Prana: A Speculative Ten-Bagger Scenario (PRAN)

March 26, 2011 · Filed Under alzheimer's, Financial, M&A, R&D, Research, Secondary Offering · Comment 

This last week brought an interesting move in shares of Prana Biotechnology Ltd. (NASDAQ: PRAN).  On Friday we gave this coverage right at the open noting at 24/7 Wall Street that the stock was still worth a look for speculators despite a news pop followed by a capital raise that hurt the stock’s gain during the week.  This ADR is of a company based in Australia and its focus is Alzheimer’s, Parkinson’s, and Huntingston’s Diseases.  It is highly speculative by any measurement.  Prana effectively has no revenues and our take is that it will be highly reliant upon grants from governments, agencies, and other foundations and organizations or it will have to rely upon the capital markets or a partnership for more funding down the road. 

The company saw shares surge earlier in the week on reports that data was being published in the science journal PLoS ONE with the title “Metal Ionophore Treatment Restores Dendritic Spine Density and Synaptic Protein Levels in a Mouse Model of Alzheimer’s Disease.”  Its PBT2 was shown to have repaired damage in an Alzheimer’s affected brain and that facilitated the restoration of cognition in Alzheimer’s Disease.

Then came news from the company that it was raising capital in Australia to the tune of $6.1 million (Australian Dollars), a move which investors often consider as pump and dump capital raises.  What is interesting though is that right after we published “Still Worth a Look for Speculators” we saw an immediate 10% rise in the stock.  Shares went from $2.78 or so up to $3.10 in very short order and then the stock rose again in a second leg up to as high as $3.34 before closing at $2.86 for a near three percent gain on the day.

Prana ADRs were under $1.50 before it published the news on Monday and shares closed at $2.86 on Friday, nearly a double for the week.  We also saw shares hit a high of $4.50 on Tuesday and that was on a whopping 36.4 million shares that day.  This was previously unheard of trading volume in a single day and there are many days where the stock has traded only a few thousand shares.  The 52-week range is $1.09 to $4.50 and this stock once traded above $6.00 per ADR back in 2004 or 2005.

We would note that StockCharts.com offers a full gallery review for the charts on Prana, and its Point & Figure price target objective is all the way up at $7.50.  That figure will change through time and was based upon March 25 prices and volume.

So, even at the low of $1.09, you may wonder why we call Prana an opportunity for a ten-bagger with that implied upside of 1,000%.  Shares have never traded above $10.00 for its ADRs and technically this stock would have to rise to well above $11.00 before we could legitimately call this a ten-bagger.  The whole issue surrounding the stock is that even at $2.86 the company’s market cap is a mere $69.2 million before considering the effects of its capital raise.  For these ADRs to rise this high in ten-bagger land it would imply a market capitalization rate of what is still only about $266 million.

We believe that the company will continue to need more funds ahead in the coming months and years and it seems logical that the company will raise capital each time its shares rise significantly.  There is no way to know yet whether PBT2 is going to be the Holy Grail or whether it will be yet another disappointing flash in the pan.  The company noted, “After 11 days of treatment, the brains of the Alzheimer’s mice showed a statistically significant increase in the numbers of spines on the branches (or dendrites) of neurons in the hippocampus, a memory centre specifically affected in Alzheimer’s Disease.” 

What we do know is simple.  If it turns out that Prana has the next new real treatment candidate for Alzheimer’s, even a $266 million market cap will sound very small.  It could quite literally end up being an “Off To The Races” scenario for investors.  A Big Pharma company could either become an acquirer or it could become a partnership opportunity. Again, this is all around speculative analysis rather than using true fundamental and financial analysis based solely on today’s finances.  There are no real US firms which cover Prana so we have no real benchmark to judge what could happen in just a bullish scenario rather than a runaway scenario.  The company has a single research report posted on its site from 2009 by Southern Cross Equities and it is very bullish with a title “Unforgettable Opportunity” from that time.

