Sizz's Biotech Blog

Cost of Capital Key to Valuation

2008-01-28T12:31:00.000-05:00

I have based a lot of my analysis on this blog around financial models, specifically rNPV, which I have talked about many times. However, after a discussion on ViroPharma's (VPHM) Yahoo! Finance message board, I noticed that I never mentioned a key component to valuation, which is a company's cost of capital.

Cost of capital (COC) is a firm's expected cost to finance its operations. It consists of a weighted average of a company's cost of equity (COE) and cost of debt (COD). COC is calculated with the following formula:

COC = [(Weight of Equity)*(COE)] + [(Weight of Debt)*(COD)]

For more information, Investopedia has several good articles that explain the components: Start with this one.

The estimate for COC is just as important as an estimate for a potential market for a drug when using rNPV. COC is the rate at which future cash flows are discounted back to the present, and underestimating COC can give you a rNPV number that would be too optimistic, and vice-versa. Present value calculations are very sensitive to changes in the discount rate.
This is why it is important for analysts to get the COC right, or at least caution on the high side.

Generally speaking, development-stage biotechs have a COC in the 20% range. While big-cap biotechs like Genentech (DNA) and Gilead (GILD) have COCs around 10-12%. The difference in COC has to do with the risk involved with investing. Genentech and Gilead have marketed products, with positive cash flows and profits and, therefore, less risk, so investors are willing to seek lower returns. However, development stage biotechs like GenVec or NeurogesX are highly risky, and investors want to be compensated for that risk.

Disclosure: I own shares of GILD and NGSX

What can we make of Amgen?

2008-01-25T11:37:00.000-05:00

Amgen (AMGN) reported earnings last night and investors are giving the stock a 4% boost today. The stock, which is down some 36% in the past year, has struggled since mid-2005. The company's growth has slowed, and the company has a cloud over it with a pending FDA panel review of anemia drugs. The panel meets in March, and could place restrictions on drugs that treat anemia from chemotherapy, which could affect Amgen's Epogen and Aranesp.

Amgen's 2007 earnings were nothing to boast about, as the company posted $14.77 billion in revenues, only a 3.5% gain, and $4.8 billion in adjusted profit, a 4% gain over 2006. It must be noted, however, that Amgen did still grow despite a 25% drop-off in fourth quarter sales of Aranesp.

Looking forward, the picture is equally mixed, at least according to analysts. With the stock off nearly $30 from its highs, some analysts are calling Amgen the potential comeback story for 2008. Others aren't ready to join the stock.

The bulls say:

Amgen's anemia drugs don't make up enough of the company's total sales to make too much of a difference.
Cowen analyst Eric Schmidt: "We would expect the recovery to begin March 14." (The day after the FDA panel review.
Positive results from a Phase III trial of osteoporosis drug Denosumanb will lead to a return of growth in 2009.
Leerink Swann analyst Bill Tanner: "We believe investors will once again revisit AMGN shares by virtue of the valuation and better business prospects beyond 2008."

The bears say:

Results of the FDA panel meeting could provide for more downside.
Banc of America analyst William Sargent says Aranesp could lose at least 25% of its patients
FBR analyst Jim Reddoch: "There is still downside potential if the (anemia drug) label is tightened."

There is a lot of opinion about Amgen out there. The stock seems cheap as it trades at less than 12x 2008 earnings (depending on the earnings estimate) and the company has a decent pipeline and enough resources to fund it and even add to it. However, there have been dark clouds over the stock for a while now and it could take some time for investors to return, especially with other big-cap biotechs thriving.

Disclosure: I do not have a position in AMGN

Gilead keeps impressing

2008-01-24T14:28:00.000-05:00

Gilead Sciences (GILD) announced a record fourth quarter yesterday, as the company posted $1 billion in product sales for the quarter, the first time the company had broken the billion-dollar mark in product sales. Led again by its HIV franchise, Gilead beat Wall Street estimates, which led to an upgrade from Friedman Billings Ramsey, an outperform reiteration from Rodman & Renshaw and a price target increase from Standard & Poors.

Revenue growth was led by continued strength in HIV drug Truvada. Truvada sales increased 33% year-over-year to $449 million for the fourth quarter. Gilead's newest HIV drug Atripla came in with $260 million in revenues for the quarter, slightly under analyst estimates. However, there are expectations for Atripla to further pick up its growth this year as the EU approved the once-a-day treatment in December.

Europe is poised to be a strong contributor this year to Gilead's growth. The weak dollar continues to help the company; Atripla sales will pick up there; and the company expects a second quarter approval of Viread for the treatment of Hepatitis B. Furthermore, Letairis, which treats Pulmonary Arterial Hypertension, and is approved in the U.S., is expected to be approved in the EU soon.

