WHAT COMES AFTER INITIAL 2-3 YEAR SURGE OUT OF 50% BEAR MARKETS?

 "Those who cannot remember the past are condemned to repeat it"  Vol 1, Reason in Common Sense, George Santayana


AFTER MAJOR MULTIYEAR BEAR MARKET LOWS OF 1843, 1861, 1878, 1932, 1938 & 1974 THAT SAW DECLINES OF –45% TO –89%, THE MARKET HAD AN INITIAL EXPLOSIVE 2-3 YEAR BULL MOVES OF AROUND 100%.  GREATER THAN 60% BEAR MARKETS, THE ADVANCE WAS AROUND 150%. AFTER THAT, NO MATTER WHAT THE VALUATIONS OR IMPROVED ECONOMIC CONDITIONS, MARKETS TRANSITIONED TO A VOLATILE MULTI-YEAR RANGE BOUND  PHASE THAT WILL FAVOR DIFFERENT INVESTMENT STRATEGIES THAN SIMPLE BUY AND HOLD COMING OUT OF THE LOW.


LETS LOOK AT 5 AND COMPARE IT TO THE CURRENT OUTLOOK.

1.       AFTER THE 1835-42 – 60% BEAR MARKET , THE STOCKS SURGED 95% FOR 2 YEARS (1843-45), THEN WENT SIDEWAYS FOR 7 YEARS  UNTIL  1852, WHEN AFTER A FALSE BREAKOUT,  LED TO ANOTHER 5 YEAR -70% BEAR  MARKET.

 

2.       AFTER THE 1857 -70% BEAR MARKET LOW, THE MARKET CHOPPED IN A BASE FOR 4 YEARS, THEN SURGED FOR 3 YEARS WHEN THE INFLATIONARY CIVIL WAR BROKE OUT.  IT THEN MEANDERED UP FOR 7 YEARS

3.       1872-1877 -50% BEAR MARKET, IS THEN FOLLOWED BY THE 1878-1881 BULL MARKET FUELED BY THE RAILROAD BUILDING BOOM AS CAPITAL POURED INTO THE US FROM EUROPE CAUSING A +150% BULL MOVE. AFTER THAT PEAK, THE MARKET MEANDERED DOWN FOR 15 YEARS.

4.       AFTER THE GREAT DEPRESSION DECLINE OF -89%, THE MARKET SURGED OFF THE LOWS, THEN CHOPPED DOWN FOR A COUPLE MORE YEARS, SURGED AGAIN IN 1935-1936, BEFORE RETRACING ALL THE WAY BACK TO 1933 LEVELS.  THE MARKET RANGE WAS CAPPED FOR 19 YEARS BETWEEN 1931 & 1950

5.    OUT OF THE –50% 1973-74 BEAR MARKET AND GENERATIONAL LOW VALUATIONS, THE MARKET SURGED ALMOST 100% IN 2 YEARS, BEFORE MEANDERED UP FOR THE NEXT VOLATILE 6 YEARS THAT INCLUDED 3 BEAR MARKETS AND FOR GOOD MEASURE AN “OCTOBER MASSACRE” OF 1978.

6.    BULL MOVE OUT OF MARCH 2009 TO CARRY INTO MID-2011?  100% MOVE OFF 666 IS 1330 S&P

The point of this exercise is to determine whether we are at the cusp of something big on the upside in the years ahead or something different.  History of bull markets following greater than 50% bear markets - that usually indicates structural damage of some kind for which equilibrium must be restored and the lessons of the prior secular bull must be unlearned.  In past 6 such bear markets back to 1835, the market has rallied about 100% in the first 2-3 years, then meandered sideways in volatile activity while it waits for the system to delever and repair structural damage.  This implies that 90% of the bull market is complete pricewise, and sometime next year will morph into a volatile multiyear trading range that absorbs aftershocks from 2008 generational event.

