I have put in a request to Market Surveillance at the NYSE AMEX to stop trading in Telkonet (TKO) until the company puts out a press release on the results of the vote on Proposal #3 at yesterday’s annual meeting. There is no excuse for not getting this information out immediately, especially with the stock trading down 20% (only three cents) today.
There’s only one thing better than catching a big stock market winner like Dendreon, 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 before a pending announcement, planning to sell the BioCryst this summer to buy Arena Pharmaceuticals before their 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 http://seekingalpha.com/article/131596-is-dendreon-a-360-stock-or-is-that-too-low) 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 their 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). They 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 their 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 a pill, 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 $140 million 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 $400 million.
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 they just reported. Like Dendreon, they have 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 their 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.
Dear New World Investor:
Yesterday, the S&P 500 made a valiant effort to push through the important 913 energy level, on its way to an attempt to break through 930 and head up to my 1060 major target for this rally. But after the 36.9% rally from the March 9 intraday bottom so far, one of the strongest rallies on record, it just did not have enough energy left to make it through. I watch these interim swings closely, not because they are worth trading but
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This really is almost unbelievable.
Rep. Alan Grayson (D-FL) asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went, and the $9 trillion of off-balance sheet obligations that Bloomberg recently reported have been quietly made. She has no clue, and doesn’t even seem to know about the off-balance sheet stuff – and she is the top cop at the Fed! I’m leaving this post unprotected so you can send the link above to anyone. Every American voter should see this.
Dear New World Investor:
I’m back from the Money Show in Las Vegas, where I had the pleasure of meeting many of you, old faces and new, and giving two talks. One was on the big MegaShift drivers of the New World Economy, and the other was titled Survive the Great Inflation. That one was standing-room only and
Isolagen Process BLA Filing Accepted by FDA – Too Late
Isolagen (ILE) said on Friday that the FDA has accepted their Biologics Licensing Application (BLA) for their nasolabial fold and wrinkles product (The Isolagen Process) for review. But is is too late for the shareholders, as the company has decided to file for bankruptcy. They borrowed $500,000 from eight lenders (!) at 20% interest (!) for bridge financing to seek debtor-in-possession financing for a bankruptcy filing.
This is a sad outcome. Management’s first job is to stay alive, and since the company has been run for over a year by the former Chief Financial Officer, I thought he understood that. I have no doubt the filing will be approved and the product will be successful. The most likely outcome of the bankruptcy filing is that all the assets and liabilities will be taken over by a bigger company, with little or nothing left for us shareholders. There is a chance a bit of a bidding war could break out, or that management will find an investor to bring the company out of bankruptcy with a small share of the new company reserved for current shareholders. So I don’t think it is worth trying to sell the stock unless you need the tax-loss right now. Tax-loss selling can wait for the end of the year, by which time it should be clearer what will happen.
I apologize for this one – I was and am quite sure that the product works and will be very successful. Looking back, I should have recommended sale when they changed CEOs, not because the new guy was the former CFO. I thought that was a positive. It was because he lives in Ireland, and it is very hard to manage a development-stage company long distance. Continue to hold ILE; I am suspending the target price.
BioCryst Reports, IM Peramivir Fails, IV Peramivir Win
BioCryst (BCRX) reported earnings and a mixed bag of news yesterday. Although the stock fell 23 cents or 7% on Friday, I was encouraged. First, let me get the financial news out of the way. They had revenues of $4.4 million, far below the $10.8 million consensus, and lost 24 cents a share, better than the 28 cent loss consensus. This happens because much of their revenues come from a $102.6 million, four-year Department of Health and Human Services grant, and if BCRX doesn’t do a lot of work in a particular quarter, their revenues are down but their costs are down further. None of this is important for the stock.
Intramuscular Peramivir Phase II Results
What is important is to remember that we bought this stock because intravenous (IV) peramivir looks like a winner for hospitalized patients with seasonal or avian flu. If intramuscular (IM) peramivir in the outpatient setting also worked, that would be great, but it didn’t matter for my investment thesis.
The company has had a number of problems with the IM trials, including possible using needles that were too short for heavier people. But yesterday they announced what I think will be the final U.S. trial results for IM peramivir. In this Phase II, 405-patient trial for for acute uncomplicated influenza, those taking the drug averaged 91.1 hours to recovery, while patients taking the placebo averaged 106.1 hours. The difference was in the right direction, but was not statistically significant. BioCryst said they are in discussions with the FDA about using IV peramivir for acute uncomplicated influenza, but I don’t think there are many doctors or patients who would put someone on an IV for simple, outpatient flu.
