Had a little more time this morning (finally) and was able to update the Port with the ARNA sell last week. It's all timing, sometimes... the one point I was able to log on to look at the actual price (something I do for every Port transaction - whatever time I look, that is the price I use at the bid or ask) ARNA was at just about it's lowest point of the day - $1.48. It was up more than 10% within an hour after that!
Today I sold 200 AMAG (getting tired of waiting for Feraheme sales and safety issues to die down) and 2000 AOB (China pharma hit the skids). I turned around and bought 6000 CLSN at $3.09.
Port now looks like:
2000 NBIX
1600 ELN
400 DNDN
6000 CLSN
2500 SGMO
7000 ONTY
3500 VICL
7000 PZG
2000 MNKD
It's worth just under $125K, which means I've reverted to the mean - I have about a 10% annual return in about 2.5 years. Now, the S&P has returned around -5% and the Nasdaq is 2.8% over that same period, so I can't be too sad but it's absolutely NOT where I want to be (neglecting the Port for 3-5 months at a time doesn't help)! I intend to be back to at least a 13-15% return by the end of the year.
Regards,
Trond
Wednesday, October 27, 2010
Friday, October 22, 2010
ARNA
I sold all the Port's ARNA this morning at $1.48. I am quite anoyed at myself for not correcting the Port immediately; I have meant to actually post this immediately after the Advisory Committee meeting and could have sold it for around $2 if I had not delayed.
Just a quick notification post; I expect the FDA to deliver a Conditional Response Letter later today.
Regards,
Trond
Just a quick notification post; I expect the FDA to deliver a Conditional Response Letter later today.
Regards,
Trond
Tuesday, July 13, 2010
ARNA and VVUS
Well, the day is nearly at hand for Vivus.
No, not the FDA PDUFA date, but the Advisory Committee meeting about its drug Qnexa. The briefing docs (http://www.fda.gov/downloads/AdvisoryCommittees/CommitteesMeetingMaterials/Drugs/EndocrinologicandMetabolicDrugsAdvisoryCommittee/UCM218824.pdf) were released this morning in preparation for the meeting on Thursday. Investors were expecting an easy efficacy review and a searching safety evalaution. They got what they expected and therefore VVUS is up today. Arena is trailing along, up slightly in sympathy.
I do not know much about VVUS. I want to emphasize I've been following ARNA and not VVUS, so the data I know is imcomplete. However, being me, a couple comments are always in order.
I looked at the safety review summary on pages 3-6 and although it most headlines seem to indicate a relatively benign safety review, it looks bad. Suicidal thoughts, birth defect potential, and this (regarding topiramate, one of the two drugs Qnexa is comprised of):
"associated, in a dose-related manner, with an increased incidence of cognitive-associated adverse events including confusion, psychomotor slowing, difficulty with concentration/attention, and difficulty with memory, speech or language problems, particularly word-finding difficulties."
Hmmm, one less plate of pasta, or fumbling for the right word?
It will certainly be black-boxed for pregnant women, and have strong language for those who may become pregnant.
I think ARNA will get approval by itself, but this market seems to favor VVUS right now. I am considering buying puts on VVUS, as the AC meeting is right before options expiration. They carry quite a premium, so I have no specific strike price in mind - just something to think about.
Regards,
Trond
No, not the FDA PDUFA date, but the Advisory Committee meeting about its drug Qnexa. The briefing docs (http://www.fda.gov/downloads/AdvisoryCommittees/CommitteesMeetingMaterials/Drugs/EndocrinologicandMetabolicDrugsAdvisoryCommittee/UCM218824.pdf) were released this morning in preparation for the meeting on Thursday. Investors were expecting an easy efficacy review and a searching safety evalaution. They got what they expected and therefore VVUS is up today. Arena is trailing along, up slightly in sympathy.
I do not know much about VVUS. I want to emphasize I've been following ARNA and not VVUS, so the data I know is imcomplete. However, being me, a couple comments are always in order.
I looked at the safety review summary on pages 3-6 and although it most headlines seem to indicate a relatively benign safety review, it looks bad. Suicidal thoughts, birth defect potential, and this (regarding topiramate, one of the two drugs Qnexa is comprised of):
"associated, in a dose-related manner, with an increased incidence of cognitive-associated adverse events including confusion, psychomotor slowing, difficulty with concentration/attention, and difficulty with memory, speech or language problems, particularly word-finding difficulties."
Hmmm, one less plate of pasta, or fumbling for the right word?
It will certainly be black-boxed for pregnant women, and have strong language for those who may become pregnant.
I think ARNA will get approval by itself, but this market seems to favor VVUS right now. I am considering buying puts on VVUS, as the AC meeting is right before options expiration. They carry quite a premium, so I have no specific strike price in mind - just something to think about.
Regards,
Trond
Thursday, May 6, 2010
Dendreon helped the Port24...
Well, the Port is "ta-da!" back where it should be. That is, back to 24% returns, annualized.
Dendreon was the prime mover, of course, and I yesterday sold 500 of the 900 shares the Port held. With the proceeds I bought 2,000 MannKind (MNKD) at $6.93 and sold 20 June $8 calls against them for $55 each.
I promised a brief writeup on MannKind but am lacking in time today. So suffice it to say MNKD is another stock I'm buying in my real-money IRA - selling some calls and holding most long through the summer.
Regards,
Trond
Dendreon was the prime mover, of course, and I yesterday sold 500 of the 900 shares the Port held. With the proceeds I bought 2,000 MannKind (MNKD) at $6.93 and sold 20 June $8 calls against them for $55 each.
I promised a brief writeup on MannKind but am lacking in time today. So suffice it to say MNKD is another stock I'm buying in my real-money IRA - selling some calls and holding most long through the summer.
Regards,
Trond
Tuesday, May 4, 2010
Greek Bailout - Mauldin letter
John Mauldin's latest letter (click on the header of my blog entry to access it) starts out in a very interesting way:
---
It now looks like almost 30% of the Greek financing will come from the IMF, rather than just a small portion. And since 40% of the IMF is funded by US taxpayers, and that debt will be JUNIOR to current bond holders (if the rumors are true) I can't tell you how outraged that makes me.
What that means is that US (and Canadian and British, etc.) tax payers will be giving money to Greece who will use a lot of it to roll over old bonds, letting European banks and funds reduce their exposure to Greece while tax-payers all over the world who fund the IMF assume that risk. And does anyone really think that Greece will pay that debt back? IMF debt should be senior and no bank should be allowed to roll over debt and reduce their exposure to Greek debt on the back of foreign tax-payers.
---
Regardless of the seniority of the bonds, this is pretty outrageous. Anyone feel like contacting their Congressional delegates?
Regards,
Trond
---
It now looks like almost 30% of the Greek financing will come from the IMF, rather than just a small portion. And since 40% of the IMF is funded by US taxpayers, and that debt will be JUNIOR to current bond holders (if the rumors are true) I can't tell you how outraged that makes me.
What that means is that US (and Canadian and British, etc.) tax payers will be giving money to Greece who will use a lot of it to roll over old bonds, letting European banks and funds reduce their exposure to Greece while tax-payers all over the world who fund the IMF assume that risk. And does anyone really think that Greece will pay that debt back? IMF debt should be senior and no bank should be allowed to roll over debt and reduce their exposure to Greek debt on the back of foreign tax-payers.
---
Regardless of the seniority of the bonds, this is pretty outrageous. Anyone feel like contacting their Congressional delegates?
Regards,
Trond
Monday, May 3, 2010
Watchlists
I recommend that everyone who is interested in individual stocks maintain one or more watchlists.
This is simply a list of companies that you are interested in. Most brokerages allow you to maintain a list, or Yahoo Finance! does quite nicely. If you get into the habit of checking in every day, you'll see a few benefits.
For one, you will hear news about your stocks very quickly. Of course, most people don't live and breathe the market, and conventional wisdom has it that one should not do this as it leads to that most evil practice of all - day trading. Ha!
Of course, conventional wisdom also counsels one to place your long term dollars in mutual funds and let the experts do their thing. As you are reading this, gentle reader, I assume you probably had an internal "Ha!" go off yourself.
It's usually not necessary to know news of a stock that is important to you immediately; very few things will be life and death to a corporation. Biotech may be the exception - trial news can kill or revive those very quickly, of course. But being aware of something at least gives you the power of choice. Here's an example: Oncothyreon (ONTY) received the unwelcome news a couple months ago that Stimuvax trials were being halted on safety concerns. It dropped immediately, of course, but kept dropping some more over the next few days. If this news spooked you, you at least had the chance the next day to sell at a higher price than the succeeding days would have allowed you.
