This is our second installment of Pharmboy's Phavorites.
Our original post ran on August 8th, when we went long in a series of very timely calls on GSK, with a $33.93/34.37 buy/write (GSK up 3% so far); AZN was our bear cover with a .45 diagonal that is now .40 (up 11%); MRK 2011 $25s are up 20% and the buy/write option is still on target as long as it can be rolled even to Oct $32.50s (but too soon for that). So astounding performance from our Big Pharma picks – note how you can use a targeted diagonal to cover longs and win rather than an index put that is sure to lose money when your upside plays do well.
On the riskier Biotech side, ARIA is well on track to cover our .60/$1.05 buy/write, which can pay up to 316% in February at $2.50; ONTY was a more bearish buy/write and it's a good thing as they dipped .12 since our entry. We're looking good with a $2.74/3.87 hedged entry and anyone who followed my patient entry advice ("expect them to fill that gap to $4.50") would have had a fantastic opportunity this week. OGXI was one I did not trust but it's right on track with my cautious play as the Jan $17.50s are up 5% and the written Sept $30 puts and calls are still $7 and right on target.
SPPI was bashed by Cramer's crew, also giving us a great entry and we hit goal on selling the naked Jan $5s for $1.10 (now $1.05), which is a huge win (44% on $2.50 in margin) if they can just hold $5 through January. The play of the $4.35/5.92 Sept buy/write is well on track with the stock at $6.49 as well but our vertical spread took a .10 hit so far, which isn't too bad though as it's gone against us so far.
All in all, a very successful first round and now Pharm is back and this time he is making his own option picks to go with the trades. I'm a little more cautious here than I was on the 8th – until we see what levels the market holds next week but they are all well worth our attention in the week ahead:
Hello all! Another installment of Pharms Phavorites. One thing that bothers me is knocking pharma for its profits and the overall benefits to The People. Crap that goes around like this…
This cartoon shows what you do every time you put a pharmaceutical in your mouth, whether it's an over-the-counter painkiller or a powerful statin drug. FDA-approved pharmaceuticals kill so many Americans each year that the numbers are equivalent to dropping a nuclear bomb on a major U.S. city once each year.
As even drug companies have been forced to admit, all drugs have unintended side effects. That's because drugs are non-specific chemicals: They don't target only the tissues with "disease," they end up hijacking the biochemistry throughout the body.
No Sh*t Sherlock – so do the carcinogens of that charbroiled burger you eat, the plants we eat which contain pseudo-estrogen mimetics, and alcohol you consume in that beer or wine (FWIW alcohol is a depressant AND stimulant).
As Paracelsus said, “All substances are poisons; there is none which is not a poison. The right dose differentiates a poison from a remedy.” Ever hear of water. Too much will kill you as well, and I am not talking about drowning. I am talking about drinking too much of it (approximately 1.5 gallon for a 150 pound human – at once).
Much like the doctors Hippocratic Oath, we try to help patients by arming doctors with the best ‘medicines’ we can. I can go into the history of drugs at another time, but here is my new post on the healthcare sector with a few pharma, pharma/device, biotech and EMR companies. Here we go:
Big Pharma (continued):
As I have frequently mentioned in the vaccine space, Novartis is always at the top of my list, as it accounts for one-quarter of Novartis' pipeline and sales. The division is expected to rise 20 percent annually for the next five years, and it also has a $1 billion contract to provide the U.S. government with swine flu (H1N1) vaccine this year. Also two meningitis vaccines should hit the U.S. market by 2012. Novartis' stock has risen 33 percent off a seven-year low in March, but shares have lagged behind the broader stock market gains, mostly because foreign currency fluctuations hurt revenue (Barron’s). Game is on with NVS.
Buying the $40 Jan10 C @ $6.40 ($1 premium), selling $45 Sept09 for $1.35 (also $1 premium)
Bristol-Myers (BMY) – On the same day that Eli Lilly was talking up the commercial prospects of pipeline candidates acquired through its $6.5B purchase of ImClone Systems last year, a deal which hijacked Bristol-Myers Squibb’s plans to get its hands on an antibody technology platform, BMS has finally fulfilled its original objective with a $2.4B swoop on Medarex. BMY still has around $8.1bn in cash and equivalents as of June ‘09, which leaves the company with a war chest to attempt further deals. Even Cramer loves BMY more than JNJ (below). Too bad I recommended them on this board back in March for $19 (selling the $19 puts for $1 and buying them there as well – I did).
Faced with a significant patent cliff when Plavix goes generic in 2011 and Avapro in 2012, if BMS intends to soften the blow further deals look likely. On 7/31/09, AstraZeneca and Bristol-Myers received FDA approval for a new diabetes drug called Onglyza. The Agency will require the companies to conduct a post-approval study to evaluate the drug's cardiovascular safety in higher-risk patients, but Onglyza was not linked to increased heart problems in low-risk diabetics according to the FDA (this was mentioned in the MRK post – and I do not consider it a real threat to MRK’s Januvia, but diabetes is a lucrative market).
