Neurocrine Biosciences (NBIX) may have spectacularly failed to get the FDA to approve their sleep remedy indiplon, but for those of us who own their stock anyway, following the progress of the company may be just as effective at lulling us into a doze. The company reported their 1Q08 results today, and the report was thin on real news. With no products in the market, they continue to generate red ink at the rate of $80MM/year or so. There is still no news on the the GnRH partnering front (“We will not speculate on a timeline for the completion of this deal,” says CEO Kevin Gorman, which is an improvement over the promises of his predecessor to wrap up a deal by the end of 2007). Three phase 2 trials continue apace. The long lamented post mortem meeting with the FDA to discuss indiplon has now been postponed until July. We are deeply under water here, but still hopeful that a GnRH partner announcement will cut our losses sometime this decade.
Archive for April, 2008
Posted by intelledgement on Wed, 30 Apr 08
Posted by intelledgement on Sun, 27 Apr 08
Another good week for Vertex (VRTX), one of our biotech plays, whose stock price has roared back from the mid-teens to the mid-twenties in the space of the last month.
On Monday, the company reported a 1Q08 loss of $96MM, higher than a year ago ($81MM), but in line with expectations that they will produce around $400MM of red ink in 2008 as the huge 4000-patient phase 3 telaprevir trial—which started in March—chugs forward. The press release includes a good update on the progress of all their current trials and research…and for more details, check out the Q&A in this transcript of the conference call they held Monday.
On Wednesday, new phase 2b trial data were released confirming the efficacy of telaprevir for treatment naive hepatitis C patients. “Final results from PROVE 1 and further interim analysis from PROVE 2 showed consistently higher SVR rates and antiviral response in the 24-week telaprevir arms — 61% of patients in PROVE 1 and 68% of patients in PROVE 2 achieving SVR, compared with 41% of patients in the PROVE 1 control arm achieving SVR and 48% of patients in the PROVE 2 control arm having undetectable HCV RNA at 12 weeks post-treatment,” according to the press release. So, we know the drug works 50% better than anything on the market and with a course of treatment that is half as long as the current SOC. The results of the just-started 4000-patient Phase 3 trial should provide the FDA with sufficient data on safety for them to make an approval/disapproval decision in 2011.
Then on Thursday, we got tantalizing preliminary results from an open-label trial of telaprevir for hepatitis C patients who had not responded to the standard of care (SOC) treatment (48 weeks of interferon plus ribaviron). When such patient repeat the SOC treatment, typically about 10% are cured, and as 48 weeks of taking interferon and ribaviron render most people unable to work and is generally no fun, the incentive to undertake a second goaround is not great. But…after four weeks of a 12-week course of treatment with telaprevir (plus interferon and ribaviron) to be followed by an additional 12 weeks of interferon and ribaviron, 82% of patients (49 out of 60) showed a significant reduction of the hepatitis C virus (to below 25 IU/mL). Although there is typically some dropoff in response as treatment continues, so far 36 of those patients have reached eight weeks and 16 of those have reached 12 weeks and they all continue to measure below 25 IU/mL.
These data are skimpy and preliminary, but if telaprevir can cure, say, 30% of those hepatitis C patients who are not cured by the SOC treatment—which is about half of those who try it—then barring serious adverse effects it is extremely likely to be approved by the FDA in an accelerated process, possibly based on the forthcoming Phase 2 trial data, as that patient population is otherwise in a very bad situation. We should get a better reading from the bigger Prove Phase 2b studies Vertex are running now; some preliminary results from them are expected in June.
Posted by intelledgement on Sun, 27 Apr 08
Our Indian buildout play, miner/metals refiner Sterlite Industries (STL), reported their 2008 fiscal year results yesterday (their FY ends 31 March), and it was nothing to write home about. Revenue was $6.17B, up 1% from 2007 and profits were flat at $1.1B…although earnings per share were down from $2.03 to $1.65 due to dilution. Despite record annual production of metals, results were muted by the appreciation of the rupee against the dollar, which cut into overall revenues. (Note: all dollar figures cited herein are converted from the original crore at the 31 Mar 08 exchange rate.)
