The Other Side of the Coin: Big Caution in Dendreon (DNDN, JNJ)

May 27, 2011 · Filed Under analyst calls, Cancer, dendreon · Comment 

Dendreon Corporation (NASDAQ: DNDN) is one we have been very positive about before the FDA approval of Provenge for metastatic prostate cancer.  We often like to feature both sides of the coin, and the other side of the coin is one of caution from Credit Suisse this week.  If this research call is right, shareholders could face some competitive pressure in shares of Dendreon.

Credit Suisse has been very cautious when it comes to Dendreon Corporation (NASDAQ: DNDN).  The firm noted that an editorial in this week’s New England Journal of Medicine was published based upon Johnson & Johnson (NYSE: JNJ) and its abiraterone post-chemotherapy trial results.  What made the concern is the focus on results which validate abiraterone’s action. 

Some may consider one article not a strong enough basis for this week’s caution.  Credit Suisse believes that the results can imply off-label pre-chemotherapy use as a competing agent against Provenge from Dendreon.  Another bit was the combination data of abiraterone and other agents as lacking, but the firm believes that its concerns about abiraterone as a competitor are currently under-appreciated.

The belief is that these trial results show that abiraterone might possibly be used in all patients with metastatic castration-resistant prostate cancer.  This is a longer-term concern rather than near-term, but and the firm is not assuming either “a pre-chemo approval in 2011 or significant off-label use ahead of an approval.”  Still, it does seem to enhance compeitive risks to Provenge.

The article from the NEJM suggests that this could impact both how new drugs are developed and used.  There is also a concern that a lack of combination data could eventually impact how Provenge is used in combination with other therapies.

Credit Suisse’s official rating Underperform with a discounted cash flow model price target obkective of $29.00 per share.  The firm is much more cautious on the risks here than most Wall Street analysts based upon competitive threats and based upon lower E.U. pricing and penetration.

Credit Suisse has modelled $0.59 EPS for 2012 on about $877.2 million in revenues and it sees 2013 estimates of $1.68 EPS and $1.162 billion in sales.

Sadly, this call is one that is very expensive to hedge against.  The call is long-term rather than short-term, so we looked at longer-dated LEAPS in options.  Going all the way out to the JAN-2013 $35 PUTS is almost at $6.50 per contract, implying that a sub-$29 share price is the breakeven point on your contract. 

Reuters noted that of the analysts following Dendreon, the ratings were as follows:

  • BUY- 11
  • OUTPERFORM- 6
  • HOLD- 5
  • UNDERPERFORM- 1
  • SELL- 1

Thomson Reuters has a consensus price target objective of $49.72 and Dendreon shares are currently trading around $42.25 with a 52-week range of $25.78 to $44.85.

AFTERTHOUGHT…… I have already been receiving some emails that need to be considered regarding abiraterone’s side-effects.  These were not really covered in the report summary and they are very important to consider.  I also kept the comments mostly to what this report was simply because it was one of the only standout research calls from the rest of the pack. 

JON C. OGG

Quest+Celera… Value With Growth (DGX, CRA)

May 18, 2011 · Filed Under Cancer, Cardiac, genomics, M&A · Comment 

Quest Diagnostics Inc. (NYSE: DGX) is a stock we have recently screened out for value investors who are looking for exposure to healthcare and now in genomics.  Some investors might not recognize the value on the current trailing 12-month P/E ratio, but there is value here in this diagnostics player.  Now the company has announced that it has completed its acquisition of Celera Corporation (NASDAQ: CRA).

Many areas in healthcare are no longer as feared by investors as in 2008 and 2009.  It turns out that Obamacare has actually not crippled as many healthcare segments as feared.  If one area is going to remain afloat in the healthcare treatment segment it is diagnostics.

Quest’s dividend is still less than 1% and that $0.10 quarterly payout has been in place since early-2006.  With the dividend growth theme that investors are seeking, it would make sense that Quest will grow its dividend through time and come more in-line with peers.

