Healthcare ETFs Outpace the Market
[web link to table of statistics for 28 healthcare ETFs sorted by net assets] [more]
As Google ad deal likely to be scrapped, look for eventual sale to Microsoft around $19-$22 per share - call option activity heating up for November in Yahoo around $15-$16 area plus Carl Icahn says some type of deal will get done with MSFT - Icahn will likely discuss when he appears on CNBC's Fast Money on Monday 11/3 - IMO, YHOO is an up $7 down $2 trade at this point - could combine with AOL first, then have MSFT buy both to better compete with Google
Warren Buffett Is Still Riding the Rails
[web link to Global Railroad Index stats and top seven companies by market cap] [more]
Health IT Poised to Rebound on Prospects for Increased Spending
[web link to index stats and top five rated companies in Health IT] [more]
Teva is on Target to Acquire Barr
[web link to updated calendar of over 70 pending FDA dates] [more]
Biogen Reports Another PML Case in Tysabri Patient
After the market close, Biogen (BIIB) filed an 8-K with the SEC reporting a new case of the potentially fatal brain disease known as PML or progressive multifocal leukoencephalopathy in a patient receiving their multiple sclerosis [MS] drug Tysabri, adding to the two new cases which were reported previously in July. Biogen is currently trading down by about 15% after hours while marketing partner Elan (ELN) is down by about 25% as of 5:15 PM. The news adds more uncertainty to Tysabri, which was removed from the market in 2005 after the initial cases of PML were reported, but was placed back on the market with stricter warnings in 2006 and approved for expanded use this year in Crohn's disease for patients who do not respond to other treatments.
The text from the 8-K filing specifies the following:
- Patient has a history of MS and prior disease modifying therapies, including beta-interferons and glatiramer acetate.
- Patient had also received prior therapy with methotrexate for a rheumatological condition.
- Patient received 14 infusions of TYSABRI monotherapy.
- Clinical vigilance led to early identification of signs and symptoms of possible PML and to clinical evaluation which included MRI scanning and CSF testing.
- Patient is under the care of patient's treating physician. [more]
Analysis of Global Coal Prices & Energy Commodity Funds
[web link to 5-month cahrt of global coal prices, KOL, UNG, USO] [more]
The Russians Are Coming. . . To PA Coal Country
Russian steelmaker Severstal (SVJTF) agreed to a lower price of $300M USD payable to the principal shareholders (representing about 80% of all outstanding shares) of Western Pennsylvania coal miner PBS Coals (Toronto: PBS), while the price of C$8.30 per share to all other shareholders remains the same. The lower price tag values the deal at about $1B (USD), which is in line with the decline in coal prices, commodities, and global stock markets since the deal was originally announced in late August for $1.3B as related ETFs have plunged in value, including the Market Vectors Russia (RSX), Steel (SLX), and Coal (KOL) funds.
PBS Coals closed down 4% on Friday in Toronto at C$7.00 ahead of the agreement to close the deal, which was announced in the early morning hours on Saturday. The acquisition will provide Severstal with a source of coking coal and the company already has expansion plans to double the output of local mines, according to reports out of Moscow from Severstal's mining division chief executive. The PBS Group currently produces about 3M clean tons of bituminous coal annually and controls over 153M tons of measured and indicated coal resources with an additional 98.3M tons of contingent resources. [more]
Biotech Blues: Four Stocks on Sale with Hope The following group of biotech companies have market caps of at least $300M with a one year stock price change that is below the iShares Nasdaq Biotech ETF (IBB) loss of 21.8% (Source: Google Finance, 10/25/08) with potential upside catalysts over the next year.
Alnylam Pharma (ALNY): $872M, -31.6%
Biogen Idec (BIIB): $12B, -48.4%
BioMarin Pharma (BMRN): $1.7B, -33%
Momenta Pharma (MNTA): $348M, -23.4%
Momenta and Novartis (NVS) expect to launch a generic version (M-Enoxaparin) of the injectable blood thinner Lovenox in 2009, pending approval of their ANDA by the Generic Division of the FDA. With Momenta trading in single digits again after reaching as high as $20 per share; an approval for M-Enoxaparin would be a significant catalyst since Lovenox posted sales of about $4B in the last year for Sanofi-Aventis (SNY).
Since trading into the upper $70s after putting itself up for sale, Biogen has pulled back into the lower $40s, which represents an attractive entry point on overblown PML concerns for Tysabri and its attractiveness as a takeover target. Biogen would provide a big pharma suitor with a portfolio of approved and late-stage biological agents positioned for growth in the future.
The two remaining companies on the list represent attractive takeover candidates for different reasons as BioMarin markets the high margin, orphan drug Kuvan with a pipeline of other specialized enzyme-based treatments while Alnylam offers its RNA interference [RNAi] drug discovery platform and early stage pipeline, which Merck (MRK) paid $1.1B two years ago for a similar RNAi drug discovery company Sirna Therapeutics. [more]
Six Healthcare Stocks on Sale Despite the notion of investing in the healthcare sector as a safe haven, the following six companies (APPY, CMED, CYPB, DSCO, MYL, PFE) are all down sharply over the past year despite solid underlying fundamentals, which are largely unaffected by global economic conditions.