Immersing yourself in the news also mean you are more in tune with your choices. You see earnings announcements, insider buys or sells, product information and the like; and hopefully you begin to understand the company somewhat better over time.
The other main benefit of a watchlist is that you begin to have an appreciation for the daily swings in price. I am not endorsing very active trading (although not disparaging it either) - but knowing that a stock you are strongly interested in is at a low point for the year, with no appreciable bad news or other information, may give you the slight extra nudge to become a shareholder. Entry price does matter - even in the long term, buying a stock at $9 instead of $10.50 will mean several extra percentage points of gain, or allow you to buy more shares than you could otherwise have done. And over the course of months, a swing of a couple dollars in price WILL happen.
I desperately need to update my blog watchlist: JAV is being bought out at $2.19 (a nice gain from my rec about 16 months ago at $1-ish), SGMO probably won't see sub $5 again, and Dendreon almost certainly will never be available at my latest upgrade of under $30.
My additions will include MannKind, Oncothyreon, Paramount Gold, Lexicon, and Opexa. I hope to talk of some of these soon in future posts. MannKind, Oncothyreon, and Paramount are probably the most timely buys; Arena and Elan would be next.
On a final note: I sold some small amounts of Dendreon over the last couple days but intend on holding the majority for the absolutely long haul. The guy who sold Microsoft for 3 or 4 times his stake looked really smart in the short term, but I believe this puppy has legs. :-)
Regards,
Trond
This is simply a list of companies that you are interested in. Most brokerages allow you to maintain a list, or Yahoo Finance! does quite nicely. If you get into the habit of checking in every day, you'll see a few benefits.
For one, you will hear news about your stocks very quickly. Of course, most people don't live and breathe the market, and conventional wisdom has it that one should not do this as it leads to that most evil practice of all - day trading. Ha!
Of course, conventional wisdom also counsels one to place your long term dollars in mutual funds and let the experts do their thing. As you are reading this, gentle reader, I assume you probably had an internal "Ha!" go off yourself.
It's usually not necessary to know news of a stock that is important to you immediately; very few things will be life and death to a corporation. Biotech may be the exception - trial news can kill or revive those very quickly, of course. But being aware of something at least gives you the power of choice. Here's an example: Oncothyreon (ONTY) received the unwelcome news a couple months ago that Stimuvax trials were being halted on safety concerns. It dropped immediately, of course, but kept dropping some more over the next few days. If this news spooked you, you at least had the chance the next day to sell at a higher price than the succeeding days would have allowed you.
Immersing yourself in the news also mean you are more in tune with your choices. You see earnings announcements, insider buys or sells, product information and the like; and hopefully you begin to understand the company somewhat better over time.
The other main benefit of a watchlist is that you begin to have an appreciation for the daily swings in price. I am not endorsing very active trading (although not disparaging it either) - but knowing that a stock you are strongly interested in is at a low point for the year, with no appreciable bad news or other information, may give you the slight extra nudge to become a shareholder. Entry price does matter - even in the long term, buying a stock at $9 instead of $10.50 will mean several extra percentage points of gain, or allow you to buy more shares than you could otherwise have done. And over the course of months, a swing of a couple dollars in price WILL happen.
I desperately need to update my blog watchlist: JAV is being bought out at $2.19 (a nice gain from my rec about 16 months ago at $1-ish), SGMO probably won't see sub $5 again, and Dendreon almost certainly will never be available at my latest upgrade of under $30.
My additions will include MannKind, Oncothyreon, Paramount Gold, Lexicon, and Opexa. I hope to talk of some of these soon in future posts. MannKind, Oncothyreon, and Paramount are probably the most timely buys; Arena and Elan would be next.
On a final note: I sold some small amounts of Dendreon over the last couple days but intend on holding the majority for the absolutely long haul. The guy who sold Microsoft for 3 or 4 times his stake looked really smart in the short term, but I believe this puppy has legs. :-)
Regards,
Trond
Friday, April 30, 2010
Dendreon's conference call
Yesterday at 11:30 PDT, Dendreon hosted a conference call to discuss Provenge's approval. You can access a replay at www.Dendreon.com, and I urge you to listen if you want to continue holding your shares long term, as I intend to do with a majority of mine.
Dendreon now has to morph from an R&D company to a commercial enterprise. They seem to have a good start and an extremely capable management staff. A few highlights frm the call:
Pricing: They announced an infusion will be $31,000. That means a standard regimen of treatment will be $93,000, to the high side of previously assumed guidance.
No Rest-Of-World partnership: they truly intend to go it alone. While this has the potential for pitfalls, in the long term if they avoid a buyout they truly could be the "next Amgen" of biotech.
People will probably comment on the 2,000 patients they said can treat i the next twelve months, but how many will have caught the very optimistic comment that following all three plants coming on line at 100%, they "can meet demand"?
All in all, a great call. Sell some if you must, but hold on to some. I think there are great things in store for this not-so-little company.
Regards,
Trond
Dendreon now has to morph from an R&D company to a commercial enterprise. They seem to have a good start and an extremely capable management staff. A few highlights frm the call:
Pricing: They announced an infusion will be $31,000. That means a standard regimen of treatment will be $93,000, to the high side of previously assumed guidance.
No Rest-Of-World partnership: they truly intend to go it alone. While this has the potential for pitfalls, in the long term if they avoid a buyout they truly could be the "next Amgen" of biotech.
People will probably comment on the 2,000 patients they said can treat i the next twelve months, but how many will have caught the very optimistic comment that following all three plants coming on line at 100%, they "can meet demand"?
All in all, a great call. Sell some if you must, but hold on to some. I think there are great things in store for this not-so-little company.
Regards,
Trond
Thursday, April 29, 2010
Provenge Approved!!!!
Trading halted - Reuters and CNBC saying approved.
What a long, long road.
Regards,
Trond
What a long, long road.
Regards,
Trond
Wednesday, April 21, 2010
William Black on Lehman Brother
This guy for Fed chief and Markopoulos for SEC Chair!
Unbelievable stuff....
Unbelievable stuff....
Tuesday, April 13, 2010
Port 24, ONTY, and ARNA
Well, Oncothyreon (ONTY) had a nice little run today, so I sold the August $5 calls in the Portfolio 24. All 3000 shares are now covered; 30 AUG $5 contracts sold for $0.60 per share.
I really should be selling Elan calls here, as they also have gone up quite nicely, recently, but I think it will hold $8 and the $9s do not have enough premium yet.
The Port now stands at $134,743, with $2,538 in cash. That gives me an annualized return of 18.1%.
I bought ARNA in both my IRA and my brokerage accounts today; the low $3s are a very good entry point. Honestly, the brokerage shares will probably be sold on any kind of bump, but the IRA shares are longer term; the FDA date is 10/22/10 and there should be some appreciation as that date gets closer.
Regards,
Trond
I really should be selling Elan calls here, as they also have gone up quite nicely, recently, but I think it will hold $8 and the $9s do not have enough premium yet.
The Port now stands at $134,743, with $2,538 in cash. That gives me an annualized return of 18.1%.
I bought ARNA in both my IRA and my brokerage accounts today; the low $3s are a very good entry point. Honestly, the brokerage shares will probably be sold on any kind of bump, but the IRA shares are longer term; the FDA date is 10/22/10 and there should be some appreciation as that date gets closer.
Regards,
Trond
Thursday, April 8, 2010
Port 24 update and other news
First some news ...
I have not decided exactly how or when, but I am going to switch out my Port24 (fake money, albeit serious thought) holdings for one of my real life IRAs. It is getting to be too much of a headache to actually manage another portfolio that does not immediately affect my new worth.
This is sad for one specific reason: this was the one portfolio where I tried to focus as exclusively on covered calls as possible. I see that as "safe", even with the priority on pre-earnings biotechs. On the plus side, you'll get to see exactly how I think and react on stocks I own and am thinking about. I do not think I will go to the lengths of posting every move before actually trading; it is my real money and sometimes I will want to make the trade ASAP. I will think more about this over a few weeks and let you know. Feedback is ALWAYS welcome.
Dendreon announced another BIG hiring this morning. Varun Nanda has joined the management team as SVP of Global Commercial Operations. Mr. Nanda comes from Roche/Genentech, where he brought Avastin into commercialization.
I do not see a Rest Of World partnership for Dendreon anymore... with Mr. Nanda and Hans Bishop on board they look ready to market Provenge themselves, worldwide. May 1, and probable Provenge approval, is less than a month away!
Port24:
A fair amount of movement this morning!
