Vertex (VRTX) update #21

Shares of our biopharma company Vertex (VRTX) were hit hard today, down 11% in heavy trading, amid concerns that new Obama administration policies will hurt the profitability of the pharmaceutical industry. Biopharma indices in general were down 5% or more. There is speculation that the imperative to limit health care costs—in order to be able to afford universal coverage—will drive policies to scrutinize how drugs are administered, which could limit usage, and to subject reimbursement rates to cost-benefit analysis, which has been used in Europe to limit prices.

While health care reform in general is a top priority for the incoming administration, we continue to believe that hepatitis C is a big enough—and costly enough—public health problem to make it unlikely that they will adopt measures that would limit access to a treatment as effective as telaprevir appears to be. But the jury is still out and the charge sheet is full, as summarized in this street.com article (Vertex in particular is mentioned on page 4). This situation needs continued attention.

Previous VRTX-related posts:

• BUY Vertex Pharmaceuticals (VRTX)—Hepatitis C Play (17 Apr 07)
• Vertex (VRTX) update—PROVE 1 trial news and 2Q07 results (25 Jul 07)
• Vertex (VRTX) update #2—down 13% on good boceprevir (SGP) results (18 Oct 07)
• Vertex (VRTX) update #3—3Q07 results (30 Oct 07)
• Vertex (VRTX) update #4—concerns about telaprevir Phase 3 trial delay and competition (5 Nov 07)
• Vertex (VRTX) update #5—still no word on start of telaprevir Phase 3 trial (9 Jan 08)
• Vertex (VRTX) update #6—down 10% on apparent FDA preference for 48-week Phase 3 (23 Jan 08)
• Vertex (VRTX) update #7—4Q07 results (11 Feb 08)
• Vertex (VRTX) update #8—Seven million shares sold to raise cash (19 Feb 08)
• Vertex (VRTX) update #9—up 8% on good Phase 2 results for cystic fibrosis drug (27 Mar 08)
• Vertex (VRTX) update #10—up 28% on excellent Phase 2 results for telaprevir (31 Mar 08)
• Vertex (VRTX) update #11—more good telaprevir Phase 2 data and 1Q08 results (27 Apr 08)
• Vertex (VRTX) update #12—up 13% on Cowens upgrade; still more good telaprevir Phase 2 data (9 Jun 08)
• Vertex (VRTX) update #13—down 5% on unattractive FDA Phase 3 parameter preferences (24 Jun 08)
• Vertex (VRTX) update #14—2Q08 results (1 Aug 08)
• Vertex (VRTX) update #15—telaprevir Phase 3 trial for SOC-resistant patients launched (19 Aug 08)
• Vertex (VRTX) update #16—nine million shares sold to raise cash (22 Sep 08)
• Vertex (VRTX) update #17—up 16% on Phase 2 results showing 2x daily telaprevir works (24 Sep 08)
• Vertex (VRTX) update #18—final Phase 2a trial results on VX-770 (CF)…on to Phase 3! (20 Oct 08)
• Vertex (VRTX) update #19—3Q08 results (27 Oct 08)
• Vertex (VRTX) update #20—up 5% on fresh telaprevir Phase 2 results (3 Nov 08)

BUY ProShares UltraShort S&P500 (SDS)

We are late to this party but it is still in full swing. We foresee at least two quarters of negative growth in the US economy and it could be more like two years.

The value of real estate continues to decline, and the issue of how to handle all the folks with diseconomic mortgages, whose most rational option is to default, has not yet been addressed. Credit card debt is still a problem, and consumer spending is in a steep decline. Consequently, business earnings are at risk. Consequently jobs are at risk. Consequently credit card debt and consumer spending become more of a problem. Consequently business earnings are at risk…rinse and repeat.

And meanwhile, the U.S. government has now decided not to purchase “toxic” mortgage-backed securities, credit default swaps, and other arcane derivatives—as they said they would—in favor of acting as the investor-of-last resort in the companies that made those bad debts. We think it’s a better deal for the government to get equity…but then how do we get that bad paper off the balance sheets? (Maybe we don’t need to, as credit does appear to be loosening in the one “good” sign we do have…we say “good” on account of: wasn’t it easy money that got us into this pickle in the first place? Just askin’.) And speaking of bad paper, there’s still more out there we haven’t focused much on yet, in terms of questionable corporate debt for many shaky companies.

We are in a deflationary spiral so powerful that the dollar is swimming upstream against torrents of fresh liquidity, which would normally be sinking it. We have the spectacle of everyone on the planet lining up to buy fresh U.S. treasury debt at breathtakingly low interest rates because despite the shocking heights to which governmental debt is climbing (and don’t forget all those entitlement obligations, and all the other industries lining up for TARP-style bailouts from the incoming administration), it still appears to be the safest place to put your money. Folks, this is not a good sign.

