices!) and raise the interest rates from their current "bank bail-out "levels, it should strengthen the dollar, stabilize commodities and restore investor confidence in US markets.

Again, it seems like I am just pointing out the obvious.

Bottom line: The biotechnology sector is fundamentally strong and may be temporarily under valued due to overall investor pessimism in US. The BBH is a great way to safely invest in the Biotech sector through an ETF.

Early data suggests Telaprevir may be helpful for patients who need it most

2008-04-01T21:35:00.005-04:00

On Monday March 31st, Vertex announced, through an abstract, the interim results of an open-label phase 2 trial for Telaprevir for treatment of Hepatitis C. 26 of 32 patients who previously failed other therapies (81%) experienced rapid virologic response (RVR) after four weeks of treatment. Even though these rates may not be sustained in longer term, chances are a good portion of these patients will be cured.

The release of these results have prompted analysts who disliked the company and the stock last week to all of a sudden change their minds. I was surprised at the timing of this news as I was expecting some results released in second half of this year.

If you read through some of my past articles, you will find that I have violated almost every rule of investing when it comes to Vertex Pharmaceutical's stock (VRTX). In fact, I have even called my behavior stubborn, which always guarantees significant losses when trading or investing.

But my fascination has always been with Telaprevir not the stock or the company. I have always believed that this drug had the best potency, efficacy and side effect profile which would make it a standard therapy for Hepatitis C, a disease with poor standard of care therapy. I won't get into the biochemical details but this is not something easily reproducible by other pharmaceutical companies. This partially explains why other similar products have failed or have had major set backs in the clinic.

Some people have blamed the recent volatility in the stock price on the management over promising results. In fact there has been some class action law suits filed. I am not a legal expert but I doubt they will serve any purpose besides costing the tax payers some money and making some lawyers rich. The law suits will end up getting thrown out of court andI wish someday the laws will change to stop these ridiculous and destructive behaviour!

The stock may fluctuate 50-60% in a year but the story remains the same. Telaprevir is the first Hepatitis C Protease inhibitor in Phase III clinical trials. It is the only drug to show significant improvement to standard of care in both treatment naive and non-responding patients and it will be the first one on the market as early as late 2009 (maybe!). It has the potential to becoming a multi-billion dollar drug, and for that VRTX should be valued no less than 5 billion dollars or about 50% higher than current price of $25.4. I am basing this on other blockbuster phase III products such as Celgene's Revlimid.

Bottom line: Buy Vertex for the long term for a once in a lifetime return!

Disclosure: The author has a long position in this company.

Lorcaserin's safety data should result in a good partnership deal for Arena Pharmaceuticals

2008-03-26T20:56:00.004-04:00

On March 17th, Arena Pharmaceuticals (ARNA) reported that they will continue with phase III trials after an independent review of unblinded data showed no cardiac safety concerns for the weight loss drug, Lorcaserin. This was a rather important result for Arena because there had been concerns that it may have similar heart valve problems that plagued fen-phen, which targeted the same receptor. I have written in the past about the differences in the selectivity in these drugs which theoretically is enough to avoid the cardiac side effects (click here to see that article). However, data released last week is the proof that the FDA needs to assure this product is safe. This also prooves that they have great scientists and good judgement.

These results should also pave the way for a potentially lucrative partnership for Arena. The product is at least two years away from the market but it has blockbuster written all over it. Given the current challenges of product development at big pharmaceutical companies, I believe finding a partner and good terms may be easy. There is also a good chance that the company may get bought out because its valuations make the purchase more appealing to a big pharma partner.

I had originally recommended this stock at $17.39 in 2006. I had assumed Lorcaserin, then in phase II, would have a quicker path to market. Today at $6.94, and with successful safety results, ARNA is a great value. I anticipate a deal announced sometime this year (I also said the same thing in 2006, so this advice may not be worth much!). However, I resisted recommending to average down on this stock until safety data was out. Now that a lot of the risk is out, I recommend to average down or open a new position at these levels.

But don't expect a quick return on this investment. The biotech index has been getting hammered recently. I don't think this is due to fundamentals of biotech stocks. In fact DNA, GENZ, BIIB and a host of other stocks have reported decent earnings reports and good guidance for 2008. My guess is that this is a byproduct of hedge fund managers chasing commodities such as oil, wheat and gold for a quick return and selling all other assets to raise cash for their gambles. These are the same guys who were betting on the real estate bubble and the dot.com bubble in the past. Do you see a trend yet? Once the commodity bubble bursts money should return to fundamentally sound sectors such as the biotech.

Disclosure: The author does not have a position in ARNA at the time of publication of this article.

January 2008 Performance Review

2008-01-20T11:51:00.002-05:00

It is time again to review past picks and to learn about my mistakes.

The table below includes a list of my historical picks.

ARNA and ALTU stand out as worst performing picks. Interestingly they are both small cap picks, so this drop is not so unexpected. I am removing ALTU from my picks due to current conflicts of interest. ARNA ( link to original post) has suffered because they have not announced a partner yet for its weight loss drug Lorcaserin. This is probably because the pharmaceutical industry thinks that weight loss drugs have litigation liability and are waiting for more safety data. I still believe Lorcaserin has a great chance to be successful because of its specific mechanism of action.

On the upside, Pharmasset (VRUS) has been a huge gainer. I did not expect it to do so well but their HepC trial drug is moving well in the clinic. Again, this is expected of small biotech companies.

In 2007 I stayed away from Onyx (ONXX) and Alnylam(ALNY). I missed an opportunity in ALNY which has had a good performance ($17-$30.5) while ONXX has been moving sideways ($52-$50).