Aside from the lack of growth in revenues and profits, it was a good year. Costs were lower across all environments, which helped to offset the exchange rate headwinds. Copper refining operations produced record output (339,000 tons) with a record 98% recovery rate. Aluminum production also set a new all-time record in 4Q08 (92,000 tons). The Hindustan Zinc Ltd. (HZL) subsidiary also produced record outputs of zinc (426,000 tons) and lead (58,000 tons), thanks to smooth commissioning of the new Chanderiya II smelter—which occurred a world record 20 months after groundbreaking; the new smelter achieved its rated capacity in the first quarter of operations. HZL was also successful on the exploration front, upping their contained zinc-lead reserves by a net 3.4 million tons despite the record production numbers.
Looking ahead, HZL will be come the largest integrated zinc-lead producer on the planet (output capacity in excess of one million tons) by 2010 if the expansion projects announced this year are completed on time. And work is progressing on the first Jharsuguda power plant (of four planned 600 megawatt plants in the phase 1 project), with the expectation it will be commissioned in March 2009.
And even though revenues were up only 1% year-over-year, since the $217MM the company pulled in in FY1998—a decade ago—the compounded annual growth rate of revenues still clocks in at 40%.
In short, life is good and getting better for Sterlite Industries.
Posted by intelledgement on Thu, 24 Apr 08
Élan (ELN), our major league biotech company, announced 1Q08 financial results today and the impact of increased tysabri sales is reflected clearly. Y-O-Y sales increased from $168MM to $207MM (including $160MM of tysabri sales, up from $41MM a year ago) and EBITA improved from a loss of $38MM to a loss of $33MM.
Management now project revenues approaching $1B for 2008 overall (up from $759MM in 2007) and reduced losses throughout the year.
Posted by intelledgement on Tue, 22 Apr 08
Position = symbol of the security for each position
Purchased = date position acquired (for long positions) or sold (for short positions)
Shares = number of shares long or short in the portfolio
Paid = price per share
Cost = what portfolio paid (including commission); note for short sales, the portfolio gains cash
Now = price per share as of the date of the report
Value = what it is worth as of the date of the report (# shrs multiplied by price per share plus value of dividends)
Change = Change since last report (not applicable for positions new since last report)
Year-to-Date = Change since 31 Dec 07
Return on Investment = on a percentage basis, the performance of this security since purchase
Compounded Annual Growth Rate = annualized ROI for this position since purchase (to help compare apples to apples)
Notes: The benchmark for the ISOP is the Greenwich Alternative Investments Global Hedge Fund Index, which historically (1988 to 2007 inclusively) provides a CAGR of around 15.1%. For comparison’s sake, we also show the NASDAQ index, which over the same time frame has yielded a CAGR of around 10.1%. 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 2% rate of interest on the listed cash balance.
Transactions: Another quiet month transaction-wise, as all we did was sell short Beazer Homes (again), as it climbed to our longstanding GTC price of $10.99…actually, it got as high as $11.44 on 24 March, but we are just grateful to be short a homebuilder again as a hedge against further market deterioration.
- 3 Mar—BPZ increases reserves by 50%
- 18 Mar—BQI winter drilling program report
- 19 Mar—TMY management buyout offer fizzling
- 19 Mar—BPZ sells 2MM shares to raise capital
- 26 Mar—BZH bonds downgraded by Moodys
- 27 Mar—VRTX announces Phase 2 results for prospective cystic fibrosis treatment
- 31 Mar—TMY announces still more bad news
- 31 Mar—VRTX announces good Phase 2 telaprevir results
Yet another great month: +8% while the NASDAQ was flat and the hedge funds declined (-2%). Don’t take this the wrong way…we are happy the fund is doing so well…but we are constrained to say that being +167% in fifteen months (a new record all-time high, BTW) is not typical…and way beyond our expectations for future performance. However, it is a good example of the kind of results that speculation—as opposed to long-term investing—can generate. We need to keep in mind that this sort of wild fluctuation can work both ways when one is speculating.