China Medical (CMED) is trading near its IPO levels of August 2005 despite excellent growth prospects and a PEG ratio of 0.3X, a forward PE of 8X, and a dividend yield of 1.8%. For some perspective on the velocity of the downturn in CMED, the stock opened this week trading in the low thirties and I bought shares this morning at around 21 bucks. The Company develops and sells consumable diagnostic kits to detect a variety of diseases and also to gauge the effectiveness of drug therapies as a play on personalized medicine.
Earlier this week, AspenBio Pharma (APPY) reported that its clinical trial was 70% enrolled for AppyScore, which is a blood-based diagnostic screening test for appendicitis. APPY expects to complete the trial before year-end and file a 510(k) with the FDA in early 2009, which is a quicker approval process for medical devices and tests compared to the PMA process.
Mylan Labs (MYL) is the number two player behind Teva Pharma (TEVA), which is trading at levels not seen in over a decade despite trends in favor of the global generic drug industry, which include the following: nearly $70B in brand name drug sales with looming generic competition through 2012 and a push by insurers to increase generic substitution rates from 65% of all prescriptions dispensed to over 70%.
Big (Generic?) Pharma
Pfizer (PFE) currently yields near 8% while trading at a forward PE of under 7X and recently announced plans to make a bigger push into the low-margin generic drug business, which is expected to nearly double to $520B in sales in 2012 from 2006 levels. Given all the talk of Pfizer looking to make a series of biotech acquisitions to fill its pipeline; the recent announcement suggests Pfizer could be eyeing a company such as Mylan Labs which specializes in high margin generics such as fentanyl patches.
Also, Mylan has a stronger global footprint with its $6.7B purchase of the generic division of Merck KGaA in 2007 – with Mylan itself now trading at a market cap of just $1.9B and an enterprise value [EV] of $6.8B. Mylan is valued at an EV/revenue multiple of just 1.75X with an estimated forward PE of 6.3X, making it an attractive buyout candidate for Pfizer to jump-start its new generic drug strategy.
Small-Cap Stocks, Big FDA Decisions
Cypress Bio (CYPB) and partner Forest Labs (FRX) have a pending FDA decision for milnacipran in the treatment of fibromyalgia, which has been widely used as an anti-depressant in Europe and other markets for over a decade. The FDA missed its decision deadline, but expects to resolve the matter in a "matter of weeks", which is encouraging since the agency did not simply delay the deadline by three months as it has done in many recent cases.
Discovery Labs (DSCO) expects to hear from the FDA by October 31 on whether the agency will classify its response to an approvable letter for Surfaxin earlier this year as a Class I review. DSCO expects the Class I designation, which would result in a decision deadline of December 17, rather than the six month period for the Class II review process. Insiders for DSCO are bullish on the stock and have been buying consistently for more than a year. [more]
Expanding Defensive Growth Index into Europe
[web link to table of 40 companies + index/benchmark stats] [more]
More Pain to Come from the FDA?
[web link to updated FDA calendar of expected decision dates] [more]
Amgen Exceeds Expectations, Again Shares of Amgen (AMGN) have moved into the green in after-hours trading following a late-day Wall Street sell-off that had the Dow tanking by over 500 points. As I wrote earlier today, Amgen was able to both exceed profit and sales expectations for 3Q08 and raise its full-year profit guidance as it had done three months ago when reporting 2Q08 results. Even with the current pop in after-hours to around $54 per share, Amgen is only trading at a PE of 12X on the mid-point of its 2008 profit guidance of $4.45 to $4.55 per share.Amgen posted EPS of $1.23 versus $1.08 consensus estimates on revenue of $3.88B versus $3.7B consensus estimates. Results of key drugs for the Company include:
- Epogen sales up 5% to $634M
- Aranesp sales up 3% to $845M
- Neulasta + Neupogen sales up 8% to $1.19B
- Enbrel sales up 9% to $893M
- Sensipar sales up 32% to $161M
Amgen ended 3Q08 with $9.8B in cash and $11.2B in debt. The Company raised both it revenue guidance ($14.9-$15.2B) and profit guidance ($4.45-$4.55 per share) for the full-year. Amgen is currently trading at a market cap around $53B, which results in a price/sales ratio of about 3.5X and a price/earnings ratio of about 12, based on full-year guidance for 2008. As a comparison, Genetech (DNA) trades at over 7X sales and a forward PE of over 20X, with an outstanding buyout bid from Roche (RHHBY) to buy out its remaining stake in the company. [more]
An Earnings Encore for Amgen?