I sold 1500 ALTH ($$8.36) and 1000 MELA ($7.32), while buying 500 more Dendreon ($39.11), 7000 PZG ($1.44), and 3500 VICL ($3.45). I sold 29 $5 Jul calls against ARNA, and 5 Apr $40s against the DNDN.
Allos had a nice couple days this week, adding almost $1. It is time to take the gains. I *think* they will have great news in Q2, from an ongoing trial, but in biotech, you take some off the table when you get some gains. I had bought these at $6.68 in October 2009, and sold some calls against them, so I definitely had a winner here.
MELA is the opposite, although I sold so many calls that the loss is not as bad. The FDA delayed their application by 180 days recently, and it fell 20%. I may just get back in, later, but I see this as "dead money" for 3 months.
The 500 Dendreon is just a 8 day play for the almost 3% of option premium. I'd LOVE for Dendreon to close on 4/16 under $40 so I can keep the shares, though!
ARNA will have it's FDA PDUFA date on October 22. The July calls net me a little premium (6% for less than 4 months) while I wait. And heck, with the stock at $3.16, if I "lose" them at $5 I will not be crying!
The two new buys are VICL and PZG.
PZG (Paramount Mining) is a black sheep here, being neither a biotech, nor optionable. A gold exploration company, it is strictly a 2-5 month buy for straight-up capital appreciation. I will talk about this one more later, suffice it to say I have some in my real money IRA as well.
VICL (Vical) has a great pipeline and should have some news in the summer/fall that will allow me to sell some $5 or even $7.50 calls later in the year for some juicy premiums.
That makes the Port now worth $130,206, or a 30% return. Annualized, it is only 15.9%, well shy of my target. On the plus side, the S&P and Nasdaq indices have annualized returns over the same period of -6.75% and 9.5% respectively, so I am beating them. In a month and a week, the Port turns 2!
Regards,
Trond
I have not decided exactly how or when, but I am going to switch out my Port24 (fake money, albeit serious thought) holdings for one of my real life IRAs. It is getting to be too much of a headache to actually manage another portfolio that does not immediately affect my new worth.
This is sad for one specific reason: this was the one portfolio where I tried to focus as exclusively on covered calls as possible. I see that as "safe", even with the priority on pre-earnings biotechs. On the plus side, you'll get to see exactly how I think and react on stocks I own and am thinking about. I do not think I will go to the lengths of posting every move before actually trading; it is my real money and sometimes I will want to make the trade ASAP. I will think more about this over a few weeks and let you know. Feedback is ALWAYS welcome.
Dendreon announced another BIG hiring this morning. Varun Nanda has joined the management team as SVP of Global Commercial Operations. Mr. Nanda comes from Roche/Genentech, where he brought Avastin into commercialization.
I do not see a Rest Of World partnership for Dendreon anymore... with Mr. Nanda and Hans Bishop on board they look ready to market Provenge themselves, worldwide. May 1, and probable Provenge approval, is less than a month away!
Port24:
A fair amount of movement this morning!
I sold 1500 ALTH ($$8.36) and 1000 MELA ($7.32), while buying 500 more Dendreon ($39.11), 7000 PZG ($1.44), and 3500 VICL ($3.45). I sold 29 $5 Jul calls against ARNA, and 5 Apr $40s against the DNDN.
Allos had a nice couple days this week, adding almost $1. It is time to take the gains. I *think* they will have great news in Q2, from an ongoing trial, but in biotech, you take some off the table when you get some gains. I had bought these at $6.68 in October 2009, and sold some calls against them, so I definitely had a winner here.
MELA is the opposite, although I sold so many calls that the loss is not as bad. The FDA delayed their application by 180 days recently, and it fell 20%. I may just get back in, later, but I see this as "dead money" for 3 months.
The 500 Dendreon is just a 8 day play for the almost 3% of option premium. I'd LOVE for Dendreon to close on 4/16 under $40 so I can keep the shares, though!
ARNA will have it's FDA PDUFA date on October 22. The July calls net me a little premium (6% for less than 4 months) while I wait. And heck, with the stock at $3.16, if I "lose" them at $5 I will not be crying!
The two new buys are VICL and PZG.
PZG (Paramount Mining) is a black sheep here, being neither a biotech, nor optionable. A gold exploration company, it is strictly a 2-5 month buy for straight-up capital appreciation. I will talk about this one more later, suffice it to say I have some in my real money IRA as well.
VICL (Vical) has a great pipeline and should have some news in the summer/fall that will allow me to sell some $5 or even $7.50 calls later in the year for some juicy premiums.
That makes the Port now worth $130,206, or a 30% return. Annualized, it is only 15.9%, well shy of my target. On the plus side, the S&P and Nasdaq indices have annualized returns over the same period of -6.75% and 9.5% respectively, so I am beating them. In a month and a week, the Port turns 2!
Regards,
Trond
Tuesday, March 23, 2010
Port Update
Sold the 4000 GNVC, as planned yesterday, and at $2.88. It is higher today, and it killed me to do it, but I really do want stocks that can have calls sold against them, in the Port. I mostly want to make money here, so if I see something enticing enough, I will buy non-optionable stocks, but the ground rules are there for a reason!
I looked at the other holdings of the Port this morning and nothing appeals to me in terms of selling calls. I have a bunch of cash, and Oncothyreon (ONTY) happens to be a watchlist stock that had bad news this morning. I bought 3,000 shares at $3.41 (and 1k in my real-world IRA at $3.45, earlier) - I'll let the share price shake out a little and then sell calls against them.
So now the Port is comprised of
2000 AOB
2000 NBIX
1600 ELN
400 DNDN
4900 ARNA
2500 SGMO
1000 MELA
200 AMAG
1500 ALTH
3000 ONTY
with $21,585 of cash.
I'm at a 30.8% return in nearly two years, a 16.6% annualized rate. The S&P 500 over that time has returned -7.3% and the Nasdaq has returned 9.3%.
Regards,
Trond
I looked at the other holdings of the Port this morning and nothing appeals to me in terms of selling calls. I have a bunch of cash, and Oncothyreon (ONTY) happens to be a watchlist stock that had bad news this morning. I bought 3,000 shares at $3.41 (and 1k in my real-world IRA at $3.45, earlier) - I'll let the share price shake out a little and then sell calls against them.
So now the Port is comprised of
2000 AOB
2000 NBIX
1600 ELN
400 DNDN
4900 ARNA
2500 SGMO
1000 MELA
200 AMAG
1500 ALTH
3000 ONTY
with $21,585 of cash.
I'm at a 30.8% return in nearly two years, a 16.6% annualized rate. The S&P 500 over that time has returned -7.3% and the Nasdaq has returned 9.3%.
Regards,
Trond
Sunday, March 21, 2010
Port update - options expiration
Quick summary of the Port, along with GenVec update:
On Friday, the Port had all 2000 ProGenics (PGNX) called away at $5, and the Elan calls expired worthless, allowing me to keep the premium and the shares. We're back to above 17% annualized return, still well shy of the 24 I am aiming for. I still feel it is doable, if I just put some time back into this Port. I have only been selling calls on 1 to 3 holdings a month, where I should be turning 100% of the holdings. I'll be selling the Genvec this coming week, since it does not offer options and I'm up over 10% already, having been in it for only a month. Time to take that profit and buy something I can sell calls against!
GenVec should be announcing the interim PACT trial results within 4 weeks now. On January 15th they said 10 to 12 weeks, and Friday 3/19/10 was exactly 9 weeks. While they may announce this coming week, both their annual earnings call and the recent Roth presentation suggested it could spill over into April so I would put more faith into it happening right around the first week of April.
In my real money IRA, I have an insane amount tied up in both Dendreon and Genvec - something like 85% of the total value. It has served me well, as the majority of Dendreon was bought under $6 (now $35) and my Genvec average basis is around $1.25 (now $2.80). I am however, finally at the point where I'll be selling at least a third of my GNVC over the next week or so, and may even dent my DNDN by 10% or so. I am far more confident that Dendreon will get approval, but at this price (mid 30s) I just do not see the return that I saw at the mid $20s we were at only a couple months ago. Genvec, at a little below $3, is also a MUCH different creature risk/return wise, than it was at the $0.77 I started buying at. The upcoming data release is a short term make-or-break event; it could go down (I honestly don't see it going below $1.50) on so-so data, but it could spike as much as another $7-10 on statistically significant data. There is a "reasonable" chance of stat-sig results - say 20-30% - but I am not risking 40+% of my net worth on a 20-30% chance of a home run. Please note that everyone's personal sense of risk vs. reward is vastly different - I AM in effect saying I'm okay with risking ~25% of my net worth!
