by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, December 07, 2011: Issue #1659
When the calendar flips from December to January, many people like to start the year with a clean slate…
They swear off junk food and promise to exercise more. They declare they won’t waste their evenings on reality TV, making a promise to themselves to read more. And finally that they will dump their losing stocks and instead only buy quality names.
Let me give you that little push that you may need. I can’t help much if you’re addicted to Haagen-Dazs and Mob Wives…
But if you own any of the following three stocks, sell them immediately.
“Hung” up on Medivation
San Francisco-based Medivation (Nasdaq: MDVN) has a promising drug for prostate cancer – MDV3100. In Phase III trials, advanced prostate cancer patients lived an average of 18.4 months versus 13.6 for patients on placebo.
The stock is up 200 percent from when the data was released just over a month ago, giving Medivation a market cap of $1.7 billion.
The company should provide more information next year as to the path to regulatory approval. Meanwhile, Medivation and partner Astellas Pharma are currently in an additional Phase III and two Phase II trials.
My problem with Medivation is two-fold:
When there was tremendous buzz about Dimebon, Hung became a rock star at investing conferences, once telling me, “I’ve made a lot of people (investment managers) heroes.”
Before you think this is sour grapes, you should know that my subscribers took big gains on Medivation during the Dimebon run-up and eventual fall. When the stock took off in anticipation of Phase III results, I recommended selling a sizeable chunk of the position, ensuring gains, even if disaster struck, which it did.
Will history repeat itself with MDV3100? In fairness, it appears to be a better-run study than the Dimebon trial. However, the company’s track record and recent run-up in the stock suggests to me that investors will be better off if they take the money and run.
Black Box Warning
ISIS Pharmaceuticals (Nasdaq: ISIS) – I’ve been banging on this one for a while now. ISIS, along with partner Sanofi-Aventis, plans on filing for FDA approval for cholesterol drug Mipomersen before the end of the year.
Mipomersen treats a rare genetic form of extremely high cholesterol. The drug works. There’s little controversy about that. The problem is that in every clinical trial, the drug has raised liver enzymes, which is a sign of toxicity.
Supporters say no patients have actually gotten sick on the drug and that the elevated enzymes are no big deal. Detractors argue that patients will have to stay on therapy for life and that the toxicity will become a problem as patients take the Mipomersen over many years.
My prediction is that the FDA either asks for more information (as they have done in the past) or approves it with a black box warning label, which should hurt sales. A black box warning cautions doctors and patients as to the severe side effects that are possible with the medication. ISIS is near its lows, but I don’t think this one is worth the considerable risk.
Come On, Mann…
MannKind (Nasdaq: MNKD) – If you’re in the plumbing supplies business, it’s alright to name your company after yourself. Same thing if you’re opening a law firm. Not so much, though, if you’re starting a biotech company.
Yet that’s what Al Mann did at MannKind. The CEO was nominated by TheStreet.com’s biotech reporter Adam Feuerstein as one of the Worst Biotech CEOs of the year. I’ve seen him speak at investor conferences before. And while he’s charismatic, you get the impression if this was 100 years ago, he’d be selling snake oil instead of inhalable insulin.
Inhalable insulin has so far not been shown to be commercially viable. Nektar Therapeutics’ (Nasdaq: NKTR) and Pfizer’s (NYSE: PFE) Exubera was a commercial disaster. Despite projections of $2 billion in sales, it only generated $12 million in revenue before being pulled from the market. MannKind’s version, called Afrezza, hasn’t even been able to obtain FDA approval, despite several attempts.
The company has $224 million in assets, of which $196 million is property, plant and equipment, while it has $210 million in debt. Stockholders’ equity is negative $280 million. Over the past year, it has burned an average of $33 million a quarter. At the end of the September quarter, it has just $22 million in cash.
Somehow the stock still has a market cap of $365 million. If you own the stock, I suggest get out now while there’s still something left to sell.
Although the rewards can be great, investing in small cap biotech stocks can be risky even under the best circumstances. In these three situations, the reward does not justify the enormous risks.