I think Amgen (AMGN) will beat consensus estimates for sales and profits again today when it reports after the market close, continuing the same trends as last quarter, including better than expected sales of embattled anemia drugs Aranesp and Epogen. Amgen reported 2Q08 results (see conference call transcript) that beat consensus analyst estimates and raised its full-year [FY] guidance for earnings and revenue, thanks to much stronger-than-expected sales of its anemia drugs Aranesp and Epogen:
- 2Q08 Revenue +1% at $3.8 billion [B] vs. $3.58B expected
- Adjusted Earnings Per Share [EPS] of $1.14 vs. $1.02 expected
- Increased EPS Guidance FY08 of $4.25 to $4.45 from $4.00 - $4.30
- Increased Revenue Guidance FY08 of $14.6B - $14.9B from $14.2B - $14.6B
- Aranesp 2Q08 Sales of $825M vs. $738M expected
- Epogen 2Q08 Sales of $622M vs. $585M expected
- Enbrel 2Q08 Sales of $841M, up 2% from 2Q07
- 2Q08 Research & Development [R&D] Expenses of $779M vs $777M in 2Q07
- Repurchased about 33M shares during 2Q08 for $1.5B with additional $4.9B authorized [more]
A small-cap, deep-value retailer which runs two store chains, DSW (shoes) and Filene's Basement (discount retailer of brand goods). Early this year, RVI unloaded its majority stake in Value City Department stores. [more]
Pfizer Beats on Profits with Aggressive Cost Cutting Pfizer (PFE) posted an EPS of $0.62 on revenues of just under $12B, which was two cents ahead of consensus earnings estimates and in-line with revenue estimates for the quarter. The Company raised its full-year revenue view to $48-$49B while narrowing its earnings estimate to a range of $2.36-$2.41 per share. Pfizer also raised its 2008 cost reduction target to at least $2B. International sales posted gains of 13% (mainly due to a currency exchange benefit of 10%) compared to a decline in U.S. revenues of 15% from the year-ago period.
Sales trends of key drugs during 3Q08 included a 1% decline for Lipitor to $3.1B, an 8% increase for Celebrex to $625M, a 49% increase for Sutent to $226M, a 24% decrease for Chantix to $182M, and a 45% increase for Lyrica to $675M. Overall drug sales totaled 11B for the quarter, which represented a 1% decline from the year-ago period and includes a favorable impact of 5% from foreign currency exchange. Animal health revenues posted an increase of 11% from the prior year to $708M. Pfizer provided guidance for $17-$18B in cash flow from operations for 2008 versus $13.4B in the prior year.
Although overall drug sales growth is not robust and generic competition looms for key products such as Lipitor, Pfizer's strong cash flow, over $26B in cash, and an aggressive cost cutting campaign make the stock a buy as a value play and turnaround candidate which can buy itself a pipeline of new drugs through targeted biotech and pharma acquisitions. [more]
The Timber Trade: A New Commodity Pool Fund Idea
Given the low correlation of timber to other asset classes and two existing company-based ETFs, investors may be interested in a new idea for a commodity pool fund which tracks the global price of lumber and wood pulp. A new commodity pool fund could be structured as follows to trade near-month futures contracts (or the closest available month to the near-month) for lumber (Lumber futures will account for 67 – 75% of the portfolio based on higher average trading volumes than pulp) and wood pulp (Wood Pulp futures will account for 25 – 33% of the portfolio) from any available global, exchange-traded futures contract product (with currently traded products listed below):
a.) CME Globex: Northern Bleached Softwood Kraft Pulp (WP)
b.) ICEX: ICE Futures US Pulp Futures (P)
c.) CME Random Length Lumber Futures (LB)
Existing company-based ETFs for timber include the Claymore Clear Global Timber Index (CUT) and the iShares S&P Global Timber & Forestry Index (WOOD). Since both of these funds invest in the stocks of companies involved in paper, pulp, and timber; their returns over time would be more correlated to the overall stock market versus a commodity pool fund which is based on the actual price of lumber and wood pulp through exchange-traded futures contracts. [more]
FDA Action Heats Up Before Year-End
[web link to FDA calendar of about 70 decision dates] [more]
A Defensive Growth Stock Index
[web link to table of index + 30 company stats] [more]
Index of Market Cap Leaders by Nation Posts Decline
[web link to index stats & top 5 companies by market cap] [more]
Below are some interesting energy and power stock + ETF plays, listed from most speculative to least speculative, with many trading at multi-year lows despite bullish long-term outlooks: [more]
A Selective Investment in Scandinavia
[web link to Nordic Region Index Stats + Top 10 Companies by Market Cap] [more]
Dialing for Dividends in Telcos
[web link to index stats and top 10 companies by market cap] [more]
Given the global economic slowdown, lower commodity prices, and cool-down in former red-hot grow markets such as China; the accompanying table presents statistics and an overview of a global transport short ETF strategy [link to table and stats for each index] for passenger airlines, auto makers, maritime, and trucking companies.
While I am still bullish on the prospects for railroads as a long investment idea and a hedge to these short transport ETF ideas, they will also suffer to some degree depending on the length and depth of the slowdown. However, the railroad industry is more fuel efficient than trucking, is not plagued by overcapacity, and also enjoys pricing power as there is a limited amount of railroad track and little ability to add new tracks in the U.S.