I was first wrong about getting out of Celgene (CELG) at $51 based on valuations just watch the stock to go up to $70. However, poor european sales and a tactical purchase of its partner has brought the price down to a more reasonable price of $54. I like CELG at these levels but I believe 2008 will be a disappointing year for CELG stock as wall street will anticipate benefits from its buy-out and the level of competition for Revlimid.

I am putting Rigel Pharmaceuticals (RIGL), Advanced Magnetics (AMAG) and Regerneron (REGN) on my watch list and I will write about them shortly.

Finally, I have been a bit stubborn while holding on to Vertex (VRTX). I still believe Telaprivir is superior to other HepC products in the clinic and will be a blockbuster. I am recommending another long position here at $22 as I believe the start of phase III trials in first half of 2008 will drive the stock price much higher. Interestingly, Vertex has recently announced they will start clinical trials for a combination therapy with an existing investigational compound from another company. I speculate this will be Pharmasset's (VRUS) polymerase inhibitor as their mechanisms of action may have a synergistic effect in weakening Hepatitis C virus.

Disclosure: The author has long positions in some of the stocks mentioned above.

Wall street signals point to a good year for Pharma and Biotech

2008-01-08T17:59:00.002-05:00

It is hard to find any signs of optimism on wall street these days. Nasdaq has had 8 consecutive down days and is down 8% to start the year, and most investors are ready to predict a bad year for the markets. Some of this sell off could be attributed to redemptions at hedge funds and mutual funds. But to me, this sell off feels a lot like flight from a US recession which has turned into a flight to anything foreign. It is true that the growth overseas (and down in South America) is much better than here in US, but it comes with a much higher set of risks.

One source of domestic safe haven has always been health care. It is a well known recession proof play that has benefited from economic cycles. The Nasdaq Biotech Index is flat for the year, outpacing the Nasdaq, and may signal a good year for Pharmaceutical and Biotech names. I had posed a Poll question on this blog asking the readers opinion on this sector in 2008. Interestingly, the overwhelming majority said that 2008 would be a great year for pharma and biotech stocks (look in the side bar for the poll results). 92% of the 14 responders predict a greater than 10% return for the sector in 2008 ( I know the sample size is tiny!). One obvious risk to this theory becomes the 2008 elections and whether a president from the democratic party would push for lower drug prices which would hurt the bottom line for the industry.

The much publicized JP morgan health care conference has been a catalyst for a lot of stock movement in the past week. Merck (MCK) is up 3% , Eli Lilly (LLY) is up 5% and Glaxo Smith Kline (GSK) is up 6% for the year. These three stocks have momentum based on good product stories. Merck is continuing with its successful Gardasil for prevention of cervical cancer, Lilly just got approval for once a day Cialis for erectile dysfunction and GSK is set to report some better news for its diabetes treatment Avandia.

For Biotech names, my favorite name Genzyme (GENZ) had a solid 07 and just signed a deal to co-develop a cholesterol treatment with ISIS pharmaceuticals, Biogen-Idec (BIIB) increased its earning projections. Celgene (CELG) beat estimates and reiterated earnings in 2008.

Even Amgen (AMGN) and Genentech (DNA) are participating in a strong first week of 2008 while coming off of their multi-year lows.

This is the year that we may see the first Phase III clinical trial for a Hepatitis C protease inhibitor, Vertex's (VRTX) Telepravir. Others, such as Pharmasset (VRUS) and Intermune (ITMN) also have HCV products in the clinic which will make for an interesting race for this multi-billion dollar market.

A safe way to invest in the Biotech sector would be to buy Merrill Lynch's Biotech Holders ETF(BBH) which is trading at $160, the lowest level since 2005.

Bottom line: Positive headline news for the pharmaceutical industry will make it a great investment opportunity in 2008. Look for more deals including mergers and acquisitions and licensing to mark a good year for health care stocks in 2008.

Disclosure: The author has long option and stock positions in some of the above mentioned companies.

Biogen-Idec (BIIB), from one extreme to the other in no time!

2007-12-13T17:31:00.001-05:00

On Ocotber 16th, shares of Biogen-Idec (BIIB) gained $13 to hit $82 based on rumors that the company had put itself up for sale. That day I recommended an aggressive sell because of the price tag and uncertainties around finding a possible suitor. (Here is the Link to that article)

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.

Onyx Pharmaceutical's (ONXX) success may pave the way for competition

2007-11-25T12:23:00.002-05:00

Onyx Pharmaceutical (ONXX) is enjoying the rewards of its potential blockbuster, Nexavar. On Monday, November 19th, FDA approved Nexavar, already approved for Kidney Cancer, for treatment of liver cancer. The product did so well in clinical trials that the company and its partner Bayer had to halt the trials for ethical reasons to give Nexavar to the control group as well.

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.

Vertex's sell off is a great buying opportunity

2007-10-21T19:18:00.002-04:00

Vertex Pharmaceutical's stock (VRTX)dropped about $5 or 14% to $30 on the news release that Schering Plough's Protease inhibitor Boceprivir, which had performed poorly in previous trials, showed that about 79% of patients achieved early response. As soon as this news came out( with no trial result detail) , an analyst from Cowen and Co. downgraded Vertex due to concerns from competition.

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.

Take profits in Biogen-Idec (BIIB)

2007-10-16T08:25:00.001-04:00

The rumors of a buy out sent Biogen-Idec (BIIB) shares up about $13 dollars to over $82 per share. I first recommended BIIB last year at $44.6 based on the potential success of Tysabri in treating MS (link to that article). As of today's price, the stock is up 84% and I am recommending to sell and to take any profits as I believe a buyout is far from certain and any changes to these speculations will send the stock back down to $70.

