Greetings PSW members from Pharmboy!
This is my first shot at writing a formal post for everyone on a few biotech/pharma picks that I believe have promise for nice returns over the next 6 to 18 months. Much of the work here is a compilation of readings elsewhere, summarized for you all to make your own conclusions. Here we go:
GlaxoSmithKline (GSK) – has a robust pipeline in inflammation, cancer and other therapeutic areas. A few line extensions could do well generic simvistatin (Zocor) + Avandia) for cardio/diabetes. Will compete against Vytorin, and others like it. In the pipeline, GSK has an Orexin antagonist for sleep disorders (very hot area), several drugs for asthma/COPD in Phase II including a PDE-4 and FLAP inhibitor. The asthma/COPD drugs have huge potential as a monotherapy or in some combination, as they are the newest line of therapies that have come along for asthma/COPD in some time (GSKs strength). GSK also has a VLA4 antagonist for multiple sclerosis in phase II.
This is the first I have seen of this in a pipeline for clinical trials. VLA4 is the target of Tysabri from BIIB. One hypothesis is that a small molecule that binds to the receptor but does not completely knock out the receptor like a mAb may be better for MS patients. Remember, Tysabri has a potential of a rare neurological condition progressive multifocal leukoencephalopathy (PML) when administered in combination with interferon beta-1a, another immunosuppressive drug often used in the treatment of multiple sclerosis.
One other note for growth, Amgen (AMGN) revealed its commercialization strategy for osteoporosis treatment, denosumab, one of the most keenly anticipated new drugs set to reach the market for several years, naming GlaxoSmithKline (GSK) as partner in Europe and other countries. GSK has several cancer treatments as well as vaccines in various stages, so it is my belief that their pipeline is rich and diverse. Current yield is 4.8%.
Phi’s Take: 4.8% and Pharm likes the pipeline – say no more! We have nice solid support building at the 200 dma at $34 and the 50 dma already crossed up and is at $38 so we can be pretty confident that we can hold the early 2008 lows at $38 long-term. That makes this a nice buy/write as we want the dividend (so we need the stock) and we wouldn’t mind buying more cheaper. Best to go with the long play here with the stock at $38.83, selling the Jan $37.50 calls for $3.40 and the Jan $35 puts for $1.50. That’s a net of $33.93/34.37, an 11% discount if put to you and 14% if called away in 5 months plus .92 expected dividend (.46 in late October and late January (so you’ll need to roll to get the 2nd dividend).
AstraZeneca (AZN) – The biggest thing for AZN right now is the approval of the diabetes drug Onglyza (DPP-IV inhibitor) co-licensed with Bristol Meyers (BMY). The drug will compete against Merck’s (MRK) Januvia (I believe Januvia to be superior) for several reasons I will not go into here. Seroquel, Crestor, and Nexium are their bellwether products. The Medimmune deal in 2007 has yet to work its magic, but there are some drugs in the pipeline that could come through but they remain elusive. Otherwise, AZN, like many drug companies, faces headwinds related to slower growth, upcoming patent expirations which then leads to generic competition, pipeline less than stellar and other issues inherent in the pharma field. AZN has moved considerably over the past few months from $31 to $46, but it does have an indicated yield in the neighborhood of 4.5%, which is worthy of consideration.
Phil’s take: Not a strong enough story for a stock that’s up over 50% from the lows and only 10% off the ’07 highs. They hit heavy resistance at $47.50, where they failed last summer before collapsing. However, if you are going to be taking positive drug sector plays it’s good to be a little short on a weaker one as a hedge so the Sept $45s at $2.67 (delta .62) can be sold against the Jan $50s at $2.12 (delta .36). On a play like this, you must be ready, willing and able to either spend $3 to roll down to the Jan $45s or possibly DD on the Jan $50s and roll the Sept $45s to 2x the Oct $50s (now .90). In other words, we think this is the weak cousin of the sector but, if we’re wrong, we’re willing to own a good amount long.
Merck (MRK) – MRK used to be the envy of the pharma industry and the best and brightest went to work for them. Those scientists lead the way for discovering new, novel drugs for the treatment of asthma (Singulair), cholesterol (Zocor), high blood pressure (Cozzarr) and inflammation (Vioxx). Their vaccine division was always in the background, but produced steady results. Somewhere, they lost their way, and unlike their brethren Pfizer, who grew their pipeline externally, Merck tried to keep the faith and grow from within. Their pipeline has grown thin. Merck has reached out in recent years to grow externally, and it may payoff from some of their recent deals mentioned below. Overall, I like MRK, and together with SPG (and Organon), the pipeline should be sufficient for growth over the coming years. Current yield is 5.2%.