Framing the last century in context of decade long cycles of ebbing between the need to manage risk, and flowing, when risk should be embraced and setbacks only lead to higher highs.  When adjusted for the rising value of money (deflation) and the falling value of money (inflation) we get a perspective of when equities have been a store of value or a cost to wealth.  As such, from the chart below we see 16 to 20 year periods when equities adjusted for CPI generally decline. Those periods include 1903-1921, 1929-1949, 1966-1982, and the latest period beginning in 1999.  While deflation adjusts the price upward, its generally harder on the absolute stock prices than inflation which hurts the real value but inflates the absolute levels of the indexes. 

Eden Rahim

IS SAVIENT AT THE CUSP OF A BIG MOVE? Volatility band spread has collapsed from $20 to $1.30

Savient has been on the roller coaster of roller coaster ride.  First soaring in September on FDA approval of Krystexxa for Refractory Gout, then pushing higher when management indicated it would pursue the sale of the company, then shockingly crashing 50% when a takeover price could not be agreed upon despite 2 or 3 interested acquirers.  Yet looking at the late October 50% crash in the SVNT one would think it must be due to something catastrophic such as a) an FDA non-approval, b) a pivotal trial failure, c) a superior competing drug, d) a patent suit outcome, e) a manufacturing contamination issue, toxicity or fatality development, f) a labeling restriction that will impact its potential market size.  Yet it was none of these issues.

Savient made new highs into mid-2008 then crashed not for company specific issues, along with everything else between Sept 2008-March 09 - particularly companies that would have future need to access the capital market.  So essentially, the stock is trading BELOW where its was in 41 out of the past 48 months - despite having a) overcome clinical trial outcome risk of phase 3 data, b) funding risk having raised capital,  c) and then FDA approval and labelling risk that was received in September.  This for an orphan drug with 7 years exclusivity for a niche market with an unmet medical need that will garner premium pricing.  Go figure.

If there were 3 perhaps more interested buyers above $20, would they not be interested at $12 - especially if they haggling over price while disputing market size?  Or do companies trade like we do, buying high and selling low? We don't have sufficient fingers on our hands to list the number of product starved Pharma & specialty pharma companies walking the plank of the looming patent cliff - all in desperate need of focused premium therapeutics that are about to be launched. The market has penalized them with single digit multiples for this reason.  How many more late stage drug failures can a PFE or LLY absorb as they have over the past 12-18 months? Something has to change for them.

With a 50% bear market in place for Savient, the hot money betting on the takeover or the post-approval price momentum has been flushed out.  The short position has soared from 9 million to 12.95mm or +43% over the past month.  The Volatility band spread has collapsed from $20 to $1.30 - implying a BIG move is very possibly the next event.  We'll see.  At a minimum, a rebound to the pre-approval range of $15 seems possible as value players enchanted by the unique risk/reward profile of SVNT at $12 will absorb the supply from momentum  and year end tax sellers and short sellers.

Perhaps the buyers will wait out SVNT's management failed experiment of unrealistic expectations of a multibillion market size, but at some point the buyers in need of a high value Rheumatology therapeutic to detail, may break ranks with kin and reach for the company - realizing a $300mm - $500 drug is still difficult to come by, especially one that has overcome all clinical hurdles.  A bearish estimate of market size for Krystexxa is ultimately penetrating 30% of 50,000 refractory gout patients (vs 97,000 estimate by the FDA & 172,000 by management), priced at $30,000 annually vs over $50,000 by management, amounts to $500 million - assuming NO off label expansion of the market or the European market that is equal to the US market size.  This is not a market size at the cusp of launch that worth pursuing by product starved big pharma?  Good trading.

NEXAVAR CURRENTLY BAYERS 4TH LARGEST DRUG PROJECTED TO GROW TO ITS 2ND IN 3 YEARS

Bayer will be reporting earnings tomorrow morning, Oct 28th.  Topline Nexavar consensus sales estimates is 186mm  Euros or ~ US $250mm.  At a 65% margin split 50-50 amounts to  ~$80mm for ONXX. From the table below, Nexavar will only continue to grow in importance to Bayer, rising from its #4 largest drug to #2 in 3 years, and potentially #1 by 2014 - and that include assuming Xarelto is a huge success.  This underscores our premise that it makes financial sense for Bayer to acquire ONXX, regardless of the patent dispute, pipeline or other usual considerations.  The issue for Bayer is purely the financial cost of replicating a therapeutic that has similar sales level, growth, margins and probability of success compared to the enterprise value of ONXX.