On the other hand, of these 405 patients with confirmed influenza A about 79% had the H274Y mutation. This mutation has been associated with resistance to the anti-viral treatment Tamiflu.
IV Peramivir News
What should have pushed the stock up instead of down was some amazing news on IV peramivir. I’ve been waiting for the Phase II results, after which the government can add the drug to its stockpile for emergency use in a pandemic even if it has not completed Phase III. So BioCryst could start generating significant revenues before approval, which could be used to fund the Phase III tests.
But on Friday they made a strange announcement. They said: “Based on discussions with the U.S. Department of Health and Human Services/Biomedical Advanced Research and Development Authority (HHS-BARDA), it is preparing a portion of its inventory of finished peramivir for addition to the U.S. Centers for Disease Control and Prevention Strategic National Stockpile. This inventory is sufficient for the treatment of approximately one thousand patients and will be delivered in the event that the government so instructs. Intravenous peramivir is currently undergoing a pre-emergency use authorization review. Government agencies are considering the future option of providing peramivir through an EUA in the event of a severe influenza outbreak with significant hospitalizations. BioCryst is advancing the clinical development of peramivir under terms of a $102.6 million, four-year contract from the HHS.”
“Will be delivered in the event that the government so instructs?” To me, that means HHS knows the clinical results so far, knows peramivir works while Tamiflu has lost its impact due to the H274Y mutation, and is ready to use peramivir when needed, clinical trials be damned. The Centers for Disease Control recently evaluated various antivirals including peramivir in laboratory tests against clinical isolates of the H1N1 virus. Ten of the 13 isolates were tested for sensitivity to peramivir. All 10 isolates were susceptible, and this will be key data for the pre-emergency use authorization review. One thousand doses is just enough to protect the most important people on earth in their minds: Congress, the Supreme Court and the Chosen Ones in the Executive Branch. After all, if we didn’t have them to run our lives, what on earth would we do?
CEO Jon Stonehouse said: “BioCryst is working diligently with government agencies to provide i.v. peramivir as a treatment option for an influenza emergency.” He then went on to talk about various red herrings, like saying patients who can’t take a pill or inhale a drug will be served by IV administration (duh) and that they are negotiating with the National Institutes of Health to conduct a study of peramivir in children. As if the Obama kids wouldn’t be right at the top of the treatment list if they got a life-threatening case of the swine flu. All this diverted attention from the core deal: The government knows the numbers and is ready to buy peramivir. That is very hot news.
On the conference call, management said all this happened in the last 10 days, and they have been in “round-the-clock” discussions. The government has already evaluated their manufacturing capacity. When BioCryst is granted Emergency Use Authorization, I think the orders will flow quickly. Tamiflu and Relenza were stockpiled at $12 to $20 a dose, but peramivir is used in a hospital setting, with an IV a day for five days. The cost of a course of treatment will be much higher than for the two oral drugs used for outpatients.
In the U.S. alone, seasonal flu puts about 200,000 people in the hospital each year. HHS says that in a pandemic like the 1918 Spanish flu, as many as 10 million people could end up in the hospital. I think that is way low, because those people had not been vaccinated as children. Those who didn’t die of childhood infections had robust immune systems, and still millions died in the U.S., and perhaps 50 million around the world. Most people today had childhood vaccinations had therefore have weaker immune systems as adults, the benefit being that more make it to adulthood. But the downside is that when a virus comes along that people have not been immunized to, it can wreak much more damage.
In any case, these last 10 days have created a dramatic positive change in the outlook for BioCryst. Irt was obvious from Friday’s drop in the stock that Wall Street does not get it. But they will, perhaps when peramivir gets the Emergency Use Authorization. I am making BCRX a Top Buy and raising my buy limit to $5 for an unchanged $30 target.
Dear New World Investor:
Yesterday, this high-powered rally cleared my first major target at 910. The shorter-term S&P 500 charts show that energy is almost exhausted for any immediate further move. There could be a quick touch up to 943 on some major good news, but that would almost certainly block any further advance and send the Index back down to at least current levels. I expect the S&P to build up more energy either via another “running consolidation” like the one we saw in mid-April, or by a scary test back into the 850-880 range to bring the put buyers out in force with their “Dow 6000 Just Ahead!” messages. Either way, there is nothing to suggest the next big move will be down. It won’t take much of a consolidation to get to 1060. It will take more work to get to 1160. But if both of these levels are broken after only short consolidations, my 1250 target for this whole move definitely will be on the table.
