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Bathwater Baby Bottoms



September 26, 2011 – Comments (10) | RELATED TICKERS: SLXP.DL , EBS , VNDA

It’s hard to establish buying thresholds when the entire stock market seems to be on the verge of falling back off the cliff it climbed in 2009 and 2010. But in the last decline, those who came out the best were the ones who had the courage to buy in the darkest part of the tunnel. So I’m going to see if I can identify a few small pharmas and biotechs that are most likely to survive the current downturn and outperform in the recovery. Of course, since I don’t know whether the S&P will bottom at 1100 or at 700 I can’t really recommend a buy-in point for these stocks. But I might use my cash reserves to establish positions in these stocks in a staggered fashion if the broad market continues to drop.

Salix Pharmaceuticals (SLXP) – market cap 1610M, share price 27.26. Cash 477M, debt 332M, quarterly profit 0 – 24M. Not much has changed in the six weeks since I green thumbed the stock at 29. Product revenues were up to 133M, following sequential quarters of 94M, 81M, 118M, and 106M. Quarterly profit was 19M, following sequential quarters of -24M, -3M, 24M, and 0. Furthermore, the company guided to a 32M profit on 140M revenue in the next quarter. The company projects 520M in revenue and upwards of 80M in profit for 2011, which indicates 141M in revenue and 29M in profit for Q4. That’s two more quarters of solid earnings in the future, which provides a pleasant security blanket for the next six months of generalized market instability. An sNDA for subcu Relistor in non-cancer opioid-induced constipation has been accepted with a PDUFA of 4/27/12, and topline data from a phase III trial of oral Relistor is expected by early 2012. The share price recently dropped below 26, and if that level is breached again I may buy 500 shares. Salix is my top buy in the category of profitable mid-cap pharmas.

Emergent Biosolutions (EBS) – market cap 560M, share price 15.61. Cash 127M, debt 39M, quarterly burn/profit 21M burn – 26M profit. It’s a little hard to know what to make of this strange mix of vaccines and therapeutics for hematologic malignancies. Quarterly profits are all over the map as well, affected dramatically by obscure factors such as internal processes of redeployment and fermentation yields. The stock hasn’t fared well in the broad decline, at least partially due to disappointment from a downward revision in 2011 earnings. The revision doesn’t reflect a drop in demand, but rather below average production of BioThrax due to an annual fermentation yield at the low end of range. Management has been emphatic that the low yield simply represents stochastic variation and is not a sign of a developing trend. Meanwhile, the company is on the verge of finalizing a BARDA contract for 45M BioThrax doses over five years, which will account for maximal yields of 9M doses per year. In the last CC, management was a little fuzzy in the Q&A over what would happen if they were unable to produce maximal capacity, but it seems more than likely that the contract would carry on until the full 45M doses were delivered. This makes the issue of annual yield less critical. The new contract dwarfs the original 15M dose contract that has already generated substantial revenues, and should provide substantial financial security for the five year duration of the contract. In addition, the company has been making steady progress in the development of a TB vaccine and in oncologic compounds acquired from Trubion and TenX pharma, although their commercial potential is difficult to assess at this time. The share price was recently as low as 15 and I would consider establishing a position if it stabilizes below that level.

Vanda Pharmaceuticals (VNDA) – market cap 144M, share price 5.13. Cash 188M, debt 0, quarterly cash burn 3-6M. This represents a completely different strategy from the revenue/profit security I see in Salix and Emergent Biosolutions. I don’t expect Vanda to book any significant revenues at all, nor do I expect them to use up much cash. I’ve rated Vanda on CAPS about 12 times since the surprise approval of Fanapt, and scored each time as the market cap oscillated between 90% and 120% of cash reserves. The broad decline has now dropped the cap down to 77% of cash, and this is the first time the share price has been below 6 since Fanapt was approved. Vanda has shown no intention of blowing their cash hoard on a questionable acquisition, and I expect they will hunker down with it until the storm clouds pass. Recently, stocks like Orexigen and Transcept whose cap has dropped well below cash have shown their potential for massive rebounds disproportionate to the significance of catalysts. If Vanda’s share price stabilizes below 5, I may become a shareholder for the first time.  

