Macro Tsimmis

intelligently hedged investment

Archive for May, 2007

Provenge and the FDA—frog meets scorpion

Posted by intelledgement on Fri, 25 May 07

In the wake of the FDA decision earlier this month to issue an approvable letter to Dendreon with respect to their anti-prostate cancer prototype treatment, Provenge, there has been a lot of speculation that some combination of hedge funds who had massive short positions and big pharma companies who market chemotherapy products somehow improperly influenced the decision.

The FDA decision to go against the advice of their own advisory committe—who voted 17-0 that Provenge is safe and 13-4 that is is probably efficatious—was a most definitely a shock. And it does appear that two of the panel members who voted negatively on efficacy had serious conflicts of interest, and certainly those two individuals later wrote letters to the FDA criticizing the majority recommendation. However, I think if the takeaway here is that the system worked well, and it was only some dark grassy knoll conspiracy that subverted what would have been the right decision at the last minute, then I think we are making a big mistake.

IMO, anyone who seriously believes the FDA careerists give a hoot about hedge fund shorts is a candidate for a flying saucer ride. And anyone who asserts that they are accepting bribes from big pharma to defend chemo franchises is not much better off…perhaps a candidate for a black helicopter ride.

No, what happened here is that the system worked exactly the way it was designed to work…except for the AC meeting efficacy vote, which due to what in retrospect was clearly an anomalous alteration of the question in the middle of the vote, came out unexpectedly in favor of Provenge. The FDA approvals process is designed to weed out any product that does not meet stringent standards. The folks who man the bulwarks there live to find “exceptions” to the straight and narrow, and stamp REJECT and RETURN TO SENDER in red ink all over them.

Such a process does not cope well with innovative products, and the handling of Provenge has consistently reflected that weakness: picking the wrong endpoints for the first two studies, screwing up enrollment of the second study, giving Dendreon management false encouragement about the outcome of the BLA, the changed question fiasco at the AC, just to name a few examples.

But this case is different, we thought. FDA Chairman Dr. von E wants to build a bridge, we thought. The FDA need immuno therapies in general—and Provenge in particular—to beat cancer by 2015, we thought. The pleas of the individual patients and providers at the AC—the very same ones that dissenter Dr. Hussain slept through—were so compelling, we thought.

LOL what we forgot about in our zeal and excitement to be part of a potentially major achievement for humanity was the old story about the scorpion and the frog…you know, the scorpion needs to cross the river and pleads with the frog to carry him but the frog refuses, explaining, “If I let you on my back, you will just sting me!” To which the scorpion replies, “Don’t be ridiculous, it makes no sense for me to sting you…I can’t swim…I can’t get across the river on my own…besides, not only do I need you to cross the river, but if I were to sting you while we were doing it, you would be paralyzed and sink…and I would drown!” So the frog relents and they get halfway across…and the scorpion stings the frog! As the poison flows through her body and the frog begins to sink beneath the surface, she croaks out, “Why did you do it? Now we will both drown!” Replies the scorpion, “I know…I’m sorry…but I can’t help it; it’s my nature.“

I accept that this decision is likely—given that Provenge probably works—to result in unnecessary pain, suffering, and death, to sink Dendreon, and to minimally push back the development of immuno therapies for cancer if not all manner of innovative medical products…that damage is now water under Dr. Von E’s mythical bridge.

But going forward, we have a problem: the FDA are so inflexibly inept at dealing with innovative products that they have created conditions where shortsellers are shooting biotech applicants like fish in a barrel. This “surcharge” on investors hurts not just Dendreon, not just immuno therapy research, not just innovative medical research in the USA in general, but humanity as a whole, to the extent that such research might advance the ball to our mutual benefit.

Now I am not saying this is black and white.

I appreciate the power of biostatistician Thomas Fleming’s implicit argument that the damage to the process of approving a red-stamped product outweighs the benefits of likely being correct in this particular case…because it would compromise the agency’s capacity to say “NO” in the 99% of such cases where that is the right answer. Mr. Fleming knows his stuff, and he is fighting his own personal battle with prostate cancer, so clearly he does not reach this conclusion lightly.

I appreciate that the FDA should not heavily weigh anecdotal testimony in making approval decisions (albeit sleeping through patient testimony is bad form).

I appreciate that in general, we want unimaginative martinets at the FDA to protect us from snake oil.

But to me, it appears that the FDA are floundering around in the middle of the river with no idea how to swim when it comes to Provenge.

To me, the right takeaway here is that we need to seriously consider whether as presently constituted their inability to make an exception to their “no exceptions” policy does us more harm than good.