In contrast, the passenger airline industry is plagued by too many airlines and too little demand as it continues to struggle despite the recent relief from high oil prices. Ironically, Southwest Airlines (LUV) reported its first loss in 17 years last week as it hedged for much higher oil prices, and is now number two in terms of market cap behind Singapore Airlines (SINGF).
As General Motors (GM) and Chrysler continue to discuss a merger of weakness, the auto industry is also struggling to make money and 24 of the 39 stocks in the index have lost over half of their value in the past year. A major exception is Volkswagen (VLKAY) which posted major gains, moving it ahead of Toyota Motor (TM) for the top market cap spot.
Along with plunging commodity prices, a measure of the cost to move that same stuff around the seas, the Baltic Dry Index, has posted declines of 52% (2-week), 70.4% (1-month), and 86.6% (1-year) as it hovers at multi-year lows. The ETFI Global Maritime Index is structured to track the 40 lowest rated companies, and includes less than half (19) duplicate companies as the recently launched Claymore/Delta Global Shipping (Long) ETF (SEA). [more]
As evidence of increased commercial interest and product development for a variety of global transport ETFs, the following ideas have been either launched or filed: Claymore/Delta Global Shipping (SEA) (Aug. launch), PowerShares Global Progressive Transportation (PTRP) (Sep. launch), and SPDR Transportation (filed with SEC). The iShares Dow Transports (IYT) is easily the most popular transport ETF with investors, with $689M in net assets as of the market close yesterday as compared to $1.8M for PTRP and $4.7M for SEA. Despite the wide recognition and popularity of the underlying Dow Transports index, IYT has several limitations such as a lack of ex-U.S. companies, the inclusion of four airlines, a limited basket of 20 stocks, and a concentration in the top five weighted stocks of over 43%.
The accompanying table presents the ETFI Global Railroad Index, which is a market cap-weighted index of 42 companies with a total return over the past year of -14.8%, outpacing IYT at -21.6% and the S&P 500 ETF (SPY) at -40%. While five of the top seven companies are based in North America and listed for trading on the NYSE, 26 of the 42 companies are not listed for trading in the U.S. The outlook for rail transport is bullish as the industry has pricing power because there is limited ability to increase capacity in terms of new tracks. Warren Buffett holds a large stake in Burlington Northern (BNI) and is a long-term bull on the industry, and a railroad ETF would give investors a globally diversified investment option beyond just rail transport companies, including railcar makers and rail infrastructure suppliers. [more]
The ETFI Global AnimalBiz Index includes a total of 35 companies with market caps between $100 million to $10 billion U.S. Dollars, with a semi-active rating system which is rebalanced each quarter to choose the top 25 rated companies as active components. The index excludes all big pharma and diversified healthcare giants which have animal health segments such as Schering-Plough (Intervet), Novartis, Pfizer, Merck + Sanofi-Aventis joint venture (Merial), Wyeth (Fort Dodge), and Eli Lilly (Elanco). These companies are excluded to make the index more leveraged to animal care as this segment typically represents only about 5% of their sales.
The Global AnimalBiz Index has declined with the overall market malaise, but outpaced the S&P 500 Index ETF (SPY) and its benchmark funds for the healthcare sector, including the iShares S&P Global Healthcare (IXJ) and the Healthcare Sector SPDR (XLV). Animal healthcare is dominated by several large and mega-cap global pharmaceutical companies, which either have distinct operating divisions from acquisitions or joint ventures focused on this niche area of pet and livestock medicine.
With the exclusion of these large and mega-cap companies from the Global AnimalBiz Index, it is dominated by small and mid-cap stocks with an average market cap of about $1B for all of the companies. Also, the companies in the index are takeover candidates given their small size and niche focus – such as the $1.6B tender offer by King Pharma (KG) for Alpharma (ALO) which was recently extended until November 21 as the latter rejected the initial offer. My favorite pick in the index is Neogen (NEOG), which is included in the accompanying table as one of the top five rated stocks. [more]
The accompanying table presents the ETFI Global Tobacco Index of 29 companies over $100M (USD) market caps, which have posted a gain over the past year for the top 20 rated stocks and outpaced its benchmark ETFs. The top 20 rated stocks have an average dividend yield of 5.6% and only 11 of the 29 companies are listed for trading in the U.S.
Tobacco stocks have outperformed benchmark ETFs for the S&P 500 Index (SPY), iShares Dow Jones Select Dividend (DVY), and consumer staple funds such as the Consumer Staples Sector SPDR (XLP), Vanguard Consumer Staples (VDC), and iShares Global Consumer Staples (KXI). Also, the FTC has cleared the way for Altria's (MO) takeover of smokeless tobacco company UST, which is expected to close in early 2009. [more]
AspenBio Pharma (APPY) should be close to completing patient enrollment in its 510(k) clinical trial for AppyScore based on its previous update in early September when the trial had reached the half-way point in patients. AppyScore is the world's first blood-based diagnostic tool for human appendicitis and APPY expects to file the 510(k0 before year-end with potential approval in early 2009
Steve Ballmer states that a Microsoft buyout of Yahoo! would still make sense economically, but the buyout price is uncertain since the original deal was rebuffed by YHOO at $33 per share. However, Carl Icahn appeared on Fast Money last night and stated that a deal with MSFT would get done in some form. With YHOO touching lows near $11 earlier today, the pressure is on for some type of deal with MSFT.
