Macro Tsimmis

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Archive for April, 2007

Dendreon (DNDN) update #9

Posted by intelledgement on Thu, 26 Apr 07

As expected, there is really no new news here. We are still expecting the FDA to rule on Provenge, Dendreon’s prostate cancer immuno therapy product, by 15 May or shortly thereafter. Of course, there is no guarantee they will follow the lead of their advisory committee—who voted last month 17-0 that Provenge was safe and 13-4 that there was substantial evidence of efficacy—and approve the product. However, they generally do not overrule advisory committees. Either way, we will know soon.

There is a high level of FUD with respect to this looming decision, in part due to the dramatic range of possibilities. With Provenge approved outright or conditionally requiring the company to complete the 9902B study as a Phase 4, Dendreon is conservatively worth $25-to-$30/shr. A rejection or approvable letter that requires the company to submit results of the 9902B Phase III trial for reconsideration when it is complete around 2010 would tank the stock back down as low as the $2 range, as there is insufficient cash to last that long, and there are the risks that by then there will be competition and, of course, that Provenge really doesn’t work.

As the DNDN bears—there were 33MM shrs short out of a float of 83MM as of 10 Apr; there are a lot of bears—incessantly point out, the FDA likes to be 99%+ confident in the efficacy of a product. FDA biostat folks estimated in March that there is a 2.5% chance that Provenge’s impressive survivor advantage is a false positive, given that the number of patients in the first two studies was relatively small, and that survival was not the primary endpoint.

The thing is, rationally, when you have a disease that is killing thousands of people each year for which there is no viable alternative treatment, it makes sense to bend the rules a tad. To paraphrase poster TMFTinkerBreaker from the Motley Fool DNDN board, if this were a toe fungus remedy, there is no way it would get approved because the evidence is not strong enough. But it would be both irrational and morally wrong to consign three years of prostate cancer victims to certain death when there is a treatment that has a 97.5% chance of enabling them to live longer…just to dot some i’s and cross some t’s, statistically speaking.

And if approved, Provenge is a $1B product for the target market (prostate cancer victims for whom hormone treatment has ceased to be efficacious) given pricing equivalent to other treatments. But that does not consider the likelihood that Provenge might even be more effective if given to prostate cancer victims at an earlier stage (a larger market). And it doesn’t count Europe. (Dendreon has exclusive rights to the North American market and will conclude a partnership for Europe after approval.) And it doesn’t consider potential other applications of Dendreon’s antigen immuno therapy mechanism (such as breast cancer or cervical cancer…once Dendreon researchers identify the most appropriate antigen target expressed in any type of cancer—presuming it is one of the several the company has patented or licensed—the same procedure used in administering Provenge immunotherapy can be applied).

But let’s just stick to $1B to be conservative. A reasonable valuation for biotech companies with a $1B product would be 6x revenue (check out the history of CELG or DNA). At $15/share, the company has a market cap of $1.23B. A 6x rev multiple gives you a share price of $73. Discount that for the two years it will most likely take Dendreon to ramp up to that level of sales, the risk there will be production issues, the risk 9902B will produce bad results, the risk of dilution as the company raises cash to fund additional R&D…a 50% discount? Let’s say 60% to be even more conservative. $73 x .4 = $29/shr.

Of course, if and when any of the upside events—European partnership, expansion of the label to increase the potential market for Provenge, progress on other immuno therapy treatments—come to fruition, then the $1B of baseline sales goes up, and so do the valuation numbers. Plus there is always the wildcard possibility of a Big Pharma buyout.

In that light, you can appreciate why we will be holding on to our $4.01 basis DNDN position throught 15 May (or whenver the announcement is made)…and may be tempted to add some more in the $14s if we get the chance. Stay tuned.