While the majority of Gilead's growth will continue to come from the HIV franchise, the company's push into other areas has been a mostly positive result for shareholders, and will continue to supplement long-term growth. The company expects its cystic fibrosis drug Aztreonam Lysine to be approved by the FDA in the third quarter; Viread is also expected be to approved for HBV in the third quarter by the FDA; Letairis had $15 million in revenues in the fourth quarter after being approved in June; and Gilead has Phase III trials ongoing for Darusentan, which treats resistant hypertension, and a Phase II trial for GS 9450 in the treatment of Hepatitis C.

The growth continued for Gilead in the fourth quarter, and the 2008 outlook looks good again. Investors should be happy with the company's results, its pipeline, and the continued $3 billion buyback of shares.

Disclosure: I own shares of GILD

Correction and Clarification to Tysabri article

2008-01-22T12:16:00.000-05:00

It has been brought to my attention that I made an error in my recent Tysabri article. The drug Remicade is owned by Johnson & Johnson, which it received in its purchase of Centocor, Inc. Schering-Plough markets the drug outside the United States. I apologize for the error.

Also, I want to clarify a few issues that have been brought up as well.

1) Tysabri was pulled due to links with PML, not necessarily because the drug causes PML. Since it has returned to market, there have been no other links to PML, which was stated in the article.

2) My analysis for the drug is based on its potential in the Crohn's market according to analysts views. I do not feel that the Crohn's market is the reason to buy these stocks. I did not do analysis for the MS market, since the Crohn's approval was the news. The MS market is very lucrative, and based on both company's views of Tysabri's potential growth, it could be a reason to buy either stocks.

3) Please refer to my disclosure statement at the bottom of my blog.

The article will re-run below with changes made:

The roller-coaster ride that the drug Tysabri has been on over the past several years hit another high this week as the FDA approved it to treat Crohn's Disease (CD). But this approval doesn't necessarily mean the roller-coaster ride will end for the drug, which is co-marketed by Elan (ELN) and Biogen Idec (BIIB) and also is approved to treat multiple sclerosis (MS).

Tysabri was originally approved for MS in 2004, but was pulled from the market in 2005 after there was a link to PML. The FDA allowed the drug to return to the market in 2006 with a risk-management plan, and there have been no complications with PML since. The drug will have a risk-management plan for Crohn's as well.

According to the companies, there are approximately 500,000 people in the U.S., which represents a market of approximately $800 million per year. However, analysts don't expect the drug to push for significant market share in CD. Tysabri is essentially a third-line therapy for Crohn's, behind Johnson & Johnson's (JNJ) Remicade and Abbott's (ABT) Humira. In my view, the drug's sales will be limited in CD because of these other treatments and because the EU rejected its approval for CD in November.

One analyst says that Tysabri could reach $182 million in peak sales for CD alone by 2013. Other estimates have the drug reaching $40 million by 2010. Total sales estimates for Tysabri, including both MS and CD, range from $400 million to $1.2 billion by 2010.

The addition of Crohn's to Tysabri's approval list shouldn't do much for either stock, in my view. Biogen's stock didn't react much to the news, trading up only 1% on the the day of the approval. Elan has more to gain from Crohn's since about 37% of its sales came from Tysabri in the third quarter 2007. But, investors didn't push the stock up any with the approval. Tysabri is not going to grab the market share in Crohn's to help these companies too much. The Crohn's market is not a good enough reason to invest in either Biogen or Elan. However, both do have other products and good pipelines that might be worth taking a look at if you are interested in these two firms.

Disclosure: I do not have positions in any of the stocks mentioned

Drug of the Week: Tysabri

2008-01-19T12:29:00.000-05:00

The roller-coaster ride that the drug Tysabri has been on over the past several years hit another high this week as the FDA approved it to treat Crohn's Disease (CD). But this approval doesn't necessarily mean the roller-coaster ride will end for the drug, which is co-marketed by Elan (ELN) and Biogen Idec (BIIB) and also is approved to treat multiple sclerosis (MS).

Tysabri was originally approved for MS in 2004, but was pulled from the market in 2005 after two patients died after contracting PML. The FDA allowed the drug to return to the market in 2006 with a risk-management plan, and there have been no complications with PML since. The drug will have a risk-management plan for Crohn's as well.

There are approximately 500,000 people in the U.S. with CD according to the companies, which represents a market of approximately $800 million per year. However, analysts don't expect the drug to push for significant market share in CD. Tysabri is essentially a third-line therapy for Crohn's, behind Schering-Plough's (SGP) Remicade and Abbott's (ABT) Humira. Concerns about safety and the fact that the EU rejected its approval for CD in November will limit the drug's sales in my view.

One analyst says that Tysabri could reach $182 million in peak sales for CD alone by 2013. Other estimates have the drug reaching $40 million by 2010. Total sales estimates for Tysabri, including both MS and CD, range from $400 million to $670 million by 2010.