The accompanying table presents an overview and statistics for 18 new global equity indexes and ETF proposals developed by ETF Innovators in order to provide investors with long or short investment vehicles for industry groups that currently have few or no ETFs on the market. The goal of these ideas is to provide investors with global equity index investment products which are more focused than broad-based ETFs such as iShares Dow Transports (IYT), Healthcare Sector SPDR (XLV), and Consumer Staples Sector SPDR (XLP).
However, the goal is to choose industry groups which are not too narrowly focused and have the potential to attract widespread investor interest. Some investment themes behind these industry groups include: pricing power for rail transport, high dividend yields + defensive nature of tobacco, global consolidation of generic drug industry, improved patient care + cost-savings for health info tech, and widespread weakness + high volatility in the airline + auto + maritime industries with the potential for a short/inverse ETF due to the global economic slowdown. [more]
With the economic downturn, rising unemployment, decline in house prices, and limited ability for consumers to continue using their homes as an ATM; credit card debt is poised to be the next disaster in the financial sector with bearish outlooks for credit lenders Capital One (COF), Discover (DFS), and American Express (AXP). Credit card processors such as Visa (V) and MasterCard (MA) have also declined with the overall market, but are leveraged to the volume of transactions with debit and credit cards rather than credit quality as the pure-play lenders. Capital One reports after the market close today and is currently trading down by about 7% and I think it will trade at new lows below the $30 level on disappointing results. [more]
Both candidates in the upcoming election are bullish on Health IT spending as part of their healthcare reform proposals, with an estimated savings of $88B to the country over 10 years. However, details of these plans are lacking; although Obama's proposal would include a $50B investment in Health IT, divided evenly over a five-year period. The accompanying table presents an overview of the ETFI Global Health IT Index, which includes a total of 38 companies.
Trends in favor of Health IT include a push toward electronic prescribing (e-prescribing), reduction of paperwork, remote patient monitoring technologies, and plans by both candidates for significant investment in the industry. Zix Corp (ZIXI) and Allscripts (MDRX) provide e-prescribing technologies, which have pending legislation in the House and Senate to provide financial incentives to promote the adoption of the technology. Other recent deals in the industry include the recently completed Allscripts-Misys Healthcare merger, GE Healthcare's bid for Vital Signs (VITL), and Philip's (PHG) purchase of remote patient monitoring company VisICU last year. [more]
Despite attracting little in the way of investor interest in terms of trading volume and net assets, the iPath Global Carbon ETN (GRN) has outpaced the S&P 500 Index, U.S. Oil Fund (USO), U.S. Natural Gas Fund (UNG), and Central Appalachian Coal Futures (QL) (down 28.5%) over the past three months. Since diverging from oil and natural gas in late July, the global price of carbon is still trading above its low point at that time despite a global unwind of leverage which has hit commodities especially hard.
Investors should also note that since GRN is structured as an ETN, it is a debt obligation of Barclays (BCS) which has lost nearly two-thirds of its value in the past year. This distinction may also be a factor in the hesitance of investors to commit capital to GRN since its launch this summer, as the ETN only has about $6.5M in net assets and a 20-day average trading volume of about 2,300 shares. However, XShares has a similar product in registration called AirShares which is structured as a commodity pool fund and may prove to be more popular with investors.
With the price of natural gas lagging coal; it is cheaper for utilities in Europe to simply switch to burning more gas to generate power which results in less greenhouse gas emissions and less demand for carbon credits. However, as illustrated in this 3-month chart, GRN has broken away from its initial correlation to key energy commodities as tracked by the U.S. Oil and Natural Gas Funds. [more]
The accompanying table presents statistics and the top five rated companies in the ETFI Global Generic Drug Index, which includes a total of 44 companies. Over the past year, generic drug companies have outpaced both the Healthcare Sector SPDR (XLV) and existing drug ETFs such as PowerShares Dynamic Pharma (PJP), Pharma HOLDRs (PPH), iShares Dow Jones US Pharma (IHE), and the S&P Pharma SPDR (XPH).
All of the top five rated generic drug companies and over two-thirds of the 44 companies in the index are based outside of the United States; so a Global Generic Drug ETF would provide investors with access to this rapidly consolidating industry. Most of the companies in the index are small and mid caps with Teva Pharma (TEVA) as the industry leader in terms of market cap and sales, which is about to get even bigger with its pending acquisition of Barr Pharma (BRL).
Trends in favor of the global generic drug industry include the following: nearly $70B in brand name drug sales with looming generic competition through 2012, push to increase generic substitution rates from 65% of all prescriptions dispensed to over 70% to save money for the consumers and the government (through Medicare Part D spending), continued industry consolidation of small and mid-caps by industry leaders such as Teva and Mylan Labs (MYL), and the potential for legislation next year regarding generic versions of high-cost biological agents – with Momenta Pharma (MNTA) as a pure-play in this space with a pending ANDA for a generic version of the injectable blood thinner Lovenox, which had nearly $4B in sales last year for Sanofi-Aventis (SNY). [more]
Who's Next in the Biotech Buyout Frenzy? The biotech industry is rapidly consolidating as big pharma companies put their cash stash to use in deals ranging from well-known large caps all the way down to unknown micro-caps in an effort to bolster their range of marketed products, late stage pipeline candidates, and drug discovery technology platforms.
