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Biotech Roundup: Vertex Vortex, MedImmune and Biotech Cyclicality


Volatility is why I'm the biotech sector mascot!


Vertex Vortex?

Perhaps the second most-awaited event for biotech this year is the latest data set from Vertex (VRTX) on what is apparently its hepatitis wonder-drug telaprevir data. "Wonder drug?" Well, it must be to support Vertex's lofty $4 bln market cap.

If you detect a bit of snarkiness there, your ear is correct. I was put off early by management's promotionalism of early data on the drug – specifically its ballyhooed "log rank reductions" in viral copies. To those who know something about the hepatitis space, such claims are essentially meaningless. The point of hepatitis treatments is not to reduce viral counts, it is to eliminate them.

In the face of big pharma buying out anti-infective companies for big margins, however, Vertex had the right PR strategy at precisely the right time. Sometimes my team's focus on the science gets in the way and we passed on covering Vertex. Not very bright in retrospect, eh?

In any case, I haven't been able to shake the impression that this one will end badly. That certainly isn't the common view on Wall Street and it probably isn't even the correct view. In any case, this will be partly answered when the data arrive tomorrow. Given how well hedge funds are able to penetrate data these days, if the data were truly terrible I would have expected the stock to decline more than it has. Stock movement into a decision isn't always accurate, as owners of Neurocrine (NBIX) going into the Indiplon decision know too well.

I just thought I'd mention the impending event, provide some color, and mention again the line that bulls and bears make money but pigs get slaughtered. If you're sitting on a big gain here, don't be a pig.

We don't do advice here on the 'Ville, but I've got a bid in for a small number of way out of the money puts in the chance my gut feeling is correct.

MedImmune on the Block

MedImmune (MEDI) is the latest mid-stage biotech whose shareholders seem to think it would be better off in big pharma. I've peripherally followed the company, primarily for its nasal flu vaccine FluMist. It was a competitor to a similar product at ID Biomedical, a company my firm covered until GlaxoSmithKline (GSK) bought it out at a healthy premium a couple of years ago.

A couple of sell-side analysts are out with notes saying the stock is fairly valued at the current levels. I agree insofar as I doubt there will be a large premium. Large premiums for biotech companies are usually reserved for the less mature firms as they are the ones the market typically misprices so badly. There are always exceptions to this, of course, but it is one reason why I think it makes more sense to focus on the better development-stage companies.

I've been talking about the trend of biotech being bought by pharma for so long even I'm getting tired of me, but this is all part of the same trend. I still want to own the companies that are on the auction block (biotech) and avoid the companies who have to shell out the big bucks to repair their bereft pipelines (big pharma and biopharma).

AACR or ASCO Sell Off?

Cyclicality in the biotech sector lent itself well to the saying "Buy JP Morgan (JPM), sell ASCO", referring to the early January JP Morgan Healthcare conference and the early June American Society of Clinical Oncology conference. Over the past few years, those who waited for ASCO ended up selling too late. Biotechs early-season cyclicality recently has not made it past April.

There are probably several logical explanations for this, the best one being the shorter time horizons of hedge fund managers. The only biotech-specific reason is that hedge funds are broadly briefed at this month's AACR meeting by the doctors they pay for information. The briefings cover what is going to be presented at ASCO. This means they don't have to wait for ASCO to make the appropriate sales.

Going out on a limb here, I expect the biotech sector will be stronger through spring than it has in the last couple of years. Some of that is fallout from how Dendreon (DNDN) traded after the panel meeting. I've taken a number of calls from people asking how the bear position was structured and how the market got so wildly inefficient on this particular stock. The calls are not from funds that typically invest in biotech. These are options specialists who tended to ignore the biotech sector because they (a) didn't understand it, and (b) thought the low volumes meant no money could be made here playing the volatility.

(Yes, I giggle every time someone says that last part.)

In any case, there is no question that new money is flowing into the sector. I suspect the money flow will provide a better bid under the market than we normally see. That may change if the FDA decides to not follow the Provenge panel, Vertex blows up, or if the May 9/10 ODAC panel meeting is too much of a circus.

Position in VRTX puts, DNDN

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