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Biotech Roundup: Merck, Sirna


Now might be a good time to start thinking less about beaches and more about your biotech investing line-up card for the fall.


This weekend is the annual Seattle-to-Portland bicycle ride (210 miles). I told my riding buddies when we last rode it in 1998 that after doing the ride five times in the past six years, I needed a break and that I'd do it again "when I was 40." Of the gang of five who rode with me a decade ago, only one answered the call for this year -- the eldest in our group, ironically. Please forgive the brief nature of today's submission as I have a fair amount of preparation to do before we launch ourselves on Day 1 of the two-day ride tomorrow at 6:00 am.

Acquisition Prices Go Up

I've been banging on the idea for some time that pharma needs to acquire new products either by partnering or acquisition to replace the 25% of revenue that will be lost to patent expirations by 2009. This necessity has me wanting to avoid pharma and biopharma, skewing towards smaller biotechnology stocks. I've admittedly been way early on this, but I wanted to point out an interesting development.

In October 2006, Merck (MRK) announced it was purchasing RNAi company Sirna for $1.1 bln. This was not a licensing deal, but a complete acquisition.

This week, Roche spent $346 mln in cash to acquire a non-exclusive license from the other major RNAi company, Alnylam (ALNY). If products actually come out of the deal, Alnylam could earn up to $1 bln from the deal.

October 2006, $1.1 bln to buy an RNAi company. July 2007, $1 bln to get non-exclusive rights.

That's price inflation for you.

Personally, I think these are dumb prices because I don't think any of these RNAi drugs will make it to market before their key patents run out. We simply don't know how to deliver the darn things yet. But I certainly wouldn't get in the way of the price gains as the technology is exceptionally useful on the lab bench and that always creates excitement there might be more there (see also gene therapy in the 1990s).

Short interest

I'm speaking to an MBA class next Monday about biotechnology and the public markets. The speaker ahead of me, VentiRx's Rob Hershberg, will discuss the latest trend in biotech startups towards "lean companies," where a core group of a half-dozen managers farm all their work out to contract players to save money.

My assignment is to give some reasons why public valuations are so far below those in the private sector. There are some good fundamental reasons, but one you simply can't leave out is the monster short interest.

The NASDAQ Biotech Index (NBI) now represents 13% of all NASDAQ short interest, up from just 10.75% in 2004. That doesn't sound like much until you realize the NBI is about 5% of total NASDAQ market cap or that between January 2004 and the latest measure NASDAQ short interest has gone from 4.7 bln shares short to 9.2 bln short. I'll point out that the NBI holds steady around 170 companies, making the per-company impact of this growth in short interest even more significant.

Get your lineup cards ready

If the macro effort on the part of the bears to break the market based upon next week's subprime mark to market event fails to work, we might see an early end to the seasonality in the biotech market. Recall that in biotech you can sell in June after ASCO and not really pay much attention to what's going on until September.

If the overall market stays hot, we might not see that seasonality come into full bloom. Now might be a good time to start thinking less about beaches and more about your biotech investing line-up card for the fall.

I mentioned to a colleague the other day that biotech valuations were depressed. He expressed skepticism. I'll note that the NBI is still 8% below where it was in August 2001. That's no real movement in 6 years! As a comparison, since August 2001 (through the end of last month):

DJIA = +30.10%
NASDAQ = +33.73%
S&P-500 = +28.04%
Russell 2000 = +73.28%
AMEX Biotech Index = +47.58%

In my mind, the only question is how long that spring will remain compressed. Six years is an awful long time. Remember, this index can move. After enduring a horrific 2002 (-46%), the NBI was up 45% in 2003.
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