August 29, 2007

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 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.

August 24, 2007

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

August 21, 2007

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

August 15, 2007

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

August 12, 2007

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

August 10, 2007

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.

August 2, 2007

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.