The long-term outlook remains gloomy and doomy, as discussed in more detail in our IMSIP 1Q08 report posted Friday. We expect to limp into the elections reasonably whole, but we are currently short one financial services company (WB) and one real estate company (BZH) as a hedge against a sooner-than-expected decline (and also because we believe their stocks are overpriced here, of course). Meanwhile, we continue to monitor our long positions. TMY looks like a writeoff here and at this point, we are holding it primarily as a potential tax loss. Our other energy plays, BQI and BPZ, still have strong fundamental stories (so long as oil remains pricey, at least). Our commodity plays (GSS gold and SLT zinc) are down so far this year, but more related to individual issues than the macros. Our biotechs are a mixed bag: ELN is down, NBIX is up, VRTX has been down and up.
We’ll know more in another month, although the additional information won’t necessarily mean more clarity.
Posted by intelledgement on Fri, 18 Apr 08
Summary of Intelledgement’s Model Macro Strategy Investment Portfolio performance as of 31 Mar 2008:
Position = security the portfolio owns
Bought = date position acquired
Purchase Price = price per share
Shares = number of shares the portfolio owns
Cost = what portfolio paid (including commission)
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 (not applicable for positions new since last report)
Return on Investment = on a percentage basis, performance to date (since date of purchase for each security and since 3 Jan 07 for the IMSIP overall and the benchmarks)
Compounded Annual Growth Rate = annualized ROI (to help compare apples to apples)
Notes: The benchmark for this account is the Greenwich Alternative Investments Global Macro Hedge Fund Index—listed in the table as “Macro HF”—which historically (1988 to 2007 inclusively) provides a CAGR of around 15.3%. For comparison’s sake, we also show the S&P 500 index, 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 and there is a 3% rate of interest on the listed cash balance.
Transactions: We had a veritable flurry of activity this quarter; we have already sold off more positions in 2008 (three) than all of last year (two):
- 23 Jan – Sold 174 USO for $69.50/shr (ROI of 34.5% and CAGR of 32%)
- 13 Mar – Sold 988 EWM for $11.36/shr (ROI of 29.1% and CAGR of 24%)
- 13 Mar – Bought 235 DBA for $42.50/shr
- 20 Mar – Sold 107 SKF for $106.66/shr (ROI of 27.9% and CAGR of 46%)
- 20 Mar – PHO dividend of $0.018/shr
- 31 Mar – SRS dividend of $0.41072/shr
Performance Review: Right, well when we said in January that our 2007 performance (+37%) was “too outstanding to reasonably expect we can replicate the performance anytime soon,” it was not our intention to immediately prove our point. But we have: we just turned in our worst quarterly performance, and first loss. We did increase separation from the S&P 500—which wracked up a nightmarish quarter—but lost ground to the Macro Hedge Fund index—which eked out a win in an admittedly tough environment.
And tough it was. India (IFN, -24%) and China (FXI, -20%) were quaking in the shadow of a possible collapse of the USA banking system. Our agriculture and water ETFs (DBA -14% and PHO -10%) and our energy ETF (IXC, -9%) were no help either. Our one remaining short sector play, the real estate ETF (SRS, -10%), was perversely down for us, meaning real estate companies somehow were up in a down market. Even mighty Brazil (EWZ, -4%) was down. Only silver (SLV, up 16%) and gold (GLD, up 10%) bucked the trend on the long side.
In retrospect, we would have been better off not making any moves this quarter. Selling off the United States Oil ETF (USO) in January in anticipation of an economic slowdown cost us when a combination of political and technical supply concerns and the slumping dollar combined to trump the factor of an anticipated slump in demand and send the price of crude skyrocketing to new all-time highs. Selling off the Ultrashort Financials ETF (SKF) also backfired in the wake of the collapse of Bear Stearns (BSC) and unrelenting thud of other shoes hitting the ground. And our purchase of the skyrocketing Powershares Agriculture Commodities ETF proved to be near an interim high from which the price backed off by the end of the quarter.
Bottom line, even if we had not made these moves, we still would have been in the red and lost to the hedgies in 1Q08. But despite the losses we incurred, we are in a good place overall, with a compounded annual growth rate after five quarters of operation of 21% compared to 10% for the average macro hedge fund and -5% for the market overall.
