Development Blog

Biotech stocks rallied with the general market today with many large caps beating the QQQQ which is up about 1.85% as of midday trading. Within the Rayno Life Science Portfolio today’s winners were: Large Caps-Biogen (BIIB) up 2.4%,Cephalon(CEPH) up 2.25%, Gilead (GILD) up 2.25%; Small and Mid Caps-Exelixis up 2.7%, Micromet up 3.2%,Nektar (NKTR) up 3.65%, Regeneron(REGN) up 2%, Seattle Genetics(SGEN) up 2.9%, Targacept (TRGT)  up 5.2%, and Viropharma (VPHM) up 6.3%. The overall portfolio is up 1.25% today with less upside in smaller caps and Tools/Dx.

Stock futures were up 1% before the market opened at 8:30 am surprising many investors as the tape was weak yesterday. The rally was attributed to a constellation of news and commentary items: David Tepper hedge fund manager and Founder of Appaloosa, came on CNBC with his bullish posture that… if the economy recovers equities are the place to be and if the economy falters the FED and QE II will come to the rescue, so it is a Win/Win scenario. The Euro rallied to $1.348 and the trend has been-equity market rallies follow Euro rallies.

David Tepper Is “Balls To The Wall” Long (But Unlevered) The Fed | zero hedge

Other events supported the bull run: Nike (NKE) earnings beat, Petrobras (PBR) raised $70B, good news from Europe and U.S. manufacturing and the overall change in sentiment due to the Sep rally and the belief that the FED will come to the rescue. Chips made big moves and Silver and Gold hit new highs. Money managers who missed the huge SEP rally need to start thinking about Q4 returns because they are way behind.

Demand for U.S. Capital Goods Rebounds as Spending Holds Up – Bloomberg

Many analysts and money managers are still skeptical citing policy uncertainties,high unemployment, weak housing and overall weak fundamentals. Pundits repeatedly say that investors are scared by the meltdown and the housing bust and are avoiding equities, but has too much money moved to bonds? For today “old school”  analysis is out and monetary drivers and technicals are in.

Within the “diagnostics and tools” track at the Rodman and Renshaw Conference here are two interesting genomics companies that presented.

Rosetta Genomics Ltd. (ROSG, $1.25) ,Market Cap $21M, Sh.Out. 16.5M

Rosetta is an Israeli Company focused in development of microRNA-based diagnostics (miRview) for various cancers as well as for the identification of the origin of the primary tumor of metastases(mets) and the differentiation of squamous(squamous) and mesothelioma (meso) cancers. MicroRNA’s (miRNAs) are a recently discovered group of short (21-23 nucleotides ) tissue specific, non-coding genes which regulate the expression of other genes. miRNA’s are potentailly a new class of hghly sensitive and specific biomarkers that can accurately identify cancer, predict outcomes and guide treatment. Revenues for six months  ending June 30 were $70k  with losses of $7.8M in from continuing operations. The Company needs to raise cash for marketing and developing its pipeline and is seeking strategic partners for companion Dx. The cash and cash equivalents position as of June 30 was about $7.7M.

In April 2009 the Company announced a Licensing and Collaboration with Prometheus Labs including U.S. marketing rights for the three miRview tests. There is currently a dispute on the amount of funding that Prometheus has to provide to ROSG.

In the current pipeline is a second generation mets miRview to include a larger panel of  antigens and an miRview bladder test for risk stratification of bladder cancer. Also in the pipeline are 10 GEN 3 body fluids based tests with applications in the neurogenerative, cardiovascular and women’s health areas. Any validated assays would most likely be marketed as LDT’s(lab developed tests) in their 6000 ft/2 CLIA lab that is expected to be CLIA certified this year. The Company has extensive IP under development in MicroRNAs.

-more news on miRNA and Rosetta-

Scientists Make Headway with miRNA

http://www.genomeweb.com/rnai/second-gen-test-menu-place-rosetta-genomics-sets-sights-third-gen-pipeline

Response Genetics (RGDX, $2.38), Market Cap $43.5, Sh.Out. 17.3

Response Genomics is an emerging molecular diagnostic, biomarker and pharmacogenomic test developer for use in the treatment of cancer. The objective is personalized therapy for each patient. It currently offers ResponseDX test suites to oncologists for non-small cell lung cancer, colorectal cancer, and gastric-esophageal cancers. The test platform measures RNA expression of ERCC1,TS and RRM1 with RT/PCR and utilizes PCR analysis of DNA to detect EGFR,BRAF and KRAS mutational status. The ResponseDX platform is proprietary including the paraffin embedded sample prep. Collaborations with drug companies for test validation and optimizing therapy such as the recent GlaxoSmithKline agreement are a key strategy of the Company. All tests are performed under CLIA certification in various States. The tests are reimbursed by CPT codes in the range of $900-$1200 /test.