Posted in B.2 Spec Equity Updates | Leave a Comment »

BUY Vertex Pharmaceuticals (VRTX)—Hepatitis C play

Posted by intelledgement on Tue, 17 Apr 07

Vertex Pharmaceuticals is a biotech company with a protease inhibitor drug—telaprevir—just completing Phase II testing that promises dramatic improvement in the treatment of Type 1 hepatitis C, which is both the most prevalent and the most pervasive form of the disease. There are an estimated 170MM people with chronic hepatitis C—meaning they can’t clear their bodies of the virus unaided—in the world, and 3.2MM in the USA; 80% of those in the USA are infected with Type 1. The number of chronic cases in the USA is expected to rise to over 10MM within the next decade or so.

Because hepatitis C is asymptomatic for years—basically until liver function begins to degrade—many infected people don’t know they have it. People infected suffer innocuously mild and brief flu-like symptoms within a few weeks—which are rarely ominous enough to trigger alarm bells—and then nothing…until things get deadly serious. However, a blood test—if the patient happens to have one—can detect the infection.

The current standard of care (SOC) for hepatitis C in the USA requires a 48-week course of treatment with interferon and ribavirin, and it is no walk in the park—many patients experience flu-like symptoms for several days following each weekly interferon injection and some suffer severe adverse events including anemia, cardiovascular distress, and depression. For those able to complete the course of treatment—about half of all those who start it—fewer than 40% appear to be free of any hepatitis C virus (HCV) and, thus, effectively cured. The combination of a year of being more-or-less disabled, the cost, and the 60+% chance of not being cured after all that has discouraged many asymptomatic HCV carriers who know they are infected from undergoing treatment. Currently only about 2% of chronic HCV carriers undergo treatment each year (which means only about half of one percent are cured annually).

In Phase 1 trials, patients dosed with telaprevir in combination with interferon or in combination with interferon and ribavirin for much shorter courses of treatment experienced effective cure rates of around 70%. Currently the company is conducting three Phase 2 trials with a total of 1000 patients testing various combinations of treatment agents and course-of-treatment durations (including 12 and 24 weeks) against a control of the current SOC (48 weeks of interferon and ribavirin). Preliminary data are due to be publicly released this Fall and the company expects to launch Phase 3 testing by the end of the year (presumably the data they already have from Phase 2 are strong and they are working with the FDA to design their Phase 3 trials in light of these data…there was some hope the FDA might be able to approve based on the Phase 2 data, but that seems to have evaporated).

Telaprevir clearly works and a cure rate of 70% in half or one-quarter the time would be a major advance over the current SOC. The cardinal fly in the ointment thus far is a new telaprevir-related side effect that surfaced in some of the early Phase 2 results—a serious rash that contributed to a relatively high 8% early days drop out rate and takes weeks to recover from. Hopefully the Vertex folks will learn enough from these trials about under what circumstances this rash is likely to be a problem to minimize the risk going forward.

Critically, Vertex has a clear shot at being first to market a product that improves materially on the current SOC for hepatitis C. Back when it appeared as if approval from the large Phase 2 trials was likely, they had a huge time advantage (presuming the potential competition all had to go through Phase 3); even now most of the potential competition are in Phase 1 or earlier. The closest potential competitor is boceprevir from Schering Plough (SGP)—who market interferon for hepatitis C, although it is a minor market for that drug—and is early in Phase 2 testing. Unless telaprevir is significantly delayed, it is likely to have established a dramatically shorter course of treatment employing all three agents—telaprevir, interferon, and ribaviron—as the new SOC.

And the market is potentially huge. About $700MM annually is presently spent on interferon/ribaviron for HCV treatment of 2% of the potential patients (of whom only 25% are typically cured—half drop out before completing the 48 weeks…although a few of those are cured never-the-less…and about 35% of those who stick out the full 48 weeks are cured…for some unknown reason, almost 50% of those who stick out the full course in Europe are cured). With a shorter course of treatment and a better chance of success, the number of patients willing to undergo treatment is likely to increase dramatically, while the dropout rate will fall.