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.

Genzyme (GENZ) stock breaks out on good news

2007-10-05T21:50:00.001-04:00

Genzyme (GENZ) saw its shares break out last week from $62.5 to over $68 on higher than average volume. The weekly chart below demonstrates this movement and its significance as it broke a long term trend of lower highs that started in 2005.

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

Promising Future for Pharmasset's (VRUS) Hepatitis C Drug Candidate

2007-10-03T19:32:00.002-04:00

Pharmasset (VRUS) is a clinical stage pharmaceutical company focused on developing antiviral medicines. Their research is focused on development of class of compounds known as nucleoside analogs. Nucleosides are the building blocks of DNA and RNA and used by virus proteins during replication and growth. The analog drug is a small chemical variation of the natural nucleoside which inhibits the activity of the enzyme leading to disruption in replication. This approach has the advantage of a high rate of success as the the natural nucleoside gives a great starting point for developing a drug in addition to a potentially low side effect profile and resistance to mutation. The disadvantages include limited potency and slow metabolism. Pharmasset has programs for treating Hepatitis B and HIV, but intrigues me the most is its Hepatitis C program. R7128 is a prodrug ( meaning it gets metabolized into the active drug after it enters the body) is an oral cytidine analog polymerase inhibitor of Hepatitis C virus. Last month, the company released positive preliminary of a phase I clinical trial which showed a 2.7 log reduction of viral load after 14 days in patients that have failed to respond to standard therapy. These results were strong enough for Pharmasset and its partner Roche to aggressively advance the product into further clinical trials to look into longer duration of therapy along with standard of care. There are other companies with polymerase inhibitors in the clinic for treatment of HCV including Gilead, Idenix and Viropharma. This class of drugs has shown to have toxicities in long term dosing. I believe HCV will eventually be treated with a combination of protease ( VRTX Telaprivir being the leading candidate), polymerase inhibitors as well as interferon with or without Ribavirin.

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.

New Poll Feature on Biotechnology Stock Blog

2007-09-24T10:51:00.000-04:00

In an attempt to have a more interactive blog and to hear more feedback from subscribers I have decided to add a Polling feature. You can find this tool on the right hand side of this page. I am hoping this tool will allow all of us to see the majority's response to a particular investment related topic and compare it to our own personal views. With 116 subscribers the results should be statistically significant. Also, you can suggest Poll questions by emailing me at arsaadat1@gmail.com

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.

First Annual Performance Review

2007-09-22T15:45:00.001-04:00

My last performance review was in April of this year. I have not been writing much recently and not due to laziness. The reason for this lack of activity was my overall skepticism of the markets. Two sharp corrections happened this year in March and in August, from which the markets have strongly rebounded. The underlying economy however was extremely weak and it looked like we were going into a recession induced by a crisis in the housing market. The fed however decided to reduce interest rates earlier this month to avoid a recession. I believe this was a mistake. I don't think the Fed's job was to bail out bad hedge funds, bad loan under writers and consumers who made poor decisions by making borrowing cheap again. I believe the long term effects of this act will be increased inflation, higher long maturity bonds and a collapse in the dollar. I hope I am wrong!

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.

Biotech sector, the posterchild for volatility, shows resilience in chaotic markets

2007-08-18T14:18:00.001-04:00

Back In March, I wrote about my expectations for a painful and drastic downturn in April and May (link to that article). I was wrong. The Dow, the Nasdaq and S&P continued to new highs while the biotech sector was flat despite posting solid Q2 earnings. Timing was not my only mistake. In my past experience, biotech stocks, specially ones with no earnings, have been hammered in bad markets and I expected that to happen again. But to my surprise, biotechs have been rather strong in an otherwise market that could be described as chaotic. This volatility has extended to include sectors and companies that do not have direct relationships to the real estate or mortgage industry (Boeing is a great example of this). I am guessing hedge funds that are in trouble are forced to sell stocks that have performed well to cover margin calls or redemptions.

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.

Altus Pharmaceuticals (ALTU) is showing clinical and financial progress

2007-05-31T22:36:00.000-04:00

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

for ALTU-238.

Disclaimer: The author has an investment position in ALTU.

Vertex Pharmaceutical's (VRTX) Telaprivir is effective, but path to market needs clarification

2007-05-16T09:01:00.001-04:00

On April 14th, Vertex Pharmaceuticals release highly anticipated Phase II clinical trial (PROVE1) results of its Hepatitis-C treatment Telaprivir. The results of the interim analysis are shown in the table below. The full press release with additional information can be found here.

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.

The other issue of higher incidence of drop outs should not be a significant issue. Since, this was a trial most patients and physicians are careful with side effects. In practice and after approval, it is safe to assume more patients will be encouraged to withstand the side effects (severe rash which exists in SOC and can be treated).

VRTX has also released their quarterly financial report and as expected they spent a significant amount of money on materials for phase III clinical trials which are expected to begin in Q4. Even after paying down some long term debt, VRTX still has a hefty $655 million in cash and short term securities which should be enough to fund the launch of Telaprivir.

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.

March performance update and plans for the summer

2007-04-04T11:41:00.000-04:00

March brought in some volatility but little in form of a net correction. Because of the high probability of an economic slow down (I talked about it before here) and the anticipated lower earnings growth rate for US corporations, I still maintain a negative bias on the market. Having said that, I do plan on letting the winners run but mostly, cutting some losses and preparing for a better buying opportunity in the coming months. Click on the image below for a table of results. Overall, my biotech picks have lagged behind non-biotechs which I think should change going forward.