Over the next 5 years, Bayer will pay out ~US$2 billion or 1.45 billion Euros, in Net Profit to ONXX as part of their agreement.  That works out to 1.75 Euros per share (1.45 bill / 827 mm shares O/S) or Euro 0.35 per year.  Multiplied by 13X P/E and that is worth over 4.5 billion Euros in additional market cap or 10%.   A 50% premium to ONXX enterprise value of 0.94 Billion Euros is 1.4 Billion Euros or 1/3 of the market cap boost.  These rough numbers excludes additional redundancy costs that are stripped from ONXX, perhaps making Nexavar even more profitable to Bayer.  And this values Carfilzomib, ONXX's promising phase 3 multiple myeloma candidate, at zero; its JAK inhibitor, at zero; its Cell cycle kinase inhibitor, at zero - even knowing all these programs could be monetized or spun off.  Adding to the list of acquired biotechs over the past 3 years, we can add BMY's recent buy of ZGEN.  Based purely on financial considerations, I think ONXX is close to the front of the line.

IS ONYX PHARMACEUTICALS PRIMED FOR A TAKEOVER?

WHY THE COMMERICAL BIOTECH TAKEOVER FRENZY?

Over the past few years M and A activity in Biotech has accelerated, with large players such as Pharma, Biotech, along with foreign Pharmaceuticals scrambling to get access to proprietary blockbuster recombinant drugs and associated platform science.  There are now many more large potential buyers seeking out the very few remaining prospects.  Big Pharma faces an epic patent cliff that will see brands coming off patent double from $20 billion to  $50 billion in 2011 and another $42 billion in 2012.  With this looming dark cloud the market has punished them with single digit multiples and 5% yields suggesting no organic growth prospects. Cost cutting can only take you so far. To maintain their market caps ranging from +$40 billion- $130 billion,  Big Pharma must now shoot for the fences having run out of development time, and can no longer hit for singles and doubles.

 Japanese companies armed with the strongest Yen ever and 1% borrowing rates, make US assets relatively cheap. Japanese pharmas favor biotechs with a commercial sales force.  I counted 6 recent acquisitions.   Big Pharma and  Large Cap Biotech (over $20 Bill Cap)  broaden their focus to include late stage biotechs with a potential blockbuster in phase 3.  Generic companies producing chemical entities and biotechs that have no significant in-house technology whose product was in-licensed but developed elsewhere, are not sought after.

Since the 2007 bull market top, I am aware of 20 biotechs acquired: DNA, MEDI, MLNM, IMCL, OSIP, MOGN, TLCR, VMSI, PHRM, ABII, SEPR, MEDX, CVTX, SCRX, CGRB, FACT, SIRT, IDEV, OMTI and now GENZ. Every single pure recombinant biotech were taken out at a median of almost 9X sales.  Narrowing down the 15 Biotech companies, their takeover metrics were:

GENZ by Sanofi 4.2X  35% prem
DNA by Roche 7.6X 27% prem
MEDI by Astra Zeneca 10.6X 70% prem
MLNM by Takeda 15.6X 86% prem
IMCL by BMY 9X 73% prem
OSIP by Astellas 8.1X 68% prem
MOGN by Eisai 9.5X 37% prem
PHRM by CELG 10.8X 53% prem
ABII by CELG no sales 60% prem
MYOG by GILD no sales 50% prem
MEDX by BMY no sales 93% prem
CGRB by JNJ no sales 19% prem
FACT by ABT 10X 75% prem
SIRT by GSK no sales 91% prem
IDEV by ENDP 6.6X 232% prem

Acquirers seem to favor companies with a) strong IP with a long patent life, b) strong bench strength with proven ability to develop INDs in-house, c) a platform technology that could have indications in other therapeutic areas because of a unique treatment pathway via recombinant technology, and a d) potential block buster either launched or in late stage development that has already cleared the pivotal data hurdle.  ONXX hits a bullseye on all points.