The addition of Crohn's to Tysabri's approval list shouldn't do much for either stock, in my view. Biogen's stock didn't react much to the news, trading up only 1% on the the day of the approval. Elan has more to gain from Crohn's since about 37% of its sales came from Tysabri in the third quarter 2007. But, investors didn't push the stock up any with the approval. I'm not overwhelmed either. Tysabri has been shown to be a high-risk drug and it isn't going to grab the market share in Crohn's to help these companies too much. Tysabri is not a good enough reason to invest in either Biogen or Elan. However, both do have other products and good pipelines that might be worth taking a look at if you are interested in these two firms.

Disclosure: I do not have positions in any of the stocks mentioned

Earnings Info Links

2008-01-14T22:34:00.000-05:00

Here are a couple of links for more information on Genentech's and future biotech earnings.

1) CNBC's Mike Huckman announces DNA earnings.

2) TheStreet.com previews the earnings season.

Another disappointing quarter for Genentech

2008-01-14T19:00:00.000-05:00

Genentech (DNA) reported full-year 2007 earnings today and, while the company beat on the bottom line and guided 2008 in-line, investors sent shares down again as its major drugs missed revenue estimates. Shares of DNA have traditionally traded on the company's revenues, and this time is no different.

Fourth quarter revenues for cancer drug Avastin came in at $603 million (a respectable 23% growth), but analysts expected sales of $616 million. Lymphoma drug Rituxan had sales of $596 million, but analysts expected $603 million. Same goes for breast cancer treatment Herceptin ($327 vs. an expected $332) and eye-disease drug Lucentis ($197 vs. $200).

DNA has been lost money for investors since 2005, when the stock hit an all-time high of $99.60. Now, 2008 may shape up as more of the same. The only thing that might save DNA shares is an FDA announcement in February on the approval of Avastin for breast cancer. However, an FDA panel already recommended to not approve Avastin for breast cancer last month. The final FDA decision is set for February 23. Investors might want to stay away from DNA, unless the FDA pulls a fast-one and goes against the panel's recommendation. I don't see that as likely.

Disclosure: I do not have a position in DNA.

Busy week comes to an end

2008-01-12T22:36:00.000-05:00

Biotech's first busy week of the new year came to an end yesterday on a down note, as Cadence Pharma (CADX) announced that its IV pain drug failed to meet its main Phase III trial goal. The announcement sent shares down more than 60%. For more information read here.

I'll stay busy next week bringing you more information from the sector as earnings season gets underway. First up is Genentech (DNA) Monday after the bell. Stay tuned.

Stock of the week: ViroPharma

2008-01-11T10:20:00.000-05:00

ViroPharma (VPHM) has had a big week with its stock climbing 20% after the company announced better-than-anticipated guidance for 2008 sales of its bacterial infection drug Vancocin. The company expects that 2007 sales of Vancocin were in the guided range of $202-208 million and that 2008 sales will fall in the range of $210-235 million. This guidance greatly out-paces what analysts were projecting. Consensus 2008 estimates had ViroPharma with $182 million in sales.

Analysts, for a couple of years now, have feared generic competition to Vancocin, which could eliminate 50% of the product's sales in the first year of an available generic. However, a generic form of Vancocin is not available yet, and it appears from ViroPharma's guidance that it does not feel one will be available this year.

However, that does not mean the threat of generic competition is gone. A generic form of Vancocin will be available at some point, and investors need to look beyond Vancocin to see if ViroPharma is a viable investment choice.

VPHM is a small ($700 million market cap), but highly profitable biotech. The company has a clean balance sheet; approximately $6 per share in cash and short-term investments; and has strong operating cash flows ($121 million in the trailing twelve months). These traits could give ViroPharma some room to seek acquisitions or partnerships. Or could make VPHM a strong buyout candidate.

For VPHM to be a buyout candidate, or for it to be a viable investment choice, we must look further and into the pipeline. ViroPharma currently has four projects that it or its partners are working on. However, I'm only accounting for one of those projects becoming financially viable at this point.

ViroPharma and Wyeth decided to discontinue Phase II dosing for HCV-796, a Hepatitis C drug because of safety concerns in August. The companies continue to pursue ways to use the drug, but I'm not counting on anything. VPHM also has a compound that could treat C. difficile-associated disease (CDAD), but it has not moved into human trials yet.

Lastly, I'm not accounting for pleconaril, a nasal spray to treat the common cold, which is being developed by Schering-Plough (SGP). Pleconaril has been a part of ViroPharma since the 1990s. The company filed an NDA for an oral form of the drug in 2001, but it was rejected by the FDA. SGP licensed the drug in 2003, and has been working on the nasal form since. ViroPharma is due to potentially receive another $65 million from SGP, as well as royalties if the drug makes it to market. However, the clinical trial process has been slow. The drug is currently in Phase II. And when I looked on Clinicaltrials.gov, it showed that a Phase II trial had been completed, but neither company has said anything about it. I would be willing to think that data from that trial should be expected sometime soon, but I have no definite time-table for that announcement. So, until we do hear something from that trial, I'm not going to account for pleconaril in ViroPharma's future earnings.

