Decoupled moves in Biotech indices highlight opportunities and challenges

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

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

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

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

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

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

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

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

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

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

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

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

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

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!

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

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

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)

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

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

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.