To me, that has to be the focus here.

If we divert our energy chasing black helicopters and digging up the grassy knoll looking for shell casings and corruption, we will, in effect, be throwing good energy after bad money…and it won’t help the frogs in the least.

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LionOre (LMGGF) update #4

Posted by intelledgement on Wed, 23 May 07

Tennis anyone?

The back-and-forth bidding match between Swiss miner Xstrata (XSRAF) and Russian miner Norilsk (NILSY) was marked today by another volley from the Russians: this one for C$27.50/share (US$6.3B). Here is a tally of the offers to date:

  1. 26 Mar—XSRAF offers C$18.50/shr
  2. 3 May—NILSY offers C$21.50/shr
  3. 15 May—XSRAF offers C$25/shr
  4. 23 May—NILSY offers C$27.50/shr

We are now pretty close to the US$7B-to-$9B valuation range we feel comfortable with. By our calculations, at this level—with nickel still near all-time highs north of $24/lb. and LionOre producing 88MM lbs./year—the deal is priced at close to 7x projected annual cash flow. We were hoping for closer to 9x cash flow…last summer, Xstrata paid 15x cash flow for Falconbridge, but nickel prices were “only” $15/lb. back than and buyers may be thinking the current price level is unsustainable. Sellers, however, were anticipating at least one more bid, as LMGGF closed the day above C$28/share.

It’s Xstrata’s serve now, right?

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Apr 07 Intelledgement Speculative Opportunity Portfolio Report

Posted by intelledgement on Tue, 22 May 07

Position Purchased Shares Paid Cost Now Value Change ROI CAGR
TMY 03-Jan-07 300 3.30 998.00 2.73 819.00 -4.55% -17.94% -46.05%
DNDN 10-Jan-07 248 4.01 1,002.48 15.03 3,727.44 16.24 271.82% 7,730.17%
PTR 23-Jan-07 8 127.17 1,025.36 112.14 913.13 -4.23% -10.95% -35.37%
IFN 13-Feb-07 24 41.76 1,010.24 39.83 955.92 4.43% -5.38% -23.33%
FXI 27-Feb-07 10 95.00 958.00 105.29 1,052.90 2.79 9.91% 74.45%
LMGGF 28-Feb-07 73 13.55 997.15 16.86 1,230.78 1.45% 23.43% 252.69%
FDG 20-Mar-07 44 22.68 1,005.92 24.04 1,082.40 8.78% 7.68% 92.09%
ELN 04-Apr-07 129 13.90 1,801.10 13.88 1,790.52 n/a -0.59% -7.94%
VRTX 18-Apr-07 57 31.65 1,812.05 30.74 1,752.18 n/a -3.30% -64.04%
cash       -610.30   5,577.64      
Overall 03-Jan-07     10,000.00   18,901.91 3.18% 89.02% 629.78%
Global HF 03-Jan-07     10,000.00   10,456.22 1.80% 4.56% 14.94%
NASDAQ 03-Jan-07     2,415.29   2,525.09 4.27% 4.55% 14.89%

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: A couple of new purchases this month…we allocated $1800 per buy instead of $1000 as the size of the portfolio at the end of March was over $18,000. (Each new position is still targeted at 10% of the portfolio, but as the overall value is up, so is the amount of money allocated to the purchase.)

• 4 Apr – Bought 129 ELN for $13.90/shr
• 18 Apr – Bought 57 VRTX for $31.65/shr

Comments: There were no really big movers this month, and overall the portfolio gained 3%. Normally this would be a very good month, but it seems a tad pale compared to our 79% gain in March—especially as the NASDAQ gained 4% to edge us out for April. 😦 Overall, however, we are up 89% so far this year compared with 5% each for the NASDAQ and hedge fund index. We’ll take it.

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BUY Neurocrine Biosciences (NBIX)—a good night’s sleep, and beyond

Posted by intelledgement on Tue, 22 May 07

As with Élan—one of our other biotechs—Neurocrine Biosciences (NBIX) have had their ups and downs. The stock was at an all-time high $70 14 months ago when the FDA somewhat surprizingly turned down their proposed anti-insomnia product, Indiplon. The stock dropped down to $60 when it appeared that a quick fix might be possible, at least in part…but five weeks later, Pfizer (PFE) terminated their four-year old worldwide Indiplon partnership with Neurocrine and the stock plummeted to $10. And it has pretty much remained there ever since.

Indiplon’s claim to fame is that it works and—even if you take it in the middle of the night after waking up and not being able to get back to sleep—there is no “hangover” the next day. Many insomniacs find that the products currently on the market, while effective, inhibit their ability to operate normally the next day.