Analysis: We continue to believe things will get worse before they get worst. That is, in a nutshell, the dollar is going to collapse and the US economy has a long way to go to adjust to the new reality where we are no longer king of the value-add hill in either manufacturing or services…but we still don’t think that is all likely to be telescoped into 2008.
Howsoever, the risks of “the big one”—a major market meltdown—continue to increase. As we have been saying, the Fed’s cheap money policy can’t solve the problem. The banks are not making loans to each other not because they don’t have the money to lend, but because they can’t assess the risk level. They typically know their own situation is secretly more dire than is being let on, so in common prudence they have to assume the same is true for any other bank seeking a loan. More liquidity injected into the system won’t magically turn bad paper into good paper, and so it won’t help the credit crunch.
The Bear Stearns collapse illustrates this. It took years for that company to accrue the leveraged securities based on unsound loans that rendered them vulnerable. And, in fact, they had been operating for over a year in no worse shape than they were on Wednesday, 12 March, when BSC CEO Alan Schwartz went on CNBC to assert that everything was fine. And he wasn’t lying—basically, Bear Stearns was no more or less exposed to disaster on 12 March than at any time over the prior several months. They were capable of conducting business all those months and they could have continued doing business indefinitely. What happened between Wednesday and Friday—by which time Schwartz was on his knees begging Morgan Stanley to bail him out for pennies on the dollar—is that BSC was hit by a panic run on the bank, and not even Goldman Sachs (who are in the best shape of any of them) could survive similar circumstances. Once that snowball starts rolling downhill…look out below! It was Bear Steans this time, but it could easily have been Lehman or UBS or any number of others had the hand been played out a bit differently.
Perhaps the efforts of the central banks—most of them world-wide are aiding the Fed by buying excess dollars—will buy enough time for the banking firms to deleverage and survive. But a panic like the one that hit Bear Stearns (technically not a run, per se, but rather a boycott by all their erstwhile trading partners…maybe “freezeout” would be a better word) would take out any one of them…even, theoretically speaking, in good times. The takeaway here is that [a] the odds of such phenomena occuring is up from the normal one-ten thousandth of one percent to something like a third of a percent on any given day, and [b] when it happens, it happens lighting fast.
It is really hard to be optimistic in light of a presidential election in the USA where candidates on one side vie to outbid each other with respect to adding entitlement obligations to the deficit-ridden Federal government and blame the actions of other countries for our economic plight…and the candidate on the other side hasn’t considered economics important enough in several decades of public service to educate himself on the subject…but who never-the-less is willing to commit us to a financially ruinous military adventure for the next century. With the exception of the fringe candidate Ron Paul, none of the many contenders are willing to discuss (or seemingly even aware of) our real problems: soaring deficits, a currency in a death spiral, and a social/political/financial system that provides incentives for both individuals and government to spend beyond their means and discourages savings or capital investment. How can it be that our physical infrastructure, our manufacturing sector, and our dollar are all collapsing and if these issues even come up in debates the best our political elite can muster by way of a response is to whine about the undervalued Chinese yuan? If they even have time to mention it between discussing the apparently more pressing matters of personality flaws, misstatements, and the foibles of each other’s supporters. Or illegal immigration. LOL if we keep wasting what little time we have left before the day of reckoning on sideshow issues, the collapse will be bad enough here that emigration will be more of a concern than immigration.
Humans have a built-in aversion to change—evolutionarily speaking, if you have survived up to now, why risk changing the conditions that made that possible?—but the process of modernization since the invention of agriculture over the last few thousand years has discounted that conservative predilection.
And just as our experience with modernization is but a small fraction timewise of the whole of human existence, the history of the USA is short compared with that of China, India, Russia, and Europe. But our history has been informed by a propensity to go where no one has gone before, socially, economically, and politically. And in pursuit of these ground-breaking endeavors, we have had little in the way of geographic or resource constraints. We have done more to challenge the wisdom of the ages with respect to change than anyone in human history. If things ended here, “new and improved” would be an apt epitaph for the United States of America.
