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Friday Roundup: Shame on Who?, Merck AG, Tis' The Season


Beware the October flop!


Whose Shame After Being Fooled Dozens of Times?

You know the old saw, "Fool me once, shame on you; fool me twice, shame on me." Given the number of times Cell Therapeutics (CTIC) has fooled its investors, even Einstein would lose count.

Let's recap the activity just over the last week:

  • On Monday, CTI announces a "$285 mln deal" with Novartis (NVS). Unless you actually read the 8K that was filed on the deal, you might be under the impression this was a great accomplishment. Essentially, management gave away its only two drugs for $15 mln in up-front cash (plus $7.5 mln if they exercise the option on pixantrone) and the promise of moderate royalties later. CTI didn't even get Novartis to agree to pay for the trials to get the drugs approved! Novartis essentially gets a very cheap call option that they don't have to exercise until after the drugs are approved by the FDA. The bigger part of the milestones – the sales based milestones – don't kick in until after $1 bln in sales – which will never happen for Xyotax or Pixantrone.

  • On Tuesday, CTI skewers investors with a big financing. $40 mln at $1.73/share, below where the stock closed before the Novartis "deal."

  • On Thursday, we find out the US Attorney's office is sending in subpoenas relating to CTI's marketing of Trisenox – specifically, the alleged practice of billing Medicare for off-label use of the drug (since it sold to Cephalon (CEPH)). I have to chuckle at this. A few years ago I made a public comment that CTI was a "train wreck waiting to happen" after I watched CEO Jim Bianco give a presentation touting all the money CTI was going to make "marketing Trisenox off label." Off-label sales can be an important source of income, but no company can be caught actually "marketing" drugs off label. At the time, the wrath of the CTI bull camp came down upon me and I was apparently the dumbest egg in the dozen.

Looks like a train wreck to me.

Merck AG Swallows Serono

Is Europe "where it's at" in healthcare these days? Europe is leading the US in biotech IPOs. I can argue that EU firms have been more aggressive in partnering late-stage biotech products. They certainly have been more active when it comes to buying each other, recent rumors about Bristol-Meyers (BMY) and Schering-Plough (SGP) notwithstanding.

Merck AG ( is acquiring Serono (SRA) for EU$10.6 bln, combining a pair of companies whose individual heft in the market was seen as too little by some analysts. (I've always questioned that perspective by the way, and don't you think "too little heft" is investment bank analyst code for "you need to generate some M&A fees for my investment banking buddies"?)

Serono was a common partner for smaller US biotech firms, and a few are selling off because acquisitions usually mean partnership decisions are delayed. Often times after a merger, the most marginal partnership arrangements are jettisoned. The rationale for this is highly variable, however, so when you see otherwise quality companies like ZymoGenetics (ZGEN) and BioMarin (BMRN) selling off for that kind of a reason, it's worth a second look to see if the knee-jerk selling is justified.

Tis' The Season

All that red in your biotech portfolio today isn't you. There were 23 companies sporting green symbols as the lunch bell rang and 111 of those sporting red were down one percent or more (out of 164 stocks in the NASDAQ Biotech Portfolio). I'd suspect the first week of October will provide our bottom, though one can never know these things for certain.

I don't think anyone believes the drop will be monumental, including me, but I always have an irrational fear of this time of year and tend to believe each October could bring another big one.

If I had to guess a sector that could be in trouble this October, I'd guess the energy and commodity patch. I doubt any fund that missed the Amaranth blowup is going to sit comfortably on their investments in like-minded hedge funds. That equals redemptions, which is rarely good for the sector.

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Position in BMRN

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