What to make of this mess?

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

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

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

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

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

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

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

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

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

Did we see Biotech turn the corner last week?

Biotech stocks provided some leadership in the markets last week, as the volatility of the overall market didn't affect the sector. The iShares Biotech ETF (IBB) returned 2.40% for the week, while the Dow Jones Industrial Average fell by 1.83% and the S&P 500 lost 1.39% for the Labor Day-shortened week. Biotech's leadership was courtesy of some bullish comments from several analysts and a positive outlook from Biogen.
The week started with an upgrade of the entire sector to "overweight" from "market perform" from Bernstein Research. Biogen (BIIB) then added to the fire Thursday by releasing a promising outlook for the next three years. Biotech also got a vote of confidence Thursday from Jim Cramer, as he said that Celgene (CELG), Gilead (GILD), and Cephalon (CEPH) are "worth a look." He also said that, "As the economy slows, you want to own biotech." Lastly, the week concluded with two bullish notes on Gilead, one from Lazard Capital and the other from Zacks.

Cramer called the last three years a bear market in biotech and after a summer of bearish note after bearish note, I'm wondering if biotech could be on the verge of a breakout. There are several factors that I see that could help biotech going into the fourth quarter.

First, is the idea of recession. During a weak economy the conventional wisdom is to turn to companies that don't have business that ebbs and flows with the economic cycle.
Second, is that most biotechs should have limited exposure to the financial crisis that has the markets continuing to worry. Biotechs are mostly financed with equity and the buyouts tend to be cash-based.
Lastly, the continuing weakness in the dollar and strength of international economies will help biotech because these companies sell their products all over the world and/or receive royalties from overseas sales.

I liked what we saw last week. Despite the overall weakness in the market and the obsession with whether or not the Fed will cut rates, I think biotech will remain clear of the turmoil. Also, the fourth quarter tends to be a good time to own biotechs because a lot of information is released during this time of the year. Clinical trial data and strong outlooks, like Biogen's, could really fuel a strong run for biotech toward 2008.


Disclosure: I own shares in GILD

Note of Disclosure

I have taken long positions in Sonus (SNUS) and NeurogesX (NGSX) over the past couple of days. However, I did not have positions in these stocks until after my most recent articles. The articles that I mention these stocks have been edited to reflect my new postitions.

All aboard? The NeurogesX train is leaving

NeurogesX announced positive top-line Phase III results yesterday for its NGX-4010 pain patch that treats post-herpetic neuropathy (PHN) (Read the press release). The stock jumped as much as 18% on the news to $8.38. The stock has shed some of that gain, back to around $8, which is still up more than $1 since last Thursday. Despite the quick run-up, I don't think we've missed the boat just yet on NGSX. I believe now is just as good of a time to get in as last week because the data release gives investors more confidence and there still isn't much ownership in this stock.

The data from the Phase III trial met both primary and secondary goals, which should give investors even more confidence that NGX-4010 will receive regulatory approval (the company plans on filing for approval in Europe in the fourth quarter and in the United States during the second half of 2008). With NGX-4010 moving into the application stage, it becomes much more valuable to the company because there is a much greater chance of the drug earning money for the company. According to my calculations, the PHN market is now worth $8.50 to the company. That alone is above the current share price. Also, NeurogesX expects to complete its Phase III trial of NGX-4010 for the treatment of HIV-related neuropathy by the end of the year, with top-line results due in the first half 2008. I believe that this market could be worth another $2 for the company and add in the possibility of NGX-4010 treating painful diabetic neuropathy (worth another $1), I think the firm is now worth $11.50, which is now above my previous price target.

I think this stock hasn't really made its run yet because it isn't well-known on Wall Street. I don't expect a small biotech to be known when it doesn't have revenues or earnings, but now that NeurogesX has a significant opportunity to earn money, the stock should start receiving more recognition on the Street. Currently, only 16% of shares are held by institutions, and nobody holds more than 5% of the company, according to Yahoo! Finance. This number should increase as we get closer to regulatory approval, which will give the stock a boost.

I have a buy rating on NGSX, with a price target of $11, and I think this is a great chance to own this stock. The stock's risk has lowered some now that its top-line data has been released. I also think that the company will have a better chance in finding a commercial partner. Also, I like the fact that the stock remains undervalued and under the radar. Once NGSX gets picked up by some of the big boys it should move fast because it is undervalued, especially now that NGX-4010 has moved into the new drug approval stage.


Disclosure: I own shares in NGSX, however, at the time of writing this article I did not.

A Lot of Optimism Surrounding Sonus

The Internet is a wonderful thing. I don't know where I'd be as an investor without it. It has done tremendous things for the individual investor, like discount brokerages, infinite amounts of information, and stock-picking ideas. Yesterday, Adam Feuerstein from The Street.com wrote an article about Sonus Pharmaceuticals (SNUS) and I was intrigued, so today I'm going to take a look at it.
Feuerstein thinks that the stock could double if its Phase III data for its breast cancer drug TOCOSOL Paclitaxel (TocP) comes out positive next month. That makes sense, considering that is a common outcome for small biotechs with positive Phase III results. Sonus, however, seems to have a bullish buzz surrounding it and Feuerstein isn't the only one. Why is this?

For starters, I want to give you an idea of the buzz. First, the call option open interest for November is outstanding. There are over 26,000 contracts open in November calls, while there are only 5,700 puts open. To me that's a pretty big contrast considering this data could make or break the company. (In comparison, there are only 450 open call contracts for October expiration) Usually, small biotechs with make-or-break data coming out have a lot of investors going both ways. This one doesn't seem to, despite the downside possibility.
Secondly, there is very low short interest on Sonus' shares. There are only about 700,000 shares held short (less than 2% of shares outstanding) as of August 15, which was even lower than July. This is weird to me, especially for a small biotech with a make-or-break the company date coming up.
Lastly, the Yahoo! Message Board activity is interesting. I usually look at message boards to get an idea of how many investors there are on each side of the fence. There usually isn't a whole lot of useful information. But, Sonus' board seems different. For one, there is a significant bullish tone coming from almost all posters. Also, I found a great piece of information (which you can link to here) that really helped me in my own research. The bullish buzz seems great, right?

Yes, except for the fact that the stock has tanked. Sonus' second quarter results were not as good as Wall Street expected, and the stock has hit a 52-week low since. However, this doesn't make sense to me. Sonus doesn't have any products at market yet, so earnings shouldn't matter. Apparently, investors took note because the company didn't recognize as much revenue from its collaboration with Bayer, and investors felt that it wasn't a good sign going forward. But, again I don't think that matters. The only thing that matters is whether or not Sonus can get TocP to market.

So, for me to make sense of all the hype, I found a fair value for TocP. I liked what I found. TocP has the potential to be safer and just as effective as other chemotherapy drugs. One competitor, Abraxane, should earn about $300 million in sales this year, according to Feuerstein. So, if TocP earned peak revenues of around $300 million, I found that the drug is worth about $5.60 to Sonus. My fair value estimations also found that the drug is worth about $8.50 if the results are positive and the company files a new drug application.