Looking at potential ten-baggers is not for widows and orphans.  After all, we are talking about study results conducted on mice and on a company which will need significant funding ahead by our count.  A large partnership or other liquidity event from a Big Pharma player could also bring rewards and also bring risks down the road.  Many companies rise on news and end up in a flame-out situation.  All of the magic characteristics are in place for a possible ten-bagger scenario, and all of the risks are in place as well.  Time will be the judge as to whether or not Prana will end up being he next ten-bagger in biohealth. 

Here is that data published in PLoS ONE.

JON C. OGG

Why Celera’s Buyout Makes Sense (CRA, DGX, HGSI, AFFX, GHDX, GNOM, ROSG, HLCS)

March 18, 2011 · Filed Under Acquisitions, Financial, genomics, M&A, R&D · Comment 

If you would have said ten years ago that Celera Corporation (NASDAQ: CRA) would be acquired by Quest Diagnostics Inc. (NYSE: DGX), most investors would have said that you were off your rocker.  Celera was a leader in genomics at the time and it had a huge mountain of cash that made up much of its value.

Celera’s Berkeley HeartLab unit has a proprietary lipid testing technology, esoteric testing capability, advanced therapy guidelines and patient support services.  The company is also focused on personalized disease management where it is “developing tests and services that identify a person’s inherent risk for a disease and may also characterize its biological basis, aiding selection among treatment options and monitoring treatment effectiveness.”

The value of the buyout is $657 million based upon an $8.00 buyout price.  Interestingly enough, the buyout cost is actually much lower because Celera has roughly $327 million in cash and short-term securities on its balance sheet.  Quest expects only a 1% revenue boost in 2011 revenues.

Celera was deemed by some to have some of the next-generation testing that goes back to when investors were all gung-ho on genomics.  Think testing for personalized medicine.  That day is not yet here but it is getting closer.  The promise goes back to the late-1990s and early 2000s.

What Quest is getting is a deal on the cheap that could offer huge upside when you consider that Quest is much more dominant and prominent than Celera.  Quest was almost 20-times its size in market cap and somewhere around 50-times its size in revenues.

We would perhaps highlight several other genomic stocks out there based in part on this deal.  Human Genome Sciences, Inc. (NASDAQ: HGSI) is now in the drug phase and we all know that it has risen from the ashes back to the genomics days.

Affymetrix, Inc. (NASDAQ: AFFX) is in genetic analysis in the life sciences and clinical healthcare markets and it has been considered a buyout target in the past.

Genomic Health Inc. (NASDAQ: GHDX) has breast cancer testing and is worth $675 million in its market capitalization.

Complete Genomics, Inc. (NASDAQ: GNOM) develops and commercializes a DNA sequencing platform for human genome sequencing and analysis and it worth nearly $190 million in market cap.

Rosetta Genomics Ltd. (NASDAQ: ROSG) develops microRNA-based diagnostic and in Israel, but its market cap is so small that most may forget that it is even there.

HELICOS BIOSCIENCES (HLCS) is pink-sheet listed now, but it is the one that was aiming for the $1,000 genome map.

JON C. OGG

Teva Raises Capital (TEVA)

March 16, 2011 · Filed Under Financial, generic drugs · 1 Comment 

Teva Pharmaceutical Industries Limited (NASDAQ: TEVA) is not exactly one of the first companies we would think of as offering a bond issue, and it might normally lead us to think that Teva was on the verge of making another acquisition.  The company is raising debt capital but it does not seem to be signaling any imminent deal is coming.

The company’s finance unit is selling some $750 million with fixed and floating rates.  The floating tranche is said to be $500 million expected at about 50 basis points over LIBOR and the $250 million fixed piece had price talk of 70 to 75 basis points above Treasuries.

This appears to be debt that can be used to refinance other debt coming due without tapping into the cash coffers.  The official use is “for general corporate purposes.”