With all that said, ViroPharma does have one very promising drug, that could earn more in peak sales than Vancocin. Camvia (maribavir) is in Phase III trials for the treatment of cytomegalovirus (CMV). The company projects that a market is available for peak sales of $500 million. That would provide significant growth for VPHM. The company says it is on track for a 2009 NDA. Using my rNPV template, I feel that Camvia is worth $4.37 currently to the company. It would be worth around $8 to the company if Phase III trials are successful.

As I see it, there are two wildcards that are holding me back from calling ViroPharma a strong buy. First, what will happen with generic Vancocin. If the company can continue to get the FDA to hold back allowing a generic Vancocin, the drug should continue to grow its sales and I feel is worth at least $10 per share, which is slightly above the current trading price alone. However, if generic competition gets in as early as next year, I feel that Vancocin is only worth $5 going forward and the stock is probably fairly valued, at best. The second wildcard that I'm looking at is pleconaril. If Schering gets this drug moving, it has the potential to be a blockbuster, and ViroPharma would reap those benefits. However, there is currently no telling if that will happen, we'll just have to keep our eye out for news.

To conclude, I like ViroPharma. It is a good company, with a couple of good products. However, there is a lot of uncertainty here in 2008 and its long-term picture is a little blurry. My opinion is that this is a buy for the long-term, but I think a lot is riding on the Phase III trials of Camvia. Camvia should be able to replace Vancocin and keep the company growing for its shareholders. Although, this stock could really go places if the two wildcards fall into place for VPHM.

Disclosure: I have no position in any of the stocks mentioned.

Videos of the Day

2008-01-10T22:58:00.000-05:00

The JPMorgan Healthcare Conference wrapped up today, and biotech is looking at a big week of earnings next week starting Monday with Genentech (DNA). Here are some good videos that should be checked out.

1) CNBC's Fast Money takes a look at DNA as well as a Crohn's drug

2) Adam Feuerstein from the TheStreet.com wraps up the JPM Conference

FDA sets date for Theravance review

2008-01-10T12:47:00.001-05:00

Theravance (THRX) shareholders will want to mark February 27 on their calendars, as the FDA announced today that it will meet to review Theravance's NDA for its drug telavancin. The FDA has already delayed telavancin's approval once, saying the company needed to submit revised labeling and re-analyzed or updated patient data.

Telavancin is a first-of-its-kind drug to treat "superbug" bacteria (essentially MRSA). Back in October, when the approvable letter was issued by the FDA, I wrote about my concerns over whether telavancin would eventually get approved. I still have a lot of concerns, and investors should be weary of this one. FDA panel reviews are not a good sign, as they are usually called when the FDA has concerns it wants addressed. However, new FDA rules require a panel review for first-of-kind drugs, so the panel could just be a formality.

Either way, I'm staying away, and I would suggest only using options ahead of this decision if you have to play this decision.

Disclosure: I have no position in THRX

Video & Headline of the Day

2008-01-09T22:25:00.000-05:00

With the JPMorgan Healthcare Conference winding down, the news was a litter thinner today, but I found a couple of links worth taking a look it.

1) First up is an article from the Motley Fool, which takes a look at Sirtris' Diabetes pipeline

2) And here is a video from TheStreet.com TV, which profiles over-the-counter-traded biotech Derma Sciences

Isis a big winner at JPMorgan Conference

2008-01-08T10:58:00.001-05:00

Isis Pharmaceuticals (ISIS) came out as the big winner from the JPMorgan Healthcare Conference as the biotech announced a licensing deal with Genzyme (GENZ) for its cholesterol drug mipomersen. The deal marked the end of an auction for the drug in which up to 10 companies were interested.

Genzyme will pay $325 million up front to Isis, with a $150 million investment and $175 million upfront licensing payment. Genzyme's investment in Isis is for five million shares of the company at $30/share, which is approximately 5.75% of Isis. Genzyme will also pay up to $1.58 billion more and the companies will split the profits if the drug reaches certain milestones.
At first look, I thought that Genzyme was paying way too much for this drug. However, after plugging some numbers into my rNPV template, I feel that both companies could greatly benefit from this deal and that Genzyme might have gotten the drug at a great price.

I looked at potential peak sales for mipomersen from $750 million annually, which is estimated by one Bear Stearns analyst according to the Wall Street Journal to $3 billion annually, which would trigger further payments by Genzyme. I believe that mipomersen will be worth from $650 million to $2.5 billion for Genzyme and from $485 million to $2.5 billion for Isis based on peak sales. If peak sales do reach $2-3 billion, I think this deal favors Isis tremendously, especially since royalty rates would jump to 50% of profits and further payments will be made by Genzyme. However, analyst estimates peg the drug more toward $1 billion in peak sales, which would favor Genzyme in the deal.