WHAT IS SO SPECIAL ABOUT ONXX?

Last year Onyx filed suit against partner Bayer for violation of property developed under a collaborative JV.  The stock was slammed and that triggered my investigation into what was going on.  I wasn't sure whether it would yield an opinion to Short ONXX or an opportunity to Buy ONXX.

ONYX's approved drug, Nexavar, for Liver and Kidney cancer has been approved for 3 years, partnered with Bayer, and Net Sales are split 50-50.  On 2010 estimated sales of $950 million at 70% gross margin, that will amount to $950 x 0.7 x 0.5 = $332 million topline sales to ONXX.  Furthermore, ONXX is reimbursed for COGS on Nexavar sales it makes, and additionally receives a single digit royalty on Japanese sales.

Onyx was on pace to earn $2 per shares, when it was broadsided by Bayer's actions and realized it could no longer trust its future to the Bayer partnership and had to take matters into its own hand.  Accordingly, Onyx ramped R and D by $65mm when it astutely acquired the Proteasome Inhibitor drug Carfilzomib. 




ONXX TECHNOLOGY:


Onyx's Multiple Kinase Inhibitor platform that has already produced a blockbuster Sorafenib (Nexavar), addresses the abnormal phosphorylation that is the basis for many cancers and diabetes.  That is why research into Kinase Inhibitors have accelerated everywhere.  Because ATP binding by KI's is hit or miss - some work well like Nexavar, while others like Pfizer's Sutent have missed multiple times.  How much more does that make Nexavar worth given its proven activity? In addition to be a RAS pathway inhibitor, Sorafenib also inhibits RAF, VEGFR and PDGFR receptors, and tyrosine kinases c-KIT, RET and FLT.


Bristol Myers and  Lilly both chased Imclone (IMCL) for its platform Extracellular anti-EGRF ERBITUX, and Astella paid a 70% premium for OSI's Intracellular Tyrosine Kinase Inhibitor TARCEVA.  Similarly, Sorafenib's potential extends to NSCLC, Thyroid, Breast, Ovarian and Colorectal cancer - on top of already being a billion dollar drug in Kidney and Liver Cancer with big markets in Asia where incidence is higher, and selling into those markets are still ahead.


A decade ago, another holding, Centocor, was acquired by  JNJ even though it was already partnered with LLY.  Even though Reopro was Centocor's approved drug, JNJ figured out that anti-TNF platform that yielded Remicade in its pipeline would be the bigger drug in Crohn's, RA and Psoriasis.  Its now a $3 billion dollar drug.


Now count on your hand  how many late stage or commercial biotechs are left out there with a proven platform technology, a blockbuster drug, and another blockbuster for which an NDA will be filed in a few months, and NOT burning Cash?  And for all this the enterprise value is $1.3 billion?  Pure late stage development companies that exceed ONXX's value include REGN, INCY, THRX, while early stage SGEN is just below.  It doesn't make sense to me.


ONXX IS MUCH MORE VALUABLE TO BAYER THAN THE MARKET IMPLIES:


 As mentioned, Onyx shares net revenues with JV and marketing partner Bayer.  The JV after COGS ($100mm) and Marketing ($240mm) amounts to a 70% margin on $950mm in sales.  So Bayer must pay out over $300 mm of pure profit to Onyx in 2010 and rising every year forward.  Bayer, given its history of dealing truthfully and honorably with development partners, is assumed to pad the cost of sales and marketing, so the margins are probably even higher than reported.  Based on analyst estimates, over the next 5 years (2010-2014) Bayer is expected to pay out to Onyx $330mm, $378mm, $390mm, $410mm and $480mm for a total of $2 Billion.  COGS and Marketing will plateau and margins will rise to 80%. 