Now from a valuation point of view, biotech companies with their first $1B blockbuster potential drug and the earning growth to match—e.g., CELG today and AMGN, BGEN, DNA in the past—typically command multiples of 15x to 20x revenues depending on how The Street regards their pipeline. (Mature healthy pharmas have marketcaps more typically in the 4x to 6x revs range.) Presuming for the sake of argument that the dollars/patient remain constant—the cost of the interferon/ribaviron is less because only half as much is needed but telaprevir takes up the slack—and that the proportion of patients seeking treatment rises from 2% in 2009 (when the FDA approves telaprevir) to 7.4% by 2012, by than telaprevir should be generating over $2B in revenues from the USA alone. By 2014, we are looking at a potential $4.3B in USA telaprevir revenues—and presuming 10% annual dilution through 2012 and 5% thereafter (as the company will be profitable and presumably won’t be so needful of selling shares to raise cash)—the share price at a P/S ratio of 15x sales puts the pps at $287. (Only 15x and not 17.5x as we used for Élan because we feel the pipeline here is not as strong.) Discount that price 25% per annum to reflect the various risk factors and we project a fair price for VRTX of around $38 by the end of 2007 (and much higher in the following years).

And speaking of the USA, Vertex have retained all rights to that market (and, at least for now, the Far East), and have concluded a marketing agreement for telaprevir with Janssen Pharmaceutica N.V., a division of Johnson & Johnson for Europe, Middle East, Africa, and Central and South America. They are due an additional $380 million in milestone payments as telaprevir is tested and brought to market there.

Beyond telaprevir, Vertex’s pipeline is decent but not outstanding. They do have stuff: VX-702, a Phase II clinical trial product for rheumatoid arthritis and other inflammatory diseases, VX-770, a Phase I clinical trial product for cystic fibrosis, and VX-883, a preclinical stage product for bacterial infection. Plus in collaboration with Merck, there are MK-0457 and MK-6592, which are in Phase II clinical trials for the treatment of cancer; in collaboration with Avalon Pharmaceuticals AVN-944, a Phase I clinical trial product for cancer; and in collaboration with GlaxoSmithKline, VX-409 and backup compounds, which are in preclinical stage for the pain management. Currently, they receive revenue for Lexiva/Telzir for the treatment of HIV infection and AIDS, which are marketed/distributed by GlaxoSmithKline. Nothing here that appears to have blockbuster potential as yet…with the potential exception of VX-500, which is their follow-on HCV protease inhibitor drug, currently in pre-human testing. Ideally this would be ready to take over from telaprevir—with better efficacy and milder AEs—around 2013 or so.

Of course, first they have to get telaprevir itself to market…and in that regard, there is always the Dendreon factor. A drug is not approved until it is approved. But here, in contrast to Provenge, we have a drug that has outstanding efficacy credentials, with a 1000-patient Phase 2 already (Provenge had a few hundred in Phase 3…and missed the primary endpoint). So based on where we are now, Vertex look to be giving the FDA an easy decision. There remains a risk of an unanticipated side effect showing up in Phase 3—that is why we do these tests, afterall—or even beyond (as with Tysabri). This is why we discount 25% per annum off our projected fair value. If you don’t think that is a conservative enough discount, then pass this one up. One man’s speculation is another man’s plunge.

Six month’s ago, when it appeared possible the FDA might approve based on the Phase 2 results, this stock was in the $40s. Based on a late-2009 approval and telaprevir revenues starting in 2010, that’s too expensive for us. But down here around $31, we’re good to go.

Posted in B.1 Spec Recs | Leave a Comment »

1Q07 Intelledgement Macro Strategy Investment Portfolio Report

Posted by intelledgement on Sun, 15 Apr 07

Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 30 Mar 2007:

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
EWA 03-Jan-07 383 23.50 9,008.50 25.95 9,938.85 10.33% 10.33% 51.80%
EWH 03-Jan-07 562 16.00 9,000.00 16.06 9,025.72 0.29% 0.29% 1.22%
EWM 03-Jan-07 988 9.10 8,998.80 10.83 10,700.04   18.91%   18.91% 108.63%
EWZ 03-Jan-07 192 46.85 9,003.20 49.22 9,450.24 4.97% 4.97% 22.85%
FXI 03-Jan-07 81 111.45 9,035.45 102.43 8,296.83 -8.17% -8.17% -30.39%
GLD 03-Jan-07 142 63.21 8,983.82 65.74 9,335.08 3.91% 3.91% 17.69%
IFN 03-Jan-07 196 45.90 9,004.40 38.14 7,475.44 -16.98% -16.98% -54.63%
IXC 03-Jan-07 81 111.47 9,037.07 111.45 9,027.45 -0.11% -0.11% -0.45%
PHO 03-Jan-07 489 18.41 9,010.49 18.69 9,151.15 1.56% 1.56% 6.80%
SLV 03-Jan-07 70 128.64 9,012.80 133.52 9,346.40 3.70% 3.70% 16.69%
USO 03-Jan-07 174 51.60 8,986.40 53.35 9,282.90 3.30% 3.30% 14.78%
cash 919.07 923.67
Overall 03-Jan-07 100,000.00 101,953.76 1.95% 8.56%
Macro HF 03-Jan-07 100,000.00 101,305.56 1.31% 5.66%
SPY 03-Jan-07 141.62 142.55 0.66% 2.66%

Position = symbol of the security the portfolio owns
Purchase = date when the security was acquired
Shares = number of shares the portfolio owns
Paid = price per share at time of purchase
Cost = total portfolio paid (including commission)
Now = price per share at time of statement
Value = what it is worth as of the date of the statement (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (blank for positions new since last report)
Return on Investment = on a percentage basis, the performance of this security to date
Compounded Annual Growth Rate = annualized ROI for this position (to help compare apples to apples)

Notes: The benchmark for this account is the Greenwich Alternative Investments Global Macro Hedge Fund Index, which historically (1988 to 2006 inclusively) provides a CAGR of around 15.5%. For comparison’s sake, we also show the SPDR S&P 500 ETF, which historically provides a CAGR of around 10.5%. Note that dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission (except for the SPY).

Transactions: All positions are shown presuming purchase on 3 Jan 07 at the closing price on 29 Dec 06; the Macro Hedge Fund Index and S&P 500 Index also reflect starting prices as of the 29 Dec 06 close. There were no sales or purchases subsequent to 3 Jan 07. We booked a dividend of $0.024/share for PHO on 16 Mar.

Summary: Aside from our Malaysia and Australian ETFs, it was a decidedly lackluster quarter. The meltdown in the volatile Shanghai stock market in early February—punctuated by a 7% loss in a single day in February—had a chilling effect on both the Chinese and Indian markets. Rising interest rates in India exacerbated their travails. Per our standard risk management policy, we did consider selling the FXI fund when it fell 10% (it actually bottomed at down 18% on 5 March) and we considered selling the IFN fund when it fell 10% (it also bottomed at down on 5 March down 19%). (We would have reviewed the positions again at a 20% loss level had that proved necessary.) Our view is that while the overall economic situation is precarious given the shakiness of the US dollar and the likelihood that higher interest rates and decline in the US real estate market will eventually decimate consumer spending, it is likely that China and the US will collaborate to avoid any serious crises until after the 2008 Olympics/US election cycle. Thus while we are prepared to shift into a defensive posture—index short funds and precious metals ETFs—if and when appropriate, we expect that the energy and emerging markets are likely to maintain an upwards momentum for another 18 months or more.

On the positive side, the Macro Hedge Fund Index had an even less impressive quarter than we did, and the S&P 500 index was essentially flat…so we did beat them both.

Posted in A.2 Investment Reports | Leave a Comment »

