A Biotech Triple Play: Dendreon, BioCryst and Arena 28 comments
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There's only one thing better than catching a big stock market winner like Dendreon (DNDN), and that's letting your profits ride on two or three winners in a row. Even though not one of the seven Wall Street analysts following Dendreon had a buy on the stock before the recent announcement that the final Phase III trial of the company's Provenge prostate cancer drug was a clear success, we had it listed as a Top Buy for many months and subscribers rode it from under $5 to over $20. I've recently asked them to sell some Dendreon and buy a position in BioCryst (BCRX) before a pending announcement planning to sell the BioCryst this summer, and to buy Arena Pharmaceuticals (ARNA) before its September announcement of the second Phase III lorcaserin obesity drug trials.
Dendreon paid off 4-for-1. I expect BioCryst to pay off about 3-for-1 from current levels (it was 4-for-1 at the time I recommended it to subscribers). Then I expect Arena to pay off about 6-for-1 from current levels. All of these are small, development-stage biotech stocks without any approved product. But the power of a triple play is that one can invest an appropriately small amount of money in the first idea and then let it ride to substantial potential profits. Just $2,000 invested in Dendreon in March turns into $144,000 by the end of the year if I have calculated the payoffs right. Even if you missed Dendreon, $2,000 invested in BioCryst turns into $36,000 by the end of the year just from the double play of BCRX and ARNA.
I am still very bullish on Dendreon (see my recent article) and expect to tell subscribers to take profits on Arena early next year and go back into Dendreon before Provenge is approved in the first half of 2010. But they should be able to buy a lot more shares than they sold.
Why Did Dendreon Work?
Dendreon was mispriced in large part because Wall Street did not like the CEO of the company. He was viewed as too promotional and, in some quarters, as trying to end-run the FDA by going through the Biologics division instead of the Oncology division. Even though the statistics on Provenge were good, and got better with the passage of time, their mistrust gave the short sellers ammunition to keep the stock depressed with rumor after rumor – until the numbers came out.
Why Will BioCryst Work?
Wall Street never liked the previous CEO and distrusts the company's main drug. Peramivir is an antiviral originally promoted for the avian flu (H5N1). As that threat faded into the background (although I expect it to return, as discussed below), the company began talking about peramivir for seasonal flu (H1N1). It followed two clinical development paths, an intramuscular (IM) injection in the outpatient setting, and an intravenous (IV) infusion in the hospital setting. About 200,000 seasonal flu patients are hospitalized every year, and about 20,000 die.
I never had much hope for the IM program, and after a series of problems, that program seems to have come to an end with the release of the latest data on May 8. Although IM peramivir reduced the number of hours a patient was ill, the difference from placebo was not statistically significant.
My original expectations for the IV peramivir program were that it would prove useful in Phase II testing, and then the government would add the antiviral to the national stockpile program without waiting for Phase III results. I expected BioCryst to share the stockpile spending in the U.S. and overseas with already-approved Tamiflu and Relenza. However, the H1N1 virus has mutated to develop immunity to Tamiflu, and that mutation constituted about 14% of the virus samples in 2007, 78% in 2008, and may be approaching 100% now. So the stockpiles of Tamiflu are not much use against the current “swine flu” outbreak (H1N1, Type A) and might be equally useless against a combination of avian flu and “swine flu” that would be as virulent as avian flu and as easily transmissible human-to-human as swine flu.
Consequently, at the same May 8 announcement that its latest IM clinical trial had failed, BioCryst management said that 10 days earlier the government had contacted them to evaluate peramivir for Emergency Use Authorization. Management said they had been engaged since then in 24/7 contact and negotiations, and that the company's manufacturing facilities has already been inspected. The government ordered 1,000 doses right away. As I semi-facetiously told my subscribers, that's enough to protect the most important people in the world, in their opinion – Congress, the Supreme Court, the top levels of the Executive Branch and, of course, upper management of the FDA.
BioCryst has been developing peramivir under a $104 million grant from the Department of Health & Human Services (HHS). HHS knows the numbers on the drug. I expect the Emergency Use Authorization to be granted in the next six weeks, followed by substantial orders in the 500,000 to 1,000,000 dose range. Tamiflu costs about $50 a dose, but it is an injectable, not an IV infusion that reasonably would be priced higher. I would not be surprised if the course of treatment for peramivir is in the $250 range, but even assuming half of that, the initial stockpile order could be worth up to $125 million for BioCryst. The company has a $1.4 billion market capitalization at current prices. With the cash in hand to finish Phase III IV trials and ongoing cash flow from additions to the world's antiviral stockpiles, I think the stock can trade up to a market capitalization north of $4 billion.
Why Will Arena Work?