Their big baby is now Abilify for depression, anxiety and schizophrenia and should grow significantly over the coming years. BMY, themselves, are a potential target for those companies noted above (NVS) and below (SNY)….BMY is also the parent company of Mead Johnson which manufactures nutritional products such as Enfamil baby formulas and infant vitamin supplements like Tri-Vi-Sol and ConvaTec, a world leader in ostomy and wound care products. These guys are a very close #1 on my list with GSK, and maybe even a little more b’c of the dividend and lower price.
Buy outright for the dividend, or buying the $20 Jan10 C @ 2.80 ($0.5 premium), selling $22.5 Sept09 C @ $0.55 and $22.5 P@ $0.7. I think this company has room to run.
Sanofi-Aventis (SNY) – Sanofi-Aventis is the world's fourth-largest pharma by prescription sales ($28B in revenue). At the end of July, Sanofi agreed to buy Merck's half of their joint Merial animal-health venture for $4B in cash recently, and said the companies may work together again in the future to form the world’s largest maker of animal treatments. Sanofi and Merck had collaborated on Merial for over ten years, building it into a company with $2.6B in annual sales. Sanofi is also the largest producer of vaccines as of 2007 (I was unaware of this until the research here) through its subsidiary Sanofi Pasteur, and along with GSK, SNY is among the first to look for approval for the H1N1 vaccine in September.
Pharmaceuticals produced by Sanofi-Aventis include Lovenox/Clexane for thrombosis (its biggest seller in 2008 at about $4B),[6] Plavix/Iscover for atherothrombosis (co-marketed with BMY in the EU), Lantus for diabetes (10% revenue in 2008 @ $3B), Taxotere for breast, lung and prostate cancer, Eloxatin for colorectal cancer, Stilnox/Ambien/Ambien CR/Myslee/Zolfresh/Zolt/Stilnoct for insomnia, Copaxone for multiple sclerosis, Aprovel/Avapro/Karvea and Delix/Tritace/Triatec for hypertension, Allegra/Telfast and Nasacort for allergic rhinitis, Menactra for meningitis, Xatral for benign prostatic hyperplasia, Actonel for osteoporosis and Paget’s disease and Depakine and Depakote for epilepsy.
Not as confident on the SNY story as of yet. I would sell the $32.5 Sept09 P, being prepared to roll down to the $30 Dec09s.
Pharma/Device:
Johnson & Johnson (JNJ) – JNJ is a US based pharma and healthcare company. The company has three primary business segments – consumer products, pharmaceuticals and medical devices. The company had a revenue of 63 billion USD in 2008. The company derives around 30-32% of its revenue and around 40-45% of operating profits from the pharma business segment.
The Pharmaceutical segment includes products in the following therapeutic areas: anti-infective (Levaquin®), antipsychotic (Risperdal®), cardiovascular (Natrecor®), contraceptive, dermatology, gastrointestinal, hematology, immunology (Remicade®), neurology (Topamax®), oncology etc. Unfortunately, Risperdal and Topamax have lost patent protection in the recent and will face drop in sales and profits due to generics (each had over $1B sales). Success of new drugs is not a given and only a few drugs in the pipeline may replace these blockbusters.
The company has a consumer products division with strong brands and an extensive distribution network which act as a hedge to the other segments. The Consumer segment includes a broad range of products used in the baby care, skin care, oral care, wound care and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products. Remember, JNJ bought Pfizer’s consumer product division in 2005-6 for $16B.
Overall, JNJ is a top tier company, but the pharma division needs to bring in some heavy hitters to keep up that profit margin and revenue growth. Otherwise they need to do something, so they better raise the price of their baby shampoo!
Buying the $55 Jan10 C @ 6.50 ($0.5 premium), selling $60s Sept09 C/P for 2.20.
Hospira (HSP) – Gel on this board asked me to comment on HSP, a company I knew very little about. So, here is my comment….HSP has a forceful generic segment which many are for injection, and also has a medical device division (pumps, monitoring systems, etc.. From their conference call a few weeks back, second-quarter net income fell to $25.5 million, or 16 cents a share, against $69.1 million, or 43 cents a share in the same period a year ago. Adjusted earnings per share were 73 cents, against 57 cents. Analysts polled by FactSet research were forecasting earnings of 60 cents a share, on average. Net sales
The company lifted its full-year adjusted earnings guidance, and now expects it to range between $2.70 and $2.75 per share, with expectations for net sales for the year to rise approximately 4% to 6% on a constant-currency basis. Profit margins are 11% and ROE is 18%, not bad. Short ratio has fallen over the past few months, so one can assume they are either fairly priced or poised to move higher. Debt to Equity is 2.2, also not bad when they generate a FCF of ~ 300M. The company is moving towards their 52-wk high, and even their 5-yr high is 15% up from here, so they need some super-duper earnings or guidance to lift them over the top. I think they need to acquire companies/products to keep the growth moving forward. JMHO
ISIS Pharmaceuticals (ISIS) – On August 6, ISIS reported financial results for the quarter ended June 30, 2009. During 2009 Isis has continued to successfully execute its business strategy and as a result reported $669,000 of pro forma net income for the quarter ended June 30, 2009, a significant improvement over the same period in 2008.