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, July 6, 2011: Issue #1550
The recent financial crisis wasn’t a fun period for most people. Major banks became insolvent, portfolios were decimated and houses were foreclosed.
But for small-cap biotech investors, the carnage provided more opportunities than they could handle.
Last week, I was in New York, meeting with various fund managers. While we didn’t always agree on each individual stock, we all agreed that it’s much harder to find good ideas. Which makes the company I think you should keep your eye on today all the more valuable.
Two years ago, and even last year, the ideas were falling in our laps as beaten-up stocks made the risk/reward profile much more favorable.
Any small-cap biotech investor knows the chances that his favorite company will take a mid-stage clinical trial drug and successfully launch a product on the market are slim. After all, only one in 1,000 drugs in pre-clinical trials become an FDA approved drug.
But that doesn’t mean there aren’t ample opportunities to make money. Investors can cash in on the hype and high expectations of drugs in their earlier stages of phase 2 trials and get out with a profit before the drugs’ late-stage trial results, when the anticipation of positive results is the highest (and often wrong)…
The Macro Picture of the Biotech Sector
I was excited to meet one portfolio manager for dinner at one of New York’s well-known steak houses. This fund manager is one of the sharpest investors I know. He’s not a guy who appears on CNBC or is quoted in The Wall Street Journal. He keeps a tight lid on his ideas, only sharing them with a few close confidants.
Fortunately, I happen to be one of them.
In past discussions, the ideas would flow like a waterfall. There was always an exciting new opportunity to talk about. This new medical device or that new cancer drug.
But last week, as we dined, the conversation drifted more towards the macro picture for both the market and the biotech sector rather than specific stock ideas.
We did talk about one interesting company with a deep pipeline that I’ll be looking into. If it amounts to anything, I’ll report back. But for the most part, the idea well was dry.
Another meeting, which I had in the lobby of my hotel, also had the same tone. In fact, we both expressed frustration that good ideas are harder to come by these days.
And no wonder. In the small-cap biotech sector, valuations have doubled over the past year.
One year ago, the price-to-book ratio of the S&P Small Cap Biotech Index stood at 2.7. Today, it’s at 5.4. The price-to-sales ratio also nearly doubled to 6.1 from 3.2. In 2009, during the crisis, the ratios were about the same. There’s no sense looking at price-to-earnings ratios since most small-cap biotechs aren’t profitable.
Investing in small-cap biotech is all about risk versus the potential reward. And many stocks in the sector are packed with both. So when valuations are twice what they were just 12 months ago, it shouldn’t be surprising that shrewd investors are having a tough time finding stocks with acceptable levels of risk compared to the potential profits.
An Undervalued Opportunity in AMAG
One of the few small-cap names that I think still has a lot of value is AMAG Pharmaceuticals (Nasdaq: AMAG). AMAG’s product is Feraheme, for anemia in chronic kidney disease patients. The company has over $11 per share in cash and no debt.
Feraheme is much more convenient than its competitor Venofer. Feraheme is given in two injections while Venofer requires eight to 10 doses.
And while its label was recently changed to include the mention of some serious adverse reactions, the observation period for patients receiving Feraheme was reduced to 30 minutes from 60 minutes, which should be seen as a positive for its safety profile.
The stock is trading at less than two times book value, including all of that cash. So Wall Street is putting very little value on its business.
If AMAG can surprise Wall Street with higher-than-expected revenue, don’t be surprised to see a higher multiple in the near future.
And although you never want to buy a stock because it’s a takeover candidate, AMAG would be a nice little tuck-in acquisition for a larger pharma or biotech company that can use its sales force to ramp up Feraheme sales. There are some activist investors involved in the stock who I’m sure would love to see the company sold.
Small-Cap Biotech Stocks Enriching Investors
But following the sage advice of buying low and selling high is particularly tough right now. AMAG may be one of the few opportunities out there. Otherwise, it may be best to wait for some stocks in the sector to come to order to reduce the risk.
I hope we never go back to the days when we worried if we’d be able to get our money out of the bank. But I wouldn’t mind having more good ideas than I knew what to do with again.