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I'm following the "buy the busted stocks" instead of breakouts methodology, but breaking a rule on buying individual biotech stocks with today's purchase of Amylin Pharmaceuticals (AMLN). This is one of the few biotechs I know pretty well, and have followed for quite a while - mostly due to its diabetes drug Byetta. Which is the cause of the recent ruckus - on Monday the FDA warned that Byetta might be linked to 6 severe cases of pancreatitis.

  • U.S. health regulators warned of more cases of dangerous pancreas inflammation in patients taking Amylin Pharmaceuticals Inc's (AMLN) diabetes drug, Byetta, pounding company shares on fears of lower sales and doubts about a new version of the medicine.
  • The Food and Drug Administration said on Monday it received six reports of hemorrhagic or necrotizing pancreatitis requiring hospitalization, including two deaths. The four others were recovering at the time of the reports.
  • It was not immediately clear if the FDA would order new so- called "black box" warnings, the strongest type available, and representatives for the agency did not immediately return calls seeking comment.
  • The new reports follow an earlier warning last October, when the FDA cited 30 reports of pancreatitis in Byetta patients. At the time, it said the drug was suspected in some of the cases, and Amylin agreed to add information about the risk to its drug label and to alert doctors about the problem.
  • Analysts said on Monday the additional cases could pressure doctors into discontinuing use of the drug, which has already seen prescription growth slacken in recent months, in part because of difficulty adhering to twice-daily injections.
  • Pancreatitis is an inflammation of the pancreas, which helps aid in digestion by releasing vital hormones. The condition usually subsides within a week, according to the National Institutes of Health.

The stock dropped by nearly 20% - and this is exactly why I usually do not gamble in individual biotech names: "FDA risk". But, since this came after the fact, I am going to take a flier here. The stock was beaten down a bit more yesterday and is down a few more % this morning to the $27s range; there is no "great" reason to buy here but we are in day 3 of a purge which I believe is a bit of an overreaction from reading what people with a lot more knowledge than I have believe. The stock did fill a gap created July 31st in the mid $28s with this fall, and there is a lot of support in the $24s/$25s so if the stock does fall to that level we'll add there. But once again if you bought the "technical breakout" which this stock did once it closed over $33, you were demolished in under a week - it's a tough market.

The company is unprofitable and does have a second drug, Symlin, which is doing well, but Byetta is 90% of sales. It has to be administered twice a day which is a big pain, but the future here is for a different version of Byetta; an "extended use" type which only needs to be taken 1x a week. The approval process for this version will extend well into next year - probably spring to summer. In late July Amylin was added to Goldman's conviction list at prices similar to where we are now:

  • Goldman Sachs replaced Gilead Sciences Inc (NASDAQ:GILD) with Amylin Pharmaceuticals Inc (AMLN) on its conviction buy list, citing higher upside in Amylin's stock.
  • The investment bank said Amylin also stood to benefit from diabetes drug Byetta, which is co-marketed with Eli Lilly and Co (NYSE:LLY)

And in an ironic stroke - in this past weekend's edition of Barron's, Amylin was among a group of 5 biotech stocks listed as a potential takeover candidate:

  • But one thing is certain: Mergers, buyouts and takeovers involving biotech outfits will become more common as Big Pharma increasingly tries to fatten its product pipeline by acquiring proven, as well as promising, bioengineered drugs.
  • Another company that could spark an acquirer's interest is Amylin Pharmaceuticals (AMLN). It's working on a Type 2 diabetes drug that could be injected once a week instead of daily. Amylin has several development partners, including Eli Lilly, on the drug. It already markets two diabetes drugs, Symlin and Byetta. But some analysts say the product under development could boast major advantages. "A once-weekly drug that lowers glucose substantially, induces weight loss, isn't associated with hypoglycemia, and lacks a cardiovascular safety signal has multibillion-dollar potential," says Markowitz.

The market is nothing if not ironic; so let's look at some opinions of the most recent situation.

Motley Fool's Brian Orelli:

  • It amazes me how much investors can overreact to known side effects of a drug. This seems a bit excessive: a 13% drop (turned into 20%) after news that  the number of pancreatitis cases from patients taking Amylin's diabetes drug Byetta increased to 36 from the 30 reported last October.
  • It's not that pancreatitis isn't a serious issue -- the newly diagnosed patients had a more severe form of pancreatitis, and two of the six patients died -- it's that diabetics are already at increased risk of pancreatitis. At worst, patients with other risk factors for developing pancreatitis -- gallstones, severe hypertriglyceridemia, and alcohol use -- will stop using Byetta.
  • The biggest worry may be about how the new cases of pancreatitis will affect Amylin's once-weekly version of Byetta that it's developing in conjunction with Alkermes (Nasdaq: ALKS).

David Kliff of Diabetic Investor (published by Forbes):

  • The FDA issued a warning Aug. 18 for diabetes drug Byetta, because according to the FDA, there were six reported cases of severe pancreatitis, two of which resulted in death. The FDA did not mention in its warning that the agency considered this event to be "a rare and uncommon event"--which it did specify when it answered questions from Diabetic Investor.
  • As expected, the mainstream media has done exactly what Diabetic Investor expected: Implied that Byetta usage causes pancreatitis. Looking over the various press reports, there is no mention that there are nearly one million patients taking Byetta or that patients with diabetes are at an increased risk of pancreatitis no matter what therapy they are following.
  • The FDA felt it was necessary to issue a warning when six patients from a population of one million Byetta users developed pancreatitis. Byetta users are at lower risk than the general population in developing pancreatitis (six per 1 million vs. one per 3,400).
  • Just what does the FDA expect patients and physicians to do now? Put patients on Januvia? Ask any respectable endocrinologist or diabetologist who's not on Merck's (NYSE:MRK)  payroll and he or she will tell you that Januvia's performance is average at best--there's a reason that the drug has gained the nickname "Junknuvia."
  • Try as they might, Merck reps don't have a leg to stand on when comparing Januvia to Byetta; Byetta has superior glucose control, a superior cardiovascular profile and a proven ability to help patients lose weight.
  • Why not just put patients on insulin? As effective as insulin therapy can be, primary-care physicians are not equipped to deal with the patient education required. Ask any primary-care provider why he doesn't prescribe more insulin therapy and the answer may just surprise you. No, it's not fear of injections, its fear of hypoglycemia, a serious and possibly life threatening event. Unlike oral medications or Byetta, which can be delivered with little or no monitoring, proper dosing of insulin requires a patient to be educated. This is something that primary-care doctors are not paid to do, nor do they have the time or infrastructure for it.

So there is definitely a risk here - if some major disclosure of a bevy of new pancreatitis cases comes out in the next few months then the big potential of the once a week Byetta could be called into question. But for a jump from 30 to 36 cases, a drop of 25% in stock value seems a bit excessive - and as we stated last week, biotech has been one of the groups money has been rotating to, so this is a nice discount to get into one of the names.

We started with a 1.5% stake in the $27.70s and if we see a fall to the $24s/$25s we'll add to our position down there.

Disclosure: Long Amylin Pharmaceuticals in fund and personal account