Phil’s take: Another dividend winner in a company we don’t mind giving to our children. I think what MRK needs is new management but we can certainly wait comfortably with a 5% dividend. Now, let’s understand something about buying a call. When you buy a call, you have the right to buy a stock that price by the expiration date. Rather than tie up $30 to make $1.50 this year and scaling into the stock, we can buy a Jan 2011 $25 call for $6.95. This means we have the right to own the stock at net $31.95 in 2011. We won’t get paid a dividend but we can still sell the Sept $30 puts and calls for $2.60 – that’s a 37% return in 3 weeks and, if MRK falls, we own the stock for net $27.40 (9% off). If MRK goes up, we are in for net $31.95, less the $2.60 we sold so net $29.35 and up .65 (2%) at worst but the plan is to happily DD the longs to 2x and even 4x down (and rolling callers along as appropriate) the line to establish our eventual ownership of the stock.
ARIAD Pharmaceuticals (ARIA) – This biotech came across my screen when I saw the CEO purchasing 1.7M shares of their shelf offering (17M shares) @ 1.75. ARIAD has had a huge run up, but looks like it has more room to run due to first interim analysis of Phase 3 data for ridaforolimus (rida), which is indicated for soft tissue and bone sarcomas. ARIA is also collaborating with Merck (MRK) for the development of rida. The aforementioned Phase 3 interim results are due out on or before September 30, 2009. Patient enrollment for the Phase 3 trial is expected to be completed by year-end and a second interim analysis is expected by Q1 2010. With positive Phase 3 data, ARIA plans to seek US approval for rida in 2010.
Phil’s take: I consider all small biotechs a crap shoot but Pharm is like having a friend at the track who knows this guy…. So, bearing in mind these are always gambles, there are 3 ways to play: You can buy the Feb $2.50s for .70 and sell the Feb $5s for .40. That’s net .30 on a $2.50 spread so 833% return if they do pop but it’s almost all or nothing. On a play like this though, my logic is that you want to play $1.90 so you would stop out with a .30 loss anyway so buy the damn spread instead and skip all the up and down heartache.
If you do buy the stock for $1.90, plan to buy more at $1.20 if they have a setback (especially if it’s a rumor of a setback) and plan to get 1/2 out if they spike back to $3, as that’s likely to be just as silly. Ariad does not look like they have enough cash to get to the end of the year without floating more stock so a dillution is very possible, but that may be the best time to buy. That does make the 3rd option tricky to manage but the stock at $1.90, selling the Feb $2.50 puts and calls for $1.90 nets .60/1.05, which gives you just .30 less profit than the veritcal at $2.50, which is where the vertical has yet to break even! Obviously much more risky because, if they do go BK, you have 2x for $1 but a company already in Phase 3 will usually survive a setback and they are "just’ $95M in debt so far.
Oncothyreon (ONTY) - ONTY announced interim trial data for Stimuvax®, the company’s cancer vaccine. The trial consists of a relatively small group of 16 patients with non-small-cell lung cancer (NSCLC). Of the 16 patients, who received Stimuvax, 10 are still living, progression free. Those treated with Stimuvax received an overall survival benefit of 30.3 months compared to 13.3 months for patients treated with the standard of care. Source: AP ONLINE.NSCLC is a very difficult cancer to treat. ONTY is collaborating with Merck (MRK) for the development of the Stimuvax. I am watching this one closely, as MRK has a ton of cash, and wants to spend it in the cancer arena.
Phil’s take: Wow, no wonder they doubled last month, those are some intense results! Not only that but the company is relatively debt free and had $36M in revenues (licensing, I imagine) in Q4 so they haven’t needed to dillute and they still have $15M in cash with a quarterly burn of $4M. I think I’m in love!!! They just got commitments to sell $15M in shares with 30% warrants for $6.58 so knock 30% off and assume people smarter (or at least richer) than us think the company is well worth $4.60 a share.
So $5.44 seems like a fair price but expect them to fill that gap to $4.50. If we buy here and sell Feb $5 puts and calls for $2.70 that’s $2.74/3.87 not bad as they are too early in trials to definitively fail and have plenty of cash so not much worry of a BK. Seems like a good spot to scale in but it’s more likey your hearache will come when the stock passes $7.50 than $2.50 so keep in mind that if you buy more at $7.50 and sell the $7.50 puts and calls for $2.50, you already made (assuming it holds up) $2.26 on the first round so you are really then in 2x for net $2.74/5.12 with the stock at $7.50. Try to have a plan for biotechs for when they fall 50% or rise 100% and you’ll enjoy them much better…
OncoGenex (OGXI) – one of the hottest and most mentioned cancers right now is prostate cancer. DNDN, AGEN,Cougar (now JNJ) and many others are on fire due to this arena. OGXI’s lead drug, OGX-011, targets castrate resistant prostate cancer. The FDA agreed to modifications of OGXIs study population of a previously reviewed Phase 3 trial featuring survival as the primary endpoint. The study population has been modified to evaluate patients receiving first-line chemotherapy, rather than those receiving second-line chemotherapy. OGXI stated that it will proceed with two Phase 3 trials subject to the receipt of additional funding, including one for first-line and one for the second-line treatment of advanced prostate cancer.