Mar 07 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Fri, 13 Apr 07

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 2.86 858.00 -28.68% -14.03% -47.37%
DNDN 10-Jan-07 248 4.01 1,002.48 12.93 3,206.64 178.66% 219.87% 21,512.65%
PTR 23-Jan-07 8 127.17 1,025.36 117.09 936.72 0.62% -8.64% -39.37%
IFN 13-Feb-07 24 41.76 1,010.24 38.14 915.36 -2.46% -9.39% -55.09%
FXI 27-Feb-07 10 95.00 958.00 102.43 1,024.30 3.36% 6.92% 119.99%
LMGGF 28-Feb-07 73 13.55 997.15 16.62 1,213.19 22.65% 21.67% 988.71%
FDG 20-Mar-07 44 22.68 1,005.92 22.10 997.04 n/a -0.88% -27.67%
cash       3,002.85   9,167.87      
Overall 03-Jan-07     10,000.00   18,319.12 78.78% 83.19% 1,207.92%
Global HF 03-Jan-07     10,000.00   10,271.34 0.87% 2.71% 12.04%
NASDAQ 03-Jan-07     2,415.29   2,421.64 0.23% 0.26% 1.12%

Position = security the portfolio owns
Purchased = date position acquired
Shares = number of shares the portfolio owns
Paid = price per share
Cost = what portfolio paid (including commission)
Now = price per share
Value = what it is worth as of the date of the statement (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (blank for positions new since last report)
Return on Investment = on a percentage basis, the performance of this security to date
Compounded Annual Growth Rate = annualized ROI for this position (to help compare apples to apples)

Notes: The benchmark for this portfolio is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2006 inclusively) provides a CAGR of around 15.4%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 11.0%. Note that for the portfolio, dividends are added back into the value of the pertinent security and not included in the “cash” total (this gives a more complete picture of the ROI for dividend-paying securities). Also, the “Cost” figures include a standard $8 commission and there is a 3% rate of interest on the listed cash balance.

Transactions: There was a flurry of activity in March as we bought and sold two options positions, plus another new equity position, each with an allocation of $1,000 (10% of the starting value of the portfolio). The commission for each of the four options transactions was $15 instead of the usual $8.

• 9 Mar – Bought 9 UKODA (DNDN Apr $5 calls) for $105/option
• 9 Mar – Bought 5 UKOKA (DNDN Apr $5 puts) for $200/option
• 20 Mar – Bought 44 FDG for $22.68/shr
• 30 Mar – Sold 9 UKODA (DNDN Apr $5 calls) for $900/option
• 30 Mar – Sold 5 UKOKA (DNDN Apr $5 puts) for $5/option

Comments: LOL we hope you are not expecting to see +79% every third month after this (or even ever again)! And no, we are not expecting the portfolio to end the year north of $120,000, which is the pace we are on here. To produce such a guady stat, we just got lucky, not only in the way the Dendreon story played out, but when it played out…a win like this would not have had as big an impact on the port in six or twelve months (at least, we hope it wouldn’t…guess if our performance in the interim sucks, then it would have). We will say that while we do not expect to gain $8,000 again in a single month, should the FDA approve Provenge by around 15 May, our DNDN could be worth another $6,000 or $7,000 from here all by itself.

As for the other big movers this month, check out the latest updates on TMY (down 29%) and LMGGF (up 23%).

Posted in B.3 Spec Reports | Leave a Comment »

Dendreon (DNDN) update #8—Intelligent debate on Provenge

Posted by intelledgement on Thu, 12 Apr 07

If you have been following the trials and tribulations of Dendreon, a speculative biotech play in our ISOP portfolio, then you might want to check a Provenge (Dendreon’s immuno therapy product for prostate cancer with the FDA are presently reviewing for possible approval) post on the Investor Village DNDN board by an intelligent and articulate bear. He cogently explains most of the serious concerns, both pre-approval and post-approval (which are the more salient issues at this point, in our opinion).

Be sure to peruse some of the replies, but at least those by croumagnon, fordwill1953, and most especially rancherho (this last being one of the best posts we have ever seen on any stock message board).

Posted in B.2 Spec Equity Updates | Leave a Comment »

Dendreon (DNDN) update #7

Posted by intelledgement on Wed, 11 Apr 07

LOL well here it is two trading sessions later, and now we have to wonder, what’s wrong with DNDN? At the close of $18.23 today, the stock is now down 23% in two days…on no news.

Get used to speculation.