Isis projects to file an NDA late 2008 or early 2009 for mipomersen in the treatment of a rare disease called hypercholesterolemia. However, the drug would not be ready for an NDA for routine high cholesterol until at least 2010.

Disclosure: I have no positions in the stocks mentioned.

Videos of the day

2008-01-07T23:12:00.000-05:00

In an effort to make my blog more functional and useful for my readers, I will be placing more information on the site. Today, I have compiled links to CNBC video of the JP Morgan Healthcare Conference.

1) Celgene CEO Sol Barer with CNBC's Mike Huckman
2) Isis Pharma CEO Stanley Crooke with Huckman
3) Onyx CEO Hollins Renton with Huckman

Stock to watch this week: Celgene

2008-01-07T11:11:00.000-05:00

Back in September, I was neutral on a high-flying Celgene (CELG). The stock has dropped 27% since then, and I feel now is a better time to get in on the stock. The last quarter of 2007 trading was not too kind to Celgene. The company offered lower guidance; the third quarter was disappointing; and then the stock lost 11% on December 10 as Millennium Pharmaceuticals (MLNM) announced that its multiple myeloma drug Velcade fared better in clinical trials than Celgene's Revlimid.

However, analysts came out afterward with bullish sentiment on Revlimid, and today Celgene said that Revlimid likely beat Street estimates for 2007 revenues, and the company upped its 2008 guidance, which is providing a boost for the stock.

This news makes Celgene my stock to watch for this week. The stock appears to have bottomed and is trading at more manageable levels. The Revlimid scare appears to be behind us, and growth for 2008 for Revlimid, as well as Celgene as a whole should be good once again (around 40%).

Disclosure: I have no positions in the stocks mentioned

2008 Re-Launch

2008-01-07T10:32:00.000-05:00

After taking two months off from my blog, I am ready to re-launch for what appears to be an interesting 2008 for investors. With recession looming, unemployment rising, interest rates falling, and a dollar that continues to be weak, investors are very weary of what 2008 will bring. However, I continue my bullish stand on biotech and I want to provide information to my readers that will be beneficial to your investing practices. This year should be fun, maybe a little scary too, but there is always money to be made in the market, and I want to make some.

What to make of this mess?

2007-11-08T22:15:00.000-05:00

Wall Street has been a mess lately. Credit woes continue; Bernanke talks of a slowing economy; the Dollar is at record lows; and oil is nearing $100. So where can we make money in this market? I'm sure the nature of my site has already given away the answer. Yep, I think we can make money in biotech. I think this market sets up good for the biotech sector because of the slowing economy, the weak dollar, and potential for growth.

It's pretty common to Wall Street that investors become defensive when a slowing economy presents itself. That tends to mean investors flock to gold, consumer staples, supermarket, and medicine stocks. Biotech certainly fits the bill because people in need of medicine are probably going to pay for it despite a slow economy.

Secondly, the weak dollar has been great for biotech and obviously is going to continue to be. Biotech companies derive a good portion of their sales overseas, and the weak dollar inflates those sales numbers.

Lastly, biotech is a growth sector by nature. In my opinion, this is the time to be seeking growth stocks. Despite a weakening economy, there are still companies that are growing at brisk paces. Growth means stock prices are likely to go up. Macroeconomic forces can only hold back stock prices so much if a company is growing at 20%+ per year, like a lot of biotechs do.

In this current market situation, I'm looking for biotech companies that get at least 30% of their revenues from markets other than the United States and are expected to grow sales and earnings greater than 20% next year. When screening for these criterion, I found 19 stocks that I'm going to do some further research on. There are some opportunities out there in the biotech sector and I'll discuss my findings from this stock screen soon, which will hopefully help us find some money-makers.

Staph infections bring biotechs into spotlight

2007-10-24T11:15:00.000-04:00

Staph infections have been sprung into the spotlight lately with several school closures and reports of infections all over the country from schools in New York and Virginia to the University of Colorado. Along with the recent news coverage came yesterday's FDA decision to issue an approvable letter to biotech company Theravance (THRX) for its drug Telavancin, which treats methicillin-resistant Staphylococcus aureus (MRSA). The Centers for Disease Control (CDC) estimates that Staph infections kill more people every year than HIV. And after reading a Forbes.com article on this topic, I thought I would take a look at the biotechs that compete in this area.