My conclusion? Sonus is undervalued at $4. The bullish tone is a little scary to me because it seems almost over the top, considering the stock continues a downward slide. However, I like the fact that analysts and biotech followers like Adam Feuerstein are pretty optimistic on the drug's chances. Also, I like the fact that this one drug alone could be worth more to the company than the stock is currently trading at. I am going to recommend Sonus (SNUS) as a buy here, with a price target of $9 by the end of 2007. However, with a make-or-break date coming up, I would suggest buying call options as the way to play Sonus. The October calls are cheaper than November, but clinical trial data dates can get delayed on occasion, so I'd wouldn't load up on October calls. The company has said that the data should be released in late September.


Disclosure: I own shares in NGSX, however, at the time of writing this article I did not.

Now is the time for Vanda

Two weeks ago, I laid out the situation at Vanda Pharmaceuticals (VNDA). Since then, not much has changed, but I have continued to review the company and I am more confident with giving it a buy recommendation.

One reason is that a couple of institutional investors are betting big on the stock. In a regulatory filing, it was announced that Galleon Management LP has raised its stake in VNDA to 10.01%. That is up from a 6.9% stake in April. Galleon is the third big buyer of Vanda's shares. Westfield Capital Management also has a 10.01% stake as of August 9. Also, Oppenheimer Funds holds a 19.18% stake of the company. According to Yahoo! Finance, institutions own about 81% of Vanda. This number would worry me if Vanda was an established company with profits and positive cash flow, etc. Since Vanda is a small biotech, this number actually is pretty reassuring to me. I look at it as a vote of confidence for the company, especially with Galleon and Westfield increasing their stakes recently. With small biotechs, any sign of confidence that the company has a good chance of FDA approval should make investors happy.

My other reason for being more confident in Vanda is my fair value calculations. There are many factors that move a stocks, but I still like the idea of a theoretical fair value. For Vanda, I think the company is currently fairly valued based on its pipeline potential, but I think it is undervalued based on the good chances that iloperdione and VSF-173 are about to move to a new stage. I calculated a fair value for each drug in its pipeline using my rNPV Template (which you can download and try).
I try to be very conservative in my calculations, and in that I found Vanda's pipeline to be worth about $10.71 right now, with about $7 coming from iloperidone. You might be saying, "that's five dollars under the current price, how can you be confident about that!?!" Well, because if I'm not so overly conservative, I think the stock is worth right at $15, with iloperidone worth more like $11.50.
Furthermore, I think the stock is worth around $21 by the end of the year, based on the company's expectations for movement through the cycle with the new drug application of iloperidone, and potential movement to Phase III for VSF-173 in the treatment of excessive sleepiness. Once iloperidone moves to the NDA stage, I believe its worth to the company becomes about $16.50, which is based on the idea that the drug has a greater chance of FDA approval. (I explain the theory of rNPV further here)

To conclude today's post, I believe the timing is pretty good for Vanda. However, I do caution the risks involved, as with all small biotechs. VNDA has pulled back to nearly $15 and there are several catalysts out there that can move the stock in the fourth quarter. However, I still believe that the company needs to secure a partner for iloperidone. If that does not happen, the full value of Vanda's pipeline may never be realized. With that said, I do believe Vanda will eventually find a partner because the schizophrenia market is huge ($16 billion) and Vanda has a pretty viable candidate to compete in the space. Friedman Billings Ramsey analyst David Amsellem thinks that iloperidone can achieve $308 million in sales by 2012 and that would be a good pick up at a decent price for a bigger biotech looking to get into the area.
Based on Vanda's potential fourth quarter catalysts, the institutional buying, the idea that Vanda will find a partner, and my fair value estimates I am placing a speculative buy recommendation on VNDA, with a price target of $21 by the end of 2007.


Disclosure: I currently own shares of VNDA, however I did not at the time of writing this article

A look at Helicos

This is the third part in a series about Helicos Biosciences, a next generation sequencing startup, written by Andrew Waight. This article is being republished with his permission from his blog Biotechnical Currency.

Helicos Part I
Helicos Part II

Helicos Financials:
Raised in IPO: 48.6 million
Q2 Burn Rate Ending June 30 2007: 8 million
6 month Burn Rate Ending June 30 2007: 16.4 million(18.1 million repaid in stock conversion)
Yearly Burn Rate 2006: 21.3 million
Total Assets June 30 2007: 68 million

The take home message from both the S-1 and the recent 10-k is that Helicos is burning money at an increasing rate. This however is to be expected from a company less than one year from their initial product launch, and from an investor's viewpoint nothing in the publicly available financials throws up any red flags. I am also assuming that the 18 million payout for preferred stock conversion pertains to a number of venture investors getting a return out of the IPO fund. Also keep in mind that the 48 million raised during the IPO was far less than the original 80 million that management was hoping for. Naturally anyone looking to invest in HLCS in the quarter following the launch of the Heliscope will have to take a much harder look at the financials, but for our purposes I think its safe to say that the numbers seem to be on track relatively speaking.

Helicos: to Buy or Not?
What a ride this analysis has been. To recap, everyone agrees that next generation sequencing is going to change the world of healthcare as we know it. Naturally therefore, the field of NGS is highly competitive, and the players include some of the biggest and baddest, as well as a lot more little guys in the wings hoping either to get a foothold in the market, or to get bought out for some of those ridiculous sums we talked about earlier. Any way that you look at it this field is a frothing pool of speculation.

Enter Helicos, a technological startup intellectually founded at CalTech by the now head of the Stanford Bioengineering Department and an HHMI investigator Stephen Quake. Backed by Flagship Ventures who, if you aren't already aware, are a very well connected firm out of Cambridge. In fact, Stanley Lapidus leaves Flagship to become the CEO of Helicos. In addition, the Helicos scientific advisory board reads like a who's who in the sequencing and bioengineering field. These include, Leroy Hood, developer of automated Sanger sequencing instrumental to the human genome project, Steven Chu director of LBL and Nobel laureate, John Quackenbush, previously of TIGR, and Eugene Meyers, co-developer of BLAST, to name only a few.

On the surface, the concept of sequencing single DNA molecules is enticing to any biotechnical investor for a multitude of reasons. Not least of which are that the words "single molecule" are white hot at the moment in both academia and in industry, not to mention that the whole concept smacks of "nanotechnology" another concept on the tips of everybody's tongues. I will readily admit that "true single molecule sequencing" was precisely what piqued my interest in researching Helicos in the first place.

Under the surface, the technology seems feasible, in other words I have no doubt that it actually works. How well it works on the other hand, is another matter. Helicos is keeping entirely mum about what I believe to be their Achilles heel ... accuracy. Now that we are armed with an in depth understanding of the fundamentals of the technologies it becomes plain to see that the error rate of any single molecule system is going to be higher than those methods which use a PCR step to make millions of identical copies and essentially increase the signal available to detect millions-fold. Furthermore accuracy is so important in this field because the major market, that of human resequencing for disease or genetic anomalies, must be 99.9% accurate for reasons which need no explanation. I think that it also goes without saying that 1000MB per day is of no use if the accuracy is 97% and you have to do sequences in triplicate. It is perfectly possible that the Heliscope does provide an accuracy comparable to the other NGS systems, however as an investor I would be more comforted to see Helicos release this information along side their 1000MB/day claims.