With no material news event likely for up to five weeks—the FDA ruling being expected by 15 May—DNDN has evidently transcended the realm of fundamental valuation and moved into the ethereal world of market psychology.  In the absence of news, the driver day-to-day is an ineffable congruence of queuing theory and crowd psychology. What starts out as a random walk in either direction may or may not develop into a panicked forced march, depending on who happens to be paying attention at that moment. This is completely unpredictable, except to say that there will be sharp moves up and down.

Thus, the $64,000 question: if you didn’t get your fill of DNDN back when we rec’ced it in January at $4.01—or you are tempted to recommend it someone else—where to enter now? We see a 50-50 chance the bleeding will drag us down in to the mid-$15s before it spends itself. And probably a 10% chance we could see the $12s. Thus if you are looking for an entry, we suggest dividing your dry powder into two piles. If they are not equal, then the first one should be the larger. Place a GTC in the low-mid $15s for the first pile. As for the second pile…a drive into the $12s, if it happens, is likely to be fleeting…you are not going to get a fill at $12.02 even if the price gets that low…so place the second GTC just below $13, or if you are feeling particularly lucky, around $12.50. You will probably end up chasing the stock as we close in on 15 May with the second pile, if not both of them, assuming you still want in wherever it is then. But at least this will give you a fighting second chance at a lower entry point or two.

Caveat: The inmates are in control of the asylum now but this $12-to-$25 range is a fleeting opportunity. The press releases rule: the day that the FDA announces their decision, this stock is headed to the $40s if Provenge is approved—or the $4s if it is not.

Another caveat: Anything you or anyone else puts into DNDN now is still speculation. The company has no product and no income at this point…and a plentitude of expenses and debt. In the long run—say, 2010 or later—should Provenge prove efficacious and presuming Dendreon solve any scaling production issues, then we will be looking at a company with a monopoly on a product that is a matter of life and death to millions of men in the USA (100% of the rights) and Europe (marketed with a strong partner) with the probability of expanding the label beyond the initial $1B target, a company with proprietary cassette delivery technology for customized immuno therapy, a company with patents on key antigens, a company with a pipeline of potential anti-cancer therapies starting with Neuvenge (breast cancer)…a company approaching $2B in revenues with tremendous growth prospects…a company likely to command a multiple of 10x sales or better based on the experience of other biotech companies with blockbuster products…a company potentially worth $240+/share. Accordingly, the right thing to do with any investment money—which generally we prefer not to put in individual company stocks—is to forgo the roller coaster and pre-approval uncertainty, wait until the FDA speaks, and then if the word is “yes”, pay whatever is asked for some shares and stuff them away for three years (excepting only the need to hit the eject button if 9902B crashes and burns).

Posted in B.2 Spec Equity Updates | Leave a Comment »

Dendreon (DNDN) update #6

Posted by intelledgement on Tue, 10 Apr 07

What’s up with Dendreon? Clearly something: our January investment is now up 488% in four months. It’s not every day you get 112% of the float traded—that is, the number of shares that changed hands that trading day was 12% higher than the number of shares in circulation…obviously some shares were traded more than once in the same trading session—as happened Friday 30 March when the DNDN was up 148% following the great advisory committee results on 29 March.

In fact, check out the last few trading sessions for DNDN:

29-Mar-07… halted

As you can see, the big news was on Thursday, 29 March and so Friday 30 March was zany and then the volume and appreciation started to tail off…until last Thursday, when, for no apparent reason—no news or analyst endorsement—the volume took off and a buying panic ensued…and that carried thru to yesterday…so what’s up? And, more to the point, given our basis of $4.01 (based on a 10 Jan 07 buy at the close), should we be selling here?