During this period that Bayer will be paying out $2 billion profit to Onyx, how many drugs will Bayer simultaneously succeed in developing that will also a) yield similar profitability b) without further R and D or c) Clinical risk and d) drug failures along the way?  You get the picture.  With drug development cost growing rapidly and risk of failure no less than in the past, isn't a bird in hand worth much much more than two in the bush given this scenario?  Now add to that a potential +$400mm myeloma drug in Carfilzomib?


LITIGATION WITH BAYER:


15 years ago, Bayer partnered with ONYX to get access to its much desired RAS Pathway Inhibitor compound Sorafenib.  In May 2009 ONYX filed suit against Bayer over 2 patents Bayer filed in Dec 20, 2005 - US # 7,351,834 and US # 7,234,576.  Essentially, Bayer took the Sorafenib compound Onyx had developed, and despite the collaborative research agreement with ONYX, Bayer separately developed Fluoro-Sorafenib - a compound that came out of the original patent.   Under the filing of the patent, Bayer used Fluoro to substitute for other elements but preserve the Sorafenib compound functionality.  In other words, create a new compound to mimic the old compound except which Bayer controls and doesn't have to share with ONYX.  When you are dealing with a billion dollar drug, I guess any sociopathic behavior is permissive to Bayer.  Talk about violating the spirit of collaboration.  

Given Bayer's long history of paying fines for predatory and collusive behavior, nothing should be surprising.  Look at Bayer's actions according to Onyx documents:  1) Bayer didn't disclose the 2003 patent filing to Onyx, but in 2005 Bayer announced trials in a cancer drug referred to as DAST.   2) Bayer withheld the chemical formula and gave Onyx no chance to work on trials or review data.  3) Bayer didn't mention its Fluoro -sorafenib trials during a presentation to Onyx in April 2007, yet a couple months later Bayer announced DAST as among their cancer therapies in development, and 4) Bayer continued to deny Onyx's subsequent request to reveal the structure of DAST.  

The suit was precipitated when a Bayer executive revealed that Bayer postponed further testing until AFTER the final cutoff date for recognizing compounds synthesized, identified or discovered under the collaborative agreement with Onyx so that Bayer could have the right to develop and market fluoro-sorafenib "unrestrained" by Onyx. 

I am not a lawyer but a very similar situation emerged in a former life with my IGEN  holding, when it was embroiled in a suit with Roche who had integrated IGEN property into its diagnostic equipment, and tried to get away with it.  After a lengthy battle, the court returned all the rights to IGEN, forcing Roche to buy them out rather then pay damages and royalties.  Similarly with Onyx, because of the JV, a court could potentially rule that Onyx similarly has rights to Fluoro-Sorafenib.  However, because of the clear intention to deceive, I imagine a settlement will be reached long before.




UPCOMING ONYX DEVELOPMENTS TO WATCH FOR:


*   Submit an accelerated NDA filing for Carfilzomib in relapsed/refractory Myeloma by year end.  
*   A settlement with Bayer for the Fluoro-sorafenib litigation hope to be reached by yearend
*   Nexavar reimbursement in South Korea by year end & in China by mid 2011.
*   Significant growth opportunity in HCC (Liver) even as Kidney plateaus.

The value of the Proteasome Inhibitors acquired by Onyx has delivered considerable value this summer.  First, in July Carfilzomib revealed significant pivotal data in multiple myeloma with and overall response rate (ORR) of 24% exceeding the 20% threshold response rate and duration over 7 months.   However, its primary benefit is the lack of peripheral neuropathy which addresses the unmet medical need for a tolerable proteasome inhibitor.  Currently, 20%-30% of myeloma patients develop a neuropathy in the course of treatment.  Carfilzomib provides patients failing current agents with cumulative neurotoxicity with an a better alternative. Secondly, the value of licensing its rights to Ono for Japan for $59mm up front plus milestones multiples of this, only underscores the additional value to come from licensing rights elsewhere in the world while perhaps holding on to US rights.