Genentech (DNA) has rejected Roche's (RHHBY) $89 bid to acquire the remaining 44% of DNA it does not already own as insufficient. I think DNA could easily get $100 per share based on Eli Lilly's (LLY) $70 buyout of ImClone Systems (IMCL), which trumped Erbitux marketing partner Bristol-Myers' (BMY) raised bid of $62 per share. Also, several buyouts in the out-of-favor small and micro-cap biotech space have been announced over the past year with 100%-plus takeover premiums, including under-the-radar names such as:
(1.) SGX Pharma (SGXP) was acquired for $64M cash by Lilly for its cancer drug discovery platform
(2.) Kosan Biosciences (KOSN) was acquired by Bristol-Myers for its cancer drug pipeline
(3.) Barrier Therapeutics (BTRX) was acquired by privately-held Stiefel Labs
(4.) Pfizer's $164M cash buyout of cancer drug developer Coley Pharma (COLY)
(5.) Shionogi (Tokyo: 4507) recently closed its $1.4B cash buyout of Sciele Pharma (SCRX)
My guess as to who may be next is based on the following factors:
(1.) existing big pharma partnerships: Bayer + Onyx Pharma (ONXX)
(2.) high margin orphan drugs: Kuvan – BioMarin (BMRN) & Soliris – Alexion (ALXN)
(3.) revolutionary drug discovery technology platforms: RNAi for Isis Pharma (ISIS) & Alnylam (ALNY)
(4.) a late-stage pipeline + approved biological agents: Biogen (BIIB) [more]
As I have written previously on Pfizer (PFE), I continue to recommend shares of the Company as a turnaround play around the $15 per share level, which equates to an even fatter dividend yield of 8.5% since I first wrote about the stock in July trading two bucks higher before the market meltdown occurred. Despite significant patent challenges to Lipitor and other products in Pfizer’s portfolio over the next few years, the Company’s strong balance sheet, marketing muscle, and ability to bolster its pipeline through targeted acquisitions should provide investors with positive returns from what appears to be a ridiculous valuation in the low teens.
Pfizer reported 2Q08 revenues of $12.1B and adjusted EPS of $0.55, which were both ahead of consensus analyst estimates for the quarter. The Company also affirmed its full-year revenue ($47B - $49B), earnings ($2.35 - $2.45 per share, adjusted), and cost-savings ($1.5B - $2B) guidance for 2008. Pfizer posted strong results in its animal health segment and brand drug sales for Lyrica, Celebrex, and Sutent. Animal health sales for 2Q08 were $715M, representing an increase of 13% from the year-ago period. Total pharmaceutical sales increased 9% from the year-ago period to $11.1B, including a significant 7% benefit from currency exchange rates due to international sales and a weak US dollar. The Company also reached an agreement with Indian generic drug maker Ranbaxy to delay a copycat version of the world’s best-selling drug Lipitor in the United States until December 2011. During 2Q08, Pfizer repurchased $500M of its own stock or about 26.4M shares.
With a dividend yield over 8% and a deal with Indian generic drug maker Ranbaxy to delay a copycat version of the world's best selling drug Lipitor (with $12.7B in 2007 sales) for over one year until late 2011, shares of Pfizer merit a buy while trading in the low teens for both income investors and those seeking a safe haven investment during the current bear market. The deal with Ranbaxy to delay generic competition for Lipitor provides Pfizer with more time to develop and acquire follow-on blockbusters for what will be a loss of patent protection to the Company's best-selling drugs beginning in late 2011 with Lipitor, which accounts for about one-quarter of total sales.
Pfizer is committed to maintaining its dividend, with expected cost savings for 2008 expected to total $2B and cash flow from operations of at least $17B in 2008, up from just $13B in 2006. The Company has over $26B in cash and repurchased $10B worth of its own stock in 2007, with another $5B authorized for the current year. Despite valid concerns of patent losses beginning in late 2011, Pfizer represents a buy in the low teens with a dividend yield of 8.5% and plenty of cash on the balance sheet, which gives it the flexibility to bolster its late-stage pipeline through acquisitions and buy back its own stock. However, I think Pfizer should consider a larger biotech acquisition such as Biogen (BIIB), which has put itself up for sale but since returned to the low $40s with a market cap of $12.4B. Biogen would bolster Pfizer's late-stage pipeline with biological agents, in addition to adding products such as Avonex, Rituxan, and Tysabri. [more]
The accompanying table presents a 20-stock defensive growth portfolio which I believe will outperform the overall market as measured by the S&P 500 Index as the current panic trade comes to an end and investors stop selling stocks regardless of their fundamentals. The average PEG ratio for this group of stocks is below one and the average dividend yield of 4.4% is nearly two times the S&P 500 ETF (SPY) yield of 2.4%. All of the stocks have a market cap over $1B with an average of just under $75B and the industry groups represented are skewed toward defensive sectors, although consumer tech growth stocks such as Apple (AAPL) and RIMM are also included.