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.

March Madness may continue into April and May!

2007-03-15T10:09:00.000-04:00

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!

JMHO

February Performance Update and reflections on past picks

2007-02-11T18:20:00.000-05:00

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

2007-02-09T18:20:00.001-05:00

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.

January performance update

2007-01-07T19:24:00.000-05:00

Click on the image below to see a table of my performance to date.

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.

JMHO

Cephalon Pharmaceuticals (CEPH) is a rare biopharmaceutical value stock in 2007

2007-01-07T19:03:00.001-05:00

Cephalon Pharmaceuticals (CEPH)

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.

JMHO.

Vertex Pharmaceuticals (VRTX) stock likely to trade in a range.

2006-12-27T10:49:00.001-05:00

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.

JMHO

December Monthly Performance Update

2006-12-16T10:36:00.000-05:00

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.

Amgen (AMGN)- Large cap biotechnology stock with growth ahead

2006-12-02T14:18:00.002-05:00

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.

JMHO

Amylin gets approval for Byetta in Europe

2006-11-25T12:39:00.001-05:00

Amylin Pharmaceutical's(AMLN) stock continued the recent weakness despite announcing European approval of it's diabetes treatment Byetta. I have previously written about Amylin and had recommended to wait for a better entry point ( click here to see that article).

Some of this recent weakness could be due to some expected competition form the strong launch reported by Merck of it's diabetes drug, Januvia and the anticipated launch of Glavus by Novartis in 2007. Both Glavus and Januvia are from the same class of small molecules known as DPP-IV inhibitors. Byetta affects the GLP-1 pathway and thus provides a different means of controlling blood sugar in patients with diabetes.

It is too early to tell whether the DPP-IV drugs will dominate the market. It is most likely that the addition of all these new treatment options will provide different solutions to different patients. I believe that all these new products will increase the awareness of different treatment options. I also think that Byetta will continue to enjoy good market uptake because of an early launch and a different and unique mechanism of action.

I recommend addition of AMLN at current level of $41 or below.

JMHO

Altus Pharmaceuticals (ALTU) - Long Term, Buy

2006-11-25T11:04:00.000-05:00

Company History:

Altus Pharmaceuticals (ALTU) is a biopharmaceutical company engaging in the development and commercialization of oral and injectable protein therapeutics for chronic gastrointestinal and metabolic disorders. It's platform technology includes a proprietary protein crystallization technique, which allows for better understanding of the structure of function of the molecule. The company's lead product candidates include ALTU-135, a phase II completed orally-administered enzyme replacement therapy for the treatment of malabsorption; and ALTU-238 used for the treatment of growth hormone deficiency in adults which is in phase II clinical trials. It's pipeline of pre-clinical candidates includes ALTU-237 for treatment of hyperoxalurias, and ALTU-236 for phenylketonuria.

Market potential:

The list of Altus' the potential drug candidates include novel biologic therapies geared at niche diseases. For example- ALTU-135 is an enzyme replacement therapy geared to treat certain aspects of Cystic Fibrosis in addition to other pancreatic diseases. If proven to be better than existing treatment, this product would have a dominant market position in a relatively small market size as far as the patients but a one that could be financially rewarding. This model closely resembles what made Genzyme a success story in the 90's.

Recent Problems Causing Delays:

There has been some manufacturing delays due to some problems in the assays used to test the quality of manufacturing materials. The management took the correct course of action by delaying the start of the trials until a correct process is in place. Even tough this results in a few more months of delay, the consequences of going into a phase III trial with poorly characterized material would have been disastrous. Furthermore, this delay allows the company more time to partner with a big pharmaceutical company to assist in execution of the trials both with funding and with expertise.

The Stock:

The stock, which started trading earlier this year, has had a wide range ( IPO at $15, high of $25 and low of around $11). This volatility is expected of a small cap biotech company with a market cap of about $430 M given the bad news that came out earlier and the biotech sector slump this summer.

The stock has made a strong move above its 200 moving average and it looks like the 50 and the 100 day MVA are soon to follow.

I think with a partnership agreement this year and with two late stage products with visible risks and rewards, ALTU is undervalued at $430 M or $18.7 /share. I expect this company to trade significantly higher in the next 12 months given a favorable partnership and no more additional clinical trial risks besides the normal uncertainties associated with any well designed trial. Of course, the stock price movement also depends on how the biotech index does in the same time frame.

Bottom Line:

I like ALTU for the long haul. Any pull backs unrelated to a fundamental issue should be considered a buying opportunity. ALTU is a good biotech long term investment with profatibility being at least 5 years away. However, patience could be rewarding and this stock could result in a 5-10X return.

JMHO

VRTX a great company but the stock is overvalued

2006-11-21T08:58:00.001-05:00

The charts show clear signs of short term correction. The stock price has appreciated 29% since end of October. The 50 day and 200 day moving averages are at 37 and 35.5 respectively. There is a lot of room for correction here. The good news from positive mid trial updates have been priced in. The only other piece of news that may move this stock is some toxicology results that are due to come out.

At 5.7 billion market cap and about 2 years removed from launch, I think it is a good time to unload more shares and options and wait for a better buying opportunity. I plan to purchase January $45 puts at $3.5 and wait for stochastics to signal oversold before going long with calls again.

I addition Susquehanna started coverage of VRTX with a negative rating that may weigh on the shares.