10 Comments – Post Your Own

#1) On September 29, 2011 at 6:55 AM, nilesgold (22.64) wrote:

Slightly off-topic, but what's your reaction to BDSI's results from its phase 3 efficacy study for BEMA Buprenorphine in chronic pain?  After-hours BDSI was down about 40% following the release.

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#2) On September 29, 2011 at 11:04 AM, zzlangerhans (99.75) wrote:

Sure looks like it's dead money to me. I haven't had a chance to decide on a sell point yet but it's one more reason not to hold through a catalyst in baby biotech.

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#3) On September 29, 2011 at 1:06 PM, nilesgold (22.64) wrote:

Down 55-60% (market cap just below $40M) the sell-off seems overly harsh.  

Dr. Finn concluded, "We observed significant efficacy in the opioid experienced subset of patients and believe there is a clear pathway forward to determine the same in the opioid naive patients."

Furthermore, from Sirgo - "In short, we know buprenorphine works in treating pain.  This opportunity has never been an "if" but a "when", and this study affirms our belief in this regard," continued Dr. Sirgo.  "We continue to believe that BEMA Buprenorphine has the opportunity to be the first transmucosal product for the treatment of chronic pain to reach the marketplace.  Our previously announced market projections for the product of $500 million in annual peak sales should not change based on the delay this outcome creates, and we will continue our ongoing partnering discussions in earnest, including the sharing of these results, which we believe should be viewed positively."

Am I being overly optimistic?  What about their other products and trials?  Do those comments represent nothing more than the company trying to put a positive spin on an utter failure?  Is BDSI truly dead in the water based on the results?

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#4) On October 03, 2011 at 9:56 PM, zzlangerhans (99.75) wrote:

Yes, BioDelivery is truly dead. Not being able to achieve a significant improvement over placebo for a pain drug is really pathetic. Reporting that they nearly achieved stat sig in a post-hoc subset is pitiful. My thesis was that this trial was highly likely to have a positive result, and I planned to sell on the pop due to doubts about the commercial potential of the drug given the failure of Onsolis. With the trial failure, it's time to take the hit and move on. I'll be selling tomorrow almost certainly.

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#5) On October 04, 2011 at 11:49 AM, TMFBlacknGold (90.58) wrote:

Would you use the upcoming market dive as an opportunity to get into regenerative medicine companies?

What is your favorite company? I've been following Athersys pretty closely for the past year and think it's worth some easy points even though the company is years away from selling a product. Thoughts?

Btw, you're the man zz! I'm rooting for you to crack the top ten within the next year!

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#6) On October 05, 2011 at 12:15 AM, zzlangerhans (99.75) wrote:

I would use the current market dive to get out of regenerative medicine companies. To the best of my knowledge none of them has shown any sign of effectiveness in phase II or III trials, unless you accept their post-hoc spin. Any one of companies like Athersys, Neuralstem, Osiris, or Stemcells has a potential to rebound but there's no way of knowing when, how much, or for how long. You're much better off buying shares of mid-cap biotechs and pharmas with solid revenues that have been getting excessively punished. My current faves are Salix and Emergent Biosolutions as above, or possibly Cubist, Acorda or Biomarin if they slide further.

Thanks for the support but I'll never crack the top 10 or the top 100, given that I do not rate leveraged ETF's or red thumb junk BB stocks and I restrict my picks to biotech.

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#7) On October 05, 2011 at 3:39 PM, TMFBlacknGold (90.58) wrote:

Yeah, unfortunately that's how it works. Crap stocks that shouldn't be on CAPS in the first place and leveraged ETFs that can gain 100 pts in a week. But I have been watching your rating zoom this summer from now. Even if you don't crack the top ten it is truly impressive that you're 99+ by only rating pharma.