This is because I already have a two bagger on Genvec - the most likely worse case scenario brings me back to a only slight average gain. I contrast this to the results, if excellent, and it makes sense for me to hold about 2/3 of what I have now, through the data release. For someone buying in now, it would be a greatly different risk/reward calculation.
Please also note that IF GenVec does drop, it very likely could be because the market is disappointed in the data not being excellent, and NOT because the data is bad. At the 92nd event - the first interim look) the hazard ratio was already .753 - the lower from 1.0 the better. This would have been a very good result, but investors were spooked because at 24 months, there was no apparent drug benefit. Missed was the fact that only three patients were still alive and uncensored, and one of those was in the placebo arm. Thus the placebo curve matched the drug-arm curve. As this interim look, at 184 deaths, most of those censored patients will have died, which will "normalize" the placebo curve and probably lower the hazard ratio even further. ANYTHING that relieves the worry about the 24 month death rate and shows improving hazard ratio beyond the .753 already seen, will vastly increase the chances of statistical significance at the final trial calculation. If the data is like this, but Mr. Market is disappointed, this could be the buy of a lifetime - with only a 18-24 month holding period until fruition. Heck - I went through this with Dendreon already from 2007 - 2009, and was rewarded with a $4 stock going to $25 (and currently $35, with a probable $40-45 in May).
Next post: more buy candidates, with the cash I now have in hand!
Regards,
Trond
On Friday, the Port had all 2000 ProGenics (PGNX) called away at $5, and the Elan calls expired worthless, allowing me to keep the premium and the shares. We're back to above 17% annualized return, still well shy of the 24 I am aiming for. I still feel it is doable, if I just put some time back into this Port. I have only been selling calls on 1 to 3 holdings a month, where I should be turning 100% of the holdings. I'll be selling the Genvec this coming week, since it does not offer options and I'm up over 10% already, having been in it for only a month. Time to take that profit and buy something I can sell calls against!
GenVec should be announcing the interim PACT trial results within 4 weeks now. On January 15th they said 10 to 12 weeks, and Friday 3/19/10 was exactly 9 weeks. While they may announce this coming week, both their annual earnings call and the recent Roth presentation suggested it could spill over into April so I would put more faith into it happening right around the first week of April.
In my real money IRA, I have an insane amount tied up in both Dendreon and Genvec - something like 85% of the total value. It has served me well, as the majority of Dendreon was bought under $6 (now $35) and my Genvec average basis is around $1.25 (now $2.80). I am however, finally at the point where I'll be selling at least a third of my GNVC over the next week or so, and may even dent my DNDN by 10% or so. I am far more confident that Dendreon will get approval, but at this price (mid 30s) I just do not see the return that I saw at the mid $20s we were at only a couple months ago. Genvec, at a little below $3, is also a MUCH different creature risk/return wise, than it was at the $0.77 I started buying at. The upcoming data release is a short term make-or-break event; it could go down (I honestly don't see it going below $1.50) on so-so data, but it could spike as much as another $7-10 on statistically significant data. There is a "reasonable" chance of stat-sig results - say 20-30% - but I am not risking 40+% of my net worth on a 20-30% chance of a home run. Please note that everyone's personal sense of risk vs. reward is vastly different - I AM in effect saying I'm okay with risking ~25% of my net worth!
This is because I already have a two bagger on Genvec - the most likely worse case scenario brings me back to a only slight average gain. I contrast this to the results, if excellent, and it makes sense for me to hold about 2/3 of what I have now, through the data release. For someone buying in now, it would be a greatly different risk/reward calculation.
Please also note that IF GenVec does drop, it very likely could be because the market is disappointed in the data not being excellent, and NOT because the data is bad. At the 92nd event - the first interim look) the hazard ratio was already .753 - the lower from 1.0 the better. This would have been a very good result, but investors were spooked because at 24 months, there was no apparent drug benefit. Missed was the fact that only three patients were still alive and uncensored, and one of those was in the placebo arm. Thus the placebo curve matched the drug-arm curve. As this interim look, at 184 deaths, most of those censored patients will have died, which will "normalize" the placebo curve and probably lower the hazard ratio even further. ANYTHING that relieves the worry about the 24 month death rate and shows improving hazard ratio beyond the .753 already seen, will vastly increase the chances of statistical significance at the final trial calculation. If the data is like this, but Mr. Market is disappointed, this could be the buy of a lifetime - with only a 18-24 month holding period until fruition. Heck - I went through this with Dendreon already from 2007 - 2009, and was rewarded with a $4 stock going to $25 (and currently $35, with a probable $40-45 in May).
Next post: more buy candidates, with the cash I now have in hand!
Regards,
Trond
Tuesday, February 23, 2010
Port 24
Well, I'm back to my old bad habits, and only posting about the Port. I do have a writeup from the Dendreon conference call last night, that I will post tomorrow.
Portfolio 24
300 Dendreon and 1000 RMTI were called away from me last Friday. I bought 4000 GNVC today, at $2.42. Cash on hand now $10,058, and the Port is worth 125,144.
I am now as excited about GenVec as I was about Dendreon. In my real life IRA, I am about 50/50 in these two, with just a few others in small amounts. Both will have large events in the next 5 to 9 weeks.
GNVC may not, and probably will not, have a statistically significant result from the upcoming interim look. However, it should let us see how it will pan out. Having an entry even here in the $2s will look really good in 2 years, if you have that kind of a time horizon. I'm going to go out on a limb here and say that before results are announced, we'll see $3.25 or $3.50 in this stock, giving you a 33 to 50% return in a month. I bought 1000 shares in my Roth today, in fact, at $2.41, with such an aim in mind.
Regards,
Trond
Portfolio 24
300 Dendreon and 1000 RMTI were called away from me last Friday. I bought 4000 GNVC today, at $2.42. Cash on hand now $10,058, and the Port is worth 125,144.
I am now as excited about GenVec as I was about Dendreon. In my real life IRA, I am about 50/50 in these two, with just a few others in small amounts. Both will have large events in the next 5 to 9 weeks.
GNVC may not, and probably will not, have a statistically significant result from the upcoming interim look. However, it should let us see how it will pan out. Having an entry even here in the $2s will look really good in 2 years, if you have that kind of a time horizon. I'm going to go out on a limb here and say that before results are announced, we'll see $3.25 or $3.50 in this stock, giving you a 33 to 50% return in a month. I bought 1000 shares in my Roth today, in fact, at $2.41, with such an aim in mind.
Regards,
Trond
Tuesday, January 19, 2010
Port 24 and assorted biotech news
Port 24 update:
The only January options I had sold were 10 MELA $10 calls, and they were exercised, with the stock at $11.05 last Friday.
With that cash, I bought 300 more Dendreon shares today, and sold 3 Feb $32 calls against them for $0.89 per share.
I am living by my resolution to be a little more active in the Port! I also sold the following calls today:
16 ELN March $9s for $0.30
15 SGMO Feb $7.50s for $0.25
10 MELA Feb $12.50s for $0.20
2 AMAG Feb $55s for $0.50
I almost sold calls against ALTH - but I feel there is a little more room beneath the stock before selling calls. AOB needs to climb closer to $5 to make it worth selling calls, and NBIX at $2.50 is not satisfactory to sell the $2.50s, and the $5s are not worth anything yet.
The Port 24 thus has the following stocks (covered calls in parentheses)
1500 ALTH
200 AMAG (2)
2000 AOB
4900 ARNA (24)
700 DNDN (3)
1600 ELN (16)
1000 MELA (10)
2000 NBIX
2000 PGNX (20)
1000 RMTI (10)
2500 SGMO (15)
.. with cash of $2,680. This gives me a port value of about $132,500 and a 19.3% annualized return. I'm getting closer to my 24% return, again!
Stocks:
Genvec released a PR that they have licensed their hearing loss pre-clinical work to Novartis, for $5M plus milestones and royalties. They also hit the 184 death interim trigger in the PACT trial on Friday, and will have data in 10 to 12 weeks. I'm nearly as excited about Genvec as I was about Dendreon, but caution that the risk/reward is much slighter here at $2 than at $0.76 when I first mentioned it here a few months ago. I was still buying in my real-world IRA at $1.70, but am probably done for now.