And make no mistake: our long winning streak in solving the problems those challenges have engendered is sorely threatened here. Sailing in uncharted waters is nothing new for us, but it’s gotten really dark and stormy out there, we are moving at flank speed…and icebergs abound. Meanwhile, the band plays on.
Conclusion: As we expected, the strategic level intervention by the Fed and world’s central banks—huge infusions of liquidity and lower interest rates in the USA and massive dollar buying to shore up its value abroad—appear to be holding the line for the most part…and the Fed has demonstrated the will and capability to intervene in acute tactical situations where the line threatens to break, as with Bear Stearns. Thus we still anticipate it is most likely the markets will muddle through the Olympics/USA election without a major collapse.
We remain focused on the US consumer and the US dollar as our “canaries in the coalmine.” Should either the dollar or US consumer spending appear likely to collapse, then we stand ready to sell off the emerging market ETFs (EWZ, IFN, FXI) and possibly the energy and commodity ETFs (IFC, DBA) in favor of additional sector/index “reverse” ETFs (such as SRS already in the portfolio).
Posted by intelledgement on Wed, 16 Apr 08
Élan (ELN) shares closed up 11% to day at $24.30 in the wake of yesterday’s announcement that there were 26,000 world-wide users of tysabri as of the end of March…and still not a single case of Progressive multifocal leukoencephalopathy (PML). Tysabri was removed from the market after a couple of cases of PML back in 2005; the FDA approved its return to market in 2006.
The company has projected that 100,000 multiple sclerosis and Crohn’s disease patients will be using tysabri by the end of 2010, but at this rate—there were 21,000 users at the end of 2007—the number of patients, and concomitant revenues, are likely to be considerably higher.
Posted by intelledgement on Wed, 16 Apr 08
Oilsands Quest (BQI) announced today that their 2007-2008 winter exploration program in Saskatchewan and Alberta concluded on 26 March, with a total of 175 hole drilled: 150 in Saskatchewan and 25 in Alberta. Of the 175 holes drilled, 155 were exploration and delineation holes of which 103 encountered meaningful intercepts of bitumen-bearing McMurray formation (66%). The quality of the bitumen encountered will be determined by lab analysis, which has already begun.
Of the 125 holes drilled in the Axe Lake Discovery area, 88 were delineation holes, of which 65 encountered meaningful intercepts of bitumen-bearing McMurray formation (70%). The depths, thickness, and observed reservoir quality of the formation were consistent with previous results. The remaining 37 holes drilled in the Axe Lake Discovery area were exploration holes, of which 18 encountered meaningful intercepts of bitumen-bearing McMurray formation (49%). The successful exploration holes extend the drilled Axe Lake Discovery area from 36 to 65 square miles.
This winter marked the first time the company has drilled exploratory holes in Alberta. Of the 25 holes, 18 encountered meaningful intercepts of McMurray formation (72%) at depths of 371 to 745 feet. The thickness of the bitumen-bearing formation was observed to be between 23 and 112 feet, with a mean of 51 feet. The Alberta drilling program demonstrated continuity of oil sands characteristics extending from Oilsands Quest’s Axe Lake Discovery in Saskatchewan westward into Alberta (in close proximity to EnCana’s Borealis project). A report on the reservoir characteristics such as bitumen saturation and net pay will be released in a few months (after geophysical log data and core analysis have been completed).
Management believe their activities this past year have been successful in discovering additional reportable resources in both Saskatchewan and Alberta, and they are working with third-party evaluators to prepare updated resources reports consistent with relevant regulations.
So we know the bitumen is there. The important question now is: how expensive will it be to produce oil from it? Preparations for the reservoir field test program in the Axe Lake Discovery area began this past winter and will continue in May or June. Phase One of the Axe Lake Discovery test program projects up to three test sites (with varying overburden and pay thickness) with one vertical steam injection well and five vertical observation wells per site. Steam injection is planned for September 2008 on Test Site #1 and towards the end of 2008 on Test Sites #2 and #3 if appropriate. The purpose of Phase One is to measure resource specific heat and fluid movement under specific operating conditions on a field scale to complement on-going simulation and laboratory analysis programs. BQI have obtained regulatory approval for Phase One.