November Performance update

2006-11-10T15:33:00.000-05:00

The image below shows a summary table of my performance to date. Since I do not buy and sell the stocks all at once, it is difficult to measure an accurate return but I am lisitng the prices as accurately as I can around the dates I buy and sell. Also, the total size of each trade as a percent of the portfolio is not the same. So, the true total portfolio return can not be measured. For example, the options that I trade end up being a very small fraction of my total portfolio ( less than 1%). I also keep a good portion 20-30% (sometimes higher) cash reserve.

I also added three new names to the non-biotech list. Toyota ( the most profitable company in Japan) China Medical Tech to get more Asia exposure in addition to Mastercard.

This month was a good month for the market in general. I expect the next few months and all of 2007 to be very challenging since the economy is expected to cool down significantly! Therefor I will shoot to increase my cash balance to at least 50% going into 2007.

Click on the image to see larger version.

Vertex Pharmaceuticals (VRTX) update

2006-10-29T22:03:00.001-05:00

Vertex recently announced interim results of VX-950 clinical trials for treatment of Hepatitis-C. Here is the link for the news release. 24 of 26 patients on VX950 and existing treatment of Pegylated Interferon and Ribavirin showed no detectable of Hep-C virus after stopping the therapy. Furthermore, the therapy was well tolerated which is almost as important as been efficacious.I have previously written about this stock link and think the company has a great future. After the latest anouncement, the stock soared by 17% as shown below in the chart.
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.

JMHO

Celgene (CELG) Q3 earning update

2006-10-29T21:45:00.001-05:00

Celgene just reported a great Q3 earings report which included strong sales form both Revlimid and Thalidomide. I have previously written about this company and previous earnings and valuations which can be viewed here.

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.

JMHO

Some non-biotech suggestions

2006-10-22T12:54:00.000-04:00

So the name of this Blog is Biotechnology stocks and I will stick to that theme. But just like any other investor, I realize the importance of diversification and I would like suggest some non-Biotech stocks.

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.

JMHO

Phase II results suggest Lorcaserin is an effective and safe weight loss treatment - Arena Pharmaceuticals (ARNA)

2006-10-21T18:03:00.000-04:00

Arena Pharmaceuticals, Inc (San Diego, California) is a biopharmaceutical with five clinical stage candidates addressing four large disease indications including: obesity, cardiovascular diseases, insomnia and diabetes. Arena utilizes a proprietary technology platform, called Constitutively Activated Receptor Technology (CART) and Melanophore, to develop orally available small molecule candidates directed at modulating G protein-coupled receptors (GPCRs). GPCRs are a class of receptors that mediate the majority of cell-to-cell communication. GPCRs are well validated, as a large percentage of prescription drugs target one or more GPCRs. This reduces some of the development risks associated with the company and its drugs. Arena’s lead candidate, Lorcaserin, is entering Phase III trials for the treatment of obesity. Lorcaserin, previously APD356, may provide efficacy equivalent to one of the most effective and popular treatments for obesity, fenfluramine, without the cardiac toxicity profile. In addition, APD125 utilizes a unique mechanism of action as a treatment for insomnia. This compound is in Phase II development and modulates the serotonergic pathway.

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.

JMHO

Amylin Pharmaceuticals (AMLN) - Byetta should pave the way to profitability, but not anytime soon

2006-10-15T20:53:00.001-04:00

Amylin Pharmaceuticals, Inc. currecntly has two marketed products, BYETTA and SYMLIN, both injectable products to treat diabetes. Symlin is a synthetic analog of human amylin which is a naturally occurring hormone. Symlin and insulin work together with glucagon, another hormone, to maintain normal glucose concentrations. It is important to note that Symlin is co-administered with insulin. However, since insulin alone is sufficient in treating most patients, the addition of Symlin is not necessary in most cases. The breakthrough for treatment of diabetes would be a drug that replaces insulin, because insulin has lots of other side effects and is also very strong and may cause hypoglycemia if misused.

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.

JMHO

Charts show money flowing into Biotech sector

2006-10-15T12:44:00.001-04:00

Sector rotation is something all investors need to consider in order to manage their portfolios. Earlier this year, we saw a rotation into commodity and consumer product stocks in addition to the energy sector which was driven by speculation. Now, at the beginning of Q4, there seems to be a new set of leadership stocks. Dow jones industrials have been getting the bulk of the headlines followed by big Nasdaq names such as CSCO, MSFT, ORCL and GOOG. Also, it is easy to speculate that there will be a year end rally in retails stocks.

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.

JMHO

Alnylam (ALNY) -unproven technology years away from the market

2006-10-11T23:21:00.001-04:00

Alnylam (ALNY) is a super-innovator in a sector of innovators. I love the company but I dislike the stock for the reason that they are developing an unproven technology. Alnylam is one of the few biotech companies working in the newest and most challenging class of therapeutics; RNAi. Unlike small molecules and protein therapeutics, RNAi based drugs work at the gene level and have the potential to be more potent and more specific. Its principal drug candidate comprises ALN-RSV01, a phase I clinical stage product for the treatment of lung infections caused by respiratory syncytial virus. The company also engages in the research and development of other drug candidates for the treatment of various diseases, including pandemic flu, cystic fibrosis, neuropathic pain, spinal cord injury, Parkinson's disease, Huntingto's disease, ocular diseases, and other diseases. Alnylam Pharmaceuticals has alliances with Merck & Co., Inc.; Novartis AG; and Medtronic, Inc. for the development and commercialization of various RNA interference system products. It also has a cooperative research and development agreement with the U.S. Army Medical Research Institute of Infectious Diseases to discover RNAi therapeutics targeting viral organisms, including hemorrhagic fever viruses. The company has collaboration agreement with University of Texas Southwestern Medical Center at Dallas to evaluate approaches for reducing LDL-cholesterol levels using RNAi therapeutics directed to a disease target, called proprotein convertase subtilisn/kexin type 9. Alnylam also has collaboration agreement with Inex Pharmaceuticals Corp. for the systemic delivery of RNAi therapeutics; and with Biogen Idec, Inc. to develop a treatment for neurological disorders. The company was founded in 2002 and is headquartered in Cambridge, Massachusetts.