Thomson Reuters has estimates of $4.33 EPS for 2011 and $4.87 EPS for 2012., indicating over 10% earnings growth on about 5% revenue growth.  The value-boost here that remains unlocked and which acts as a hidden value that will generate future growth is Quest’s acquisition of Celera Corporation (NASDAQ: CRA).  That is a $671 million acquisition, on the surface until you consider that almost half of Celera’s value was in cash.   The revenue and earnings estimates will not be greatly changed for a few years on Quest after the addition of Celera but this is a key future growth mechanism that is being acquired on the cheap.

Celera has no real debt and carried over $325 million in cash and liquidity on its books.  Quest will have a broader personalized genetic testing business for heart condition, cancer and more via genomics and proteomics after it integrates Celera. The old saying is that beauty is in the eye of the beholder, but it is feasible to think that Celera could possibly become a multi-billion value in the coming decade.

Quest recently paid $241 million in a settlement to get a Medicaid suit behind it. While the company has a larger debt load with over $3.5 billion in long-term debt versus a $89 billion market cap, Quest’s earnings ahead should be more than sufficient to offset leverage. 

Shares closed Tuesday at $57.93, its 52-week range is $43.38 to $59.39, and Thomson Reuters has a consensus share price target of $64.28.  A combined 2011 to 2012 blended earnings estimate puts a forward earnings multiple at only about 12.5-times expected earnings.

JON C. OGG

Analysis Sizing Up FDA Approval Chances of Obesity Drugs (VVUS, OREX, ARNA)

May 12, 2011 · Filed Under analyst calls, Diabetes, obesity · 95 Comments 

We have a new report sizing up obesity drugs this morning from Bank of America Merrill Lynch.  The long and short of the three ratings is that Orexigen Therapeutics, Inc. (NASDAQ: OREX) and Vivus, Inc. (NASDAQ: VVUS) are both rated ‘Buy’ at Bank of America Merrill Lynch, but Arena Pharmaceuticals, Inc. (NASDAQ: ARNA) is ‘Underperform’ rated.  As always, it is the devil in the details that offers the most insight.

Vivus, Inc. (NASDAQ: VVUS) is finalizing its study design and the company’s President said efforts to finalize the trial design is assessing the risk of fetal malformations from Qnexa use in pregnant women.  The company will complete its retrospective analysis and re-file the Qnexa application by year-end. If the fetal malformation results are bad, then Vivus will re-file for a limited indication that excludes excluding women of child-bearing age. BofA believes this will boost the chance of commercially available in 2012 and it has a discounted cash flow model price of $10.00 ($7 of which is based upon Qnexa). An earlier than expected approval or securing a commercial partner could offer upside. 

Orexigen Therapeutics, Inc. (NASDAQ: OREX) is getting ready for an FDA meeting this quarter and its CFO focus is on that meeting.  The company hopes for FDA approval on cutting the time required for pre-approval.  It so far is assuming 0.5% per year in major cardiac event risk. The company indicated that Takeda would participate in the upcoming FDA meeting for Contrave.  BofA sees a relatively low downside risk for Orexigen with a discounted cash flow price target of $5.00.  It is using a 50% chance of success in its model but noted that upside could be seen if the FDA approves trials faster, if it secures an international sales partner, or if managed care organizations add weight loss drugs to formularies.

Arena Pharmaceuticals, Inc. (NASDAQ: ARNA) will conduct a three month “rat carcinogenicity trial” of Lorcaserin to satisfy the requirements in FDA’s complete response letter. Arena will conduct several non-human studies to assess the potential role of elevated prolactin levels.  The company submitted results from its BLOOM-DM trial on obese patients with diabetes showing a statistically significant reduction in A1c and fasting glucose levels from lorcaserin.  Bank of America remains cautious and has a $1.00 discounted cash flow target on Arena. The risks to its $1 target are an FDA request for long-term trials, a rejection of the lorcaserin NDA, an approval with restricted use, and a slower than expected sales ramp after approval.  Some upside could be there if lorcaserin gets approval before expectations, if production costs are lower, and if lorcaserin can gain market share faster than is expected. 