In the natural resource and energy space, I chose Freeport McMoRan (FCX), Sasol (SSL), Chevron (CVX), and Devon Energy (DVN) -- which trade as deep value plays with an average PE of about five and average yield around 5% for the quartet. In the agri-biotech space, I chose Monsanto (MON) as a bullish play on the ever-growing demand for food in the world and the ability to improve farm yields through seeds and fertilizers.
In the healthcare sector, I chose Pfizer (PFE) for a turnaround, big pharma play with a strong balance sheet and fat dividend yield. Abbott Labs (ABT) has a more diversified mix of healthcare business segments beyond pharmaceuticals, including diagnostics and nutrition. Invitrogen (IVGN) recently raised its earning guidance and it supplies the tools and systems used in the drug discovery process, genetic analysis, and diagnostics. I like Amgen (AMGN) in the rapidly consolidating biotech space and Teva Pharma (TEVA) as the generic drug industry leader, which also develops and markets brand name pharmaceuticals such as Copaxone.
Some other core holdings in the portfolio include Verizon (VZ), AT&T (T), Procter & Gamble (PG), and Philip Morris International (PM) for the defensive nature of their businesses and above-market dividend yields. Burlington Northern (BNI) was chosen as part of a bullish outlook on rail transport, which has pricing power due to demand for the fuel efficient transport of ag and energy commodities and the limited ability to increase rail capacity in the U.S. Wells Fargo (WFC) is the only financial company in the portfolio since the company will likely benefit from the Wachovia (WB) acquisition. Finally, I chose Microsoft (MSFT) and Google (GOOG) as tech plays on internet advertising, search, and software. [more]
Some likely near-term movers on the FDA's decision date calendar for 70 different items (click to enlarge, left) include Cypress Bioscience ( CYPB ) + partner Forest Labs ( FRX ) with a pending decision on milnacipran in the treatment of fibromyalgia slated for the end of October in addition to results from a Phase 3 trial for the drug some time before year end.
Also, Discovery Labs ( DSCO ) is not listed on the calendar, but expects to file a complete response to a May 1st FDA approvable letter for Surfaxin by the end of September and expects a Class I review by the agency with a potential decision in just two months. Another company not listed on the calendar is BioDelivery Sciences ( BDSI ), which expects approval for Onsolis [BEMA fentanyl] during the first half of 2009 after making modifications to the risk management program it previously submitted as required by the FDA for approval of the high-potency opioid pain medication. The current slide in shares of Eli Lilly ( LLY ) could prove to be a good entry point assuming the issues surrounding the delay are minor or just caused by the FDA being understaffed. Analysts are forecasting blockbuster sales for Effient, which could eventually reach $2 billion by some estimates; so approval for the drug is important to fuel the future growth of Eli Lilly in the face of looming generic competition for Zyprexa. Effient would represent new competition for the multi-billion dollar blood thinner Plavix, which is marketed by Bristol-Myers ( BMY ) and Sanofi-Aventis ( SNY ). Given the complexity of the regulatory filing for Effient and the previous three month delay, it appears the FDA probably just needs more time to review the application rather than something more ominous such as requiring additional clinical trials. Also, many companies have faced similar delays by the agency, such as Cardiome's ( CRME ) wait of over six months for an approvable ruling on Kynapid.Momenta Pharma ( MNTA ) represents a pure-play on the future of complex bio-generic drugs with a major near-term opportunity to steal market share from Sanofi's ( SNY ) Lovenox, which posted blockbuster sales of $3.8 billion worldwide in 2007.
The company's stock price tanked to below $5 per share last November as the FDA rejected the ANDA for Enoxaparin. The generic division of the FDA does not issue decision date deadlines, but the fact that no new clinical trials were required and the complete response has now been filed by the Sandoz generic drug division of Novartis ( NVS ) removes a degree of uncertainty and makes it a waiting game for Momenta investors.