DEEP LATE STAGE PIPELINE:



ONYX pipeline has significant undervalued optionality as well.  Outcomes pending for Nexavar include adjuvant RCC, HCC, TACE combo, Tarceva combo, NSCLC, and Thyroid cancer.  Additionally, Carfilzomib for Myeloma results are still to come and early stage development of JAK 1 and 2 Inhibitors.

CONCLUSION:


Biotech is perhaps the riskiest investment sector in the universe with multiple factors working against the investment at any given time, much like being long Option premium:   adverse binary outcomes, burning cash, constant funding needs, multiple approval and clinical trial hurdles, safety issues, is the market for the drug really there or will it gain re-imbursement upon approval, or embroiled in litigation to defend property rights - and on and on.   So when you encounter a company for which many of these risks can be handicapped with reasonable accuracy and the outcome yields a favorable Risk/Benefit relative to its price, it is worth a closer look.  Onyx Pharmceutical has exceeded the hurdle on most of these issues. 


First, there are hungry large cap medical companies in search of mid- biotech companies with proprietary recombinant platform technology of which few remain.  Secondly, it technology has  already yield a commercial blockbuster with expectation of broadening into other indications. It has become the standard of care, and competing drugs Sutent and Brivanib will have a tough time proving superiority in Phase 2s.  Third, Valuation is compelling given it is profitable, self funded, cash rich, and valued much less than more risky development stage biotechs.  Third, it is not the defendant in IP litigation and cannot have existing property taken away.  Having witnessed these litigations multiple times, from the documents it is clear where the burden of proof resides.  Finally, the value to Bayer is considerably more than it is to Wall Street on an earnings basis.  Wall St targets range from $31 to $41.  To Bayer, ONXX is probably worth north of $45 given the math of what it cost Bayer to payout to ONXX in relation to the cost of separately developing an equivalent revenue stream at 80% margins.

GLP-1 Scripts continue to grow. Bodes well for eventual Bydureon conversion of Victoza scripts

Competitor Insulin drug Victoza, by Novo, continues to grow the GLP-1 market up 37% since launch in January . According to Barclays, a part of this growth will be converted to Bydureon use when launched. At one large practice they surveyed with 250 eligible GLP-1 users, only 11 started Victoza with the rest waiting for once weekly Bydureon. As expected, Byetta scripts continue to decline as the market awaits Bydureon. Nevertheless, Victoza launch is still lagging Byetta's launch trajectory. Market share is 70% Byetta 30% Victoza. NRx share is 62% to 38%.   The clock is ticking on Bydureon Approval, though the PDUFA date is Oct 22nd, the options market has priced in an earlier approval.

Technically, AMLN, with a relative strength of 93 is pushing out of $18-$20 range its been locked in for 50 trading days. Accumulation/Distribution is surging upward during this sideways price period.

UNDER THE BIG TOP: HOW MUCH LONGER CAN CRUDE LEVITATE?

4, 8 & 12 months ago Crude was where it is right now.  In each of those periods 1) were expectations of future growth in demand for crude up? Yes.  2) Was the Chinese a big inventory buyer foolishly outbidding itself in creating superficial demand? Yes. 3) Was the Carry trade favorable so that Wall St bankers could use Fed funds to buy spot crude, store it in VLCCs then sell the > 1 year forward to lock in huge contango profits? Yes  4) Was money abandoning stock funds & MM funds and pouring into Commodity funds in record amounts to fuel purchases? Yes.  5) Was relentless above expectations inventory rebuilding going to turn into a big draw? Of course.

Flash forward to now.  The answer to each of those 5 points has shifted to NO. No rocket science here about where growth expectations have shifted.  As for Chinese inventory buying, it has slowed to a trickle and accordingly, so have Goldman's front running profits. The contango has flattened considerable but there are still well over 100 VLCCs floating out on the ocean holding Wall St. Crude.  The money pouring into commodities has shifted to a slightly less risky Emerging Market bonds.  And now inventory is building at the fastest rate at a point a draw is typically expected.  Looks like some of those Tankers have reached port.

