Pharma’s Green Shoots

Courtesy of Pharmboy

Hello all! Not a bad month since our first plays in the Pharma and Biotech space. Phil summed up last week the positions and the nice profits on our picks, and I think it is time for a few more companies to focus on for our virtual portfolios (e.g., 100K), after all, it’s about tilling the soil and making some money on our Pharm…. 

First, the healthcare debate is going to rage on after the holiday weekend, and I am expecting this sector to take some lumps with our good ride up. I would expect the economies of scale to weigh in, as even though price may be lower, picking up more coverage (patients) is what it is all about. Those dependent upon high priced biologics may be the ones that take the biggest hit, as the costs are quite different than popping a pill every day for a few $$$. Just things to ponder and we will react as developments take shape on the horizon.

Mid-summer and early fall are the times for the biotech and pharma segments to provide the greatest returns. I cannot decide if it is the cyclical nature or if more clinical data are being released during this time. Looking at XBI and XPH over a five year period, the biotech fund (XBI) has done a bit better on overall return, but the two charts follow the same overall pattern. Thus, we are entering the final stretch for this sector, and should be prepared for a slight pullback during the holidays.

5 yr XBI and XPH Chart Here >>

Now, on to the good stuff….

Shire PLC (SPHGY), founded in 1986, aims to be a market leader in meeting the needs of specialist physicians in targeted segments. Its core therapeutic focus areas are attention deficit hyperactivity disorder (ADHD; within central nervous system, CNS) and increasingly biopharmaceuticals that address specific genetic disorders. Consistent with this strategy, Shire has been made a number of important acquisitions, including the 2007 purchase of New River, the developer of Vyvanse (the successor for Adderall XR ADHD treatment; and a series of biopharmaceutical acquisitions, following the Transkaryotic Therapies entry acquisition in 2005. In 2008, Shire acquired German biotech company Jerini, which brought along Firazyr, a treatment for hereditary angioedema. 

Recently, Shire has sent its treatment for Gaucher disease, an alternative to the Genzyme (GENZ) drug Cerezyme, to the FDA for approval.

The Company focuses its drug research and development on the relatively common mental abnormality Attention Deficit Hyperactivity Disorder (ADHD), as is made evident by the fact that three of its currently leading medications (Adderall/Adderall XR, Daytrana, and the newly developed Vyvanse), are intended for that disorder. However the Company also works on gastrointestinal (GI) treatments, human genetic therapies (HGT) and renal diseases.

Shire’s ROA and ROE are above the sector standards at 9.2% and 29.3% versue 1.2% and 2.1%. Standard and Poor  forecasts that 2009 product sales will decline about 4% from 2008's $2.75 billion on generic erosion of Adderall XR (for attention deficit hyperactivity disorder, or ADHD – which was 40% of product sales – YEOW) and U.S. dollar strength. After a projected 12% increase in royalties, and other income, we see total revenues falling 3%, to $2.93 billion. Sales of Shire's key product Adderall XR are expected to drop 50% to about $552 million, impacted by generic erosion in the U.S. that began in early April 2009. On the plus side, we expect robust growth for recently launched Vyvanse (for ADHD), Lialda (ulcerative colitis) and human genetic therapies.We see Vyvanse sales rising over 60%, to $520 million. ä We expect 2009 EBIT margins to narrow to 26.0%, from 2008's 31.7%, primarily reflecting the loss of Adderall XR sales due to generic competition in the U.S. After 2009, we expect margins to improve, helped by expansion in genetic therapy products, and a gradual reduction in the SG&A expense ratio.

The CEO just sold 17K shares on 9/4, but who wouldn’t shed a little when the company is doing so well, and several analysts just downgraded them from buy to hold/neutral.

I like Shire as a growth story as well as a takeover candidate. The stock just created a gap from $49-51, and they have been swinging wildly, so being conservative on the jump is the way to go. Buying $47.5 Apr10s C for $7.5 as well as selling ½ 50 Oct09 C for $3.5 or better.   Phil might have a better play and I would yield to his expertise.

Gilead (GLD) – I really like this company. Gilead means ‘hill of testimony’ or ‘mound of witness’, and do they have a mound of a pipeline. For many years since the company was founded, the company concentrated primarily on antiviral drugs to treat patients infected with HIV, hepatitis B or influenza. In 2006, Gilead acquired two companies that were developing drugs to treat patients with pulmonary diseases, Corus and Myogen. GILD is a core biotech holding that has strong fundamentals. First half 2009 cash flows of $1.26 billion under the current economic conditions are a good sign, and S&P forecasts 2009 product sales of $6.14 billion, which would represent 21% growth over 2008, and total revenues 21% higher at $6.45 billion.