On 5/30/09, OGXI, announced the final results of a Randomized Phase 2 Trial which indicated a survival benefit in patients treated with OGX-011 in combination with docetaxel compared to docetaxel alone (the current standard care for patients with advanced prostate cancer). The median overall survival in patients with advanced metastatic prostate cancer who were treated with OGX-011 plus docetaxel in a randomized Phase 2 trial was 23.8 months compared to 16.9 months for patients treated with docetaxel alone — a 6.9 month observed survival advantage for the OGX-011 arm. The unadjusted hazard ratio (HR), a measure used to compare the death rates between treatment groups, was 0.61, representing a 39% lower rate of death for patients treated with OGX-011. Study investigators concluded that OGX-011 treatment was well tolerated in combination with docetaxel. (Source: Seeking Alpha – Mike Havrilla)
Phil’s take: This is my least favorite. One of many working on the same thing, needing funding to move on to next phase with just $9M in the bank (enough for less than one year at current burn rate). It’s a very different play with a $30 stock than a $1.90 stock. You cannot use a biotech as a downside hedge the way we can use AZN because any single biotech can rise or fall on it’s own. The spreads on options are so wide you can drive a truck through them too so, on the whole, this stock is a pass to me. If you don’t mind owning them for net $25 (20% off) as a first round entry you can do an artificial buy/write – buying the Jan $17.50s at $14.40 ($2 in premium) and selling the Sept $30 puts and calls for $7 for net $24.90/23.
The stock could gap down to $10, where you would be forced to buy (or roll) at net $23 and you would still have your long $17.50 calls at a loss as well. If you DD at $10 (net $16.50) and roll the $17.50s down to the Jan $10s then you can probably sell Jan $15s for $2 and hope for the best but it’s a disaster if they fail so just know that going in and there’s a reason the play is not bold!!!
Spectrum Pharmaceuticals (SPPI) – Takeover candidate?? On Friday July 31, Jonathan Moreland covered SPPI in an article published at RealMoney. Biotech has been particularly hot this month. Shares of the SPDR S&P Biotech exchange-traded fund have popped more than 15% in the past three weeks alone. The oft-discussed need for big pharma to buy out smaller, promising biotech firms to fill its skimpy product pipelines seems to be breeding speculation about who could be the next target. To that point, Rodman & Renshaw biotech analyst, Reni J. Benjamin, agrees that Spectrum Pharmaceuticals could benefit from such speculation. "They Spectrum have several products that are in clinical development, and their revenue-generating products look attractive to other specialty pharmaceuticals companies. Company’s like Bayer or Bristol-Myers may also look at the company more seriously if they are able to successfully market Zevalin." Benjamin’s buy rating on SPPI, however, is based on the firm’s solid revenue prospects and solid balance sheet. Spectrum generated $14.1 million in revenue last quarter…Contrary to that though, Adam Feuerstein of the Street.com doesn’t think so….his link is here.
Phil’s take: I agree with Benjamin and Adam Feuertein of the Street.com is nothing more than a Cramer thug who’s prior assignment was keeping people out of DNDN while Cramer’s hedge fund buddies accumulated it on the cheap. Cramer’s crew is loathesome inside TheStreet and you need to take anything they say with a huge grain of salt. SPPI already has a $250M market cap but they also have $60M in the banks so say $200M for a stock with $50M in sales (no profits). Figure a big boy could buy them out and make 30% on $50M with the expectation of doubling it so the company is worth $30M in bottom line to an industry with an average p/e of 12 so call it $360M as a fair buy-out even in a crappy market.
That means these guys are very attractive as buy and accumulate so we can buy write at $7.10, selling Sept $7.50 puts and calls for $2.75 for net $4.35/5.92. If they drop to $3, just buy more and wait… At $360M the buyout would be $10 so the Feb $5s at $3.20, selling the Feb $7.50s for $2.15 is net $1.05 with a nice 128% profit if the stock can just pretty much maintain it’s current price for 6 months. You can just sell the Jan $5 puts naked for $1.10 and that puts you in for net $3.90 and, if they fall all the way to $1 again – just DD and you are ling at net $2 – that worked out very well for all the pople who bought last year (and early this year) at that price.
Finally, there’s a nice spread of buying the Feb $2.50s for $4.80, selling the Feb $10s for $1.35 and buying the Feb $7.50 puts for $2.50. You spend net $5.95 for the right to make $7.50 (as you can buy the stock for $2.50 and sell it at $10) and you have a garanteed way to put the stock to someone at $7.50 so the most you can lose is .95. You don’t make this play for the .50 upside advantage though, this is a play where, if the stock goes higher, you can buy more Feb calls or take out some callers. You can also sell your put before taking a big loss if you get more confident the stock is heading higher.
The way this play works best however, is for what I foresee, which is that jackass Feurerstein succeeding in jamming the stock down where you will have a chance to buy back the caller, cash in the puts and use that money to DD on the stock. So, if they get bought out, you make net $1.55 and if they have a big setback, you can DD and take out the callers (assuming we think, as we did over and over with DNDN, that the play still has merit).
This is the first of a series of writings I hope to post over the coming months. Happy trading!
Phil’s take: Phantastic job Pharm! This is great stuff and I encourage any of our guys with expertise in a sector to do the same. Pooling our knowledge like this is the best way to build a strong investing community.