Phase Two of the Axe Lake Discovery test program will consider expanding the three test sites with horizontal wells and/or injecting mobilization agents other than steam. Current plans call for placement of horizontal wells early next year and injection thereafter. The purpose of Phase Two is to evaluate and analyze information gathered from Phase One regarding mobilization agents and to measure field scale response using horizontal wells.
Phase Three of the Axe Lake Discovery test program is currently in the scoping phase where the options being considered range from a continued reservoir test program to a technology feasibility pilot to a full commercial demonstration project.
Four reservoir test wells have already been drilled at Reservoir Test Site #1 and ten 1,000-barrel heated liquid storage tanks are on site. Other critical components, such as test and control equipment and steam generation facilities are scheduled for delivery starting in June. BQI plan to continue construction of the test facilities on Test Site #1 in May or June and expect initial steam injection into the reservoir Test Site #1 to begin late this summer.
The recently completed 3D seismic programs in Saskatchewan and Alberta were utilized CGG Veritas’ highest quality, three-component 3D technology. The 1,053 miles of lines cut for the 3D program were low-impact and environmentally friendly. The 3D program covered over 15 square miles in Saskatchewan and 6 square miles in Alberta. The data from this program has been processed and interpretation of the data is now being completed.
This company continues to be a perfect speculative play, spending money like the US government and—in pursuit of fresh funds to spend—issuing new shares like Max Max Bialystock and Leo Bloom in The Producers. Did we mention they have no revenue whatsoever, nor prospect of any within sight? But goodness do they have potential! With oil selling for over $120/BBLS, BQI can afford to spend $60-to$80/BBLS in production and still be fabulously profitable! The big remaining questions are [a] where do they get the natural gas to fire their production process (and how much does it cost) and [b] what sort of quality will the finished product turn out to be.
This summer’s reservoir field test program won’t completely answer those questions, but it could considerably advance the ball. Stay tuned.
Posted by intelledgement on Wed, 16 Apr 08
The saga continues…Transmeridian announced today that they are seeking new financing. This is hardly a surprize in view of their spurning of a $2/share external buyout offer last year in favor of a $3/share offer from management that failed to come together, all in the face of declining production and continued operational losses.
Management now say they believe “that the company can continue to generate sufficient cash flow to fund its ongoing operating costs, overhead and cash interest requirements” at the current production level of 2200 BBLS/day, but that they are seeking additional cash to enable them to boost production to 4000 BBLS/day. This is a different story than we heard last year, when they said they needed 4000 BBLS/day to keep the doors open…and is also a more optimistic assessment than that of their own accountants, who saddled the company with a going concern note in their 2007 10-K, as reported here last month. Of course, the price of oil is a lot higher now than it was last year, so manifestly 2200 BBLS gets you further than it used to cash flow wise.
Stay tuned. We are in the for duration; at least we are getting entertainment and educational value for our money.
Posted by intelledgement on Mon, 14 Apr 08
Wachovia (WB), our finance sector short play, announced their 1Q08 results today and—surprize!—they lost money. $393 million worth of red ink, or 20 cents a share—and that doesn’t count the additional “market disruption-related valuation losses of $2.0 billion”—marks the first reported quarterly loss for WB since…well, actually, we can’t seem to confirm that they have ever reported an operating loss before…if so, it must have been before we relocated from New York to North Carolina in the early 90s as they have been invariably profitable since then.
But wait, there’s more. The company also announced another round of preferred stock offerings, this time aimed at raising $7B in new capital. LOL this is just two months after they raised $3.5B (and assured shareholders that they were then well-capitalized for 2008 and that the dividend was safe). Oh…right…speaking of the dividend—it has been sliced 50% to 37.5 cents/share.
We are sorry to see it, but these guys were dumb enough to pay $25B to buy Golden West in 2006 at the peak of the housing bubble—and between the bad mortgages they got in that deal and their own only a Bear Stearns style bailout will avert insolvancy here. BSC stock declined 95% from January to March…we may not get that much here, but we sure expect to see prices far lower than $30 per share.