Wednesday, June 28, 2006 The Times' Drug Problem

I love finding hard facts that prove popular opinion wrong. This article from Malcolm Gladwell is both a statement on drug pricing AND media bias (or at least poor reporting). Turns out that drug prices (essentially) aren't rising. The Times' Drug Problem

Wednesday, June 07, 2006

The mess over HGH just getting started

The general public is now aware of the white elephant in the room. HGH - absolutely undetectable unless blood is drawn - is now the drug of choice for baseball players.

A couple of observations about the impact of this story:

1. I hope that this crisis shines a spotlight on pitchers' use of performance enhancers. I think (and have read it suggested elsewhere) that pitchers may have actually been the bigger users of steroids.
2. Jason Grimsley has been a fringe player thru much of his career (more or less), as have been many of the other players publicly outed (R. Franklin, M. Lawton, etc.) Is this a case that fringe players are big users since they're already ont he bubble, or does this indicate that everybody (even the fringe players) were users.
3. No one is catching another big story buried in this: latin players as abundant users. Sammy (see my prior post: ) laid out his argument, and we weren't even listening. But, considering the greater economic proposition for the latin players, I understand it (generally, the alternative to a major league job for a latin is dramtically different for a US national, thus motivating bad decisions by these players).
4. Strangely, I wonder if the one guy smiling at this episode is Barry Bonds. He stands to gain greatly if the popular opinion decides that his steroid-fueled homers do represent a record because he was hitting off steroid-fueled pitchers. - MLB - Stark: The mess over HGH just getting started

Thursday, June 01, 2006

Other buys....

I've been remiss in mentioning other recent portfolio actions. Here's aquick summary:

I bought Vertex (VRTX) on May 22 @$29.70, as the company released stunning phase II HCV results. (read about it here: DDW: Novel HCV Protease Inhibitor Promising in Early Trial - CME Teaching Brief - MedPage Today

Happily, shares 10 days later are already up 16%!

I sold half of my Microsoft stock in order to buy twice the number of Microsoft LEAPs to expire January 2008. (I sold the MSFT shares @ $23.65 (a 15% loss) and paid $5.60 per $20 LEAP, meaning that I'll (theoretically) make money if MSFT is rises >8.2% over the next 19 months. (Or, less than 5% annualized.)

In reality, I'm counting on MSFT getting some good news over the next 2 years. Perhaps a lift from the next Windows OS, perhaps a lift from Office '07, perhaps a slip by Google.

Should MSFT grow at 10% per year, I'll have about a 41% return.

However safe this bet looks, though, consider that MSFT has pretty much been flat for 4 years now.

A few other moves that don't need much comment:
-with my '05+'06 IRA contributions, I bought 2 Fidelity overseas funds (FSCOX - overseas small caps, and FSEAX - Southeast Asia).
-I halved my FNMIX (emerging markets income) holdings in favor of more broad international exposure (EFA - the global ETF), and IWB - the Russell 1000 ETF, in order to catch a rotation to large caps.

I bought: ONXX (Onyx Pharm)

I'm a big believer in targeted therapies, and Onyx is one of a handful of companies that offer one. Nexavar, developed by Onyx and marketed by Bayer, was approved in February, 2006.

But ONXX shares have been crushed, which makes the company a buy on valuation. Nexavar sold $23M in the first quarter, and per the linked article is projected to sell $144M in '06. (Which suggests an annualized pace >$200m at the end of the first 12 months - which is Avastin-like in performance.) I think this number will increase dramatically with penetration AND additional indication approvals. (I also think, based on the $23M 1Q number, that the full 2006 sales figure could be closer to $200M.)

(Nexavar sells for ~$50,000/year, so the 1Q data suggest ~2,000 customers in just 3 months. Could the combined Onyx/Bayer sales force add that many more each quarter? With ~33,000 new cases per year, with about half that number failing first line treatment. With that figure as the total potential market, how hard would it be for ONXX/Bayer to add 1,000 customers per quarter? 5,000 customers - annual revenue (pace) is $260M - not bad for the first year.)