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.

My monthly Performance Report

2006-10-07T12:34:00.000-04:00

Here is how my picks have done so far.

I compared my average returns to NBI (Nasdaq Biotech Index), BTK (Amex Biotech Index) and Nasdaq.

Click on the image below to enlarge it.

Biogen-Idec(BIIB) The bar is set low for Tysabri

2006-09-27T20:44:00.001-04:00

Tysabri was first launched in 2005 as a revolutionary treatment for Multiple Sclerosis, an autoimmune disease affecting the central nervous system. Tysabri, a biologic co-developed with Elan (ELN), showed great success in clinical trials. It was really a miracle drug that helped many patients live pain free lives for the first time.

Then there were a few cases of complications and deaths from Tysabri. Although, these cases were rare and occurred in patients with complicated cases often on many different therapies, Biogen-Idec voluntarily took it off of the market to access its safety. A year later, Tysabri is back on the market and many feel that it's image has been tarnished.

I beg to differ. Tysabri meets my blockbuster criteria ( see my other article where I explain my success criteria for biotech companies link). It is truly a novel medication in a disease that has been poorly treated to date and has a huge market size. One of it's negative attributes is that it is a biologic and must be injected in a physician's office. This is actually not a bad trait since it helps minimize mid-dosing problems. There are a few successful injectables on the market such as Enbrel).

I also think the delay has had operational and logistical benefits for Biogen-Idec. The company has had more time to optimize its launch strategy and will be simultaneously launching in Europe. Also, it is not a cheap drug. At about $20K per year it could quickly add to the bottom line.

Yes physicians and patients as well as Biogen-idec employees will be very careful to look for signs of complications, but the positive aspects of this drug is too good and should help overcome these challenges. Another positive is a lack of hype for this drug. I don't believe the upside has been captured here. This very important because most companies with blockbusters have so much anticipation built into them that any slip up will cause the stock to tank.

I expect a modest upside surprise in Tysabri in Q3 but definitely expect an increase in estimates in Q4. Today BIIB closed at $44.6 and trading at about 18.5 times 2007 earnings a very low multiple for this type of stock (link to chart). 2007 is only a few months away and historically these stocks trade at about 30-35X current year. At 14.9 billion in market cap it is a very cheap biotech stock. Biogen-idec has a lot of cash and has been investing heavily to boost it's pipeline. I think BIIB should be accumulated at these levels with intentions of selling in the 60's in 2007. The price increase will be supported by increased earnings as well as increased in PE ratios paid for this company. The chart will not give a strong buy signal until the stock crosses above it's current 200 moving average of about $45. But I am a buyer at any level below here.

JMHO

Vertex (VRTX) has the right formula for success

2006-09-21T10:11:00.001-04:00

The recent slump in most Biotech names would make you believe that the industry is in trouble, but this may be a just a great opportunity to buy shares of great companies at a discount. One of the main attractions of this industry is the patentability of their products. The others are pricing power, high profit margins and relative immunity to economic conditions. They are however affected by political events and changes in regulations. But what attracts me the most is the virtual monopolies that some biotech companies enjoy. This virtual monopoly is a result of the extremely difficult challenges facing these innovative companies. There is a good amount of luck that is behind some of the great successful stories like Genentech (DNA), Amgen (AMGN), Biogen-Idec (BIIB) and Genzyme (GENZ). But what they all have in common is that they have a dominant product in a disease area with significant unmet medical need. This is what I look for when I try to find the next successful company. Who is going to come up with the next treatment for a disease that currently does not have a great therapy and also is coupled with a large enough market? This link to the Motleyfool.com also provides a great set of rules for investing in Biotechnology stocks.

Vertex Pharmaceutical (VRTX) has this success formula in their late stage product VX950 for treatment of Hepatitis-C. It has all the characteristics of a blockbuster that could propel Vertex into the category of a great biotech company.

First the market; Hepatitis-C is a devastating infectious blood born disease that could get transmitted by blood or sexual contact. It can survive outside the human host for up to a week and was not discovered until early 90's. Some think the whole US blood supply was contaminated with this virus in the 80's since there was not testing done yet. What makes this virus more dangerous is the fact that it has a dormant period of up to two decades. This means that we may have not even begun to see this epidemic yet. It is estimated that about 4 million people in the United States are infected with hepatitis C, which is about 2% of the population. The number of patients with chronic Hepatitis-C is expected to increase to 10.8 million in the next 10 to 12 years. Each year, there are about 35,000 cases of acute hepatitis C.

The treatment is difficult since by the time most people have found out they have Hep-C, their liver is severely damaged. The standard therapy is Pegylated-Interferon alpha, a protein that non-specifically increases the immune response and Ribavirin an antiviral. Unfortunately, this combination is not very effective. Last time I checked, the response rate was around 50%. Furthermore, the side effects are almost impossible to handle. I personally know someone who took these medications and he complained of having bad flu like symptoms every day for a year. This treatment is so bad that most people can not finish the 12 month duration and some become suicidal.