For whatever this is worth, BioHealthInvestor’s take is that the most likely of these three to get approval is Vivus for Qnexa and then Orexigen for Contrave.  Our take is that Vivus will get approval but it will exclude pregnant women and those who may wish to become pregnant.  Most doctors already monitor pregnant womens’ medications as is and it seems that a doctor would not want at all for a pregnant woman on a weight loss drug during pregnancy going in.  Many doctors are even against most basic vitamins and supplements during pregnancy, let alone  most prescription drugs.

JON C. OGG

Quest for $1,000 Genome: Complete Genomics Raises Expansion Capital (GNOM)

May 10, 2011 · Filed Under genomics, Secondary Offering · Comment 

COMPLETE GENOMICS, INC. (NASDAQ: GNOM) has filed to raise up to $75 million in cash in a public stock offering.  The filing is for 4.5 million shares, or it would be 5.175 million shares if the overallotment is exercised. The book-runners are Jefferies and UBS Investment Bank, and co-managers are Baird and Cowen & Co.

Based upon the company’s name, you already figured out that they are in the genomics business.  It has a DNA sequencing platform and its goal is to “become the preferred solution for complete human genome sequencing and analysis” via its proprietary Complete Genomics Analysis Platform.  This allows academic and biopharmaceutical researchers a quality, cost-efficient and scale-efficient platform without having to invest in the expensive in-house sequencing instruments and equipment and personnel.  Its service launched in May 2010, it has sequenced over 1,400 complete human genomes, and its count was over 600 in the first quarter of 2011.  At March 31, 2011, it claimed an order backlog of over 2,000 genomes.

The use of proceeds (approximately $62.0 million) is as follows:

  • Approximately $20.0 million will go for capital expenditures to expand the sequencing and computing capacity in its Mountain View and Santa Clara leased facilities;
  • Approximately $15.0 million to finance the further development of its sequencing technology and services;
  • Approximately $15.0 million for sales and marketing activities;
  • The remainder of cash will be for working capital and other general corporate purposes.

The company stated in its IPO filing, “Our goal is to be the first company to sequence and analyze high-quality complete human genomes, at scale, for a total cost of under $1,000 per genome.”

The present facility has the capacity to sequence and analyze over 400 complete human genomes per month, and the company seeks to a capacity boost of between two- and three-fold by the end of 2011 as it deploys additional sequencers and increases the throughput its sequencing process through software refinements and component upgrades.

The company just reported earnings yesterday and showed to have revenues of $6.8 million for the first quarter.  That compares to about $0.3 million in the first quarter.  Operating expenses were $18.9 million, up from $14.6 million a year earlier.  The company said that it believes its backlog will be worth some $15 million over the next twelve months.  Pricing of genome services starts at $9,500 per genome for small order sizes to between $5,000 to $7,500 per genome for orders in the hundreds of genomes.

Complete Genomics ended the quarter with $68.8 million in cash, which reflects the completion of a $20 million loan agreement with Oxford Finance Corporation. $7.4 million of the Oxford loan was used to repay the balance of an existing loan with Comerica.

The market cap before the effects of this offering was listed as $364 million.  The stock has less than a year of trading and its range has been $6.60 to $17.25 and the average daily volume is 150,000 shares.

JON C. OGG

Alkermes & Elan, Game-Changing Deal For Both Companies (ALKS, ELN, JNJ, ACOR, AMLN, LLY)

May 9, 2011 · Filed Under Diabetes, Diagnostics, Financial, M&A, multiple sclerosis, R&D · Comment 

The biotech sector has been full of consolidation and mergers of late, but now we have a new model whereby a smaller company is set to grow by taking a part of a larger company.  We cannot exactly call it a reverse merger. Alkermes, Inc. (NASDAQ: ALKS) and Elan Corporation, plc (NYSE: ELN) have signed a definitive pact where Alkermes will merge with Elan’s unit called Elan Drug Technologies.

The drug technologies unit is profitable and is the drug formulation and manufacturing unit.  The cash and stock transaction is valued toda at roughly $960 million and Alkermes and the unit will be combined under a new holding company structure that is incorporated in Ireland called Alkermes plc.

Alkermes says this deal will be immediately accretive to cash earnings.  It also is said to accelerate Alkermes’ path “to building a sustainably profitable biopharmaceutical company with expertise in developing treatments for central nervous system diseases and a broad, diversified portfolio of products and pipeline based on proprietary science and technologies.”