Exactly what happened back in 2006 is a little unclear, but the New Drug Application (NDA) submitted by Neurocrine-Pfizer was for 5mg and 10mg fast-acting capsules and 15mg slow release tablets, and the FDA issued an approvable letter for the capsules and a non-approvable letter for the tablets. In retrospect, it appeared that Neurocrine-Pfizer screwed up on the 15mg dosage, submitting more data relevant to a 20mg dosage (for which they did not seek approval) and then applying for a expedited approval and even failing to get results from one relevant study to the FDA in time for it be included in their review. In any event, five weeks after the 15 May decision, Pfizer evidently reached the conclusion that the cost of getting the 15mg dosage approved—presumably another study—outweighed the benefits, and as that long-acting dosage was projected to account for half the product revenue or more, the prospective approval of just the 5mg and 10mg fast-acting dosages did not suffice to continue the partnership.

At first, it appeared that a new three-month safety and efficacy study would be required for the capsules, too, but fortunately, after several months of discussions with the FDA, NBIX management announced in January of 2007 that all the FDA required was “the resubmission [of] further analyses and modifications of analyses previously submitted to address questions raised by the Agency in its initial review. The FDA also requested, and the Company has completed, a supplemental pharmacokinetic/food effect profile of indiplon capsules including several meal types.” The revised NDA is expected to be resubmitted to the FDA in 2Q07 (this quarter) and the FDA should announce a decision within six months. So barring a weird screw-up, the company should be marketing “indiplon lite” by early in 2008. It is no longer a potential billion dollar product at these light dosage levels and without the marketing power of Pfizer behind it. But $70MM of revenue in 2008 and eventually up to $250MM/year seem reasonable.

Which is nice, but not the half of it. There is another potential blockbuster in NBIX’s pipeline: their small molecule gonadotropin releasing hormone (GnRH) agonists agent, NBI-56418, which is currently being tested (phase 2) against endometriosis. Endometriosis is a common medical condition characterized by growth of tissue like endometrium, the lining of the uterus, beyond or outside the uterus. It is frequently very painful and occasionally, depending on the location of the growths, can interfere with normal functioning of pelvic region organs such as the bladder or bowels. About 89MM women worldwide are affected, including about seven million in the USA.

GnRH agonists are probably the most effective medication available to treat endometriosis. They drastically reduce estrogen levels, which is quite effective in discouraging production of endometrium tissue. Unfortunately, they also induce unpleasant menopausal symptoms, and extended use incurs a risk of osteoporosis. This is where NBI-56418—Neurocrine’s proprietary, orally-active small molecule Gonadotropin-Releasing Hormone (GnRH) receptor antagonist—comes in. The company believe they have engineered a GnRH agonist that is effective at reducing estrogen levels but with fewer adverse effects. In January, they reported preliminary results for a second phase 2a study—successful results from their first phase 2a study were reported in 2006—and they are presently enrolling patients in a larger phase 2b study.

The company also are working on a CRF R antagonist in conjunction with GlaxoSmithKline (GSK) for the treatment of depression/anxiety and on NBI-69734, a drug designed to mimic the effect of the protein urocortin 2 with respect to the treatment of congestive heart failure. These show promise but are at a more preliminary stage than the others.

So here we have a biotech worth just over $400MM with one drug—indiplon—with a potential of $100MM-to-$250MM in annual revenues likely to be approved in December (with the possibility of follow-on approval for the long-acting 20mg dose which could generate considerably more revenue) and a second drug in phase 2 testing that has $1B potential. This appears to us to be the most potentially undervalued US biotech company out there.

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Élan (ELN) update

Posted by intelledgement on Mon, 21 May 07

Our neuropharma company, Élan (ELN), announced today in conjunction with their development partner Wyeth (WYE) that they have determined to initiate a Phase 3 trial of their Alzheimer’s disease  humanized monoclonal antibody, bapineuzumab (AAB-001) before the end of 2007, subject to regulatory approval. This decision is based on preliminary data from the two ongoing Phase 2 trials, which are not due to be completed until 2008. It is unusual for a Phase 3 trial to be initiated before Phase 2 is complete; the clear implication is that the preliminary data from the Phase 2 tests—no data from Phase 2 are expected to be made public before completion of the trials in 2008—must be very strong…evidently strong enough, in management’s judgment, to persuade regulators to approve this move.

ELN closed at $18.69, up 13% on the day.

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LionOre (LMGGF) update #3

Posted by intelledgement on Tue, 15 May 07

Ah, better and better!