VX950 has shown tremendous efficacy with minimal side effects in early clinical trials. A phase Ib trial showed most patients responding very after a couple of weeks of treatment and in some cases the virus was completely gone which lead to the FDA granting fast track status. What makes VX950 special and hard to copy is that Vertex was a pioneer in this field. They were the first company to solve the 3D crystal structure of the protease protein that VX950 inhibits (they also did the same for HIV protease which revolutionized treatment of HIV). I don't want to get into the science but solving this structure and finding a molecule to specifically inhibit it that is safe and gets absorbed by the body is next to impossible. They have a huge head start and have solved some incredible problems. Even if someone wants to imitate this molecule, its chemical structure is so complicated that it makes manufacturing process development very difficult. VX950 is a direct result of huge perseverance by Vertex scientists and management mixed with some good luck.

Because of all these reasons, I believe VX950 will make it to the market and will be a multi billion dollar product with limited competition for a long time. The product is not expected to launch until late2008 (aggressive timeline) but at $3.5 billion market cap it has lots of upside movements left as this product moves through clinical trials. I expect Vertex's market cap to be around 7-10 billion right around the launch time and I will be aggressively buying dips from now until then. In addition to VX950, the company has products in trials to treat inflammatory diseases such as a p38 inhibitor which could be the first oral RA medication. They have a partnership with Merck to develop a kinase inhibitor for treating cancer and they have the first and second ever compounds in clinic to treat Cystic Fibrosis. Vertex should be admired for its science and should be a core holding in the biotech portion of any portfolio.

As of the posting date of this blog, Vertex is trading at $33.25 and should be accumulated aggressively. It has been consolidating since making its high of about $44 for a 25% correction and has found support at $30.

During this time, VRTX has made a partnership with J&J for distribution of VX950 outside US worth about $545 million while keeping sales in US. They have also raised $300 million in a public offering and have retired some convertible debt. These activities should provide enough cash for VRTX to get this product to the market and become a success story.

JMHO

Know your Biotech Index

2006-09-13T21:36:00.001-04:00

Find the right Biotech Index

They say that sector movement accounts for about 50% of a stock’s increase or decrease. Thus, in addition to performing fundamental and technical analysis on a stock one should also take a look at the overall sector. Usually, this task is accomplished by looking at an index of stocks that are in the same business. In addition to sectors and industries some indices also consider the size of the stocks (the Russell 2000 is a small cap index whereas S&P 500 is comprised of large cap stocks).

The two most well known biotech indices are BTK (Amex Bioteck Index) and NBI ( Nasdaq Biotech Index). In addition to these two I also look at BBH, Merrill lynch biotech HOLDERS which is a tradable basket of biotech stocks. Today, I looked at each one of their performances year-to-date and I was quite amazed at the differences between the three.

The following link shows a Year-to-date chart of the above mentioned indices. Overlay chart
Although the direction of the moves of each index tracks with others, the magnitude and recent divergence has made me want to look more closely at them. Since January, BTK is down about 3% while NBI and BBH are down 6% and 13% respectively. Furthermore, in the last week BTK and NBI have been moving up while BBH has been trending downward. Personally, I have been using the BTK to assess the sector movement of my biotech stocks and after seeing this difference, I was not sure if I was using the correct index.

BTK

The BTK (Amex Biotechnology Index) is an equally weighted index of the following stocks:

AFFX, AMGN, BIIB, CELG, CEPH, CRA, DNA, GENZ, GILD, HGSI, ICOS, IMCL, ITMN, IVGN, MEDI, MLNM, MYOG, NKTR, PDLI, VRTX

They all have about a 5% weighing which gets reset every quarter. This is a drawback as it puts equal weight in smaller companies and a few bad performers could have a large impact on the performance of the index. Another drawback of this index is its narrow focus. There are only 20 companies represented (There where 17 in 2004). This list also includes companies that are not drug companies. These include AFFX, CRA, IVGN which sell products or services to the biotech industry. They sell either instruments, technology or raw materials and tend to have lower profit margins, lower growth potential as well as significant amount of competition. IVGN (Invitrogen) for example has been a flat stock since 2000. In my opinion these companies should not be placed in an index of biotech drug manufacturers. Instead, I would like to include ALKS, AMLN, SEPR, CBST, OSIP, RNAI, ALNY or any other biotech company that is trying to market pharmaceutical products which are usually patent protected and have very high profit margins and outstanding market potential.

I do like the fact that the BTK is not weighted by the size of the companies and not dominated by DNA and AMGN.

NBI

The NASDAQ Biotechnology Index (NBI) contains about 170 Nasdaq listed biotechnology and pharmaceutical companies and is calculated using a modified capitalization-weighted methodology. The capitalization weighing however could be counteracted by the number of companies present in this index. This link shows the companies that make up the NBI.

BBH (click on the image to see a list of the stocks in BBH)

The Merrill Lynch Bitoech HOLDERS is a basket of stocks. When you buy a share of BBH, you own a piece of each of the companies. As you can see from this table, this basket is heavily weighted to the large cap compankies such as DNA, AMGN, GILD and GENZ. Interestingly, MLNM (which I think is one of the worse companies in this sector and I will be sure to write a blog entry about it) has a relatively high share. No sign of VRTX, AMLN, PDLI,CEPH or RNAI. This is probably the weakest of the three indices because it has a limited number of company and it is biased towards large cap stocks.

Bottom Line

After analyzing the three indices, it is my opinion that NBI is the most relevant index unless you own DNA or AMGN then I would use the BBH. BTK has an advantage because it is equal weighted but it does not have enough of relevant biotech stocks to make it a good index. You could make your own basket of relevant equally weighted 50 biotech stocks (all in the same growth stage) that would be better than any of the above indices but who has time for that?

