Across the great equity markets and financial landscapes, one will find a wide variety of styles and strategies when it comes to people and their money. Here you will find all types of investing and tools being employed within the vast array of sectors in the markets. But when you narrow it down, the most exciting equity market to watch is the speculative biotech sector. It is here that crossroads exist where momentum traders and long term investors meet head on and the distinct lines of the two disciplines become blurred in the process. For the market traders, fortunes can be made and lost in a blink of an eye. Conversely, well thought out strategies and patience with the right amount of due diligence can culminate into huge rewards for long term investors.
Before we just dive in, we should make sure to define the characteristics of each type of investor. The momentum trader will either be short or long the stock looking for that high volatility bounce in the price. They will often use options and all sorts of strategies to leverage themselves for the maximum effect. Most times they will care little for the company’s strategic business plans and will focus on pivotal points in time looking for the volatility. As a position turns against them, they will cut and run limiting their losses. For this type of investing, timing is the key as they will live and die by how well they judge the events at hand. In comparison, the long term investor will submerge themselves in the company’s business plans, SEC filings, and any other data they can get their hands on whether trivial or not. Daily changes in stock price mean little and they will be willing to ride out deep price drops as long as the science/business concepts remain sound in their view. Now when the two meet inside the speculative biotech investing landscape is when it gets interesting. Let’s take a look at some of the most touted stocks in the sector and see how both of these types of investors might be playing the game with and against each other.
Transcept Pharmaceuticals, Inc. (TSPT)
In the land of biotech the most recent and exciting news up to date is dealing with Transcept Pharmaceuticals. This company is a specialty pharmaceutical company, focuses on the development and commercialization of proprietary products that address therapeutic needs in the field of neuroscience. Its principal product consists of Intermezzo, a drug under development as a sleep aid for use in the middle of the night at the time a patient awakens and has difficulty returning to sleep. On November 23, 2011 the U.S. Food and Drug Administration (FDA) approved Intermezzo and TSPT finally cleared their first hurdle for the drug. This was the much needed good news after an initial rejection back in July. Now all eyes will turn to Purdue Pharma who has an exclusive commercialization agreement for the drug in the United States. Under this collaboration agreement, Purdue plans to launch Intermezzo in the second quarter of 2012 and to invest approximately $100 million to support sales and marketing during the first year of commercialization. As they move forward TSPT will be eligible to receive royalties on net sales ranging from the mid-teen to mid-20 percentage level.
Recently TSPT has not been the best stock for momentum traders. Any trader that was short in the July timeframe, when the rejection letter came out, did quite well as the price fell from $11 to around $3. On the flip side, any trader long at that time took some dramatic losses. The most recent news of the FDA acceptance did provide a small pop in the stock price for a very limited period of time and was probably not as much as the traders would have liked. If the long traders were nimble and quick they did just fine, but as the stock has settled back close to the price before the announcement I’m sure it has proved to be an overall disappointment.
For the long term investor TSPT has been a gut wrenching roller coaster ride, but finally there is a light at the end of the tunnel with FDA acceptance. Any investor who went long the stock around the July timeframe is probably still in a losing position but that could easily change into a winning one. Investors who went long after the July rejection letter are probably sitting pretty. What all these investors, unlike the traders, are looking to is what exactly is the market for this product is worth. Analysts have very different takes on the final outcome. Some have stated that the drug will run into serious competition and the revenue stream will not be there to support higher equity prices. Others have a different take in that they see the demand for the drug will be high as it can be taken as needed, rather than falling into an automated regiment of taking a daily sleep aid based only on anticipated need. Also there will be the discussion of additional partners that could potentially arise. All of this will take lots of time to come to fruition. Time is what the long term investors have plenty of, but not so the trader as time is money to them. If the demand is truly there as many long term investors believe then TSPT will be worth quite a bit more than it trades for today.
In the not too distant future one of the epic moments in biotech’s history will play out around the regenerative side of the house. It all started with GERN’s departure from the field of stem cell medicine. On November 14th the company announced that their intent is to focus on the oncology programs and discontinue further development of its stem cell programs. As this news came out of the blue momentum traders had little time to react. Long term investors were equally surprised and unprepared for the fallout as they had to revisit their strategies minus the stem cell component. Looking back though, it was not too hard to envision that this could happen. GERN picked the spinal cord and nervous system to test their relatively new stem cell therapy on. Being one of the most complex and intricate parts of the human anatomy, the company was taking a gamble. Unfortunately the gamble did not pay off as the costs and time to tackle such an ambitious project was too much for the GERN to bear. It’s not that the stem cells could not work, it’s just GERN was aiming too high with too little assets to back them up for the long haul. With their exit the whole stem cell sector got a black eye as they were the biggest and most well funded of the group.