Like Dendreon, Arena Pharmaceuticals has a CEO that Wall Street views as overly promotional. Like Dendreon, the stock is heavily shorted – 18.1% of the float as of mid-April – even though it is in low single digits and has a drug that both works and will be approved. Like Dendreon, only one more Phase III trial lies between them and approval, and all that trial has to do is be not much worse than the virtually identical successful Phase III trial the company just reported. Like Dendreon, it has a very small market capitalization, only $260 million compared to Dendreon's $400 million in early March. Also like Dendreon, there are repeated misstatements in the media and on Wall Street about the company, such as that its drug did not meet the FDA requirements for approval, or the company is about to run out of cash. Frankly, I hope the bears continue their drumbeat until after we can cash in our BCRX shares and roll into ARNA at the current low prices.
Arena, of course, is bringing the obesity drug lorcaserin through trials. It is essentially a safe form of fenfluramine that does not cause heart damage. Fenfluramine was the “fen” in fen-phen. The other half of that combination, phentermine, is widely prescribed today as an anti-obesity drug, but it is not especially effective. Neither was fenfluramine on its own. Lorcaserin delivers meaningful weight loss on its own with a low side effect profile, even without a rigid diet and exercise program. It therefore has good patient compliance, which is one of the real-world factors that contributes to a successful drug. It will undoubtedly be combined with phentermine in a new lorca-phen weight loss combination that will become the talk of the cocktail circuit, just as fen-phen did.
It is difficult to tell how large the market for lorcaserin and lorca-phen will be. In terms of numbers, eventually about six million people took fen-phen. Americans are more obese now than they were 15 years ago, and I do not know how lorcaserin will be priced. An effective obesity drug is certainly a multi-billion dollar blockbuster on a worldwide basis, and drug companies often sell for about six times revenue. My 6-to-1 target for ARNA gets the company up to only a $1.5 billion market capitalization, which seems awfully low for a successful drug of this size.
So there you have it. Development-stage biotech stocks are inherently risky, so you deal with that by making only a small investment up front. Then you focus on stocks Wall Street does not like, preferably heavily shorted, where the science is sound and the final hurdles are about to be jumped. You invest sequentially to roll the profits from one into the stock of the next, hopefully still at a price depressed by short sellers and rumor mongers. And then you wait a short time for the event that will cause a wholesale revision in the Street's attitude. We are following this triple play closely at NewWorldInvestor.com, and I will update this article in the comments section if anything changes dramatically.
Disclosure: Long DNDN, BCRX and ARNA.
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So are you suggesting your price target for Biocryst is now 400M and not 4B?
Thank you for the suggestions you made; I'll definitely start digging through data on both lorcaserin and peramivir. Reciprocating, you might find DSCO (lucinactant) worth checking out - I think they'll come out of their June 2 meeting with the FDA looking a lot more attractive. No blockbuster profits, but still solid money. IMO, it's hard to beat a story like "high utility, good data, we're just not sure about your shelf QC processes yet."
Thank you so much for prompt reply.
I have no doubts in your logic and speculation.
I will subscribe !!
MD in FL
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I've noticed that another Seeking Alpha writer, Dr. Kris from MIT has developed a really interesting item called the SMC analyzer....it puts together Modern Portfolio Theory and several market timing oscillators - seems she prefers the CCI - in regard to properly allocating assets. Looks like an innovative and new way to allocate, and puts 'buy and hold' to bed for good it seems. Are you familiar with it?
I've been involved in markets for many years and fund managers have never shown that they can effectively time the markets. Maybe they should take a look at it, since this seems to be hard math and there is no 'human' element to louse the results.... Your thoughts on it? Thanks
On May 25 09:16 AM hoopdreamerz@yahoo.com wrote:
> Somehow my comment disappeared so maybe i need to be a little softer.
>
>
> You made two MAJOR gaffes in your Biocryst analysis.
> One, Tamiflu is ORAL not injected. As a pill it's going to be dramatically
> cheaper to make, distribute and administer, plus it's actually effective
> unlike peramivir.
>
> Two, Biocryst has a market valuation of $140M not $1.4B. This is
> a 10X difference, so your $4B target is 29X. This is a serious mistake
> on your part.
>
> Peramivir has been shown in trial after trial that it doesn't work
> or barely has any effect at all. Stockpiling an ineffective drug,
> sure i guess the US government does dumber things. But driving Biocryst
> stock to a 29-fold gain, i don't think so.
As you will see if you read the press releases, 66% of subjects 'completing' (operative word is completing) the study lost >5% of their body weight; 39% lost >10% of their body weight. About 75% completed the two-year study. Vivus had similar results with about 70% completing the study. Qnexa had more people drop out due to adverse effects vs. LOR.
So do some better DD before making incorrect and inaccurate comments. At this point in time, I would say that both Vivus and Arena have approvable obesity drugs with each having large market potential. Orexigen's Contrave could also be a player.
A key point to remember is not how quickly you lose the weight, but how safely you lose the weight and maintain that weight loss over time.