If you want to track the performance of biotech companies that are not large cap such asDNA, AMGN, GENZ, BIIB, you can use the difference between NBI and the BTK. The comparison between BBH and BTK could be used to determine the effect of weighting. BBH, the weighted index of 17 stocks is down 13% YTD while BTK the equally weighted index of similar 20 stocks is down only 3% YTD.

To me this suggest that the large cap biotechs have been hurting the most in this sector. In fact if you look at my CELG article , you can see a table that shows relatively low PE and relatively low expected growth rates for the large cap biotechs. The 2007PEG(PE07/growth ratio) for these stocks is between 1.42-1.93, which makes them fairly valued. Historically, these companies have had higher PEs and PEGs and as sector rotation puts Bitoech back in favor, I expect these stock prices and PEs to increase. Of course, this assumes no changes in the companies’ businesses going forward. As new products are launched or mergers occur, these companies could take off.

JMHO

CELG still has upside potential

2006-09-13T19:01:00.001-04:00

CELG is one of the few profitable biotech companies in the middle of a growth phase. I first discovered this growth stock in March of 2005. Since then the stock has more than doubled and split once. In this article, I will present some arguments why it is an attractive stock to purchase.

Products
CELG's products ranked by revenue are Thalomid(Indications: Multiple Myeloma,ENL), Revlimid(Multiple Myeloma, MDS), Alkeran(Multiple Myeloma and Focalin(ADHD). Revlimid
and Tholomid are from the same class of immunomodulary drug(IMiD). Revlimid is the newer generation with a better drug profile (better potency and toxicity).

Most recent Revenue and Earnings

Here are the sales numbers for CELG's major products for the last three quarters ( in million dollars)

	Total	Thalomid	Revlimid	other
Q42005	149	106	3	40
Q12006	182	107	32	43
Q22006	197	107	63	6

Obviously, growth for CELG has been driven by Revlimid. In addition to sales in MDS, Revlimid has been cannibalizing Thalomid sales in Multiple Myeloma. Since CELG pays 1% in royalties for Revlimid compared to 10% for Thalomid, the cannibalization is actually boosting the profit margins of CELG. Another concern is the RevAssist program. Since Revlimid is a new product, the company is providing free samples to new patients and patients that have received this product during a clinical trial. According to the management, this represents 20-25% of the prescriptions. This may be a short term concern for revenues but in the long term it will allow more patients to try Revlimid and become paying customers. This practice is very common in the pharmaceutical industry. During the conference call, the management expects this percentage to drop closer to the industry average of 3-5%.

In addition, last quarter saw a decline in Alkeran. In the conference call, the management addressed this as issues with reimbursement and in manufacturing. They think the sales for Alkeran will recover but they want to be conservative about it.

Stock movement

After a seemingly unstoppable run that started last year and saw the stock price more than double, CELG has been off of it's all time high of about $49 back in July to as low as $41. Part of this is attributable to inflation and recession fears in the market. This profit taking is normal and has coincided with the summer months that historically see low volumes and high volatility.

At $41 it is trading at about 80X 2006 earnings (0.51/share estimated) and 38X 2007 earnings (1.09/share estimated). This transaltes to a PEG of about 0.7 (using current PE of 80). To put this in perspective, I have made a table of the same data for other large cap biotech stocks:
Click on the image to enlarge.

These data suggest that CELG is the most expensive stock in that group according to 80 PE but has the highest growth rate at 114%. In fact, if you combine the PE and growth rates in form of PEG, it has the best value with a PEG of 0.71 in this group.

Other factors to consider

CELG is applying for approval of Revlimid in Europe. if approved, this should add significantly to the expected revenues and earnings. The cost of this expansion into europe is already priced in because the company has announced the costs of regulatory filings and has already put into place sales and distribution channels.

In addition, Revlimid is in clinical trials for treating Chronic Lymphocytic Leukemia(CLL) and aggressive non-Hodgkin's lymphomas (NHL) as well as non-deletion 5Q MDS. These, if successful, can add significant revenues in the coming years.

Bottom line:

CELG enjoys a monopoly in blood related cancers with its successful pipeline of IMiDs. Cannibalization of Thalomid by Revlimid is actually good for CELG as it causes profit margin expansion. Additional approvals in Europe and in other diseases would add significant upside potential to current estimates. Downside risks include changes in reimbursement from government or insurers as well as if Revlimid does not get necessary approvals in above mentioned trials. In the long term, CELG has some interesting small molecule kinase inhibitors and other immunomodulators that could allow it to expand into other therapeutic areas including other immune related diseases such as Psoriasis.

As far as trading CELG. I am waiting for the stock price to reach the 200 MVA which is currently around $37. This does not necessarily mean that I am waiting for the stock to drop. The stock could remain above $40 while the MVA moves up over time. I think the third quarter earnings will not be as disappointing as the last one. At $49 CELG's valuation was getting ahead of its earning. But a good Q3 and announcements regarding EU approval and clinical trial developments could send this stock towrds $50 where I think this stock will end up at the end of this year.

Disclosure: As of Sept 13, I own option positions in CELG. They inclue April 2007 $40 call options priced around $7 partially hedged by October$37.5 put options priced around $1. The stock price was around $40.5 when these positions were opened. The goal is to close these positions if CELG moves towards $50 in the near term for a gain of at least %40, or if there is a sharp decline towards $37.5 with a loss of about 10-20%. This will depend on the timing of the move and other outside factors such as volatility.

JMHO