Dendreon had an interview published in the Xconomy online magazine with the new COO Hans Bishop. It is a MUST READ, here: http://www.xconomy.com/seattle/2010/01/19/dendreons-new-operations-man-hans-bishop-aims-to-keep-provenge-trains-running-on-time/
Sangamo had good results (albeit from one patient, in a Phase I trial) here: http://finance.yahoo.com/news/Sangamo-BioSciences-Announces-prnews-1693198508.html?x=0&.v=1
Regards,
Trond
The only January options I had sold were 10 MELA $10 calls, and they were exercised, with the stock at $11.05 last Friday.
With that cash, I bought 300 more Dendreon shares today, and sold 3 Feb $32 calls against them for $0.89 per share.
I am living by my resolution to be a little more active in the Port! I also sold the following calls today:
16 ELN March $9s for $0.30
15 SGMO Feb $7.50s for $0.25
10 MELA Feb $12.50s for $0.20
2 AMAG Feb $55s for $0.50
I almost sold calls against ALTH - but I feel there is a little more room beneath the stock before selling calls. AOB needs to climb closer to $5 to make it worth selling calls, and NBIX at $2.50 is not satisfactory to sell the $2.50s, and the $5s are not worth anything yet.
The Port 24 thus has the following stocks (covered calls in parentheses)
1500 ALTH
200 AMAG (2)
2000 AOB
4900 ARNA (24)
700 DNDN (3)
1600 ELN (16)
1000 MELA (10)
2000 NBIX
2000 PGNX (20)
1000 RMTI (10)
2500 SGMO (15)
.. with cash of $2,680. This gives me a port value of about $132,500 and a 19.3% annualized return. I'm getting closer to my 24% return, again!
Stocks:
Genvec released a PR that they have licensed their hearing loss pre-clinical work to Novartis, for $5M plus milestones and royalties. They also hit the 184 death interim trigger in the PACT trial on Friday, and will have data in 10 to 12 weeks. I'm nearly as excited about Genvec as I was about Dendreon, but caution that the risk/reward is much slighter here at $2 than at $0.76 when I first mentioned it here a few months ago. I was still buying in my real-world IRA at $1.70, but am probably done for now.
Dendreon had an interview published in the Xconomy online magazine with the new COO Hans Bishop. It is a MUST READ, here: http://www.xconomy.com/seattle/2010/01/19/dendreons-new-operations-man-hans-bishop-aims-to-keep-provenge-trains-running-on-time/
Sangamo had good results (albeit from one patient, in a Phase I trial) here: http://finance.yahoo.com/news/Sangamo-BioSciences-Announces-prnews-1693198508.html?x=0&.v=1
Regards,
Trond
Thursday, January 7, 2010
Port 24 update, Dendreon, and GenVec
I neglected to mention yesterday that I bought 1000 shares of Rockwell Medical Technologies (RMTI) at $7.73 in the Port24. I turned and sold February $7.50 calls for $0.85 each.
I wanted to clarify in my end-of-year post that although my annualized rate of return in the Port24 is only 13%, the gross return was about 25% - we've gone from $100,000 to $125K in 19 months. I took the time to see what benchmarks might be like: the S&P in the same time frame had a -10.5% annualized return (including dividends) and the Nasdaq was 8.1%.
GenVec and Dendreon both received an opening nod and a "buy" recommendation from Roth Capital Partners this morning. Further upgrades will probably be coming shortly.
GenVec in particular is nice to see at $1.60+ this morning as it officially constitutes a double from my initial rec back in October ($0.76 was my first buy in my real-world IRA). For the record, I was still buying yesterday at $1.37. With the rise and my further buys, it is now actually my second largest holding (after Dendreon) and at this rate might be the largest in a couple days... :-)
Regards,
Trond
I wanted to clarify in my end-of-year post that although my annualized rate of return in the Port24 is only 13%, the gross return was about 25% - we've gone from $100,000 to $125K in 19 months. I took the time to see what benchmarks might be like: the S&P in the same time frame had a -10.5% annualized return (including dividends) and the Nasdaq was 8.1%.
GenVec and Dendreon both received an opening nod and a "buy" recommendation from Roth Capital Partners this morning. Further upgrades will probably be coming shortly.
GenVec in particular is nice to see at $1.60+ this morning as it officially constitutes a double from my initial rec back in October ($0.76 was my first buy in my real-world IRA). For the record, I was still buying yesterday at $1.37. With the rise and my further buys, it is now actually my second largest holding (after Dendreon) and at this rate might be the largest in a couple days... :-)
Regards,
Trond
Wednesday, January 6, 2010
Stock market vs. the economy
It used to be that if the economic climate was good, the stock market would do well also. Conversely, with the release of bad economic data, the market would have a "correction".
I believe that the correlation between the two is much weaker now. I think there are two main reasons why this is so.
More money
There is simply too much money sloshing around the system right now. The advent on 401(k) plans and discount brokerages in the last 20 years has meant an explosion in the amount of money being invested. Something like 40% of workers now have some sort of directed stake in the market - where it used to be around 6%. Add to that the burgeoning number of private and even sovereign equity funds...
That money has to find a home. With more money chasing stocks, the general price level will rise, even with no rise in the value of the underlying companies.
Trading mentality
I am not talking day trading here! But the automated rebalancing of 401(k) plans, ETFs that get moved around every day, a general populace that is more comfortable staying in stocks during "bad" times, and a growing number of individual investors who arewilling to buy dips in the market, all contribute to flattening out some of the more violent swings we have seen previously.
Are there any lessons here? Perhaps not - just a general reminder that over the last 10 months as the market has gone up, please understand that the economy itself may not follow suit immediately. Make sure you rebalance, if that is your choice, as your allocations have certainly swung dramatically from a year ago. Do you have an emergency fund? Are you pre-paying your mortgage? Paying more than the minimum on your credit cards?
I am not convinced that the "green shoots" will truly take root in 2010. Please make sure your family is living below your means, saving (and investing) money, and adequately insured.
Regards,
Trond
I believe that the correlation between the two is much weaker now. I think there are two main reasons why this is so.
More money
There is simply too much money sloshing around the system right now. The advent on 401(k) plans and discount brokerages in the last 20 years has meant an explosion in the amount of money being invested. Something like 40% of workers now have some sort of directed stake in the market - where it used to be around 6%. Add to that the burgeoning number of private and even sovereign equity funds...
That money has to find a home. With more money chasing stocks, the general price level will rise, even with no rise in the value of the underlying companies.
Trading mentality
I am not talking day trading here! But the automated rebalancing of 401(k) plans, ETFs that get moved around every day, a general populace that is more comfortable staying in stocks during "bad" times, and a growing number of individual investors who arewilling to buy dips in the market, all contribute to flattening out some of the more violent swings we have seen previously.
Are there any lessons here? Perhaps not - just a general reminder that over the last 10 months as the market has gone up, please understand that the economy itself may not follow suit immediately. Make sure you rebalance, if that is your choice, as your allocations have certainly swung dramatically from a year ago. Do you have an emergency fund? Are you pre-paying your mortgage? Paying more than the minimum on your credit cards?
I am not convinced that the "green shoots" will truly take root in 2010. Please make sure your family is living below your means, saving (and investing) money, and adequately insured.
Regards,
Trond
Wednesday, December 30, 2009
Happy New Year
Thanks to all who read this - I have not been good about keeping up posting, or even the Port 24. I shall strive to do better in the new year, as I want to bring my returns back up to the 24% level.
I am closing out the year with a few calls being sold in the Port. 24 Arena Feb $4s, 10 Electro-Optical Jan $10s, and 20 Progenics Feb $5s ... all with a monthly return of about 4%.
I will be ending 2009 with an annualized rate of return of about 13% - good, but far short of my target. I do take comfort in the fact that I ignored the Port for long stretches of time and would have made a few more percentage points on the calls I neglected to sell.
My worst move this year was to not sell ARNA on the spikes. That cost me around $20,000. Of course I would not have sold at exactly the high point, but I really should have lightened up. On the plus side, I did exactly that with BioCryst - buying low, selling high, and selling a lot of calls in the interim. Dendreon was the clear winner this year - going from around $5 to the current $26.
Next year should see Dendreon achieve FDA approval for Provenge, Electro-Optical gain approval for MelaFund, partnerships for Arena and Neurocrine, and significant appreciation for Elan, Amag, and Allos. I find myself hoping that GenVec starts trading options as I would love to have some GNVC in the Port.
May everyone have a fun and safe New Year!
Regards,
Trond
I am closing out the year with a few calls being sold in the Port. 24 Arena Feb $4s, 10 Electro-Optical Jan $10s, and 20 Progenics Feb $5s ... all with a monthly return of about 4%.
I will be ending 2009 with an annualized rate of return of about 13% - good, but far short of my target. I do take comfort in the fact that I ignored the Port for long stretches of time and would have made a few more percentage points on the calls I neglected to sell.
