October 24, 2007

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

October 22, 2007

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

October 11, 2007

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

October 10, 2007

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