On Jun 07 02:02 PM PhillyDan wrote:
> CTIC: I could not disagree with you more about Arena's LOR and it's
> market potential and FDA approvability. Suggest you read Vivus'
> and Arena's PRs from the ADA. Both show very good results and safety
> profiles. Arena's Bloom study had over 3 times as many subjects
> as the Vivus Equate study and the time period was longer.
>
> As you will see if you read the press releases, 66% of subjects 'completing'
> (operative word is completing) the study lost >5% of their body weight;
> 39% lost >10% of their body weight. About 75% completed the two-year
> study. Vivus had similar results with about 70% completing the study.
> Qnexa had more people drop out due to adverse effects vs. LOR.<br/>
>
> So do some better DD before making incorrect and inaccurate comments.
> At this point in time, I would say that both Vivus and Arena have
> approvable obesity drugs with each having large market potential.
> Orexigen's Contrave could also be a player.
>
> A key point to remember is not how quickly you lose the weight, but
> how safely you lose the weight and maintain that weight loss over
> time.
lost at least 5% weight:
arna 66.40 arna placebo 32.10%
vvus 66% vvus placebo 15%
lost at least 10% weight:
arna 36.20% arna placebo 13.60%
vvus 41% vvus placebo 7%
lost at least 15% weight
arna no data
vvus 19% vvus placebo 2%
retention after 1 year:
arna 55%
vvus 70%
those results speak for themselves
While I agree with your rather optimistic view of DNDN (holding this one) and I traded in and out of BCRX with a nice profit (thanks!), I have to disagree with the call on ARNA. Yes, they rallied nicely today, but Im more inclined to go with VVUS regarding obesity. What are your thoughts on VVUS?
3 drugs in phase 3 with much more potential for upside and much better phase 3 results for their obesity drug than ARNA. ARNA gets approved, but whats the potential for stock from here? Seems to me they are optimistically valued at todays price.
These comparisons are difficult because the diet and exercise requirements (and policing thereof) differ so much in the trials. Only ARNA has a new drug - the others are combination drugs - and only lorcaserin can be combined with phentermine to create the next version of fen-phen. In the real world of poor obesity patient compliance and cocktail party chatter about lorca-phen, I think ARNA will have the #1 obesity drug. Plus, they will be first to market.
But in the stock market world, I think all we need are BLOSSOM results the same as BLOOM and ARNA to say they will be ready to file in Q1:2010 to get ARNA to $20+. Still 22% of the float sold short, thank goodness.
(Note to shorts - ignore everything I said, Arena doesn't have a chance, BLOSSOM is sure to fail, please don't cover your short before the trial results are announced.)
On Jun 08 05:40 PM makk wrote:
> Michael,
> While I agree with your rather optimistic view of DNDN (holding
> this one) and I traded in and out of BCRX with a nice profit (thanks!),
> I have to disagree with the call on ARNA. Yes, they rallied nicely
> today, but Im more inclined to go with VVUS regarding obesity. What
> are your thoughts on VVUS?
> 3 drugs in phase 3 with much more potential for upside and much better
> phase 3 results for their obesity drug than ARNA. ARNA gets approved,
> but whats the potential for stock from here? Seems to me they are
> optimistically valued at todays price.
Why are you out of BCRX with the Emergency Use Authorization due any day?
On Jun 08 05:40 PM makk wrote:
> Michael,
> While I agree with your rather optimistic view of DNDN (holding
> this one) and I traded in and out of BCRX with a nice profit (thanks!),
> I have to disagree with the call on ARNA. Yes, they rallied nicely
> today, but Im more inclined to go with VVUS regarding obesity. What
> are your thoughts on VVUS?
> 3 drugs in phase 3 with much more potential for upside and much better
> phase 3 results for their obesity drug than ARNA. ARNA gets approved,
> but whats the potential for stock from here? Seems to me they are
> optimistically valued at todays price.
www.cdc.gov/mmwr/previ...
"The efficacy of intravenous peramivir demonstrated in a prior study conducted by Shionogi & Company Ltd. indicates its potential as a treatment for acute uncomplicated influenza," commented Dr. William P. Sheridan, Chief Medical Officer of BioCryst. "Based on the clinical evidence of activity, safety and tolerability of peramivir, we are currently in discussions with HHS-BARDA and the U.S. Food and Drug Administration (FDA) regarding further development of i.v. peramivir as a treatment for influenza." investor.shareholder.c...
The above.. this very positive trial in their Hospital Trial make it clear that many here don't have the facts.. or are deliberately misleading.
investor.shareholder.c...
Wonder if the above reasoning is correct.
Point #2: Given that Peramivir blocks the surface protein that allows the virus to leave the infected cell and migrate to a healthy cell, I wonder if this mechanism can be generalized to prevent any virus to leave an infected cell. The scope of such type of drugs would extent well beyond attacking the flu, to other viral infections.
Point #3: Are surface proteins subject to structural changes (mutations), or is it only the RNA that can mutate?
Tamiflu became inefective. It seems that Peramivir does not have that problem (my guess).
Thanks.