With the dollar rocketing northwards, we are tempted just to stay in cash and collect our 2%…but at some point, the lenders will lose some confidence in the solvency of the U.S. government, interest rates will rise, and the dollar will resume its long descent into the dust bin of history. In the meantime, it is a safe bet that the U.S. stock market is likely to continue to decline.

So, the ProShares UItraShort S&P 500 ETF is designed to “correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P500^® Index,” using short sales, options, derivatives, and other relatively arcane maneuvers. We don’t actually care if it hits the 2X mark or not; just so long as the inverse performance promise is met, we will be happy with this one. For at least the next quarter or two, we expect.

SELL PowerShares Water Resources (PHO)

We are hitting the silk here—at a loss, to boot—not because we don’t like the infrastucture/fresh water scarcity story long term, but because we like the dollar more with deflation looming…and we expect to be able to get more shares of PHO for our money down the road aways.

Golden Star Resources (GSS) update #9

We are beginning to wonder if our red ink-producing gold mining spec play, Golden Star Resources (GSS), might be better off reincorporating as a non-profit charity, in the wake of their 3Q08 results announced today. This comes in the wake of the juxtaposition of last month’s announcement (click here and then on “Golden Star Awarded Nedbank Capital Green Mining Award”) that the company had won the Nedbank Capital Green Mining award—in consideration of the company’s Golden Star Oil Palm Plantation Project (GSOPP), which grants four-hectare farm plots to qualifying farmers—and their seventh consecutive (and worst-yet) money-losing quarter.

Today, the company unveiled 3Q08 losses of $22.4 million (10 cents/share) on sales of $74 million. Not much mystery here; the company sold each ounce of gold for $897, but it cost them $866 to produce each ounce…a gross profit margin that is no where’s near fat enough to cover overhead. $866 is a new record for the highest quarterly cost per ounce, and extends an unhappy trend line:

• 4Q07 = $602/oz
• 1Q08 = $652/oz
• 2Q08 = $757/oz
• 3Q08 = $866/oz

This vector is unsustainable; if management cannot figure out how to stop the bleeding here, the company—or at least their mining operation in Ghana—is doomed. Fortunately, there is a reasonable expectation for improvement: $60-to-$85 of the 3Q08 cost is attributable to doubled rates for electricity that Ghana imposed on miners (click here and then on “Golden Star Reports Increases in Power Costs in Ghana”) to offset the huge run-up in the price of oil, and the miners are negotiating for some relief, which is likely now that oil prices have retreated from their summer highs. And the mix of gold production this quarter was skewed towards the more expensive Bogoso/Prestea facility as one of the two milling facilities at Wassa was disabled (click here and then on “Golden Star Announces Wassa Mill 2 Repairs Complete”) due to a pinion gear malfunction—and that has now been fixed.

Still, the burden of proof on management to make this operation work economically is getting heavier following what is now seven consecutive quarters of red ink. This is not what we signed up for, and if things don’t improve soon, we will be looking for greener pastures.

Previous GSS-related posts:

• BUY Golden Star Resources (GSS)—Ghanian gold (19 Jul 07)
• Golden Star Resources (GSS) update #1—2Q07 results (8 Aug 07)
• Buy Golden Star Resources (GSS)—yep, again! (24 Aug 07)
• Golden Star Resources (GSS) update #2—unexpected debentures sale (24 Oct 07)
• Golden Star Resources (GSS) update #3—3Q07 results (7 Nov 07)
• Golden Star Resources (GSS) update #4—new CEO (20 Dec 07)
• Golden Star Resources (GSS) update #5—record production…is BIOX® finally working? (17 Jan 08)
• Golden Star Resources (GSS) update #6—4Q07 results (28 Feb 08)
• Golden Star Resources (GSS) update #7—1Q08 results (6 May 08)
• Golden Star Resources (GSS) update #8—2Q08 results (9 Aug 08)

Vertex (VRTX) update #20

Shares of VRTX, our development-stage biotech company, popped up as much as 5% today in the wake of the presentation of new data over the weekend at the biannual American Association for the Study of Liver Diseases meeting in San Francisco. The data—from the company’s unusually large phase 2 trials which have recently been completed—confirmed the efficacy of telaprevir in treating hepatitis C patients who had previously failed to be cured by the current standard of care treatment (48 weeks of interferon plus ribaviron).

Also, there were more data indicating that a twice-a-day regimen of telaprevir may suffice, from interim results of another ongoing phase 2 trial.

For more details on all the results, check out the press release from Saturday. And for a good summary of where telaprevir stands in relation to the competition—primarly, Schering-Plough’s boceprevir—see Adam Feuerstein’s report from the AASLD posted early today.