The Company recently settled a Proxy contest on Sep 17 with the Special Situations Fund and agreed to, among other things. a revised slate of nine Director nominees that will be voted on the Dec 1,2010 stockholder meeting. The Company has 60 full time employees.

Net (unaudited) Revenues for the last six months ended June 30,2010 were $9.340M compared to $3.435 for the previous period in 2009, a 172% increase. Total losses for six mos. ended 2010 were $2.533M compared to a loss of $5.628M in 2009. Cash and cash equivalents were $6.6M.

Sequenom (SQNM) $7, Market Cap $529M, 76M Sh. Outstanding

Sequenom presented a financial update and their plans for their T21 trisomy 21 noninvasive pre-natal test for fetal gene and chromosomal abnormalities. The Company plans to launch a CLIA LDT (lab developed test) by Q4 2011 and submit a PMA by late 2012. The T21 test will utilize the Illumina (ILMN) HiSeq 2000 next -generation sequencing platform which was recently launched by ILMN. The Fetal Nucleic Acid Technology utilized by SQNM test utilizes circulating cell-free maternal plasma to examine variances in genetic material of the fetus.

Sequenom received an FDA letter recently along with 13 other companies recently regarding improper marketing of LDT’s and the Company responded that it is marketing only to physicians and not to consumers.

Total revenue for Q2 grew 24% to $11.4M primarily MassARRAY DNA analysis system and related consumables. 11 systems were shipped in Q4 for basic and translational research use only, with a total of 350 systems  placed worldwide. A Next Generation MassARRAY 4 mass spectrometry system was recently introduced for genetic analysis and validation of biomarkers. Losses for Q2 were $59.1M or $0.86 per share. Analyst forecasts for 2011 revenues are in the $60M range. All of the legal issues of the Company have been resolved so legal and admin costs should be reduced. The Company has $68M in Cash but will need more funding by late next year.    A $150M shelf offering was filed today.

http://www.sequenom.com/Home

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Continuing from Part 1 here are some specific comments on interesting companies.

Adeona Pharmaceuticals (AEN) Amex ($0.83) Market Cap $19M, $25M Sh. Outstanding

Adeona is a development stage drug Company focused in CNS  that in -licenses clinical stage product candidates that are ready to be “tested in humans”. The pipeline is quite diverse with five product candidates: Trimesta for MS, Effirma for fibromyalgia, Zinthionein ZC for Alzheimer Disease (AD)-a prescription medical food, dnaJP1 for RA, and Zinc MonoCysteine for dry age-related macro degeneration.The Company achieved $980k in Q2 income with Revenues from licensing of $2,195k and CLIA Lab Revenues of $2,255K. The Company has $3.3M in cash and has significant grant funding.

The Company has a strategic partnership with MEDA a Swedish drug Company for fibromyalgia with potential milestones of $15M. The CLIA Lab is focused in Microbiology and pediatric testing and a unique CopperProof Panel Test for Zinc and Copper levels. The Company believes that copper toxicity is responsible for cognitive decline and implicated in AD and is seeking data to show that Zinthionein ZC can be prescribed as a medical food.

Exact Sciences (EXAS) NASDAQ ($6.40), Market Cap $258.6 , 40.3M sh. Outstanding

Exact Sciences is a molecular diagnostic Company focused on the early detection and prevention of colorectal cancer.A third generation proprietary test currently in development is based upon stool -based DNA (sDNA) that is combined with an older test FIT, a blood protein test. The goal of the 3rd Gen product is a patient friendly test that is non-invasive and provides improved specificity (>90%) and sensitivity (>50%) over current tests.  The molecular test platform utilizes methylated vimentin biomarkers in a PCR and Invader platform (licensed from Hologic). Some of the biomarkers are exclusively licensed from OncoMethylome Sciences. The  CEO of EXAS, Kevin Conroy , was previously the CEO of Third Wave which was sold to Hologic (HOLX). The Invader platform was used for the detection OF HPV and is a marketing model for the adoption of sDNA testing.