Teva was already carrying $4.331 billion in long-term debt and carried more than $2 billion between ‘other liabilities’ and deferred long-term liability charges.  The company’s market cap is now back down to $42.7 billion now that shares are this far off its 52-week high.  With shares down 1.9% at $47.53 today, Teva’s 52-week trading range is $46.99 to $64.95

JON C. OGG

KV Holders: Pricing Backlash Seems Likely (KV-A)

March 12, 2011 · Filed Under fda, Financial, General, politics · 3 Comments 

When we first covered the rebirth of KV Pharmaceutical Co. (KV-A) for its Makena drug aimed to prevent premature birth, we knew this was going to be a home run due to FDA market exclusivity.  Premature births result in costs that run into the billions yearly to healthcare providers and insurers.  Now it seems very likely that there is going to be a backlash in the form of public outrage that works its way into both the legal system and the political outrage venues against the company.  A price hike seemed certain after getting FDA approval for exclusivity, but the degree of the gouging is going to be where the line gets drawn in the sand between high stakes capitalism and grand larceny.  Keep in mind that yours truly believes in and supports the belief that capitalism is the incentive behind most creation.  In this case, it does not take a rocket scientist to realize that KV is very likely going to have yell a “Do over!” on its pricing.

It seems that KV decided that the price per patient should now be $1,500.00.  The price was about $15.00 per patient before KV got this exclusive in an off-label use regime.  What do you think is going to happen when politicians arguing against the cost of medicine start bashing a company for literally a one-hundred-fold increase in the price of a drug?

Forbes’ David Whelan wrote in his Health Dollars blog “Is KV Pharmaceutical A Flat-Out Evil Company?” and Derek Lowe outlined a more balanced or methodical approach to this called “KV Pharmaceuticals Gets Away With Pricing on Makena” at Seeking Alpha.

Here is the take from a capitalist-minded centrist who would generally rather have less government involvement in most cases.  There is going to be more backlash against KV on this in the weeks ahead.  It is one thing when reporters and patients are angered by what they see, but companies generally tend to not do as well when they are the target of politicians and consumer activists.  KV will probably take a lot more incoming heat from this move.

KV shares have already risen exponentially from the bottom.  This stock was above $20.00 in 2008 before it woes began, yet it literally fell to under $1.00 at the lows in 2010.  Shares closed on Friday at $11.99 with a 5.14% drop on that day.

JON C. OGG

Benlysta Approval Cheat Sheet: What You Need to Know (HGSI, GSK)

March 9, 2011 · Filed Under analyst calls, Cancer, fda, genomics, Lupus · Comment 

It is official… The FDA has approved Benlysta as the first new drug regimen for systemic lupus in  over 50 years.  Human Genome Sciences, Inc. (NASDAQ: HGSI) and partner GlaxoSmithKline plc (NYSE: GSK) are sure to have a Blockbuster on their hands.  The treatment is for the treatment of adult patients with active, autoantibody-positive systemic lupus erythematosus who are receiving standard therapy.

We want to stress that analyst data is going to change greatly and we want a snapshot here of what this looks like before the change.  The side-effects have taken a lot of space, and those are just verbatim.  The rest after that is where the guts of the outlook is.  We have been keeping tabs on a few side-bar issues going into this approval and here is are some of the key issues we think you need to know:

First is that we have been expecting Human Genome Sciences to win approval.  Not everyone was, but this is not an issue we see being negative for Human Genome regardless of how this stock acts in the first few days.  By now you know FDA approval stocks can have mega-moves up down and back and forth. The cost is currently aimed at $35,000 per patient per year.  There will be discounts and exceptions but this is within the range we were expecting.

