Merrill Lynch analyst Eric Ende writes that the technical circumstances of the biotechnology industry indicates a long-term rise, but a probable slide in the short term. As an investor, I ask myself two questions: one, what is meant by biotechnology companies; and two, where does Israel fit in? Which among the many public Israeli companies are really biotechnology companies? Merrill Lynch & Co. Inc, by the way, astounded everyone with marvelous financials.
I noted that the companies Ende recommends are well known in the industry, such as Genentech Inc. (NYSE: DNA) and Genzyme Corp. (Nasdaq:GENZ), but also includes Israel’s Keryx Biopharmaceuticals Inc. (Nasdaq: KERX). Why did this experienced analyst choose Keryx rather than other supposedly no less promising biotechnology companies, such as Teva Pharmaceutical Industries Ltd. (Nasdaq: TEVA) for example? It’s not clear to me, but it could well be because Teva is categorized as a generic drug maker.
Let’s glance at Keryx. Firstly, Ende’s picks are shares worth holding towards the end of the year. This is the kind of recommendation that requires interpretation, before rushing out and buying one of the stock picks.
US investors are now entering the much talked-about period of tax sales. During this period, the fourth quarter of the year, experts distinguish between ordinary recommendations and special recommendations for the tax sale period. In other words, recommendations for stocks that the expert believes will rise during the tax sale period because they do not affect them. Since all of Ende’s stock picks, either did not plummet in the past year, or are rising at the moment, those are the ones he’s talking about.
A tax sale is one involving the following actions only. The designated stock was sold and repurchased within 30 days (not business days, which means 22 days for the purpose of this definition). This year, because many people will see large profits on which they will have to pay taxes (such as the many people who made large profits in real estate and are seeking ways to offset these profits), we’ll see tax sales of the kind I mentioned. A share like Teva, for example, which started the year at $43, and is now worth $35, is an ideal share for a tax sale, especially for large entities. It should be borne in mind that Teva fell from $44 in May to $30 in August, cannot be used for tax savings. The IRS recognizes a loss as tax deductible only if it occurs during the fourth quarter of the year.
There are stocks that it is recommended to invest in precisely at this time because there is no chance that anyone will use them for this purpose. Keryx is an example. These are stocks that will probably never be used in the current tax round. Why? Because in the case of Genentech, it barely fell during 2006, so the tax dodge won’t work. In the case of Keryx, the share has been rising quite strongly, so it is likely that anyone trying to exploit Keryx (which fell sharply before August) has already missed the boat. Teva, for anyone who bought it at $43 or $44, is still a fantastic object for a tax sale, especially if the investment was a large one at high levels.
What does Keryx actually do? The biotechnology world is different from the pharmaceutical world in terms of the active ingredients used to make drugs. Biotechnology uses living raw material, mainly proteins. Pharmacology mainly uses chemical substances to make drugs. Understanding Keryx’s field, and what it’s building its future on, is not easy. But one thing is clear, and that is that Keryx has a number of platforms nearing the market. What does “nearing” mean? It means that, over the next two to three years, with a little bit of luck, there might be drugs for treating some diseases or other.
In early October Keryx signed a contract with Kyowa Hakko Kogyo Co. Ltd. of Japan, which hints at this direction. Keryx granted Kyowa global distribution rights to its UCN-01 product, a substance intended to prevent certain cancers.
Keryx has risen 42% since mid-August, which I attribute to a recommendation by Jeffries & Co. early that month. Jeffries dismissed investors’ worries about the company. The report did not discuss the company’s cancer treatments, but its flagship product, Sulonex, a treatment for diabetic nephropathy, or renal failure among diabetics, Sulonex is patent protected through 2014, and Jeffries believes that sales of the product will exceed $250 million by 2009.
Investment institutions were apparently worried about rising competition in the field 2009 is very short term in the biotechnology dream world, which is why Keryx’s share is rising. Keryx, in contrast to fly-by-night biotechnology or genome companies, has excellent management. Keryx chairman and CEO Michael Weiss was the power behind XTL Biopharmaceuticals Ltd. (Nasdaq:XTLB). Keryx president Dr. I. Craig Henderson came from Access Oncology Inc., which Keryx acquired.
Keryx recently hired CFO Ronald C. Renaud from J.P. Morgan, where he was a senior biotechnology analyst working with companies such as Amgen (Nasdaq:AMGN). He has vast and important experience. Weiss also brought in top guns to Keryx’s board, including Dr. Lindsay A. Rosenwald, a surgeon and professor; Eric Rose; and Malcolm Hoenlein, one of the most connected Jewish-American leaders.
Is Keryx worth almost a market cap of almost $600 million? Wall Street thinks so, but it’s harder to assess the opinion on Main Street. That said, if what Jeffries & Co. says is correct, then the price is definitely appropriate.
I will now return to conclude with Teva. Firstly, in terms of definitions, Teva is as much a biotechnology, chemicals and even genome company as all the companies defined as such. I think that Teva is going through a periodical weakness that began with “industry leader syndrome”, which lead to worries (unfounded, in my opinion) that the company’s growth will grind to a halt in 2007 because of its very strong growth this year. The weakness has persisted because recent tax loss sales. I think that Teva is now a very good buy opportunity, and it should be included in every medium and long-term portfolio.
Published originally by Globes [online], Israel business news - www.globes.co.il © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.
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