What is ISIS made of? Antisense. Antisense is a treatment for genetic disorders which focuses on the use of specially coded nucleic strands to bind to mRNA within a patient’s cells. mRNA is the nucleic acid which carries coding information from the nucleus to the ribosomes for protein synthesis. A sense is a single sequence which codes for a particular protein. Antisense therapies focus on suppressing expression of a particular sense which effectively “turns off” particular genes. Delivery of these is the challenge, b’c in a test tube, it works great, but in the human body, things get a bit more complicated.
Isis’ track record as the only biotech to bring an antisense drug to market as well as the current co-developer of a phase III cholesterol drug which could receive FDA approval by 2010. They are partnered with Genzyme (below). In May, they announced that the Phase 3 clinical trial of mipomersen in patients with homozygous familial hypercholesterolemia (hoFH) met its primary endpoint, with a 25% reduction in LDL cholesterol after 26 weeks of treatment compared to a 3% placebo reduction (p<0.001). This study also met each of its three secondary endpoints of reduction in levels of apolipoprotein B, total cholesterol, and non-HDL cholesterol (all p<0.001).
Data from this phase 3 study of mipomersen in patients with hoFH will form the basis of Genzyme’s initial regulatory filing for marketing approval, which is expected to occur during 2H10. Many have a target range of $16-20. I don’t have a strong opinion on ISIS, as they are a one trick pony for now. They are ahead of the scientific curve, but the first out of the gate does not mean the will win the race.
Not confident with these guys – I would avoid for this time.
Genzyme is another potential target for big pharma I have mentioned in the past, and things look more on the bright side for a growth company. They have a few short term battles to fight, but long term looks good by me.
Buying the $50 Oct09C @ 4.2 ($1.5 premium), letting it run for the next few days, and then selling $55 Sept09 for 1.25 or better (all premium).
Other:
These are companies to watch. I do not know as much about this sector of health care, but I thought I would help us all learn about some other companies. These companies are competitors, but they should benefit from the heath care initiatives that Cap’s friend, Obama, wants to employ.
Both rivals Eclypsis and Cerner have far outperformed the S&P 500 since healthcare became an issue six months ago, but they are still worth consideration with billions on the line. The last one goes IPO on Monday, and in the words of Keith Oberman – they should ‘put that biscuit in the basket’, cause its gonna fly (Cramer says so too, ouch!).
Cerner (CERN) – I mentioned this company back in early May when they were at $49 or so, and since then they have moved to $63. In their most recent conference call,Cerner posted quarterly earnings and revenue that lagged market estimates, and cut its revenue outlook for 2009. The company also forecast third-quarter sales below analysts' expectations, but reaffirmed its 2009 earnings view. Directors and Officers of the company were selling in the mid-$60s. Its products include Powerchart and Millennium e-Booking, which is providing a code base for Choose and Book. Enter carefully, but they should benefit in the long term.
Eclipsys (ECLP) – Based in Atlanta, GA, Eclipsys is a leader in the area of electronic medical records (EMR) and financial analytics software for hospitals. The company began in 1995 as Integrated Healthcare Solutions, with origins in Computerized Physician Order Entry (CPOE) systems. A CPOE system processes and helps coordinate doctors’ requests for medications, lab tests, and other diagnostic procedures within a hospital. Eclipsys has a highly regarded product built on the Microsoft .NET platform, and now offers a broad range of medical management software products. Current market cap is $960M, it generates a profit margin of 18.6%, and a ROE of 29%. Quarterly revenue growth is 4.7%, and the levered FCF is $20M on $500M in revenue. Cash on hand can pay off the total debt, so I consider that a big plus. Revenues for the quarter ended June 30, 2009 were $129.8 million, compared to revenues of $132.1 million for the quarter ended June 30, 2008. GAAP net loss for the second quarter of 2009 was $4.1 million, or $0.07 per diluted common share, compared to GAAP net income of $8.5 million, or $0.15 per share on a diluted basis for the second quarter of 2008. An officer of the company bought $1M worth of stock at $14.33 in May.
Another unfortunate pump, as Cramer already spoke their name: Emdeon (EM) announced the pricing of its initial public offering of 23,700,000 shares of its Class A common stock at a price of $15.50 per share. Of the shares being offered, 10,725,000 were offered by the Company and 12,975,000 were offered by selling stockholders. The shares will be listed on the New York Stock Exchange under the ticker symbol "EM." To the extent that the underwriters sell more than 23,700,000 shares of Class A common stock, the underwriters have the option to purchase up to an additional 3,555,000 shares of Class A common stock from the selling stockholders at the initial public offering price less the underwriting discount. The offering is expected to close on or about August 17, 2009.
Biotech (continued):