THERE ARE SOME LIMITATIONS… The efficacy has not been evaluated in patients with severe active lupus nephritis or severe active central nervous system lupus.  It has not been studied in combination with other biologics or intravenous cyclophosphamide. Use is therefore not recommended in these situations.  What you need to know: Like it or not, off-labeling will occur here.  Think about it, 50+ years since the last approval…

TIMING & REVENUE HOPES… The companies are aiming for deliveries to begin to doctors within a couple of weeks, which of course will be an average.  That means that revenues can actually start sneaking in during this first quarter.  Do not expect much… Thomson Reuters only had estimates of $21.77 million in Q1 and $30.64 million in Q2 for revenues.  The current estimates of $172.37 million for 2011 revenues are fair and the estimates of $495.96 million for 2012 may need to be adjusted.  For 2012 the range is $295 million to $736 million, so it is not like there aren’t some differing opinions.  Our guess is that estimates on the lower end will come up.

SIDE-EFFECTS & MORTALITY RISKS… “Out of 2133 patients in 3 clinical trials, a total of 14 deaths occurred during the placebo-controlled, double-blind treatment periods: 3/675 (0.4%), 5/673 (0.7%), 0/111 (0%), and 6/674 (0.9%) deaths in the placebo, belimumab 1 mg/kg, belimumab 4 mg/kg and belimumab 10 mg/kg groups, respectively. No single cause of death predominated. Etiologies included infection, cardiovascular disease, and suicide. Serious and sometimes fatal infections have been reported in patients receiving immunosuppressive agents, including belimumab. In controlled clinical trials, serious infections occurred in 6.0% of patients treated with belimumab and in 5.2% of patients who received placebo. The most frequent serious infections included pneumonia, urinary tract infection (UTI), cellulitis, and bronchitis. The most frequent infections (≥5%) were upper respiratory tract infection, UTI, nasopharyngitis, sinusitis, bronchitis, and influenza.” Hypersensitivity reactions were reported in 13% of patients receiving belimumab and 11% of patients receiving placebo, and included anaphylaxis (0.6% with belimumab and 0.4% with placebo). Infusion-associated adverse events were reported in 17% of patients receiving belimumab and 15% of patients receiving placebo. Psychiatric events (primarily depression, insomnia, and anxiety) were reported more frequently with belimumab (16%) than with placebo (12%). Serious psychiatric events, serious depression and two suicides were also reported (0.8% for belimumab and 0.4% for placebo).

Analyst estimates… Thomson Reuters has a consensus price target objective of about $34.00 today, with a low of $23 and a high of $45 per share from analysts.  Over the last year shares have traded in a range of $20.56 to $34.49.  Earnings estimates are -$0.43 EPS and $21.77 million in revenues for this quarter; -$0.41 EPS and $30.64 million in revenues next quarter; -$1.47 EPS and $172.37 million in 2011; and -$0.60 EPS and $495.96 million in revenues in 2012.

Buyout or independent… Some still consider HGSI a buyout candidate.  We ONLY consider it a buyout target if GSK wants to acquire it.  Buying the company only gives a half-share of Benlysta and come-along partners do not always work as well in biotech and drug deals.

Company stats… The market cap is $4.85 billion.  Assets in cash and other we are looking at as hard assets are $155.7 million in cash and equivalents, $282 million in other short-term investments, and $448.6 million in long-term investments.  It also has $253 million in plant and equipment. Long-term dent is $434.7 million.

Trading patterns… Average daily volume is down to only 2.3 million shares and March 1 was the most recent day with 5 million shares traded.  That volume will be explosive Thursday.  March options show an open interest of over 100,000 CALLS for MARCH and over 70,000 contracts for MARCH only.

More analyst calls… Gleacher was very positive at the end of December.  Cowen & Co. took a very negative stance.

We will get to see how this begins trade indications early-early tomorrow after the NASDAQ releases its halt time.  Again, trading may very well be all over the place for the next few days.

The links throughout will offer more insight to individual sales targets, but hopefully this offers a bit of a cheat sheet. By morning, much of the analyst data will have changed… that part never changes.

JON C. OGG

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