Check out this “Lightbulb” post from Investor Village (a stock message board)…a cogent and plausible explanation of the confluence of strategic and tactical winds driving DNDN’s share price at this point in time. For our part, we are planning to hold on here, unless the short squeeze pushes us north of $40 prior to 15 May (the date by which the FDA is committed to rule on approval for Provenge). If you are long in an account that is immune from short term gain tax issues, you might look to sell on the approval news in the hope of getting back in cheaper following the “sell on the news” reaction…but be nimble in that event, as more good news is coming shortly thereafter in the form of [a] a favorable line of credit expansion that will, along with cash on hand, suffice to tool up Provenge production (it is amazing how many bank doors open up when you have a near-sure-thing product that can profitably generate $1B+ of revenues), [b] an ROW (rest-of-world) partner agreement that will afford Dendreon another infusion of cash, perhaps as much as $50MM, and [c] a shelf registration offering that will be targeted to garner the company funds to restart their pipeline work (Nuevenge—breast cancer—and beyond)…normally, dilution is bad news for existing shareholders but with biotechs in this situation, investors often calculate that the ROI on the funds will make the company more valuable going forward and drives the price per share northwards.

The thing is, there is a chance we might have the holy grail here: a methodology that leads to a cure for cancer. You can’t get more macro than that in biotech land!

The position is not risk free, of course…heck, given the small study, there is at least a 2.5% chance the Provenge survival benefit was a false positive…if so, the whole house of cards collapses.

But we won’t know that until we get final results from 9902B, which are at least a two or three years off. And in the mean time, the upper limit here is not within sight

Posted in B.2 Spec Equity Updates | Leave a Comment »

BUY Élan (ELN)—Tysabri + AAB-001 = $$$$

Posted by intelledgement on Fri, 06 Apr 07

Élan (ELN) is a biotech company based in Ireland, and constitutes a poster child for the vagaries of speculation. At the beginning of the decade, the company had a marketcap around $20B and shares traded as high as $61 in June 2001…but then a grievous accounting scandal broke, and within 16 months, the stock was down below $2 amid strong doubts the company could recover. However, they hired a CEO from the USA, G. Kelly Martin, and he focused on moving Tysabri—a humanized monoclonal antibody that proved efficacious in the treatment of multiple sclerosis (MS) and Crohn’s disease (CD)—to market.

Élan had entered into partnership with Biogen Idec (BIIB) in 2000—BIIB is responsible for manufacturing and distribution in Europe; ELN is responsible for distribution in the USA; revs are split 50-50 up to $700MM and 65-35 in favor of BIIB thereafter unless ELN elect to make a milestone payment of $75MM, which buys them a 50-50 split up to $1.1B, after which it is 65-35 in favor of BIIB unless ELN elect to make a second milestone payment of $50MM, which buys them a 50-50 split on all revenue thereafter. After the FDA approved Tysabri for MS in late 2004, the stock reached $27. But then in February 2007, two cases of a rare and often lethal brain disease known as progressive multifocal leukoencephalopathy (PML) were found in patients given Tysabri in combination with Avonex (BIIB’s interferon beta-1a MS drug). The companies withdrew Tysabri from the market and began a safety evaluation. This review uncovered a third case of PML, in a CD patient taking Tysabri in conjunction with immunosuppressant agents who had died in December 2003 from what was thought at that time to be a brain tumor, but the diagnosis was subsequently re-evaluated as having been PML. This time, the stock only fell to $3, but the collapse took a lot less time (two months).

Fast forward to June 2006: satisfied with the safety review, the FDA and EMEA (European Medicines Agency) both approved the return of Tysabri to the market. The stock bounces around in the $17-to-$19 range. But enthusiasm for ELN on The Street is low. Analysts worry that there will be more PML cases. They worry that MS patients and doctors will worry about PML and won’t use/prescribe Tysabri. They worry that Biogen Idec salesmen won’t push Tysabri in Europe now that it can no longer be used in conjunction with BIIB’s old MS drug, Avonex (for whom the salesmen might be better compensated as Biogen does not have to share Avonex revenues with Élan). They might worry that folks would remember when they recommended ELN at $60 in 2001 or at $27 in 2005, except no one ever seems to track what analysts on The Street said in the past so that most likely is not a concern. They worry that Tysabri will not be approved for treatment of CD in the USA or EU (decisions on both expected in the second half of this year). Whatever, no one seems to like ELN and the stock is languishing here back down around $13.50 (marketcap of $6B).

But we like ELN here.