So Helicos is talking a big game but holding their cards close. Adding to these mixed signals, the company is absolutely stacked with some of the biggest names in the field. They have also been awarded a handsome grant from the NHGRI which further inspires confidence. Yet, when so much is at stake battling for supremacy in this truly revolutionary field the skeptic in me remembers the last time genomic hype was at its peak. In this, I feel that some sort of academic coup is not entirely out of the question. That being said, this particular academic coup would have a very good chance of pulling off say, the backing of some very big name institutions.
The entire speculative business of evaluating biotechnical IPOs notwithstanding, I am inclined to jump on the bandwagon and buy myself a small stake in HLCS. Therefore should Helicos not commence shipments on an acceptable Heliscope "next generation sequencing system" that lives up to its expectations by say, the first quarter of 2008, I will indeed have egg on my face. However in this, I will also be in some very distinguished company.


Disclosure: Author intends on taking a long position in HLCS

Biotech notes

Gilead licenses new drug

Gilead (GILD) held strong today, despite the 1.4% decline in the S&P 500. After the bell, the company announced that it had entered into a licensing and co-development agreement with Parion Sciences on drug P-680, which treats pulmonary diseases like cystic fibrosis, chronic obstructive pulmonary disease and non-CF bronchiectasis. This drugs adds to Gilead's pipeline, which already includes Aztreonam Lysine, a Phase III cystic fibrosis candidate. Parion is also developing P-552, which treats cystic fibrosis, and is currently in Phase II trials. P-680 is currently in pre-clinical testing, which Parion will conduct. If the drug moves into clinical trials, Gilead will take over.
According to the press release, P-680 employs a proprietary Parion technology known as an epithelial sodium channel inhibitor, or an ENaC. The technology stimulates hydration on mucosal surfaces in the body, such as those in the lungs, warding off infections in patients who suffer from chronic lung diseases such as cystic fibrosis and chronic obstructive pulmonary diseases such as long-term bronchitis.

What does this mean for investors? Probably not much right now. Gilead has done a great job recently expanding its portfolio across different diseases other than its main area of expertise HIV. Gilead is the world leader in HIV treatments, but lately it has been expanding its reach. It got Letairis approved in June, which treats pulmonary arterial hypertension; it has a late stage drug to treat Hepatitis B, which could add to its current Hepatitis portfolio. While this license won't do much for shareholders now, investors should be happy that Gilead continues to invest and expand its portfolio.

Disclosure: I am long shares of GILD


Amgen to cut jobs

Amgen (AMGN) continued its six-month decline today as shares eased another 1.42%. The company today announced that it will cut up to 14% of its work forces in an effort to cut costs. The company said that a weakening market for its anemia drugs Aranesp and Epogen are to blame.
Investors have been very sour on Amgen this year, as growth seems to be slowing. Shares are off roughly 25% over the past 6 months.


Disclosure: I have no position in AMGN

Analyzing Vanda: Part 2

In my eyes, Vanda (VNDA) takes on several different identities as a stock. Here, I'll outline those, and which I feel give investors the best chance to make money. In my research, I see Vanda's stock as being anywhere from a short candidate to a buyout target. Today, I'll analyze it as a short play, a short squeeze, a buyout, and an option play.

1. Short Play
As of last month, approximately 15% of VNDA shares were held short. The shorts have held strong on VNDA for the last eight months. The stock hit a high of $32 in January after it announced positive top line data for Iloperidone. However, since that high, the stock has floundered, trading as low as $15.06 as recently as last week. Investors have been down on Vanda despite all the positive news out of its pipeline. The stock started is downward momentum with a secondary offering in January. Then the momentum gained traction as insiders were selling. And last week, the stock dove toward $15 as the company announced that it is having trouble finding a partner.
Shorts have a hold of this stock, but I don't think now would be the time to initiate a new short position, despite the downward momentum, but I look for the selling pressure to hold until the company can turn the tide with some positive news.

2. Short squeeze
I think this play could have some fruit. BioHealth Investor ran an article about short squeezing biotechs, and Vanda sets up pretty well for it. There is significant short interest in the stock and any positive data or news will send shorts running for cover. The company does anticipate some events in the fourth quarter that could have a short squeeze effect. Vanda expects to complete its phase II trial for excessive sleepiness (VSF-173), it expects to initiate phase II trials for depression (VEC-162), and it plans on starting dosing for its next phase III trial for chronic insomnia (VEC-162). The company is also going to file a NDA for iloperidone by the end of the year. All of these events could send the stock higher, but what I want to see is a partnership, which would send the stock up, up, up.
Looking at option activity, there is significantly higher open interest in September's $17.50 calls. This could signify that investors are expecting some announcement by then that could send the stock higher.

3. Buyout target
I would never buy a stock solely because I thought that it would get bought out, but I'm not afraid to entertain the option. Vanda has some promising drugs that are nearing the end of development and the company has already hired JP Morgan to help it find a partnership. Why wouldn't a larger firm just buy the company's entire portfolio, instead of just iloperidone? Some are thinking Wyeth became a candidate after the FDA refused to approve its schizophrenia drug Friday.
Then again, maybe the company is already overpriced to be a buyout target. And the current market conditions have stemmed the M&A activity recently.

4. Option Play
Options might be the best way to make some money with Vanda. Like I've said before, I like options for small biotechs. Some risk can be reduced by using options. For the most part, from what I'm seeing, there is pretty good reason to be bullish on VNDA in the fourth quarter. However, as with all small biotechs, there is risk and being long can expose you to that risk more than holding call options. I'd be interested in calls with expirations as far out as January 2009.

To conclude, I like what I'm seeing from Vanda. The stock is well off its highs and I think there is less downside now than there was before and there are catalysts set up for the end of the year that could send the stock higher. I have started my process of finding a fair value for Vanda, and I will report that in a later post, but as of now I am moderately bullish on VNDA.


Disclosure: I currently own shares of VNDA, however I did not at the time of writing this article

Vanda's pipeline nearing FDA stage

Today I'm talking about Vanda Pharmaceuticals, which I think has a little bit of everything for investors. What does that mean? Well, its a short candidate, a long candidate, a trade possibility, an investment possibility, or even an option play. How, you say? I get into that in the next post. In this post, I'll talk about the company's drugs.
Vanda is a development-stage small cap biotech that has three drugs currently in its pipeline. Its lead drug Iloperidone, is being tested to treat schizophrenia and bipolar disorder, VEC-162 is being tested for insomnia and depression, and VSF-173 is being tested for excessive sleepiness.

The markets:
Vanda is attempting to penetrate some big markets with some very well known drugs already in them. Anti-psychotic drugs, which treat schizophrenia among other diseases, are a some $18 billion market according to data firm IMS Health. And there are some blockbuster drugs in the area that you've probably heard of, such as Abilify and Seroquel.
The insomnia market is estimated at $4.5 billion, with around 11 million people worldwide receiving treatment. There are some heavy-hitters already is this space too, such as Ambien and Lunesta.
The depression market is about $19 billion, however most of the big drugs have already expired their patents, which means most of this market is filled by generic drugs.
Lastly, the excessive sleepiness market is around $500 million, but is the least competitive.