My worst move this year was to not sell ARNA on the spikes. That cost me around $20,000. Of course I would not have sold at exactly the high point, but I really should have lightened up. On the plus side, I did exactly that with BioCryst - buying low, selling high, and selling a lot of calls in the interim. Dendreon was the clear winner this year - going from around $5 to the current $26.
Next year should see Dendreon achieve FDA approval for Provenge, Electro-Optical gain approval for MelaFund, partnerships for Arena and Neurocrine, and significant appreciation for Elan, Amag, and Allos. I find myself hoping that GenVec starts trading options as I would love to have some GNVC in the Port.
May everyone have a fun and safe New Year!
Regards,
Trond
Monday, November 9, 2009
Biotech trees and investment forests
FezHenry has a very interesting comment about my last post (valuing biotechs). I like (and agree with) several of his points - I have taken the liberty of copying the majority of it below, as I want to highlight the parts I agree with, and show why I think differently on others.
>>Thank you for taking the time to post such an in-depth response. The reason why I asked initially is because all of those biotech stocks you've mentioned have had zero positive free cash flow over the past ten years. This rate of cash burn has always been a reason why I have never personally invested in bio-tech's, because in my opinion, the majority of them just end up as giant cash-sucking research machines in the long run.
Yes, that giant sucking sound was not just jobs moving to Mexico - it is also biotechs (and nearly all early corporations) siphoning cash out of investors and giving them back lottery tickets. And you know what typically happens with lotteries...
I like how you've analyzed these stocks in such great detail, and you've obviously done some interesting modeling as well, but I'm somewhat concerned that you may be missing the investment forest for the bio-tech tree. For a company to be a proper investment, it needs to be able to generate more than just positive earnings...it has to be able to generate free cash flow.
Free cash flow (FCF) - or ANY kind of cash flow - is an attribute of a good company. And I agree FCF is something a typical investor will be looking for. Let's explore WHY that is.
Once a company is making more than it spends, on a real earnings basis, there are typically four things they can do with it. They can (i) pay a dividend (ii) retain earnings and reinvest in the company (usually better equipment to manufacture more quickly or more cheaply), (iii) reinvest in R&D for new or better products) or (iv) acquire other companies, with which they hope to make more or better products than it costs to acquire them.
But please note something about these choices:
Option i is perhaps the best from the investor's point of view (I can certainly spend extra money better than my favorite company can!) but note that the company then does not grow.
Option ii is wonderful up to a point, but you can make only so many widgets at a lesser price that people are willing to buy at any price.
Options iii and iv act just like what the company did when they themselves were the ones raising capital, through issuing more shares or debt. The difference of course is that they can pay for it as a going concern, but a couple products that don't make it from the lab to the shelf, or bad acquisitions, and that money is still sucked away.
My point is NOT to slam products, or making money via them. It is that companies making these profits will eventually have to revisit risk and invention. They have a far firmer foothold than pre-earnings corporations, but still have to allocate their capital in an intelligent way.
I think you may need to pay more heed towards how these companies are financing their revenues, and the impact on their profitability in the long term, otherwise you are just gambling that one of them will discover the next big thing.
Ah, but here's the thing. Even the next big thing is not a guarantee of a great company that is a good investment.
As example #1, I will pick on Tivo. I had a roommate who literally was probably one of the first 100 people to buy one. And the next day, he went and bought another (the larger storage one) for a second room. He LOVED A-V equipment and was a technophile. And he was right - everyone loved it. The problem is that the company made some poor choices with marketing and has been a dog for several years. Someone who waited for the sales to begin, measured them for a few quarters, projected them into the future, and was finally confident enough to buy, was the person who finally capitulated several years later for a loss.
Example #2 will be your choice of the financials over 2006 and 2007. Maybe Bear Stearns? Profitability up the yin-yang, darling of Wall Street, sweet credit ratings, and at the height amazing earnings that were projected to increase at astronomical multiples. Even though they did not make widgets, making deals can be just as profitable. But we all know how that ended up.
I am NOT dissing a company making actual profits. Many companies make great marketing decisions, and do not go charging into bubbles, as these two examples show. But simply having real FCF is not the only answer either.
I hope you don't think that I'm trying to rain on your parade, so to speak. I know that you have superior analytical skills from working with you @ CNB all of those years, but I just think you need to maybe take more of a fundamental view on some of these companies so you can properly estimate your risk. From a fundamental perspective, I personally wouldn't invest in any of these companies until they can at the very least, generate positive free cash flow and be able to stand on their own without financing their operations via shareholder dilution, or excessive leveraging...
Pre-earnings biotechs, as a category, are far riskier, as FezHenry notes, because to raise the funds necessary to maintain operation, they have to leverage debt, or sell more shares.
Note that I do not worry too much about the dilutative nature of issuing more shares (to a point!) - I may own 1.05 millionth of a company instead of 1 millionth but those existing shares then have $0.00001 more cash per share. And if I trust management enough to use that cash, I do not care if they raised it in a secondary or by achieving FCF.
Now here is the real difference, I believe, in the investing styles. I view fundamentals as more than just the metrics of cash per share, earnings per share, current ratios, and debt/equity. To me the fundamentals are "is what the company is doing, advancing its potential?" and "do I trust the management?"
... but I follow Warren Buffett's first two rules of investing:
1. Never lose money.
2. Never forget rule #1.
I think FezHenry and I are actually closer to each other than apart. I am a huge Buffett fan (I just finished Alice Schroeder's Snowball: Warren Buffett and the Business of Life and it is a fantastic telling of Buffett's life) but what you actually get out of it is that Buffett the investor is inhuman. I do not have the investing resources nor the time horizon of Buffett the investor. He can buy entire companies which gives him pricing power. He can sit on Coca Cola for 30 years. I freely admit I cannot.
But - there are a couple things I like to emulate him on. You do your research (due diligence), you talk to people, you fanatically find out every scrap of information you can, and when you get your fat pitch, you buy. Buffet talks of a punch card where you only make 20 investing decisions over your whole life. If you use 1/20 of your lifetime buys on Sangamo, you will want to make sure it is a great opportunity.
The other quality I have learned from Buffett, through Ben Graham, is that Mr. Market truly is insane. You can buy the same company for $20 a share one day and for $19 a share the next day. It is NOT 95% as good a company the second day, it is simply a function of fear, greed, reaction, hope, and maybe a little bit of the weather in New York. So if after my research I am in a company and I am convinced it is overvalued for the moment, I can sell some of my position without freaking out that I am breaking "Buffett's rules". The key for me from this second point is that you enter a position into a company you like with a core position, and can also trade around that position.
Please check out this post for an idea of what I am speaking of: http://www.fwallstreet.com/blog/31.htm
Done! And a good example of what you are leery of. However, I will point out that as a company, it may not be making money, but some investors had an amazing ride. Investing is a zero sum game - every share that gets bought means someone else has sold. The company really isn't more or less valuable - it is simply the relative pressure of the fear versus the greed.
I hope I haven't gone down too many rabbit holes and you are still with me. To close, my argument really boils down to my biotechs simply haven't started selling products yet. Once they do, the metrics you want to use (fundamentals) will either bear out the story, or they won't. You have different information available to you with the Buffetesque companies you choose to follow - actual sales information. I have to model out the potential sales before they happen with the companies I choose to follow. I do have to make the leap of faith that I have the next best thing, but you are making the implicit leap of faith that your competitors won't come out with the next, next, best thing.
As always, thanks for the thought provoking comments.
Regards,
Trond
>>Thank you for taking the time to post such an in-depth response. The reason why I asked initially is because all of those biotech stocks you've mentioned have had zero positive free cash flow over the past ten years. This rate of cash burn has always been a reason why I have never personally invested in bio-tech's, because in my opinion, the majority of them just end up as giant cash-sucking research machines in the long run.
Yes, that giant sucking sound was not just jobs moving to Mexico - it is also biotechs (and nearly all early corporations) siphoning cash out of investors and giving them back lottery tickets. And you know what typically happens with lotteries...
I like how you've analyzed these stocks in such great detail, and you've obviously done some interesting modeling as well, but I'm somewhat concerned that you may be missing the investment forest for the bio-tech tree. For a company to be a proper investment, it needs to be able to generate more than just positive earnings...it has to be able to generate free cash flow.
Free cash flow (FCF) - or ANY kind of cash flow - is an attribute of a good company. And I agree FCF is something a typical investor will be looking for. Let's explore WHY that is.