In an odd arrangement, though, Onyx splits all Nexavar profits 50/50 with Bayer. This halves the upside, but increases the likelihood that Bayer will eventually acquire Onyx. With Nexavar expected to peak at over $1B in annual sales, the product represents $500m in 'revenue' to Onyx. Typical pharma price/sales ratios are 3-4X, while biotech tend much higher due to high growth (Genentech's P/S ratio is 12X, Celgene's is 23X.) Pick a midlling ratio (7X) and a slightly aggressive revenue rate of $400m one year from now, and Onyx could sell for >$1.4M (incl. cash), making a 75% return from today's valuation - though I think this represents the CONSERVATIVE scenario - it's more likely that in this case, Onyx management drives a better bargain, or holds on until Nexavar sales are closer to peak.

Another perspective is the earnings model. It's hard to get too particular in Onyx's case due to Nexavar launch costs, but Genentech consistently records 30% operating profit margins. At Nexavar's $1B peak, that's $150M in operating profit for Onyx. P/E multiples range are usually 15-20 for pharma, and at least twice that for biotech(Celgene: 42X), meaning that this values Nexavar at something like $4.5B at peak, using 30X OP. Discount that back 3 years at 20% per year, and today's value is ~$2.6B

The kicker here is the financial story. Onyx's market cap is ~$800m, and the company has $220M in net cash on the balance sheet. Is the rest of the company worth $580M? You bet!

Adding to the story is the current environment favoring the acquisition of biotech products by larger pharma. With success, I could see Bayer buying out Onyx for $2B this time next year.

Now for the negative: Nexavar is only approved for treatment of kidney cancer (RCC). Sutent, a direct competitor to Nexavar was launched by Pfizer in 1Q06, and a Genentech drug is used off-label for the same thing.

But while the drugs have the same therapeutic approach (starving tumors of blood), they differ in 3 important ways:
-Sutent is far more toxic than Nexavar
-Nexavar is an oral pill, while avastin is an antibody given intravenously. (Sutent is also a pill)
-Nexavar and Sutent inhibit a number of common proteins (VEGFR2+3, PDGFRB, Kit, Flt-3, and RET), but Nexavar also inhibits RAF, while Sutent inhibits 2 additional growth factors (PDGFRA and VEGFR1). Given a choice, I'd rather also inhibit RAF (and therefore the RAF/MEK/ERK pathway) versus 2 additional growth factors, but that's a strictly academic opinion from someone totally unqualified to give one. It could mean, though, that Sutent and Nexavar could be given in combination!)

While the above makes a case for better than average sales of Nexavar, one worry would be going up against the sales resources of Pfizer (though they don't have a history of selling cancer products) and Genentech.

Finally, the other reason to worry (or sit on the sidelines) is that the ASCO conference (beginning tomorrow) could completely upset the market, as additional data for all of the drugs mentioned above and more will be revealed. ONXX will be volatile for the foreseeable future, but I think a good buy, at $19.63, which is what I bought it at today.

Onyx Shares Seen Volatile Through ASCO -

With my new friends on the Great Wall of China

With my new friends on the Great Wall of China
Click to go to my online photography

World sun clock

Uncommon Man's Creed

"I do not choose to be a common man. It is my right to be uncommon -- if I can. I seek opportunity -- not security. I do not wish to be a kept citizen, humbled and dulled by having the state look after me. I wish to take the calculated risk; to dream and to build, to fail and to succeed. I refuse to barter incentive for a dole, I prefer the challenges of life to the guaranteed existence; the thrill of fulfillment to the stale calm of utopia. I will not trade freedom for beneficence, nor my dignity for a handout. I will never cower before any master, nor bend to any threat. It is my heritage to stand erect, proud, and unafraid, to think and act for myself, to enjoy the benefit of my creations, and to face the world boldly and say, "this I have done." All this is what it means to be an American." -- Anonymous