With the demise of GERN’s stem cell program ACTC, with all its potential and faults, is being thrust into the limelight for all to see. Unlike GERN’s highly complicated trial, ACTC’s FDA approved phase 1/2 clinical trials for Stargardt's macular dystrophy and dry age-related macular degeneration is going after the low hanging fruit with a greater chance for success. Unfortunately the company is dealing with outstanding lawsuits which might make further dilution necessary to settle. With well over 1.6 billion shares already outstanding, this threat of more dilution has cast a shadow over the stock and the share price.
So the question is why does ACTC have so many traders and long term investors licking their chops? If one were to take some time and look a bit closer at the current happenings then it becomes all too clear. In current conference calls the company has stated multiple times that they are very excited about the results of the trial. Of all the terms that could be used to describe how things were progressing with the trial, the term of “very excited” was used and is proving to be very interesting. The first trials were to be about safety and if the treatment up to this point achieved the safety goal only then “very excited” probably would not be the phrase used for the description. Now if the initial low doses of the stem cells were to show some sort of visual improvement or efficacy, then one could easily make the connection. If that was not enough to get anyone’s attention, consider the fact that the company went on to state that they are talking with three groups of Chinese partners who in exchange for the funding of the trial, will get an equity participation in the future sale of these cells in China. Finally the statements that hit home was when ACTC stated that when they introduced the Chinese partner(s), that the deals that the company has done in the past with licensing and joint venture (JV), will not look anything like this upcoming deal. That is probably enough information for the momentum traders in the near term to get them very interested. A large Chinese JV with a cash infusion will get ACTC enough cash to fund their other projects and jumpstart the company’s ambitions, as well as their stock price.
Where the momentum traders stop is where the long term traders begin. The “very excited” results and potential Chinese partner(s) are just the tip of the iceberg for them. They understand that any Chinese partnership will soon be followed by one from Europe; especially since the U.K. Medicines and Healthcare Products Regulatory Agency has also granted ACTC the go ahead to begin similar Phase 1/2 clinical trials in Europe. Long term investors also know that macular degeneration is a market worth over $30 billion in the U.S. and if the rest of the world is added in, that number becomes many times larger. They know that if the trial is successful, the treatment has the potential to treat over 200 other eye aliments, which adds even more fuel to the fire. Getting away from the macular degeneration side of the house, long term investors begin to see a Phase II-approved Myoblast autologous adult stem cell therapy for the treatment of chronic heart failure, advanced cardiac disease, myocardial infarction, and ischemia; as well as the Hemangioblast program for the treatment of blood and cardiovascular diseases. They also notice ACTC sitting on patents across the U.S., Europe, and China to protect their technology, including their proprietary "single-cell blastomere" technique where human embryonic stem cell lines are derived without destroying embryos. Needless to say this gives the company a distinct advantage as recently the European Court of Justice ruled that that an invention must be regarded as “unpatentable” if it requires the destruction of human embryos. And if that was not enough, ACTC has a definitive collaborative agreement with Roslin Cells LTD of Scotland where the two companies will work together to establish a bank of Good Manufacturing Practice grade human embryonic stem cell (hESC) lines using the patented, proprietary single-cell blastomere technique. Stem cell lines from the resulting bank will be made available for both research and commercial purposes.
For both the traders and investors the future hinges on the current trials. If successful and ACTC can deliver on their promises, then the traders will hit the jackpot when initial news is released. Needless to say, the longer term investors will see returns that are much too jaw dropping to mention here. If the trials were to fail, then ACTC and any investor’s money will go the way of the dinosaurs, extinct.