So why is crude still at $73 and not say $63 or $53 or $43?  We have learned that above all, the norm in a Bernanke market is to expect only delayed reactions to the obvious. In 2007, the market misguidedly made a new high only a month before the recession began instead of the usual 6 months of foresight. It literally didn't see the worst crisis in 80 years coming right around the corner.  In September 2008, the market was down less than 20% despite epic financial failures and a real estate depression.  Such was the faith the Fed would hold the system together.  Then of course, it crashed.  Perhaps the same is lying in wait for crude with supply demand dynamics so far out of whack with only bullish future expectations holding it together.  ~ Eden Rahim

THE IMPORTANCE OF THE S&P 950 13-YEAR PIVOT LEVEL. ARE WE HEADED THERE IN THE 78 WEEK CYCLE?

77-78 WEEK CYCLE POINTING DOWN INTO LATE AUGUST +/- 2 Weeks.

Implied Volatility on Oct vs Jan Calls imply chance of earlier Approval

The implied volatility (vols) on the October At-the-Money (ATM) Call options are 58% vs 48% for the Septembers.  With the PDUFA date of Oct 22nd, a week AFTER the Oct expiry, one would expect a big bump up in the available Jan Vols as seen between the Seps and Octs.  Instead, the Jan vols at 60% - about the same at the Octs.  This would suggest the market is pricing in the possibility of approval before the Octs expire but not before the Seps expire.  Also, because the vols are around 60 and not north of 100 as one might expect for such a binary event, the market clearly expects approval.  The elevated Vol, 60% vs 30% historic, is for the impact of a black box label for pancreatitis which Byetta does not have and trial data does not show as being necessary.  But the FDA being a regulator gets to protect itself from future liability by needlessly slapping on a warning label - even if trial data doesn't back it up.

As an update, the 10-day Call/Put ratio continues to sink, now to the lowest level in a year at 0.64.  Ordinarily investors are giddy piling into Calls of a biotech that is about to get approval for a huge drug - especially in a market where there is a scarcity of big new drugs to be approved for unmet medical needs.  Maybe AMLN should buy a Goldmine in angola, dig for oil under the Eiffel Tower, or manufacture lead paint in china, in order generate some bullish investor interest.

AMLN continues to evoke doubt

Two days ago AMLN pushed to the upside, closing above the 2 month consolidation in the $18-$20 range. So screens lit up, bells range, and investors turned more bullish to buy the breakout, right?  Uh Uh.  It was greeted with 936 Calls to 7,279 Puts or a daily 0.13 Call/Put ratio, taking the 10 day average down to 0.87 - the lowest reading in over 6 months. A contrarian's dream. This is reminiscent of when LCC was beginning its big rally from $3 last December and short interest and the Put/Call ratio rose with the stock through $4, then $5 and so on.  There were occasional sharp pullbacks, but LCC quickly snapped back.

Evidently, with AMLN this move above $20 is greeted as the selling opportunity of a lifetime.  My premise remains that with a bedrock of skepticism from both analysts and traders despite a relative strength (RS) of 86,  in the face of reasonable fundamentals, with the bonus of AMLN being an increasingly scarce and desirable asset to large foreign pharma, particularly those armed with a strong Yen that want access to the US market with a big drug  in an unmet medical need and a sales force, sets up a favorable risk-reward position.

http://stockcharts.com/c-sc/sc?s=AMLN&p=D&yr=0&mn=3&dy=0&i=t23263972693&r=2692

My response to Birinyi's pollyannaish "Invest Like its 1982" in the WSJ

http://online.barrons.com/article/SB127687523498807499.html#top-of-comments

Eden Rahim wrote: (your comment)

In 1982, Birinyi cites October 3rd Times, but that was only 6 weeks after the August 16th market low and still 3 months BEFORE the economy actually bottomed and recession ended. So in some ways the Times article was justified. The equivalent period this cycle would be early May 2009 - six weeks after the market low - not 15 months after the market low that he's invoking now.