The deal is a game-changer because on a standalone basis Alkermes was set to have a loss of -$0.31 EPS on $213.27 million in its fiscal year March-2012. The combined company is said to see a growing product, royalty and manufacturing revenues in excess of $450 million annually.  Alkermes said it will also become immediately profitable on a cash earnings basis.  In short, Alkermes instantly transforms. Now the company will have a revenue stream from 25 commercialized products and its 5 growth products will now be from RISPERDAL CONSTA, INVEGA SUSTENNA, AMPYRA, VIVITROL, and BYDUREON.

For Elan, it gets to cut the debt on its balance sheet and will get to improve its capital structure, increase its operating leverage, and this will allow for additional focus and disciplined investments.  It also gets a stake in Alkermes plc that can drive its value ahead.

RISPERDAL CONSTA and INVEGA SUSTENNA are both commercialized by Johnson & Johnson (NYSE: JNJ) as long-acting injectable atypical antipsychotic medications for schizophrenia and bipolar I disorder.  Ampyra is an MS drug under Acorda Therapeutics, Inc. (NASDAQ: ACOR). Bydureon is an extended release Typy-II diabetes treatment that Alkermes is in with Amylin Pharmaceuticals, Inc. (NASDAQ: AMLN) and Eli Lilly and Company (NYSE LLY).

Elan is set to receive $500 million plus it will also receive 31.9 million ordinary shares of Alkermes plc common stock.  The companies will also enter into a shareholder agreement that contains a lockup, standstill and voting agreement for Elan’s shares of Alkermes plc.

As far as existing Alkermes holders, they will receive one ordinary share of Alkermes plc per each share of Alkermes, Inc. owned at the merger date.  The new Alkermes plc shares will be registered in the United States and are expected to trade on NASDAQ. Alkermes plc will be headquartered in Dublin, Ireland  The company did note that this transaction is expected to be taxable to existing Alkermes holders and it has obtained a commitment from Morgan Stanley & Co. and HSBC to provide up to $450 million of term loans to finance the transaction.

Revenues are expected to grow in fiscal 2012 and is expected to reach double-digit growth rates in fiscal 2013 and beyond. Pro forma Adjusted EBITDA margins in fiscal 2012 are projected at 15% to 20%, pro forma Adjusted EBITDA is put at $70 million to $90 million, and pro forma adjusted EBITDA margins should expand to 30% to 35% in fiscal year 2013 and beyond.  Also noted was that it has identified about $20 million of annual synergies in U.S. operations that can be fully realized by fiscal 2013.

JON C. OGG

Ahead of Earnings: Analysts Fight Over Dendreon (DNDN)

May 2, 2011 · Filed Under analyst calls, Cancer, dendreon · 2 Comments 

Dendreon Corporation (NASDAQ: DNDN) was just highlighted on Saturday morning as being on of the top analyst calls of the week because ThinkEquity had initiated coverage of Dendreon with a “Buy” rating at the firm with a price target objective of $50.00 per share.

This Monday came a new analyst call from Credit Suisse that is almost the exact opposite.  Credit Suisse started coverage with an “Underperform” rating and only a $29.00 price target objective. 

What makes both of these calls so important is that this is ahead of this week’s expected earnings report.  Credit Suisse was cautious on peak-Provenge sales, while ThinkEquity was positive on peak-Provenge sales.
Dendreon earnings are due shortly and remains a story around guidance for late-2011 and into 2012 rather than it is an earnings story for the last quarter. Provenge sales are just getting going and Thomson Reuters has estimates of -$0.70 EPS and $28.86 million in revenues; next quarter estimates are -$0.69 EPS and $58.3 million in revenues.

The Thomson Reuters estimates for 2011 are -$2.24 EPS and $369.7 million in revenues, but the 2012 estimates are $0.30 EPS and about $860.5 million in revenues.

This is one of those instances where research teams basically have access to the same data yet have differing conclusions.  That is what makes a ball game.

Shares closed at $43.43 on Friday and the stock is down 1.2% at $42.90 in pre-market trading this Monday.

JON C. OGG

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