Oftentimes traders and long term investors will focus upon a specific drug rather than a company. One will find this when the drug or technology has the potential to be a “block buster” and might fulfill some unmet medical need that currently exists. There are several examples out in the market place but one of the best is the drug LibiGel. This drug is a gel formulation of testosterone, designed to be quickly absorbed through the skin after a once-daily application on the upper arm, delivering testosterone to the bloodstream evenly over time and in a non-invasive and painless manner. The drug was designed to treat sexual dysfunction or Hypoactive Sexual Desire Disorder (HSDD) in women. It will improve women's sexual desire and the frequency of satisfying sexual events. Currently in the market place there are many products for men’s sexual health, but that cannot be said for women. According to the company HSDD affects millions of women in the U.S. and is more common than erectile dysfunction which is a $2 billion per year prescription business in the U.S. So traders and long term investors will both want to get exposure into this event. The question is how might they differ in going about it?
The two companies standing to benefit from LibiGel is BioSante and Antares, but traders and long term investors may have very different views on the two. When it comes to control BPAX has the rights to the U.S. markets, but AIS will retain commercialization rights to the rest of the world, and with top-line efficacy results due shortly it will get exciting. Traders will be instantly drawn to BPAX as on the initial glance they seem to have the most exposure and chance for success with this drug. Take a look at their pipeline below and one can see that LibiGel will be the catalyst for the company’s immediate future.
On top of this one cannot forget the roll that options come into play. BPAX trades options and traders can use a variety of strategies using puts and calls to leverage their holdings. Many longer term investors will also invest in BPAX as well, but being more interested in long term trends and strategies, they will start to gravitate to AIS as the full story unfolds. AIS has the commercialization rights to the rest of the world, and let’s face it, it’s a big world. Also AIS will receive up-front and milestone payments from BioSante as part of the licensing agreement between the two. For the long term investor it comes down to simple mathematics as BPAX had to spend close to $100 million to conduct the trials, where AIS did not spend a dime. So where BPAX will get the initial lion’s share of the revenue, they will have to recoup their rather large investment while AIS will just pocket the cash as they figure out what to do with the rest of the world. This will take time for the complete strategy to play out for AIS, so traders will be less likely to enter the fray at this time. Also AIS not having any options will also deter traders from the stock. Now I am not saying one company is better than the other. Both have many other products in the pipeline, but in this example we are just introducing the concept of investing in a specific drug rather than a company as a whole.
Another great example of how long term investors and traders are banking on a specific drug is with the companies of KERX and AEZS. The drug is Perifosine which is an oral anti-cancer drug that is designed to treat advanced colorectal cancer, but also is being tested on other forms of cancer as well. KERX derived the rights to the drug from a commercial license agreement in 2002 with Zentaris AG, which is a wholly owned subsidiary of AEterna Zentaris Inc. If successful, KERX will promote the drug in North America. AEZS has further agreements with Yakult Honsha (OTC:YKLTF) for Japan, Handok for Korea, and Hikma Pharmaceuticals for Middle East and North Africa. Much like BPAX and AIS mentioned above, traders and long term investors will gravitate to different names. KERX, having actively traded options, will probably be the choice for the traders. The company has a very limited pipeline and Perifosine will be the main focus as it will have a major impact on KERX’s future cash flow and stock price. To understand why the traders will gravitate to KERX one must consider that the American Cancer Society states that colorectal cancer is the third most common form of cancer diagnosed in the United States. It is estimated that over 141,000 people will be diagnosed with some form of colorectal cancer in the United States, with over 49,000 patients dying from colorectal cancer in 2011. If the colorectal cancer market was not enough, traders also know that Perifosine has a second study dealing with multiple myelomas and its primary completion date is September 2012 and a study completion date of October 2012. If indeed the drug can be used to fight different types of tumors and cancers then KERX will be a traders dream.
Long term investors will definitely also jump on the KERX bandwagon but will find themselves drawn to AEZS as well. AEZS has no options to trade, but has a much bigger pipeline in development when compared to KERX. The company has been very active and has signed various agreements across the globe for Perifosine. It seems they are more than willing to sign up partners and let them share in the revenue if they are willing to take on the hard work of marketing the drug. So it seems that KERX, being so much more exposed to Perifosine with only one other advanced clinical product in its inventory, will be much more volatile once the final outcome of Perifosine becomes known. AEZS will definitely have a great revenue stream with Perifosine if all goes well, but have so many other pans in the fire that the reaction will be mooted compared to KERX. Still in the long run an investment in AEZS in regards to Perifosine could prove to be a winning combination as it would generate large sums of cash that could easily put the company into a profitable position while funding other their clinical studies.