Secondly, in 1982 unlike now, after economy bottomed in December 1982 & 5 months after the market lifted off, the unemployed #s began to plunge, falling 1.7 million people in 8 months in 1983. Now however, 15 months after the low, the decline in unemployment remain elusive. In fact 15 million remain unemployed. There is perhaps good reason this time to suspect the system is broken and cause for concern.

http://research.stlouisfed.org/fred2/series/UNEMPLOY?cid=12

Amylin 18 month chart

Upside channel projects about $25

The Price to Sales of prior biotech takeovers

AMLN is trading at 2.7X 2011 est. sales of $1.07 Bil. Giant problem ridden GENZ with negative sales growth will be taken out at about 5X sales. Here are the specific FY+1 Price/Sales of comparable takeovers of pure recombinant biotechs

DNA by Roche 7.6X 27% prem
MEDI by Astra Zeneca 10.6X 70% prem
MLNM by Takeda 15.6X 86% prem
IMCL by BMY 9X 73% prem
OSIP by Astellas 8.1X 68% prem
MOGN by Eisai 9.5X 37% prem
PHRM by CELG 10.8X 53% prem
ABII by CELG no sales 60% prem
MYOG by GILD no sales 50% prem
MEDX by BMY no sales 93% prem
CGRB by JNJ no sales 19% prem
FACT by ABT 10X 75% prem
SIRT by GSK no sales 91% prem
IDEV by ENDP 6.6X 232% prem

Remarkable skepticism about Amylin (AMLN) despite 20 biotech takeouts since 2007

The skepticism is such that 10 of 17 analysts have a HOLD rating; the 10 day Call/Put ratio is 0.98, the lowest since early January just prior to a run from $16 to $24. The $ Put premium was 3X Call premium yesterday. The short interest has surged to 17.6 mm shares or 13% of float - the highest in 19 months, up from 14mm a month ago and less than 10mm in January. Not only is there NO speculation of a buyout in AMLN as seen in below average Call buying volume, but there is an overt bearish bet. 

Clearly they are betting that a) LLY, viewed as the natural buyers,  will not be stepping up to take them out, or b) competitive drug Victoza,launched in January, will dominate the GLP-1 market for T2-diabetes as its more convenient dosing and needle prevails gaining 26% market share of GLP-1 market from AMLN, or 3) Thyroid cancer risk as assigned a blackbox label to Victoza will also be viewed as an issue with the FDA when reviewing Bydureon. 

But there are offsetting positives: 1) the FDA does not require further trials for Bydureon, 2) no unusual incidence of Pancreatitis or Thyroid cancer has be seen in P3 trial data that has been filed, 3) Best in class phase 3 data for 1X weekly Bydureon with weight loss benefit, that should make the October PDUFA straightforward given what is already known about 2x daily Byetta that is on the market and selling at a $700 mm pace, 4) Roche's Taspoglutide recently had a set back that delays additional competition past 2013 after pre-filled Bydureon hits the market that overcomes the needle issue.  In the meantime, frenetic takeover activity in mid-cap biotech has been unabated.  Since the 2007 bull market top, i've counted 20 biotechs gone: DNA, MEDI, MLNM, IMCL, OSIP, MOGN, TLCR, VMSI, PHRM, ABII, SEPR, MEDX, CVTX, SCRX, CGRB, FACT, SIRT, IDEV, OMTI and now GENZ. Every single pure recombinant biotech were taken out at a median of 9X sales.  You would think this trend and resulting scarcity of mid cap biotechs with commercial blockbusters and in-house technology would create a frenzy of speculation. Yet it's been anything but that for AMLN.

AMLN has traded in a narrow $18-$20 range above the 50-day and 200-day MA for 30 days, consolidating the impulse volume surge from $15 to $20.  The volatility bands have tightened to $1.75 from $7 a month ago and RS is in the top quartile at 81. A breakout of that range is simmering.

http://finance.yahoo.com/q/ta?s=AMLN&t=3m&l=on&z=l&q=c&p=b,e50,e200,v&a=&c=

http://www.schaeffersresearch.com/streetools/stock_quotes.aspx?Ticker=AMLN