Once a company is making more than it spends, on a real earnings basis, there are typically four things they can do with it. They can (i) pay a dividend (ii) retain earnings and reinvest in the company (usually better equipment to manufacture more quickly or more cheaply), (iii) reinvest in R&D for new or better products) or (iv) acquire other companies, with which they hope to make more or better products than it costs to acquire them.
But please note something about these choices:
Option i is perhaps the best from the investor's point of view (I can certainly spend extra money better than my favorite company can!) but note that the company then does not grow.
Option ii is wonderful up to a point, but you can make only so many widgets at a lesser price that people are willing to buy at any price.
Options iii and iv act just like what the company did when they themselves were the ones raising capital, through issuing more shares or debt. The difference of course is that they can pay for it as a going concern, but a couple products that don't make it from the lab to the shelf, or bad acquisitions, and that money is still sucked away.
My point is NOT to slam products, or making money via them. It is that companies making these profits will eventually have to revisit risk and invention. They have a far firmer foothold than pre-earnings corporations, but still have to allocate their capital in an intelligent way.
I think you may need to pay more heed towards how these companies are financing their revenues, and the impact on their profitability in the long term, otherwise you are just gambling that one of them will discover the next big thing.
Ah, but here's the thing. Even the next big thing is not a guarantee of a great company that is a good investment.
As example #1, I will pick on Tivo. I had a roommate who literally was probably one of the first 100 people to buy one. And the next day, he went and bought another (the larger storage one) for a second room. He LOVED A-V equipment and was a technophile. And he was right - everyone loved it. The problem is that the company made some poor choices with marketing and has been a dog for several years. Someone who waited for the sales to begin, measured them for a few quarters, projected them into the future, and was finally confident enough to buy, was the person who finally capitulated several years later for a loss.
Example #2 will be your choice of the financials over 2006 and 2007. Maybe Bear Stearns? Profitability up the yin-yang, darling of Wall Street, sweet credit ratings, and at the height amazing earnings that were projected to increase at astronomical multiples. Even though they did not make widgets, making deals can be just as profitable. But we all know how that ended up.
I am NOT dissing a company making actual profits. Many companies make great marketing decisions, and do not go charging into bubbles, as these two examples show. But simply having real FCF is not the only answer either.
I hope you don't think that I'm trying to rain on your parade, so to speak. I know that you have superior analytical skills from working with you @ CNB all of those years, but I just think you need to maybe take more of a fundamental view on some of these companies so you can properly estimate your risk. From a fundamental perspective, I personally wouldn't invest in any of these companies until they can at the very least, generate positive free cash flow and be able to stand on their own without financing their operations via shareholder dilution, or excessive leveraging...
Pre-earnings biotechs, as a category, are far riskier, as FezHenry notes, because to raise the funds necessary to maintain operation, they have to leverage debt, or sell more shares.
Note that I do not worry too much about the dilutative nature of issuing more shares (to a point!) - I may own 1.05 millionth of a company instead of 1 millionth but those existing shares then have $0.00001 more cash per share. And if I trust management enough to use that cash, I do not care if they raised it in a secondary or by achieving FCF.
Now here is the real difference, I believe, in the investing styles. I view fundamentals as more than just the metrics of cash per share, earnings per share, current ratios, and debt/equity. To me the fundamentals are "is what the company is doing, advancing its potential?" and "do I trust the management?"
... but I follow Warren Buffett's first two rules of investing:
1. Never lose money.
2. Never forget rule #1.
I think FezHenry and I are actually closer to each other than apart. I am a huge Buffett fan (I just finished Alice Schroeder's Snowball: Warren Buffett and the Business of Life and it is a fantastic telling of Buffett's life) but what you actually get out of it is that Buffett the investor is inhuman. I do not have the investing resources nor the time horizon of Buffett the investor. He can buy entire companies which gives him pricing power. He can sit on Coca Cola for 30 years. I freely admit I cannot.
But - there are a couple things I like to emulate him on. You do your research (due diligence), you talk to people, you fanatically find out every scrap of information you can, and when you get your fat pitch, you buy. Buffet talks of a punch card where you only make 20 investing decisions over your whole life. If you use 1/20 of your lifetime buys on Sangamo, you will want to make sure it is a great opportunity.
The other quality I have learned from Buffett, through Ben Graham, is that Mr. Market truly is insane. You can buy the same company for $20 a share one day and for $19 a share the next day. It is NOT 95% as good a company the second day, it is simply a function of fear, greed, reaction, hope, and maybe a little bit of the weather in New York. So if after my research I am in a company and I am convinced it is overvalued for the moment, I can sell some of my position without freaking out that I am breaking "Buffett's rules". The key for me from this second point is that you enter a position into a company you like with a core position, and can also trade around that position.
Please check out this post for an idea of what I am speaking of: http://www.fwallstreet.com/blog/31.htm
Done! And a good example of what you are leery of. However, I will point out that as a company, it may not be making money, but some investors had an amazing ride. Investing is a zero sum game - every share that gets bought means someone else has sold. The company really isn't more or less valuable - it is simply the relative pressure of the fear versus the greed.
I hope I haven't gone down too many rabbit holes and you are still with me. To close, my argument really boils down to my biotechs simply haven't started selling products yet. Once they do, the metrics you want to use (fundamentals) will either bear out the story, or they won't. You have different information available to you with the Buffetesque companies you choose to follow - actual sales information. I have to model out the potential sales before they happen with the companies I choose to follow. I do have to make the leap of faith that I have the next best thing, but you are making the implicit leap of faith that your competitors won't come out with the next, next, best thing.
As always, thanks for the thought provoking comments.
Regards,
Trond
Thursday, November 5, 2009
Valuing biotechs
FezHenry asks how I come up with the valuations for the biotechs I suggested. That is a fair question, and not an easy one to answer.
When you have companies that make products, have revenue, and (gasp) actual profits, then the task can be a bit easier. There are a number of metrics such as price-to-earnings (P/E), or price-to-sales, that you can use to compare a company against another within the industry and see which is a better deal. I am suspicious of these metrics, by the way, on the whole, because earnings are massaged quite a bit, and even sales can be "managed" from quarter to quarter. But at least there are real numbers to work with!
Biotechs that have no products available for sale yet are much trickier. Look at BioCryst (BCRX) which today announced its first order for the IV version of its swine flu drug peramivir. The pricing was MUCH more aggressive than the Street expected and the stock responded with a 15% gain on the day! At this point, forecasting more sales really depends on how much more the government will stockpile, whether doctors start prescribing it off its emergency-use label, if and when the other countries that have negotiated with the company (Israel, China, e.g.) start ordering, and perhaps most immediately important - whether Japan gives its emergency use authorization and they get an order for 500,00 to 1M doses. That would be a $1B order minimum, or $200M at its Shionogi royalty rate - one order alone that is half its market cap! Can you say hello $20s or $30s, from it's $11.39 today? (and yes, I have a little BCRX in my IRA - not a lot but I think this one, too, will do well in the next year)
Back to the actual question though.
Let's take Dendreon for an example, simply because I can do these numbers in my sleep. Provenge is not approved yet, so we have no real metrics. We don't even have a good price point on them - Dr. Gold has stated the one plant they have now, at full capacity, can produce $500M to $1B of sales. It however, is only 25% built out presently... and to complicate matters, they are planning two new plants, each of which will produce 3/4 of the NJ facility.
Now, you probably should also look at the number of patients a year who will get prostate cancer, at the phase at which this will be prescribed (post-androgen therapy) and make an estimate of the market penetration, and then figure the number of patients who actually get the drug multiplied by the cost per treatment. Suffice it to say I believe within 5 years, these three plants will all be at full capacity. (1+3/4+3/4) plants at $500M to $1B gives you a range of revenue of $1.25B to $2.5B ( you can usually also figure in modest price increases per year, but I'm ignoring that, for now). You can use the midpoint, but I like to assume the low point as a reality check. So $1.25B of sales is our first checkpoint.
Now you can apply some other metrics. Five-to-seven times sales is one rule of thumb for projected market cap. So using 5 * 1.25 gives us a $6.25B market cap, 5 years out. Our market cap now is about $3.2B so it's nearly a double - call it $55 from today's $27.78.
But wait!
We now need to discount back to the present, adjusting for risk. I have assumed approval and I have assumed revenues into the future (they will not be making $1.25B next year). At least I assumed the lower levels for the other choices! We can say there is a 10% risk that Provenge is not approved, or has a delay. There may be a 15% discount per year into the future revenue stream. All told that $55 in the future may only be worth $32 or so today. Still a nice 10 to 15% discount to today's price! And please note if I use the midpoints of revenue and times sales, we would arrive at a market cap of $11.25B - or a share price of $90 or so. Discounted that would be $60ish, compared to today's $27.78 - nice! I like to be conservative but I also like to see what might be in store.