The drugs:
Iloperidone, Vanda's lead candidate, has completed its Phase III trials for schizophrenia and the company plans on filing a New Drug Application by the end of 2007. The drug has shown very positive results in its clinical trials and the effectiveness of the drug does not appear to be a problem in getting FDA approval. However, FDA approval probably hinges on whether or not the FDA deems the drug as safe enough. The Motley Fool takes a Closer Look at Vanda here. The company believes that iloperidone is actually safer than its competitors with less side effects and low weight gain.
VEC-162, which treats insomnia and depression, will enter its second Phase III trial in the fourth quarter and is currently in Phase II trails for depression. The second Phase III trial is a safety and efficacy trial for chronic insomnia. The company has already completed a phase III trial for transient insomnia, which had very positive results. The drug could probably enter the market by 2010.
VSF-173 is currently in Phase II testing for excessive sleepiness. There is limited competition is this area, as Cephalon's Provigil commands most of the market. The Motley Fool's Brian Lawler thinks that if VSF-173 shows a suitable efficacy and safety profile, there "would be a big market."

In my next post, I'll take a look at Vanda's stock and how investors might want to play it.


Disclosure: I currently own shares of VNDA, however I did not at the time of writing this article

Reasons to be optimistic on NeurogesX

Recently I recommended NeurogesX (NGSX) as a speculative buy and after its second quarter earnings release, I remain optimistic on this stock. I have three reasons to be even more optimistic on NGSX. However, I think the timeline on whether or not to buy the stock has moved up.

The first reason to be optimistic is that the company reported that it will release top line results from its Phase III trials of NGX-4010 for the treatment of post-herpetic neuralgia in September. This means investors have a key date for a catalyst approaching fast.
In its earnings report, the company said that it plans to release its data near the end of September, which is well ahead of schedule. NeurogesX also says that it remains on schedule to apply for marketing approval in Europe by the end of 2007 and in the United States in early 2008.

The second reason for optimism is the that the company's Phase III trial for NGX-4010 in treating HIV-related pain is nearing its end as well. The company reported that this trial is over 90% of its enrollment, which will allow the company to report top line data in early 2008.

Thirdly, NeurogesX said that NGX-1998, which is a second generation drug of NGX-4010, is showing "reduced pungency and shorter application time than NGX-4010." NGX-1998 is currently in Phase I trials, but investors should be happy that NeurogesX has a possible drug in the pipeline that can follow its first drug.

There are still concerns and risks of investing in NGSX, just like any small biotech. The stock remains very weak, trading under $7. It is possible that these potential catalysts are already priced into the stock. It is also possible that the Street is just waiting for the data. If the latter is the case, now is probably a good time to buy. Also, I am a little concerned that the company does not have a partner in production of NGX-4010. But, again, that may just be something that will happen after the results come out next month.
Even with the concerns I have, I still think this would be a good time to buy if you have some speculative money. I believe that the PHN market is worth around $6.61 per share for the company, which means right now Wall Street believes the company's other potential markets are not worth much. Additionally, I think that the PHN market could be worth near $9 if the drug has the potential to gain a double digit market share. I also believe that the HIV pain market is currently worth nearly $2. The company also has potential in the painful diabetic neuropathy area, which I think is only worth about $1 right now, but could push to $4 in the future if Phase II trials go well. So, based on my fair value estimate for the company of $9.50, which I reported in an earlier post, the company is trading around a 25% discount to fair value. I believe that gives a pretty nice margin of safety, especially for a high risk stock.


Disclosure: I own shares in NGSX, however, at the time of writing this article I did not.

Options: Another tool for investors

Options are relatively unknown to the individual investor. They tend to be used mostly by hedge funds and other institutional or big-money investors. However, options are much easier to trade now than they have ever been. Online brokerages now allow for option trading by individuals at low commissions, and there are now even specific brokerages that deal mostly in options trading like OptionsXpress.

I find options very intriguing. And I think every investor should have some knowledge of options, so that they have more (for lack of a better term) options when investing. There are three main purposes of options. 1. Speculation; 2. Hedging; 3. Income

For our purposes, the use of options with biotech stocks, especially small biotechs, is generally limited to speculation, which is what I'll focus on here. For more information on options, there are several great web sites out there. Personally, I like Investopedia and 888options.

Many of the biotechs I've focused on in my blog have been very small companies, with little or no revenues, and not even a hint of a profit yet. In other words, very high risk stocks for investors. Instead of investing directly in some of these companies, we could instead purchase call options. However, not all of these small biotechs even have options trading. For example, I have talked recently about GenVec (GNVC), Neurogesx (NGSX), and Ziopharm (ZIOP), all of which have potential for stock price appreciation, but also could be subject to price declines based on their clinical trials and the potential of their drugs gaining FDA approval. Personally, I would rather use options, but none of these stocks have options trading because of their size.

I think options would be a great way to play stocks like these (if they were available) and other small biotechs because they can take out some risk. Options give you the opportunity to participate in stock gains (call options) or stock losses (put options) without using as much capital as would be necessary to actually buy the stock or as much risk as shorting. However, if options expire out-of-the-money, options owners will lose their initial investment in the options. But, that could be an acceptable loss when dealing with small biotechs.

For example, lets say Family Biotech Inc. has a drug in Phase III trials and the data should be released soon. As an investor, you think FBI's stock could go either way depending on the data and the stock price move could be very significant. You wouldn't want to buy the stock because the data has just as good of a chance to be bad, which would send the stock down significantly. This is where options are good. You could buy calls and/or puts, which would give you exposure to the stock price move without buying the stock.

Being able to understand options and having the ability to use it as another investing tool can open up avenues to better returns for investors. However, there are risks associated with options that are different that just buying stock. Investors should educate themselves first with options before trying their hands at it.

This was only an introductory post on options. Options will be another area that I will be tracking in future posts. I plan on finding some potential investments in small biotech that have options to trade, so that I can provide you with more avenues to better returns.


Disclosure: I own shares in NGSX, however, at the time of writing this article I did not. I do not have positions in any of the other stocks mentioned.

Too early to call on Ziopharm

Last week, I blogged about Ziopharm Oncology, which was featured is Business Week's Inside Wall Street. This week, I'll take a look at the company and its potential for investors.

Ziopharm has three clinical trial-stage drugs that are being tested to treat various cancers from myeloma, liver cancer, and sarcoma. Its drugs ZIO-101 and ZIO-201 are currently in Phase II testings. The company believes it will complete its current Phase II trials for ZIO-101 in myeloma, liver tumors, and hematological cancers by the end of this year. It also thinks it will be able to complete its Phase II trials for sarcoma with ZIO-201 by the end of the year.

This should be encouraging to investors. The end of these trials could create catalysts for the stock to move, which it needs, as the stock has been stuck in neutral ever since going public. However, the data that has been made available so far has been very limited. The company appears to be having success in its trials, but I'm afraid it is too early to make a call on this stock. The end of the current trials should give us a better idea of the direction this company is headed.

