Videos of the Day

The JPMorgan Healthcare Conference wrapped up today, and biotech is looking at a big week of earnings next week starting Monday with Genentech (DNA). Here are some good videos that should be checked out.

1) CNBC's Fast Money takes a look at DNA as well as a Crohn's drug

2) Adam Feuerstein from the TheStreet.com wraps up the JPM Conference

FDA sets date for Theravance review

Theravance (THRX) shareholders will want to mark February 27 on their calendars, as the FDA announced today that it will meet to review Theravance's NDA for its drug telavancin. The FDA has already delayed telavancin's approval once, saying the company needed to submit revised labeling and re-analyzed or updated patient data.

Telavancin is a first-of-its-kind drug to treat "superbug" bacteria (essentially MRSA). Back in October, when the approvable letter was issued by the FDA, I wrote about my concerns over whether telavancin would eventually get approved. I still have a lot of concerns, and investors should be weary of this one. FDA panel reviews are not a good sign, as they are usually called when the FDA has concerns it wants addressed. However, new FDA rules require a panel review for first-of-kind drugs, so the panel could just be a formality.

Either way, I'm staying away, and I would suggest only using options ahead of this decision if you have to play this decision.


Disclosure: I have no position in THRX

Video & Headline of the Day

With the JPMorgan Healthcare Conference winding down, the news was a litter thinner today, but I found a couple of links worth taking a look it.

1) First up is an article from the Motley Fool, which takes a look at Sirtris' Diabetes pipeline

2) And here is a video from TheStreet.com TV, which profiles over-the-counter-traded biotech Derma Sciences

Isis a big winner at JPMorgan Conference

Isis Pharmaceuticals (ISIS) came out as the big winner from the JPMorgan Healthcare Conference as the biotech announced a licensing deal with Genzyme (GENZ) for its cholesterol drug mipomersen. The deal marked the end of an auction for the drug in which up to 10 companies were interested.

Genzyme will pay $325 million up front to Isis, with a $150 million investment and $175 million upfront licensing payment. Genzyme's investment in Isis is for five million shares of the company at $30/share, which is approximately 5.75% of Isis. Genzyme will also pay up to $1.58 billion more and the companies will split the profits if the drug reaches certain milestones.
At first look, I thought that Genzyme was paying way too much for this drug. However, after plugging some numbers into my rNPV template, I feel that both companies could greatly benefit from this deal and that Genzyme might have gotten the drug at a great price.

I looked at potential peak sales for mipomersen from $750 million annually, which is estimated by one Bear Stearns analyst according to the Wall Street Journal to $3 billion annually, which would trigger further payments by Genzyme. I believe that mipomersen will be worth from $650 million to $2.5 billion for Genzyme and from $485 million to $2.5 billion for Isis based on peak sales. If peak sales do reach $2-3 billion, I think this deal favors Isis tremendously, especially since royalty rates would jump to 50% of profits and further payments will be made by Genzyme. However, analyst estimates peg the drug more toward $1 billion in peak sales, which would favor Genzyme in the deal.

Isis projects to file an NDA late 2008 or early 2009 for mipomersen in the treatment of a rare disease called hypercholesterolemia. However, the drug would not be ready for an NDA for routine high cholesterol until at least 2010.


Disclosure: I have no positions in the stocks mentioned.

Videos of the day

In an effort to make my blog more functional and useful for my readers, I will be placing more information on the site. Today, I have compiled links to CNBC video of the JP Morgan Healthcare Conference.

1) Celgene CEO Sol Barer with CNBC's Mike Huckman
2) Isis Pharma CEO Stanley Crooke with Huckman
3) Onyx CEO Hollins Renton with Huckman

Stock to watch this week: Celgene

Back in September, I was neutral on a high-flying Celgene (CELG). The stock has dropped 27% since then, and I feel now is a better time to get in on the stock. The last quarter of 2007 trading was not too kind to Celgene. The company offered lower guidance; the third quarter was disappointing; and then the stock lost 11% on December 10 as Millennium Pharmaceuticals (MLNM) announced that its multiple myeloma drug Velcade fared better in clinical trials than Celgene's Revlimid.

However, analysts came out afterward with bullish sentiment on Revlimid, and today Celgene said that Revlimid likely beat Street estimates for 2007 revenues, and the company upped its 2008 guidance, which is providing a boost for the stock.

This news makes Celgene my stock to watch for this week. The stock appears to have bottomed and is trading at more manageable levels. The Revlimid scare appears to be behind us, and growth for 2008 for Revlimid, as well as Celgene as a whole should be good once again (around 40%).


Disclosure: I have no positions in the stocks mentioned

2008 Re-Launch

After taking two months off from my blog, I am ready to re-launch for what appears to be an interesting 2008 for investors. With recession looming, unemployment rising, interest rates falling, and a dollar that continues to be weak, investors are very weary of what 2008 will bring. However, I continue my bullish stand on biotech and I want to provide information to my readers that will be beneficial to your investing practices. This year should be fun, maybe a little scary too, but there is always money to be made in the market, and I want to make some.

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.