Staph infections fall into the $26 billion per year market for antibiotics. That market is estimated by the Stanford Group to reach $40 billion by 2010. There were approximately 95,000 cases of MRSA in 2005, which resulted in nearly 19,000 deaths. Pfizer (PFE) has been a leader in antibiotics, with Zithromax netting $2.03 billion in revenues in 2005. Zyvox, also made by Pfizer, has overtaken the lead as the world's best seller for bacteria infections, with $782 million in sales in 2006.

However, the market is so big that there is plenty of room for competition. Cubist's (CBST) drug Cubicin has sold $257 million in the past year. And there are several drugs nearing approval. Telavancin is one, while Pfizer has been trying to get Zeven approved since 2004.

As investors, the best way to play the breakout in Staph infections would be either Cubist or Theravance, as I see it. Pfizer is too big for one health problem to make its stock move, and its got other problems (like the pulling of Exubera). On the other hand, Cubist's only marketed product is Cubicin, and Theravance had only $19 million in revenue in 2006. Of course, that means we're working with much riskier stocks.

First, I have to be a little worried about the approvable letter from the FDA to Theravance. Encysive (ENCY) received three approvable letters from the FDA, never conducted new clinical trials, and now its drug Thelin is probably going to be left for dead in the United States, even though it is approved in Europe. The FDA asked Theravance to resolve issues with good manufacturing practices compliance at a third-party manufacturer, as well as asked the company to revise its labeling for Telavancin. Lastly, the FDA asked the company for more clinical data or to re-analyze its current clinical data. However, the company is downplaying the data part, saying that it believes the current data is sufficient. This worries me. Based on what I've seen in cases like Encysive's, I don't know if Telavancin is going to get approved. Investors are obviously worried as well, as the stock has tanked to 52-week lows. A play here would be highly speculative if investors want to be long.

As for Cubicin, it is already approved and Cubist has a good chance to seize some market share. The company believes that Cubicin could reach $750 million in sales annually in the U.S. alone, and if that were to happen, I believe Cubist is undervalued. However, with competition from Pfizer, potentially Theravance, and others, those sales numbers might not be met.
Regardless, with the extra attention this market is receiving right now, I like Cubist. I think the stock has a fair value around $30, thanks to Cubicin's expected growth over the next two years. However, I do want to keep an eye on its competition, and its pipeline. Cubist just reached an agreement with Illumigen Biosciences to buy a pre-clinical Hepatitis C drug, but there is not much else currently in the pipeline. If Cubicin were to falter, Cubist does not have much to keep investors happy.

If you feel compelled to play the current Staph infection outbreak, I think Cubist is the best play. There is too much uncertainty with Theravance, and Pfizer has problems beyond just its problems with Zeven. Cubist, on the other hand, is profitable, growing strong and well positioned to gain market share in a growing market.

Disclosure: I do not have positions in the stocks mentioned

Gilead continues to be stellar

2007-10-22T20:41:00.000-04:00

Gilead (GILD) once again posted stellar numbers last week when it announced its third quarter earnings. The company earned $0.42 per share on $1.06 billion in revenues. Also, the company announced today that its board has authorized the repurchase of $3 billion worth of its stock through 2010.

To start with, I think the earnings strength is no surprise. However, it did "surprise" and beat Street by three cents. Gilead's core strengths are dominant right now. Sales from the HIV franchise grew by 45% year-over-year, thanks to Truvada and Atripla. Also, Atripla was approved by the European Union last week, so sales should continue to increase for that product. The company also guided toward $3.6-$3.7 billion in total product revenues for the full year 2007, raising previous guidance.

As an investor in Gilead, a buyback is always great to see, especially since the company has been buying back shares for a few years now (Gilead bought $455 million worth of shares in the second quarter, in connection with the stock split). The company has about 929 million shares outstanding and this buyback could buy nearly 69 million of those shares, or roughly 7% of the company, at a trading price of $43. I also hope to see a continuation of Gilead's acquisitions, if the right opportunities present themselves.

With all of the positives, I remain bullish on the stock and I am going to raise my year-end price target to $50 from $45. However, some headwinds might pose problems for Gilead in the future, which we will need to keep an eye on. First, the HIV growth is beginning to slow, and competition might begin to stiffen; Merck (MRK) just got the approval for a new HIV drug. Also, while Gilead's pipeline looks strong, it is playing catch-up in some areas with strong competition. Finally, we will have to wait and see if Letairis can pull significant market share in pulmonary arterial hypertension. Sales have been slow so far, but that could be attributed to rebates offered by Gilead.

Disclosure: I own shares of GILD

Vanda surging this week

2007-10-11T12:29:00.000-04:00

Vanda shares, which have struggled for months now, have surged 20% in the past two days. The company presented at the Natixis Bleichroeder Hidden Gems Conference on Monday, and the stock has been riding strong following it. Investors must have liked what President and CEO Dr. Mihael H. Polymeropoulos had to say at the conference. I listened to the conference call and there are a few things I heard that could be the reasoning behind the stock's recent movement.