I am not currently comfortable making a investment or recommendation on this stock. I am cautiously optimistic about the future though. In looking at the potential value of this firm, I came up with a fair value of about $6, which only takes into account part of ZIO-101's potential, and ZIO-201, it doesn't include ZIO-301, which is in Phase I trials. I feel like I'll be able to get a better idea of the company's potential value later in the year, when more data comes out. I am also cautiously optimistic because the two analysts that follow the company have buy ratings on the stock with price targets of $10 and $20. I will be following this stock as we get closer to year-end. There is potential for Ziopharm, I just feel we can take our time and do the proper research before investing in this risky biotech.


Disclosure: I have no position in ZIOP

Biotech gets a boost from earnings, upgrades

The Dow Jones US Biotechnology Index was up more than 1% during trading today after some positive outlooks from Amylin (AMLN) and Biogen (BIIB) and a couple of analyst upgrades. Amylin, the diabetes drug maker, met earnings expectations after the close yesterday and shares were sent higher today as analysts expect a Phase III diabetes drug and a Phase II obesity drug to fuel future growth. Analysts are expecting positive results from clinical trials to be announced later this year. Amylin also received an upgrade to Buy from Hold over at Stanford Research.

Biogen, meanwhile, posted much better-than-expected earnings results today, which had the stock trading nearly 4% higher. The company also raised its full-year guidance as it is now expecting 16-18% growth in sales and 16-20% growth in EPS on strong sales of its multiple sclerosis drugs.

Additionally, Amgen (AMGN) received an upgrade yesterday to Hold from Sell by Citigroup. Amgen reports earnings Thursday.

Neurogesx: A speculative possibility

Since I've started this blog, I've been scouring the Internet for other ideas for investing in biotech. Recently, Baby Biotechs ran a three-part piece featuring small biotech firm NeurogesX (NGSX). I was intrigued. The company has a late-stage drug candidate with some potential to fill a hole in medical need. However, the stock has struggled since its IPO. After reading Baby Biotech's take on the stock, I looked into it, and to say the least, I'm tempted to buy it.

NeurogesX develops pain management therapies, specifically in the area of neuropathic pain relief. Is main candidate is NGX-4010, which is in separate Phase III trials to treat Post-Herpetic Neuralgia (pain associated with shingles) and HIV-associated Neuropathy. It is also in Phase II trials to treat Painful Diabetic Neuropathy. Based on my research, I've estimated the PHN and PDN markets to be around $1.5 billion each. While I estimate the HIV market to be around $500 million. For more information on neuropathic pain, go to Baby Biotech's post.

I like this stock for speculative purposes only for several reasons. First, the company announced in June that it had completed the enrollment for its Phase III trial of PHN, which means that data should be announced within the next couple of months. This gives the stock a catalyst. Positive data will definitely move the stock. However, negative data is also at risk, as this would send the stock lower. Secondly, the data up to this point has been positive, which gives reason to believe that the final Phase III data will be too. Thirdly, I like the fact that the Street is starting to catch wind of this stock. TheStreet.com ran a piece in June about the stock and two analysts have rated the stock a buy with price targets at $12 and $13. Finally, a like the stock because it appears undervalued. This was the same conclusion Baby Biotechs came to. Using conservative market share estimates, I found a fair value of $9.50 for NGSX using my rNPV template, with $6.61 coming from NGX-4010's treatment of PHN.

However, there are some risks that we need to be aware of here. First, the stock (trading around $7) has had significant selling pressure since its IPO. The stock priced at $11 in May, but have never traded above that mark. That is very negative for an IPO. Secondly, even after the positive data release in June, the stock has resumed its move to the downside. Lastly, there are many pain treatments on the market, including generic treatments that will compete with NGX-4010.

I believe my fair value takes into account the potential competition, possibly even more than necessary (I estimate a 10% market share), so I believe that the stock is fairly undervalued here. I also believe that this stock carries very significant risk and should only be invested on a speculative basis and only by those individuals that are risk tolerant. I am placing a speculative buy rating on this stock with a price target of $11. I will revisit this stock after its Phase III data is released later this year.


Disclosure: I own shares in NGSX, however, at the time of writing this article I did not.

Interesting day after earnings for Gilead

Gilead (GILD) shares were down more than 5% at $38 after analysts turned sour on the company's second quarter earnings results. Interestingly enough, however, several analysts raised their price targets for the firm. Today's weakness is being attributed to a sales shortfall from the company's newest HIV drug Atripla. Atripla came in with second quarter sales of $212 million, below the expected $229 million. However, that shortfall was made up for by sales in Truvada. Also concerning analysts is a potential delay in the approval in Europe of Atripla. All of this said, the company still raised sales guidance for the full year 2007.
Gilead's weakness today is nothing new to the large biotechs lately. Investors have been concerned of slowing growth rates and today it turned on Gilead.
The weakness today is disappointing to me as an investor, but I remain in Gilead for the long-haul and I am reiterating a Buy rating on the stock with a target price of $45.


Disclosure: I am long shares of Gilead

Gilead continues impressive growth

Gilead Sciences (GILD) announced another solid quarter Thursday, as the company beat analysts' EPS estimates by $0.03. Gilead reported $0.42 in EPS and $408 million in net income for the second quarter, a 53% year-over-year growth in income. The company recognized $1.05 billion in revenues, a 52% growth, with record products sales of $905 million (53% growth YOY). Sales were driven again by the significant growth of Gilead's HIV franchise, which contributed $762 million in sales, a 60% increase.
Gilead's strong push to diversify is paying off as well, as the company saw growth in each of its product categories. Hepsera sales increased 32% and AmBisome sales increased 16%. The company received $123 million in royalty revenues from Roche for the sales of Tamiflu, which was a 68% growth YOY.
Most importantly to investors, the company also raised its guidance, now predicting $3.6-3.7 billion in product sales for fiscal year 2007 (up from $3.4-3.5). The company also expects to receive a higher royalty rate next quarter from Roche, based on timing of sales.

All-in-all, it was a pretty impressive quarter again for Gilead. Investors should like what happened in the second quarter, and should be excited for the second half of 2007. In addition to the guidance raise, the company said that it will continue to seek ways to increase shareholder value by utilizing the some $2 billion in cash it has on hand. This included seeking acquisitions as well as considering future share repurchases. The company is currently pursuing the marketing launch of Letairis to treat pulmonary arterial hypertension, and Gilead expects sales from Viread for the treatment of Hepatitis B and its new cystic fibrosis drug to begin in the second half 2008, pending the approval by the FDA.

I am happy with what I heard on the conference call, and I will be reviewing my target price for the stock in a future post.