GILD's should expand U.S. HIV drug market share given recent safety concerns with rival GlaxoSmithKline's abacavir. With 70% of HIV patients and 80% of all treatment-naive HIV patients on a tenofovir (Viread)-based treatment and next-generation anti-viral therapies are nearing late-stage studies, I think Gilead is on the road to being the next Genetech or Amgen.  Atripla just went on sale in Europe, being available in its five largest markets, after launching in France in mid-2009 will further increase Gilead’s balance sheet. 

While the company’s antiviral segment will continue to dominate the growth picture for the next year or more, Gilead has the potential to see new growth from its Liver Disease and Cardiovascular products that are just now coming onto the market. It is too early to tell if these products will achieve billion dollar status, though the early signs point that direction. In countries where their liver disease products have been approved for use, they have achieved 13% market share. Management is now ramping up their product sales to help these products achieve even greater success. Since Hepatitis affects many people, the prospects for Gilead’s liver disease products have good potential to become important contributors to the growth of the company’s sales (if Vertex gets to market in the hepatitis area, they WILL dominate…)

More recently, Gilead has become an important participant in the cardiovascular disease segment. Through acquisitions, most recently CV Therapeutics, Gilead now is becoming a participant in the cardiovascular disease segment. The potential for this segment is up in the air as it is to early to make and reasonable forecast on the potential sales that will stem from this segment.

GILD is positioned to acquire new clinical assets such as the recently completed $1.4 billion purchase of CV Therapeutics for its cardiovascular products and infrastructure. While HIV drugs still account for most of GILD's product sales, diversification from an expanded cardiovascular franchise over the coming years will only strengthen their reputation as a solid mid-tier biopharmaceutical company.

I noted on Wednesday to buy the $41 Feb10 for $6.6 when I mentioned them a few weeks ago (now $7.3), and selling ½ $47s Oct09 for $1.5 or better. 

Abbott Labs (ABT) – Abbott has never been a favorite of mine, and I do not know why. They are a mix of Pharma and device company (ala JNJ), with a trailing 12-mo P/E of 13.4 and a quarterly revenue growth of 2.5%. 

In 1985, the company developed the first HIV blood screening test. The company's drug virtual portfolio includes Humira, a drug for rheumatoid arthritis, psoriatic arthritis, ankylosing spondylitis, Crohn's disease, moderate to severe chronic psoriasis and juvenile idiopathic arthritis; Norvir, a treatment for HIV; Depakote, an anticonvulsant drug; and Synthroid, a synthetic thyroid hormone. Abbott also has a broad range of medical devices, diagnostics and immunoassay products as well as nutritional products, including Ensure, a line of well known meal replacement shakes, and EAS, the largest producer of performance based nutritional supplements.

In Februaury 2009, Abbott completed its acquisition of Advanced Medical Optics based out of Santa Ana, Ca.  The acquisition gave Abbott a Vision Eye Care division and on Wednesday, September 2 ABT said it will acquire Visiogen Inc. for $400 million in cash, in a move to expand its vision care segment. Irvine, Calif.-based Visiogen brings a next-generation accommodating intraocular lens technology, called Synchrony, which addresses presbyopia for cataract patients. Presbyopia is a condition in which the eye gradually loses its ability to focus on nearby objects. Intraocular lenses are implanted in a patient's eye after the removal of the natural lens that has become clouded by a cataract. Visiogen's Synchrony is designed to deliver improved vision at all distances.

Recently, ABT launched the XIENCE V system – a medical grade cobalt chromium stent with a thin coating of drug, everolimus, on its surface. The stent gives mechanical support to the artery while everolimus is slowly released into the artery wall around the stent from a thin polymer (a type of plastic) coating. The polymer coating helps control the release of everolimus into the arterial wall. The release of everolimus is intended to limit the overgrowth of tissue within the coronary stent. Only time will tell if this stent becomes the standard of care, competing against JNJ and Boston Scientific in this area….

This drug manufacturer knows the best medicine for a sick virtual portfolio is increased dividends. ABT has been dispensing higher dividends for 37 consecutive years. One cannot argue with that and many ‘experts’ like ABT. I exert a bit more caution on ABT due to Humaria and the drug business being more or less the cash machine, and thus recommend $42 Feb10 @ $6.1, and waiting to see if ABT can make it through the $48 price range, then selling ½ $48 Oct09 for $1 or better, otherwise ½ the $47s can be sold and rolled to $49 Nov09.

I am going to stop here, as the biotechs are running out of time. ARIA has popped to $3 (from my first post), and ARNA announces later this month on it pivotal Blossom trial, and that will be the one for the month. I know that several of you have been playing ARNA, and whilst I know the mechanism will work, the question remains, how well does it work and how ARNA phrases it to the investment community. Several scientists outside of ARNA have noted that if ARNA worded their press releases like Orexigen, ARNA would not be in the bent over position it is today.