September 27, 2007

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

September 24, 2007

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 :-(

September 19, 2007

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.

September 14, 2007

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

September 8, 2007

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

September 6, 2007

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.

September 5, 2007

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.