Disclosure: I am long shares of Gilead

Ziopharm Oncology getting recognition

Ziopharm Oncology (ZIOP), a small-cap biotech, recently picked up some national recognition in this week's Business Week. Ziopharm, a cancer research company, has three candidates in clinical trials for the testing of myeloma, sarcoma, and mitosis. Its most interesting drug candidate is ZIO-101, which uses organic arsenic in treating myeloma and other types of blood cancers. Arsenic has been in use as a cancer fighter for a while now, but it can be very toxic. But, the arsenic that Ziopharm uses in ZIO-101 is organic, which reduces the toxic side effects according to CEO Jonathan Lewis.
Ziopharm is highly speculative for investors at this point. Its drug candidates are only in Phase I and II trials. The company has had success so far in its clinical trials, as it announced positive data from its Phase II trials of ZIO-202, which treats sarcoma, on July 9. However, the stock has had a very bumpy ride over the last year. Investors can probably expect the roller coaster ride to continue for a while, at least until ZIO-202 can move into Phase III.
A coming post will look at my intrinsic value for Ziopharm.

Biotech earnings into full swing Thursday

Genentech started the biotech earnings season on a mixed note last Thursday as second quarter earnings beat the Street's estimates, but its outlook was less than stellar. Biotech might take a backseat to tech bellwethers Microsoft and Google Thursday, but big biotech Gilead reports Thursday and other big biotechs Amylin, Biogen, Genzyme, Celgene and Amgen report next week.

Here is what the Street is expecting from biotech's second quarter.

Gilead (GILD): EPS: $0.39 (39% growth), Revenues: $1.02B (49% growth)
Amylin (AMLN): EPS: $-0.34 (10%), Revenues: $198M (67%)
Biogen (BIIB): EPS: $0.63 (11%), Revenues: $759M (15%)
Genzyme (GENZ): EPS: $0.81 (19%), Revenues: $912M (15%)
Celgene (CELG): EPS: $0.23 (109%), Revenues: $318M (61%)
Amgen (AMGN): EPS: $1.06 (1%), Revenues: $3.69B (2%)

Genentech: Stuck in a Rut

DNA
Recommendation: Hold
Fair Value: $80
Disclosure: I have no position in DNA

In looking at the intrinsic value for Genentech, I'm with the Street right now: it is not time to buy DNA. Genentech, as I see it, is stuck in a rut. It is beginning to mature, which leaves a large biotech firm in a state of flux. The company is digressing from the biotech growth story that it has been and is starting to look more like Big Pharma.
The stock is very cheap compared to what it has been. DNA is seeing a multiple contraction that has the stock trading at 30-times the last 12 month's earnings. That is so low for a biotech firm. In fact, several big biotechs are experiencing this multiple contraction (Amgen is at 22, Gilead 31). However, if DNA were to transition into a company like Big Pharma stocks Merck and Pfizer it would be trading at a multiple much higher than those stocks do (Merck 24, Pfizer 10).
This is where the rut lies. As investors, we need to figure out where the company goes next. This year seems pretty bleak for DNA shareholders. Most analysts do not think there are short-term catalysts to propel the stock upward. So, we need to look to 2008 and beyond.
The company has a deep pipeline as it looks to solidify current drugs with more approvals and add a few new drugs in more diversified areas. For the most part, Genentech's growth in the future is going to only come from its current drugs, with the exception of a drug to treat Adult Growth Hormone Deficiency, which is in Phase III trials. It is a plus that it is trying to extend its market share for Avastin, Herceptin, and Rituxan, but investors are going to have to wait until 2008 to see if the pipeline can expand as its current Phase II trials begin moving to Phase III. Success in the second phase for some of the Genentech's drugs will help continue to diversify the company beyond cancer drugs, and will help investor confidence that the company can keep growing beyond its current drugs.

I am placing a hold on Genentech. I believe it is worth around $80, but with the current negative sentiment and a lack of any short-term catalysts, I do not believe the stock can trade back above $80 at least until a clearer picture of the company's direction comes out. I think investors will just have to be patient with DNA and see what happens.

Genentech Kicks off Biotech Earnings

Genentech kicked off the earnings season for biotechs yesterday, posting a better than expected $0.70 per share for the second quarter on revenues of $3 billion. That was a 41% jump in profit and the company raised its full-year 2007 guidance. But, it was not good enough for investors, as fears of a growth slowdown had shares off by as much as 2.5%.
Analysts were sharply negative on Genentech following the announcement. Thomas Weisel analyst M. Ian Somaiya said that the company has a lack of near-term milestones, which "will result in Genentech trading sideways for the remainder of 2007." This is despite the opportunities the company has, especially with its leading cancer drug Avastin being tested to treat more types of cancer.
This could be a buying opportunity for investors. Or it could be dead money for next year. A coming post will focus on the intrinsic valuation for Genentech and whether or not to buy.

The Risks of Small Biotech

DepoMed got crushed yesterday, losing almost 60% of its market share after the company announced its Phase III trial for Gabapentin GR, a extended release tablet for neuropathic pain, did not meet its end goal. Evidence, yet again, that the risks of investing in small biotechs are very significant. For as many home runs in small biotechs, there are many more strikeouts and determining which companies will hit a home run is not easy.
So is investing in small biotechs just bona fide gambling? It sure can be if we just put all of our eggs in the proverbial one basket.
Investors are so often reminded to keep a diversified portfolio and this should be the case again when investing in biotech. Here are some steps that I would do when investing in small biotech.

1. Spread your money into more than two different firms -- this reduces risk by giving you a better chance of being in a company to will succeed
2. Invest in companies with drugs in late-stage trials -- this reduces some of the risk involved, as Phase III drugs have much better chances of making it to market
3. Invest in companies with drugs that are not faced with significant competition -- there is always going to be competition, but drugs that could gain a 30% or more market share because of a lack of competition is great for investors.
4. Value the drugs -- intrinsic values can be arbitrary, but it can give you an idea of what the drug could be worth -- try my rNPV method spreadsheet for starters.
5. Collaborations are key -- many of these small firms do not have the capability of selling a drug on their own, and collaborations are necessary. So, look for firms that already have collaborations in place. Large firms have more resources and would give a drug a better chance to succeed.
6. Get out if necessary -- save some money and sell before its too late if it starting to look like the firm is not going to be successful after all.
7. Use options too -- options can give you other opportunities to make money without contributing as much capital up front.

These are just some things to keep in mind. Leave a comment if you would like to contribute any further advice to investors.

Barron's Jumps on Gilead's Bandwagon

Barron's July 9 issue was bullish on Gilead, saying that the stock could "climb another 20 to 25% (this year), fueled by strong demand for both existing drugs and remedies now in the pipeline." Barron's also stated that earnings could reach $2 per share by 2009.
This should be music to investors' ears. What should be even more encouraging to investors is the position that Gilead is in. The Barron's article outlines Gilead's successes, which start obviously with HIV. The article states that about 70% of new Atripla patients are switchovers from Glaxo's Combivir and other drugs. That's great for Gilead as it squashes some of the idea that Atripla was going to cannibalize sales of its other HIV drugs.
Furthermore, Tamiflu is being stockpiled by many countries and international agencies in case of a flu pandemic. This should help growth continue, as Tamiflu royalties account for about 20% of Gilead's revenues. Also, I see this as a great benefit because it keeps the company diversified.
The company will also be further diversified going forward with the approval of Letaris. Barron's states that the market for pulmonary arterial hypertension is $2 billion. The acquisition of Myogen, which created Letaris, and Corus Pharma have put Gilead in great position according to Barron's. Lastly, Barron's says that the company could be looking to make more acquisitions with over $2 billion in cash on hand or even be a takeover target itself.
This article could be what Gilead investors needed to get the stock out of its summer hibernation.


