Biotech Portfolio Overview: PDL Biopharm Still Cheap, CV Therapeutics Still Falling

Friday was an interesting day for Biotech investing -- two of my companies released earnings, neither of which could really be called great. In response, one stayed even while the other continued its downward spiral.

PDL Biopharma (PDLI), formerly Protein Design Labs, was the mildly positive one -- this company is pretty far along as far as small biotechs go, with several marketed (if small time) products, a deep royalty stream and solid pipeline. They released earnings that show they're continuing to be cash flow positive, if not yet with positive real earnings -- that's a significant step, but not a surprise.

The bad news for PDLI was that one of their minor clinical trials failed. One of the drugs they acquired with their takeover of ESP Pharma last year, a takeover that also brought in all of PDLI's current marketed drugs and helped to bring them to the verge of profitability, failed in a phase three trial.

I was hoping that this failure, in which terlipressin did not meet its primary endpoints but did show some potential good effect, would bring PDLI's share price down even further -- I had a buy order in at $16 in the hope that investors would overreact to this failure and dump the stock on the "failure" headlines without reading further.

No such luck, though it did shoot down for a while in after hours trading. PDLI also released earnings yesterday, which included higher than expected costs but still reflected a reasonable financial position and some very good royalty streams, and the shares are relatively unchanged, though they're only a dollar above their 52-week low.

It was the royalty streams for Genentech's (DNA) blockbuster drugs that first got me interested in PDLI -- they own the patent on the humanized monoclonal antibodies that enable Herceptin, Avastin and others, so I think that stream of income should only grow in the coming few years.

But the argument for PDLI growing significantly beyond what these royalty streams can do is that they have three solid compounds in clinical trials -- not including terlipressin, which was a bit of a long shot for what seems to be a nearly untreatable disease, and is really being developed by Orphan Therapeutics (PDLI just has US rights if the drug pans out). Terlipressin was the most advanced drug in the pipeline, but the more promising Nuvion and Ularitide are also well advanced in Phase II, and there are three other lower profile drugs in Phase II trials as well (Full clinical pipeline is here). The next year or two should show some really significant clinical results for PDLI, whether good or bad, and as we wait for those results we see them maintaining a solid revenue stream (over $100 million in sales this quarter, up 20%) that's growing quite well and helping to pay for these expensive clinical trials.

PDLI, Exelixis (EXEL) and Intuitive Surgical (ISRG) remain my favorite investments in health care right now, and I think PDLI is criminally cheap at the moment -- perhaps the kneejerk downgrade from First Albany will help to bring the price down a bit. I never thought I'd see $16 again and if I do I will be hard pressed to resist adding to my stake.

CV Therapeutics (CVTX), on the other hand, is just plain depressing. This is largely a one-trick-pony (OK, two tricks -- but neither one is really up to Cirque du Soleil standards). Their two lead drugs on the market are Ranexa and Aceon, and they have some other pipeline drugs that don't have anyone excited, along with Regadenoson, a promising new cardiac imaging agent.

But CVTX shares right now are really just an option on Ranexa, and the news has not yet been nearly as good as investors hoped. Shares dipped by about 10% this morning on dramatically higher costs, largely, I think, because those costs -- without enough offsetting sales increases -- clarify what is already known, that Aceon is not exactly flying out the door, and that CVTX's new sales force is having a really hard time selling much Ranexa so far.

Ranexa right now is approved on a pretty limited label, as more or less a last resort drug for angina. If you think that's as far as Ranexa will go, you've got no business buying CVTX.

But if you believe, as CV does, that they can get an expanded label for Ranexa and make this into one of the core drugs for chronic angina (which hasn't seen a new treatment in decades, and counts millions of sufferers anxious for relief), then the shares are dirt cheap right here. So we await the FDA's response.

Ranexa is now in a follow up phase III clinical trial called MERLIN, which is aimed at proving safety and getting the FDA to expand the label. There has been no bad news out of the trial yet, and they recently got permission to move forward with continuing the trial (which means, at least, that the drug is not proving to be dramatically dangerous), but it's going to be the end of the year before we really know anything substantive. With the cautious FDA and a condition that isn't necessarily life threatening or untreatable, the bar is likely pretty high for CVTX to prove that Ranexa is safe.

I have no idea what will happen, and I remain conflicted on this holding -- whenever I think of the millions of people clamoring for new angina drugs to provide an option beyond beta blockers and the like, I get optimistic and think CV has a real chance and a big market opening up to them. Whenever I see the FDA being extra cautious, and the examples of that are legion but include Encysive's (ENCY) recent woes with Thelin, I imagine that CV is going to run through hundreds of millions of dollars to get a "thumbs down" from the FDA, and investors will be left with a portfolio of small time drugs and no real hope of future profitability.

At this point, my shares have fallen so far on what was initially just a small position that it's not worth it to me to sell -- I'll take a chance and hold on to see what the future holds for Ranexa. But until there is news from MERLIN and the FDA, I'm resolved to not buy any more, no matter how cheap it looks.