While you are absolutely correct about the lack of results (Athersys hasn't even completed a phase II) from stem cell companies and I completely understand any investor's concern over speculative pharma stocks, I do feel differently. To be fair, you answered my question and I don't know how you feel about the technology. However, stem cell technology exists and has been proven to work, so trials for therapies involving it shouldn't be grouped into the same category as trials for cancer drugs. 

Dozens of professional athletes travel every year to Japan, Korea, Germany, and Russia to have stem cell treatments performed. We aren't talking PRP either. Real, full-blown stem cell therapies. Top-tier soccer athletes have their cells growing in labs in Europe right now as insurance against a mid-season injury (I'll try to dig up the ESPN article about it...) So when looking at baby regenerative medicine companies I humbly accept that some of them will still be around ten years from now.

The better investments are clearly what you have listed above - no arguing that. But I think most investors should have a little play money for more risk. If the company works out, you win big. If not, its was only play money. Given the wide array of applications for stem cells I expect to see some hefty market caps in ten years.

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#8) On November 04, 2011 at 2:50 PM, mhy729 (30.41) wrote:

Old news now, but I haven't seen much mention of it here on CAPS....

Great call on ANDS!  I accumulated a small position last December (cost basis around $1) following some research of my own, but that was only after reading your posts on it and the GBMB "endorsement".  This one is certainly the shining gem among my biotech positions for the year, and I thank you.

Take care, and good luck with your investments!

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#9) On November 21, 2011 at 3:28 AM, zzlangerhans (99.75) wrote:

Thanks, but at the end I was more lucky than good with Anadys. Their polymerase inhibitor was looking like an also ran compared to Pharmasset and Inhibitex's offerings but the market cap got so low I guess it was just pocket change for Roche. Of course, I was more unlucky than bad with a few of my other picks so I'm happy to take this one.

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#10) On January 18, 2012 at 4:47 PM, portefeuille (98.89) wrote:

links to some of your older baby biotech posts from this post.


October 10, 2008, Small cap biotech investing in the era of underperformance

October 19, 2008, Biotech investing - the Good, the Bad, and the Ugly

October 19, 2008, Biotech Investing: The Ugly

November 05, 2008, Ugly lessons in Biotech: Pay attention to interim data from phase III trials

November 20, 2008, Ugly lessons in biotech: Avoid binary events

November 24, 2008, Ten Rules of Small Cap Biotech Investing: Lessons From the Ugly

December 01, 2008, Small cap biotech: The BAD (part I)

December 02, 2008, Small cap biotech: The BAD (part II)

December 09, 2008, Small cap biotech: The GOOD (part I)

December 22, 2008, Small cap biotech: The GOOD (part II)

May 11, 2009, Small cap biotech: the GOOD (part III)

February 17, 2009, Efficient market? Not in Biotech.

January 04, 2010, GOOD and BAD Biotechs: One year later

January 05, 2010, GOOD and BAD Biotechs: One year later (part II)

January 07, 2010, GOOD and BAD Biotechs: One year later (part III)

January 11, 2010, Grabbing Bottoms in Miami Beach: A Trader's Manifesto

October 04, 2010, Two bottoms and a put

October 18, 2010, GBMB update

October 19, 2010, Two new bottoms for the GBMB

December 14, 2010, GBMB update

January 22, 2011, Two more bottoms for the GBMB

February 25, 2011, Back in the GBMB hunt

March 07, 2011, Carnival Bottoms

March 24, 2011, More bottoms for the grabbing

April 02, 2011, The GBMB in review, part I

April 06, 2011, The GBMB in review, part II

April 10, 2011, The GBMB in review, part III

May 02, 2011, First 2011 GBMB update

May 20, 2011, May Bottomfest

June 06, 2011, Stinky Bottoms

July 18, 2011, Hot summer bottoms

July 29, 2011, Bottoms up!

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