--Disclosure: I am long shares of Gilead--

GenVec: Too much risk

GNVC
Recommendation: Hold
Fair Value: $2.62
Disclosure: I have no position in GNVC

Putting my estimates together in my rNPV template turn up a fair value for GenVec. The majority of the company's value is in the potential for TNFerade, but the company is currently just too risky for a buy recommendation. The company needs to continue moving forward with TNFerade. It had a slight misstep this month, as data for TNFerade's treatment of pancreatic cancer was not up to investors' standards. Any more problems and GenVec could be in serious trouble as a company. The company already needs to raise more cash, and investors will probably not be too excited to give GenVec money if TNFerade is not progressing.
Barring any more setbacks, I value TNFerade at $2.27, with $1.52 coming from the potential to treat pancreatic cancer. I value AdPEDF at $0.19, and the whole company at $2.62, which includes TNFerade, AdPEDF, and the company's government collaborations. Obviously, value would be realized with progress in any area for its two drugs.
I am placing a hold recommendation on GenVec due to a lack of upside. I believe that the company is fairly valued and until there is more data released on TNFerade's progress I do not think that the stock can move. There should not be much downside, either, but I do not think investors will be able to make money in this stock for a few months to come. I will revisit this recommendation as mid-trial data is announced.

GenVec: Potential Markets and Financials

GenVec has never turned a profit, and operating cash flows are very negative. The company claims it only has enough cash to operate for another year and a half. So, why does this company have value on Wall Street? Potential, that's why. Companies like GenVec is where rNPV comes into play when determining a value for the company. (See my previous post on rNPV) Today's post will look at the potential markets for GenVec, which are the foundation for my valuation of the firm.

TNFerade:
GenVec's lead drug has to be valued several different times because it has the potential to treat four different types of cancer.

1. Pancreatic Cancer
--TNFerade is currently being tested in Phase III. Its Phase I and II tests have been highly successful, with survival rates much higher than the standard radiation treatments. Pancreatic cancer is the fourth-leading cause of cancer deaths, with approximately 37,000 new cases yearly. The market has been estimated at $2.6 billion and analysts have pegged TNFerade with potential peak sales of $250 million. These estimates give TNFerade almost a 10% market share in the Pancreatic Market. I estimate that TNFerade could make it to market by 2010 if all goes well, with peak sales achieved by 2012.

2. Melanoma
--TNFerade is in Phase II for the treatment of melanoma. TNFerade showed good success in a limited Phase I trial and the current Phase II trial is limited before further enrollment. There are 62,000 new cases of melanoma each year and 10% of those are metastatic, which could be treated by TNFerade. The market is estimated around $250 million, but is growing rapidly (around 19% annually). With limited competition in this area, I have pegged a 30% market share for TNFerade, which would give peak sales of $212 million by 2015.

3. Colorectal Cancer
--TNFerade is in Phase II trials for colorectal cancer. This market is estimated to be around $7 billion, with approximately 41,000 new cases yearly. I have estimated a 5% share for TNFerade due to significant competition in this field, which could give TNFerade $300 million in peak sales by 2015.

4. Head and Neck Cancer
--GenVec is sponsoring two separate Phase I trials for TNFerade in the treatment of head and neck cancer. There are approximately 34,000 new cases each year of this type of cancer and the market is approximately $100 million and growing around 17% annually. I have estimated peak sales of $50 million by 2016, which gives TNFerade a 17% market share of a potential $300 million market by then.

AdPEDF:
GenVec's age-related macular degeneration drug AdPEDF could bring significant value to the company as well. There are approximately 200,000 new cases of wet AMD yearly in the United States. However, the market is only $1 billion, but could reach $1.5 billion by 2015. I have estimated a 20% market share as current competition currently own about that much apiece. By 2015 current drugs will be outdated, so I think AdPEDF could reach almost $300 million in peak sales.

Next Post: I will put my estimates together to come up with a value for the company

GenVec: Profile

GenVec, Inc.
Ticker Symbol: GNVC
Risk: Speculative
Drug's Statuses: 2 in Clinical Trials, 1 in Pre-Clinical testing, 1 currently halted


About GenVec:

GenVec is a biopharmaceutical company that develops gene-based drugs and vaccines that deliver proteins directly to the site of the disease. The company is currently testing drugs in clinical trials to treat various forms of cancer, as well as age-related macular degeneration, coronary artery disease, and hearing loss. The company also develops and tests products in collaboration with government institutions. These collaborations are the company’s only current source of revenue. GenVec is currently working on projects with the United States Department of Homeland Security, the National Institute of Allergy and Infectious Diseases and the National Institute of Health to treat such diseases as HIV, malaria, influenza, and foot and mouth disease.


Risk Profile:

The company is of a high-risk profile, and should be considered speculative in nature by investors. Some of the risks involved with investing in GenVec are the fact that it has a history of losses, which should continue at least for the next few years; it also faces the possibility that its drugs will never obtain FDA approval; it faces significant competition; it has a lack of resources and the company will need to obtain more capital to continue as a going concern; lastly, GenVec needs to secure a collaborative partnership to market its drugs if they do get approved by the FDA.


GenVec's Drugs:

1. TNFerade:
--Its leading candidate for FDA approval is TNFerade, which is a protein that has anti-cancer effects when combined directly with a tumor. It is currently being tested to treat pancreatic cancer, melanoma, colorectal cancer, and head and neck cancer. It is furthest along in pancreatic cancer, as the company initiated Phase III testing in 2006. It is being tested in Phase II for melanoma and colorectal cancer, and is completing Phase I testing for head and neck cancer.

2. AdPEDF:
--AdPEDF treats wet age-related macular degeneration by replicating a protein that naturally exists in the human eye. The drug has completed a Phase I clinical trial, and could be moving into Phase II soon.

3. TherAtoh:
--A pre-clinical trial drug, TherAtoh, delivers genes that produce therapeutic proteins to the inner ear. Its research is currently being focused on restoring the hearing or balance function of the ear by regenerating critical cells in the inner ear, which are called sensory hair cells.

4. BioBypass:
--BioBypass has completed Phase II trials for the treatment of coronary artery disease. The research for BioBypass is in collaboration with Cordis. However, the company curtailed its testing in 2006 to focus on its other drugs. GenVec retains the development rights to BioBypass and the company says that it will "explore alternative commercialization strategies as data and circumstances warrant."


Next Post: The Potential Markets for TNFerade and AdPEDF

Valuing Biotechs: Part 2

Risk-adjusted net present value is most useful for biotechs because it can place a value on an individual drug. This helps us out for small biotechs because most of these firms' value is derived from drugs in their pipelines. With rNPV, we can find the value of each drug in a company's pipeline, add them up, and get a value for the whole company. This could also be applied to larger biotechs, but rNPV really only values the pipeline, so we would also have to find a value for the drugs that are already marketed using a traditional discounted cash flow method.