You can also use the P/E ratio, once you estimate sales, to arrive at a price. At $1.25B (again, the low point in assumptions) in sales, the margins should be around 25% so there would be $312M in profit. I am going to assume they will issue more shares within 5 years and there will be 150M shares outstanding. That would be over $2 per share in earnings, and with an assumed x25 earnings multiple, we arrive at $50 per share - slightly less than my $55 from the times-sales estimate.
Note all these example all estimate ONLY United States revenue. Dendreon is actively seeking a rest-of-world partner - where they will collect a royalty on ex-US sales. These royalties will have an effect on the bottom line, perhaps as much as 20-25% of the US revenue.
They also have other immunotherapeutics in their pipeline that will follow Provenge, all based off the same method of action. They have learned HOW to construct trials for cancer vaccines, and their agents for breast, ovarian, kidney, colon, and lung cancers should move along more quickly through trials than Provenge did. This will become a growth stock once investors realize cancer may become a manageable disease through these immunotherapeutics.
Whew - lecture on Dendreon is now over. The take away from this lesson should be that there are a HUGE number of assumptions that go into any kind of estimate like this. Patient count, adoption rate, pricing, earnings, competition, production capacity - any of these could be off by factors of 50% or more! My usual method is to try to use the low points of most ranges to come up with a basement level price, and then start tweaking numbers, as not ALL categories will be at the lowest possible point. If the basement price looks attractive compared to today's price, though, you just may have a winner.
Too, the companies do not have to succeed in the end, for the stock to move in the next year or so. Each of these are "story stocks", where there is news coming out in a specific time frame. I actually think my 50-100% price rise will be accomplished BEFORE the actual news. I want to buy in to companies where there is some reason to believe the drugs work, let the pre-announcement excitement build, and then sell some-to-most of the position before the actual news. If GNVC hits $1.50 next spring, I will sell about half of my holdings and then let the rest ride into the interim results.
I have a lot more work to do on some of these models, but I will say that GNVC and SGMO look incredibly mispriced right now, based on potential sales. GNVC could be worth $30+, from today's $0.93 - but the trial itself still may go for 2 years, with a year plus from then for approval, and ramp up. Are you willing to buy $1,000 now, for $30,000 in seven years? SGMO could be a paradigm changer - where every company that wants to modify a single gene has to pay a royalty to Sangamo. In ten years, they may have 1,000 contracts for $10K to $50K each, as a yearly income stream along with their own drug sales from the trials they are running now.
Biotechs may be pie-in-the-sky, but several will pan out, into gold. There WILL be the next Amgen, the next Genentech... I think a couple of the names I've thrown out there may just be those companies.
Regards,
Trond
When you have companies that make products, have revenue, and (gasp) actual profits, then the task can be a bit easier. There are a number of metrics such as price-to-earnings (P/E), or price-to-sales, that you can use to compare a company against another within the industry and see which is a better deal. I am suspicious of these metrics, by the way, on the whole, because earnings are massaged quite a bit, and even sales can be "managed" from quarter to quarter. But at least there are real numbers to work with!
Biotechs that have no products available for sale yet are much trickier. Look at BioCryst (BCRX) which today announced its first order for the IV version of its swine flu drug peramivir. The pricing was MUCH more aggressive than the Street expected and the stock responded with a 15% gain on the day! At this point, forecasting more sales really depends on how much more the government will stockpile, whether doctors start prescribing it off its emergency-use label, if and when the other countries that have negotiated with the company (Israel, China, e.g.) start ordering, and perhaps most immediately important - whether Japan gives its emergency use authorization and they get an order for 500,00 to 1M doses. That would be a $1B order minimum, or $200M at its Shionogi royalty rate - one order alone that is half its market cap! Can you say hello $20s or $30s, from it's $11.39 today? (and yes, I have a little BCRX in my IRA - not a lot but I think this one, too, will do well in the next year)
Back to the actual question though.
Let's take Dendreon for an example, simply because I can do these numbers in my sleep. Provenge is not approved yet, so we have no real metrics. We don't even have a good price point on them - Dr. Gold has stated the one plant they have now, at full capacity, can produce $500M to $1B of sales. It however, is only 25% built out presently... and to complicate matters, they are planning two new plants, each of which will produce 3/4 of the NJ facility.
Now, you probably should also look at the number of patients a year who will get prostate cancer, at the phase at which this will be prescribed (post-androgen therapy) and make an estimate of the market penetration, and then figure the number of patients who actually get the drug multiplied by the cost per treatment. Suffice it to say I believe within 5 years, these three plants will all be at full capacity. (1+3/4+3/4) plants at $500M to $1B gives you a range of revenue of $1.25B to $2.5B ( you can usually also figure in modest price increases per year, but I'm ignoring that, for now). You can use the midpoint, but I like to assume the low point as a reality check. So $1.25B of sales is our first checkpoint.
Now you can apply some other metrics. Five-to-seven times sales is one rule of thumb for projected market cap. So using 5 * 1.25 gives us a $6.25B market cap, 5 years out. Our market cap now is about $3.2B so it's nearly a double - call it $55 from today's $27.78.
But wait!
We now need to discount back to the present, adjusting for risk. I have assumed approval and I have assumed revenues into the future (they will not be making $1.25B next year). At least I assumed the lower levels for the other choices! We can say there is a 10% risk that Provenge is not approved, or has a delay. There may be a 15% discount per year into the future revenue stream. All told that $55 in the future may only be worth $32 or so today. Still a nice 10 to 15% discount to today's price! And please note if I use the midpoints of revenue and times sales, we would arrive at a market cap of $11.25B - or a share price of $90 or so. Discounted that would be $60ish, compared to today's $27.78 - nice! I like to be conservative but I also like to see what might be in store.
You can also use the P/E ratio, once you estimate sales, to arrive at a price. At $1.25B (again, the low point in assumptions) in sales, the margins should be around 25% so there would be $312M in profit. I am going to assume they will issue more shares within 5 years and there will be 150M shares outstanding. That would be over $2 per share in earnings, and with an assumed x25 earnings multiple, we arrive at $50 per share - slightly less than my $55 from the times-sales estimate.
Note all these example all estimate ONLY United States revenue. Dendreon is actively seeking a rest-of-world partner - where they will collect a royalty on ex-US sales. These royalties will have an effect on the bottom line, perhaps as much as 20-25% of the US revenue.
They also have other immunotherapeutics in their pipeline that will follow Provenge, all based off the same method of action. They have learned HOW to construct trials for cancer vaccines, and their agents for breast, ovarian, kidney, colon, and lung cancers should move along more quickly through trials than Provenge did. This will become a growth stock once investors realize cancer may become a manageable disease through these immunotherapeutics.
Whew - lecture on Dendreon is now over. The take away from this lesson should be that there are a HUGE number of assumptions that go into any kind of estimate like this. Patient count, adoption rate, pricing, earnings, competition, production capacity - any of these could be off by factors of 50% or more! My usual method is to try to use the low points of most ranges to come up with a basement level price, and then start tweaking numbers, as not ALL categories will be at the lowest possible point. If the basement price looks attractive compared to today's price, though, you just may have a winner.
Too, the companies do not have to succeed in the end, for the stock to move in the next year or so. Each of these are "story stocks", where there is news coming out in a specific time frame. I actually think my 50-100% price rise will be accomplished BEFORE the actual news. I want to buy in to companies where there is some reason to believe the drugs work, let the pre-announcement excitement build, and then sell some-to-most of the position before the actual news. If GNVC hits $1.50 next spring, I will sell about half of my holdings and then let the rest ride into the interim results.
I have a lot more work to do on some of these models, but I will say that GNVC and SGMO look incredibly mispriced right now, based on potential sales. GNVC could be worth $30+, from today's $0.93 - but the trial itself still may go for 2 years, with a year plus from then for approval, and ramp up. Are you willing to buy $1,000 now, for $30,000 in seven years? SGMO could be a paradigm changer - where every company that wants to modify a single gene has to pay a royalty to Sangamo. In ten years, they may have 1,000 contracts for $10K to $50K each, as a yearly income stream along with their own drug sales from the trials they are running now.
Biotechs may be pie-in-the-sky, but several will pan out, into gold. There WILL be the next Amgen, the next Genentech... I think a couple of the names I've thrown out there may just be those companies.
Regards,
Trond
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