A good portion of the conference call was spent talking about Vanda's prospects for finding a partner. I have said several times previously that I think a partner would be the best way to unlock the company's true value for shareholders.
In the call, Dr. Polymeropoulos was fairly vague when it came to questions about a partner, but I heard a few things that I liked.
1. "We have made significant progress in our discussions that gives us confidence that we will complete a deal that will put us in a maximum strategy position to negotiate future deals and continue developing compounds."
2. "Perhaps a deal on VEC-162 (could) put us in a very strong position to maximize options of what we could accomplish."
3. "We have quite a few options...we might not need (additional) fundraising."

The conference call was not the best sound quality, so some of Dr. Polymeropoulos' quotes were hard to hear, but I think the gist of things is in these three quotes. First, the company has confidence that they will complete a deal. Now, this could just be 'corporate speak' and the CEO just telling us what we want to hear. But, he hinted to the company being close to a deal for VEC-162 in the second quote I have posted above. I really liked the last quote because it gives me further confidence that a deal will be found. If a deal is not struck, Vanda will need new money, and that will likely dilute shareholder's interests further.

I think there are some positives coming in the future for Vanda, which is why I am a shareholder and have recommended it as a speculative buy in the past. The Street must also think positively of the comments we heard on Monday because of the 20% move in two days. Some real news on the partner issue could have an enormous effect on the stock price.

Disclosure: I own shares in VNDA

The process of approval

2007-10-10T10:46:00.000-04:00

When talking about development-stage biotechs, we often refer to the three phases of clinical trials and new drug applications like the process of obtaining FDA approval for a drug is rather simple. However, it is much more complicated than just a four-step process. And today, I hope to explain the process a little further.

The process of getting a drug from the lab to patients takes 12-15 years on average. And the likelihood of a drug ever getting from the lab to market is 1 in 5000, while just making it to human testing is 1 in 1000.

The process of approval starts with discovery and pre-clinical testing. This stage, on average, takes 5-7 years. In a lab, scientists use synthesis and purification testing, seeking a drug that has potential value. There is also limited animal testing done at this time. Five out of every 5000 drugs that are tested in the lab, ever make it to the next stage.

If a drug is deemed to have some potential value, a company will file an Investigational New Drug Application (IND) with the FDA. This allows a company to begin clinical trials, which are broken up into the three phases that are commonly referred to. The clinical trial process lasts, on average, 5-7 years as well.

Phase I trials are short term (6-18 months), testing the drug in 20-80 healthy volunteers to determine basic safety and dosage profiles for the drug. If a drug is deemed safe, it will move to Phase II, where the drug is tested for a longer period of time (18-24 months) on 100-500 patients. These tests seek efficacy and safety. Phase II trials typically experiment with dosage levels to find the optimal level of dosage and also seek further safety information. Next, if a drug meets safety and efficacy goals, it will move into Phase III testing. Phase III is large-scale testing for safety and effectiveness. Approximately 1000-5000 patients are tested over a 2-3-year period, seeking long-term effectiveness information, and long-term side-effect information. Phase III trials are the most important, and are the primary information that the FDA uses in determining approval.

If a drug succeeds in meeting all of its goals in clinical testing, the company can then file a New Drug Application (NDA) with the FDA. Over the next 6-18 months, the FDA will review the drug's safety and effectiveness, along with recommended labeling. FDA approval will allow the drug to be marketed in the United States with approved labeling. Lastly, the FDA will monitor the drug while it is at market, gathering safety information, which can lead to changes in labeling or even pulling the drug from the market if long-term adverse effects are reported.

As we can see, the FDA approval process is long and requires a significant level of investment. It is very important for investors to understand this process because it can take a significant toll on small, development-stage biotechs with most of their cash riding on a few drugs in clinical trials.

Most of my information was obtained from FDAReview.org

NeurogesX and Vanda submit marketing applications

2007-09-27T13:36:00.000-04:00

Development-stage biotechnology companies NeurogesX (NGSX) and Vanda Pharmaceuticals (VNDA) both announced today that they have filed marketing applications for their respective products. NeurogesX, which announced positive top-line data for its pain patch NGX-4010 earlier this month, said that it has filed a Marketing Authorization Application with the European Medicines Agency for NGX-4010. Vanda said that it has filed a new drug application with the FDA for its schizophrenia drug iloperidone.

Both announcements were expected, but are still significant for investors.

First, NeurogesX's announcement means that it remains on track with its plan. The company expects to file for approval of NGX-4010 in the United States in the first half of next year and approval in Europe before that would be very positive for the company. Starting in Europe will force the company to get a partner sooner, which investors want. It also allows the company to start earning revenues while the NDA is under review in the US, which would increase the company's value.