To help you out, I have made a template for valuing drugs using rNPV. You can download it here and try it out for yourself. If you have questions, send me a comment.

To put all of this into practice, I will take you through my valuation for GenVec all this week.

Biotech Weakness: Opportunity or Justified?

The weakness in the large-cap biotechs is back, but why? With the exception of Amgen, the financials and growth from these companies continue to amaze. Genentech has grown sales and earnings at a clip above 35% for the last three years; Gilead and Celgene have both grown greater than 60% per year over the past five years. These growths should continue in 2007, but after that, growths for Genentech and Gilead could slip below 20%. Should this cause investors to panic? Is this reasoning for the weakness?
An article in Investors Business Daily Friday outlined some other problems facing the industry. Investors are worrying about FDA delays, Congress, and potential competition from generics. Is this weakness justified? Or should we look at this as a buying opportunity?

Not to be neutral, but I think that it is both. The volatility in the overall market will make it tough for any one stock in the group to stand out, but I think that this is a stock-pickers market and you have to find stocks that will continue to be quality companies, deliver strong growth, and that will continue to be market leaders in their respective areas. Companies that possess these qualities will outperform the market and the industry in the long-run.
Investor concerns over the FDA, Congress, and generics are justified. The FDA has been more stringent in its review of drugs, but that poses more of a threat to the small biotechs. It has been unkind to Genentech recently, asking it to provide more information before approving Avastin to treat breast cancer. But, Gilead got its drug approved to treat hypertension without much trouble.
The article in IBD also outlines some newly passed measures from Congress that will allow generics to have a better chance in the future. But, biotechs still will have 12 years of exclusivity in the market, and with the large R&D budgets of these companies and the advancement of medical technology, most drugs will have competition within 12 years anyway.
I think this recent weakness is justified, but I also feel it is just a short-term hiccup. Most of the large biotech firms are growing too fast and have positions in their respective markets that are untouched. Genentech is expected to grow 30% this year and its cancer drugs are the best available, but the stock has given back 7.8% year-to-date. Gilead has had an impressive run, up 20% this year, but even it has given back 4% in the last month. Celgene's run has been tempered as well, giving back more than 9% in June.
As I've posted before, I'm a buyer of Gilead. I also like the weakness in Genentech and Celgene as buying opportunities, but the weakness will probably continue in the entire industry, especially with the overall market volatility. I don't see any reason to rush into a position right now, the momentum is pushing lower, so I would suggest doing the proper due diligence and taking your time to find the proper fit for your portfolio.

Valuing Biotechs

Valuing stocks can be a bit of an art and determining a value for biotech companies is even tougher, especially for biotechs without any products at market. So today I'll outline one of the methods I like to use when valuing companies. This method is called Risk-adjusted net present value, and it is fairly specific to the biotech industry.

Risk-adjusted net present value (rNPV) attempts to value a company by taking into account not only the future cash flows, but also the probabilities that those cash flows will even take place. This is especially useful for small biotechs that have not yet obtained FDA approval for a product. In using rNPV, we are able to find a company's value while taking into account significant events that could affect the stock price (like moving from Phase II to Phase III trials).

NPV is the same as a discounted cash flow analysis. It finds the present value of a firm's future cash flows. rNPV is similar. It is the present value of future cash flows, but those cash flows are adjusted by the probability of effect.
So, what are these cash flows? And, what are these probabilities?
These assumptions are crucial to our analysis of a small biotech.

1. Probabilities
Based on historical numbers, drugs in clinical trials have been approved by the FDA at the following rates:
Phase I: 20%
Phase II: 30%
Phase III: 67%
New Drug Application: 85%
(*These rates can differ +/- 5% based on differing types of drugs)
These percentages are the probabilities that we can use in finding rNPV. However, these percentages are the probabilities of a drug in each stage obtaining FDA approval. The percentage of drugs moving from one stage to another is the following:
Phase I to Phase II: 67%
Phase II to Phase III: 45%
Phase III to NDA: 79%
NDA to FDA Approval: 85%
These percentages are the probabilities that we use when a drug moves to a different stage.

2. Cash Flows
Determining a drug's cash flows can be very difficult. First, we must determine the costs. Secondly, we want to determine the potential revenues.

--Costs:
Costs tend to be determinate on the stage that a drug is in.
Phase I (1 year): $500,000 for animal testing + $12,000 per human subject (20-80 subjects)
Phase II (1.5 yrs): $1 mil for animals + $12,000 per human (100-300)
Phase III (3 yrs): $1.5 mil for animals + $6,000 per humna (1000-3000)
New Drug Application (1 yr): $1.8 million

--Revenues:
A peak sales estimate (which can usually be obtained about 3 years after FDA approval) can be determined by taking the market size and multiplying it by an estimated market share. Also, drugs tend to have a life of around 10 years. Revenues are usually assumed to ramp up, and ramp down with about 5-7 years of peak sales.


Alright, let's make sense of this information.

As an example, let's take Fictional Biotech, Inc. FBI has a drug in Phase II trials. This drug treats pancreatic cancer, which has a market of $2.6 billion. FBI's drug has an estimated market share of 8%, which leads to potential peak sales of approximately $200 million.
Now, let's take a look at some cash flows. For example purpose, we'll look at years 1, 3, and 10

Year 1: Costs: -$1.7 mil for phase II testing
Year 3: Costs: -$6.5 mil for phase III testing
Year 10: Costs: 60% of Revenue, Revenues: $200 mil

So, according to the rNPV method, these cash flows must be adjusted by the probability that they will occur.

Year 1: rNPV Cash Flow = (Costs x Probability) = (-$1,700,000 x 100%) This stock is already in phase II, so the probability is 100%
Year 3: rNPV CF = (Costs x Probability that drug will move to phase III testing) =
(-$6,500,000 x 45%)
Year 7: rNPV CF = (Revenues x Cost of Revenue x Probability that drug will obtain approval)
($200,000,000 x 40% x 30%)

To conclude this quick intro to rNPV, to get a value for the company, we find the net present value of all the cash flows that each drug in the pipeline could bring in. We discount at the company's weighted-average cost of capital, which is usually 20% or more for a small biotech firm.

For more information on rNPV (and a better example) check out: http://www.maricopa.edu/bwd/pdfs/biotechpb.pdf

Also, Brian at Baby Biotechs outlines a similar formula here: http://www.babybiotechs.com/investment-strategy/investing-in-small-biotechs

Coming Soon: GenVec

I have just completed my valuation of GenVec (GNVC) and will be posting my recommendation soon.

I plan to post recommendations on a weekly basis on all different sizes of biotechs that focus on many different areas.

Adam Feuerstein: Biotech Master

TheStreet.com's Adam Feuerstein covers the biotech industry in ways that are very convenient to individual investors. I appreciate that. He has provided tons of information in his columns that most individuals might not have information to. He has recently posted an FDA approval calendar, which is extremely convenient for investors looking to piggyback on those announcements. Also, his Biotech Mailbag provides weekly updates on several different realms of the biotech world.
For anyone looking for information on biotech, this is the guy to go to.