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.