Swiss miner Xstrata (XSRAF) have sweetened the pot, upping their 26 March all-cash offer of C$18.50/share for LMGGF—which was trumped on 3 May by Russian mining giant Norilsk’s all-cash bid of C$21.50—to a new all-cash bid of C$25 (US$5.6B). We still think LionOre is worth US$7B-to-$9B…and The Street still agrees that this new price is yet too low, with the stock closing today at C$26.68—i.e., above the offering price—up 13% on the day.

It ain’t over ‘til the fat lady sings.

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Transmeridian (TMY) update #3

Posted by intelledgement on Fri, 11 May 07

Transmeridian (TMY) announced their 1Q07 results yesterday after the close of the market and there was no joy in Mudville. Average daily production for the quarter was a record 3500 bpd of oil but expenses rose even faster and while the production numbers approached what management had targeted as their breakeven threshold of 4000 bpd, the red ink surged year-over-year from $12.7MM in 1Q06 to $15.5MM this year. And while the volume of sales were up, the average price per barrel actually declined from $30.05 in 1Q06 to $28.19 in 1Q07.

This investment is not looking good but the spec port overall is doing well enough here that we can afford to cut TMY management some slack given the still huge potential upside if they can get their production issues solved. Let’s see how the second quarter goes.

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SELL Dendreon (DNDN)

Posted by intelledgement on Wed, 09 May 07

Well, we got our eagerly-anticipated news today, and it was not good: the FDA issued an approvable letter. According to Dendreon management, the specifics of what the agency are asking for are unclear, but it involves both clinical data and information on manufacturing. Up to now, management were confident the FDA were satisfied on both counts, so it’s not surprizing they are clueless in the face of this development. We are certainly shocked.

It is remotely possible that what the FDA are after can be satisfied by an interim snapshot of some of the early 9902B data (TTP) but as they have already stated that time to progression is not the correct endpoint for measuring immuno therapy, we are expecting that it will take the survival data, not expected until 2010.

Dendreon has about $100MM in cash, which is enough to tide them over for a few months assuming they fire most of the sales and production staff they have added in recent weeks, but to keep going until 2010, they will need more financing…which means dilution as they are unlikely to get a loan on reasonable terms, with no solid prospect of Provenge revenues in the offing. And three years is enough time for competition to arise, although in the wake of the FDA decision this morning, all immuno therapy companies are suffering stock price wise, and are likely to find financing tough to come by themselves—an unfortunate side effect of this decision—so any competition will likely have to arise from another quarter.

To be honest, it is a bit surprizing the stock price is holding up as well as it is (down over $10 to around $7). We were expecting it to tank to the $2 range on an approvable letter. Given the risks of dilution, competition, and the chance that 9902B will reveal the earlier data to have been a false positive—which the FDA must have concluded is greater than one in forty; can’t conceive of them consigning tens of thousands of men to death in the next three years if they believed there was a treatment with a 97.5% likelihood of efficacy available—we are cashing in all our 10 Jan $4.01 chips here for a 75% profit and will wait and see.

Good thing we didn’t buy more in the $14s! In the event, we can’t really complain from a financial standpoint: we made money on the stock and we made money on the options. This turn of events is none-the-less shocking, however, because when you consider that the product probably works, that the disease is killing 10,000 people a year, and that the FDA’s own advisory committee recommended approval…well, it just seems like a bad decision.

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LionOre (LNGGF) update #2

Posted by intelledgement on Thu, 03 May 07

The Russians are coming! The Russians are coming!

We were beginning to wonder. It has been over a month since Swiss miner Xstrata (XSRAF) made their lowball all-cash “friendly” (that is, unanimously endorsed by the disloyal-to-the-shareholders LionOre board and CEO) takeover offer of C$18.50/share (US$4.2B). Our thinking is that with nickel prices are at all-time highs, north of US$23/lb., LionOre is worth more like US$7B-to-$9B. Apparently other LMGGF shareholders agreed shared our dissatisfaction with the XSRAF offer to some extent, as the price has been hovering around C$19/share (US$4.3B). But we were wondering if any professional miners agreed with our assessment that LMGGF is grossly undervalued here…and if not, worrying that maybe we were delusional?

Today, thankfully, a serious counteroffer has arrived from Moscow-based Norilsk Nickel (NILSY), the largest mining company in the Russian Federation. The all-cash offer from NILSY is for C$21.50/share for all LMGGF stock (US$4.8B)…and better still, The Street still seems to agree with us that even this offer is too low, as the stock closed up 25%(!) today to over C$23/share.

Stay tuned.

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