As for Vanda, longs want to see iloperidone get approved ASAP. This stock has been a huge short for the last couple of months and investors need the belief that the stock is going to go up. It is very discouraging that Vanda still does not have a partner, either. The company has been searching for one for a while now, and the fact that Vanda filed the NDA without a partner is cause for some concern for some investors. The impression is that big pharma is not necessarily believing the hype of iloperidone. That would not bode well for Vanda; a partner is necessary for this company because the schizophrenia market is huge and there is significant competition. A big pharma partner would give iloperidone much more validation in the marketplace.

I have written several articles on both of these stocks, and I still think they are buys. However, the issue of a partner for both will become more and more significant as time passes. Vanda's stock will not make a move to the upside until there is reason for shorts to cover. I really believe a partner will give them reason to do so. NeurogesX sits in a much better position because it has a product that a lot of analysts feel can make an impact in a market where there is less competition, but a partner announcement would be the next catalyst to make the stock move higher.

Disclosure: I own shares in both VNDA and NGSX

Several Lessons to be Learned from Sonus

2007-09-24T09:24:00.000-04:00

Sonus Pharmaceuticals (SNUS) announced today that its breast cancer drug Tocosol paclitaxel did not meet its primary endpoints in a phase III trial and, therefore, the company will not pursue a new drug application. The announcement sent shares tumbling some 85% in pre-market trading. I got burned in this one as well, but there are several lessons that we (including myself) can take away from this one.

1: Risk
As I have mentioned before, and as should be pretty common understanding to most investors, development-stage biotech companies carry a lot of risk, and their stocks should only be traded by those that are willing to take on risk. Sonus is very speculative, especially considering all of its future was riding on this one clinical trial.
Investors should be willing to hedge this risk, so that they aren't just gambling. To do that, investors can use options (I suggested using options to play Sonus back in August) or split their speculative money between companies. Option players right now are probably a lot better off than longs. October $5 call options would have cost you $0.90 last week, and losing $90 is a considerable less loss than buying 100 shares at $4.35 and having to sell today at $0.70 for a loss of $365.
Personally, I have my speculative money split between several companies, which included Sonus. I will take a good loss on Sonus, but like I said, it was with speculative money and I was willing to take that risk. However, with my other positions, I have been able to hedge some of that risk because (if I've done my homework right) I will make (or already have made) money on those positions.

2. If it seems too good to be true, it probably is
When I wrote about Sonus in August, there were several factors that made this seem too good to be true. 1) There were few shorts, 2) All the analysts were talking good about it, and 3) The message boards were too positive. Development-stage biotechs, especially ones with data coming out that is going to make-or-break the company should have more people on both sides of the fence. Sonus was dominated with positive sentiment. This is a lesson that I'll definitely take out of this experience.

The positive sentiment was very encouraging, and the fact that I had found Sonus to be undervalued based on my fair value estimation make this a tough one to believe. But it just goes to show, that stock trading is not for the weak and a fair value estimation, is just that: an estimation.

Disclosure: I have sold the shares I owned of SNUS :-(

Note of Disclosure

2007-09-19T11:23:00.001-04:00

I have taken a long positions in Vanda Pharmaceuticals (VNDA) recently. However, I did not have a positions in VNDA until after my most recent articles. The articles that I mention these stocks have been edited to reflect my new position.

Celgene offers high-flying growth for investors

2007-09-14T11:33:00.000-04:00

Celgene (CELG) has a 62% difference between its current 52-week high and low. What's impressive about that is the fact that there is almost 52 weeks between those two marks. Celgene has been a diamond in the rough-patch that has been big-cap biotech over the past year, returning 70% since September 14, 2006. While big-cap biotechs Amgen (AMGN) and Genentech (DNA) have seen their stock prices flounder (AMGN has fell 20% over the past year; DNA is flat), Celgene has continued to give investors what they want when investing in biotech--growth.

Celgene grew its earnings per share 475% over the past 12 months versus the previous 12 months. Revenues have grown 76% over that same time. Analysts expect the company to post 100% growth in EPS for the fiscal year 2007, as well as 58% growth in revenue.

Celgene's growth has been fueled by booming sales of Revlimid, which treats myelodysplastic syndromes (MDS) and myeloma, which are types of bone marrow and blood cancers. Its other lead products are Thalomid and Alkeran, which also treat blood cancers. The company also receives royalty revenue from Novartis for sales of Ritalin and Focalin, which treat attention deficit disorders. The company also has several clinical trials for drugs treating various cancers as well as psoriasis and arthritis.

Trading around $69 currently, Celgene is at some loftly levels. It trades with a P/E of 185, although forward P/E estimates are 42. I think investors need to trade cautiously with Celgene up here. Personally, I would not be a buyer here. However, investors love growth and as long Celgene keeps providing the numbers, the stock could continue its upward move. The next earnings date for Celgene is October 25.

Disclosure: I do not have positions in any of the stocks mentioned