Company Name Ticker Date FDA Decision - Mike Havrilla - Updated 10/3/08 [more]
I think the recent decline in Discovery Labs (DSCO) since the company announced a minor delay in submitting a complete response to the FDA for an approvable ruling on Surfaxin represents a buying opportunity -- especially in light of the overall market malaise that has shares of DSCO trading around the $1.50 level. [more]
Eli Lilly (LLY) and Daiichi Sankyo [Tokyo: 4568] announced in early October that the FDA had not completed the regulatory review for their blood thinner drug, which would go by the brand name of Effient (prasugrel). The FDA previously delayed its decision by three months earlier this summer, but in this case no new deadline was set by the agency. [more]
Since I last wrote about Cypress Bioscience (CYPB) two months ago, the stock has moved lower with the company now trading even closer to its net cash position of $4 per share with a closing price on Friday of $6.43 per share. [more]
According to a SEC 8-K filing in late September, an amendment has been submitted to the FDA for Momenta Pharma's (MNTA) Enoxaparin Sodium Injection Abbreviated New Drug Application [ANDA] by its partner, Sandoz, which is the generic drug operating division of Novartis (NVS). Momenta believes the amendment represents a complete response to the agency's concerns over the potential for immune-mediated reactions to the product, which is intended to be a generic equivalent of the injectable blood thinner Lovenox. [more]
Cytori Therapeutics (CYTX) announced plans today to raise $17 million [M] from a private placement financing led by strategic partner Olympus Corp (Tokyo: 7733) in addition to select institutional investors. Net proceeds are expected to be approximately $16.4M after fees and expenses. Cytori will issue a total of 2.83M shares of common stock with 50% warrant coverage at $6.00 per unit. The warrants will be exercisable for up to a total of 1.42M shares of common stock at an exercise price of $8.50 per share. The warrants will have a five year term and will be exercizable no sooner than six months following the closing of this transaction. Olympus, as the lead investor, will purchase 1M shares and warrants exercizable for up to an additional 500,000 shares.Cytori also announced 2Q08 operating results, which included product revenue of $1.4M from the company's cosmetic and reconstructive surgery [CRS] business -- including the Celution System, related single procedure consumables, surgical instruments, and a proprietary enzyme solution. Cytori also received orders late in 2Q08 for an additional $0.9M in CRS-related products, which will be shipped and likely recognized during 3Q08. [more]
Abbott Labs (ABT) posted better than expected earnings and sales growth and raised its guidance this morning, reflected in the 1-year stock chart posted on my blog which shows that the company has outperformed the S&P 500 index by over 30% and the Healthcare Sector SPDR exchange-traded fund (XLV) by over 20%. [more]
The top four holdings in the Pharma HOLDRs (PPH) account for over 60% of the 21 components and include Johnson & Johnson (JNJ – 25.8%), Pfizer (PFE – 15.6%), Abbott Labs (ABT – 11.8%), and Merck (MRK – 10%). However, this is by far the most popular pharmaceutical exchange-traded fund [ETF] with net assets of $1.7 billion and an average daily trading volume of over 800,000 shares and it carries the lowest price-to-earnings [PE] multiple (12.5). [more]
The top three HealthShares ETFs by net assets under management [AUM] include Diagnostics (HHD), Cancer (HHK), and Enabling Technologies (HHV) with AUM of $26.2 million [M], $9.7M, and $6.5M, respectively, versus an average of $171M for the overall health ETF category. However, the distribution of AUM among the 42 healthcare ETFs is uneven, including half (21) of the funds attracting less than $10 million AUM and 15 funds attracting over $50 million AUM. As illustrated in the one year chart, the top three HealthShares ETFs have outperformed both the Healthcare Sector SPDR (XLV) and the S&P 500 Index by a wide margin over the past year. [more]
In mid-July, Novartis (NVS) reported better-than-expected financial results for Q208 due to sales growth of 14% (which included a 9% forex benefit thanks to a weak US Dollar), resulting in an EPS of $0.98 for the quarter. Pharmaceutical sales were driven by strong demand for the blood pressure drug Diovan, which faces generic competition in 2012, and cancer drugs such as Gleevac, Zometa, and Femara. Novartis is expected to file for regulatory approval of cancer drug Afinitor by the end of this year. As illustrated in the accompanying five-year chart, Novartis has outperformed both its larger US rival Johnson & Johnson (JNJ) and the iShares S&P Global Healthcare exchange-traded fund (IXJ). [more]
Amgen (AMGN) reported 2Q08 results (see conference call transcript) that beat consensus analyst estimates and raised its full-year [FY] guidance for earnings and revenue, thanks to much stronger-than-expected sales of its anemia drugs Aranesp and Epogen: [more]
The FDA has published a table with the names of products and potential signals of serious risks and/or new safety information identified for these products during 1Q08 in the AERS database. The FDA notes that patients should not stop taking these medications and should consult their prescriber with any questions as the agency will investigate each of the claims further before taking action or issuing more definitive statements on the reported concerns. [more]
Pfizer (PFE) reported 2Q08 revenues of $12.1 billion [B] and adjusted earnings-per-share of $0.55, which were both ahead of consensus analyst estimates for the quarter. The Company also affirmed its full-year revenue ($47B - $49B), earnings ($2.35 - $2.45 per share, adjusted), and cost-savings ($1.5B - $2B) guidance for 2008. Pfizer posted strong results in its animal health segment and brand drug sales for Lyrica, Celebrex, and Sutent. Animal health sales for 2Q08 were $715 million [M], representing an increase of 13% from the year-ago period. Total pharmaceutical sales increased 9% from the year-ago period to $11.1B, including a significant 7% benefit from currency exchange rates due to international sales and a weak US dollar. The Company also reached an agreement with Indian generic drug maker Ranbaxy to delay a copycat version of the world’s best-selling drug Lipitor in the United States until December 2011. During 2Q08, Pfizer repurchased $500M of its own stock or about 26.4M shares. [more]