First of all, we are reasonably reassured that the folks at Élan have a handle on the PML issue and that the safety guidelines they have come up are likely to avert any more cases. Of course, some risk from that quarter remains—and there is always the chance that some new complication will arise, perhaps a problem that only becomes evident after some years have passed—but based on what is known now, we believe that MS patients will embrace a drug that reduces relapses 67% of the time and slows progression of the disease 42% of the time (both numbers twice as good as anything else out there).

Now from a valuation point of view, biotech companies with their first $1B blockbuster potential drug and the earning growth to match—e.g., CELG today and AMGN, BGEN, DNA in the past—typically command multiples of 15x to 20x revenues depending on how The Street regards their pipeline. (Mature healthy pharmas have marketcaps more typically in the 4x to 6x revs range.) The potential MS market for Tysabri is 500,000+ patients in the USA and Europe. To reach revenues of $1B, Tysaberi needs about 7% of the potential market—35,000 patients—currently they have just a few thousand and expect to exceed 15,000 this year. Here is how we see Tysabri sales unfolding over the next few years (barring any more catastrophes, of course; typical annual cost of treatement is $28,500; projections based solely on MS market…any additions from the smaller CD market would be gravy):

Year End—# of Patients

So, we forsee Tysabri becoming a $1B product on an annualized basis by the end of 2008. Because ELN only get about half this revenue, it takes them until sometime in 2010 to get to $1B themselves. By the end of 2010, they will be taking in $1.4B on an annualized basis (presuming they elect to pay the milestone payments to BIIB in 2008 and 2009, as we expect). At a P/S ratio of 17.5x sales, ELN shares ought to be fetching around $58/share by then. Discount that price 25% per annum to reflect the various risk factors and we figure a fair price for ELN here is around $20 ($24.50 by the end of the year if they hit our target of 17,500 Tysabri users by then).

Therefore, presuming Tysabri meets expectations—and presuming the pipeline looks good—the stock appears to be somewhat undervalued here. So…what else they got?

What they got is the world’s leading candidate Alzheimer’s disease (AD) treatment.

Élan already back in 2002 were testing the first (and up to now, still the only) AD drug—AN 1792, a synthetic form of the beta amyloid peptide—that succeeded in reducing beta amyloid plaque in patients’ brains! Unfortunately, the stimulation of the patients’ immune system AN 1792 induced in order to mobilize the body’s defenses against the plaque also apparently engendered encephalitis, so the Phase II test was halted. Well, actually, they continued the study but switched everyone over to placebos; the results indicating the efficacy of AN 1792 were reported in 2004 based in part on autopsy reports.

But that was then, and now Élan—in partnership with Wyeth (WYE)—have a new AD treatment in Phase II testing: AAB-001. Unlike AN 1792, AAB-001 is not designed to stimulate the body’s immune system to fight the beta amyloid peptide, but rather provides antibodies itself. According to Élan’s website, “Animal studies have shown that this approach is equally effective in clearing beta amyloid from the brain as traditional active immunization methods” such as AN-1792…but absent what we now know to be the risky tactic of stimulating the patient’s immune response to beta amyloid.

Now it is only Phase II, and their last AD Phase II ended badly, and even if the these results show both efficacy and safety, it’s a long way from there through Phase III to approval…and while AN 1792 is still the only treatment proven to reduce brain plaque in humans, other companies are not standing still and that distinction won’t last indefinitely: competition is coming. But…having said all that…AAB-001 is right now the best hope there is for AD and if it lives up to its promise, the potential annual market could be anywhere from $2MM to $10MM+…anywhere from blockbuster to humongous and beyond.

So ELN is not a one-trick pony. Aside from Tysabri and AAB-001, they have some other stuff under development…and they actually have some real products and real revenues (unlike Dendreon, our other biotech investment): $560MM worth or revenue in 2006 with no help whatsoever from Tysabri. Not enough to generate black ink, but it ain’t hay. For more details, check out their website.

Bottom line: a $6B company that should be worth $9B here, likely will be worth $20B in 21 months or so, and has a reasonable shot at a $40B+ valuation in the next five years or so.

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