Nine biomarkers are being targeted in the validation study with the goal of picking the 3-4 which provide the best results. The validation data will be presented on October 28/29 and would provide the basis for a $15-20M clinical study. The trial should be completed by Q3 2011 with an FDA submission in the 2012 timeframe. The Company plans to launch its test as a “home brew” or CLIA Lab Test (LDT) prior to gaining broad FDA approval.

The market potential based upon a target population of 100M is $1.2B. About $12B is currently being spent on colonoscopy but 50% have never been screened. Colonoscopy is considered an invasive,expensive,uncomfortable procedure and it is expected that the 3rd Gen test will be used in conjunction with colonoscopy.

On August 17 the Company filed a shelf offering for offer or sale of  $150M in securities.As of June 30  the Company had $37M in cash, and $1.3M in revenue. The stock has almost doubled from the mid-July level so investors are expecting excellent results from the clinical validation study on October 27.

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Exact Sciences (EXAS)

We attended the R&R Conference in NYC this week and here is a brief summary:

• Over 5000 people were registered with hundreds of companies presenting in healthcare, metals and mining,energy and China.
• Chinese companies were a significant presence for the first time this year.A major report (175 pages) was issued by Rodman and Renshaw,” The Chinese Pharmaceutical Industry:A Driving Force in an Emerging Market”. The Chinese Pharmaceutical industry is estimated to achieve $180B in sales in 2010. China has established a $124B healthcare stimulus budget for 2009-2011 which mainly focuses on health insurance coverage ,rural clinic and public health services, as well as hospital reform. Drugs sold in China are mainly generic versions of branded products. Many Chinese Life Science companies are looking to go public in the U.S. through reverse mergers. This could create public vehicles that would participate in specific growth stories e.g. Mindray (MR) a Chinese medTech Company that went public in 2006.
• DealFlow Media, Inc. (www.dealflow.com) publishes the monthly The Reverse Merger Report that provides news and information on “Alternative Public Offerings”. Their data shows reverse merger deals with Chinese companies going from 46 in 2009 to 57 YTD a growing appetite. However one key issue that comes up is corporate governance and a focus on audits as the Public Company Accounting Oversight Board (PCAOB) published a warning in mid-July.
• Many excellent small cap and micro cap U.S. companies that presented were at historically low, venture capital  valuations due to the overall weak economy, lack of retail and institutional interest in equities and difficulties in raising capital especially for “pre-revenue companies”.  In a discussion with a top tier investment banker and hedge fund manager, he commented that raising money money for a small cap equity fund was not possible in this environment. On the plus side if many of the small cap biotech and life science companies outperform the market in Q4, money should move from the sidelines.(more on this topic in Part 2)
• We look to Q4 and especially the IPO market to see if emerging growth equities can get financing.An interesting model for development stage financing is that of Safeguard Scientifics (SFE) whereby a Public Holding Company with strong financial resources “incubates” and drives milestones of its portfolio companies.
• We will provide comments on some of the companies presenting in Part 2: Adeon Pharmaceuticals (AEN) ,Dendreon, (DNDN) Exact Sciences (EXAS), Rosetta Genomics (ROSG), Response Genetics (RGDX), Safeguard Scientifics (SFE), Sequenom (SQNM)and Supergen (SUPG).

Francis Collins,the NIH and the Federal District Court for the District of Colombia (Judge Royce C. Lamberth).

Francis Collins, evangelicals, and stem cells : The New Yorker

Court Ends Ban on U.S. Stem Cell Financing, for Now – NYTimes.com

Court of Appeal Stay Drives Stem Cell Stocks | Scimitar Equity Blog

Zymogenetics (ZGEN) stock soared 84% today on the $9.75 ($885M)buyout offer from Bristol-Myers Squibb (BMY). Bristol was also up 1% even though the acquisition is dilutive to 2011 earnings. Bristol was seeking the the ZGEN Hepatitis C drug PEG-Interferon lamda which is in Phase 2 studies and already under a collaboration agreement with BMY. Zymogenetics has already out-licensed a broad pipeline of therapeutic protein drug candidates and had Q2 revenues of $37.7M with a loss of $23.2M. Novo Nordisk A S was also a major holder of the stock with 22M shares and 37% of the stock was tendered for the acquisition.

The deal boosted small and mid-cap biotechs with our mid-cap index up 2.75% and the Rayno Life Science Portfolio up 1.5% as of mid-day trading. Among the smaller cap big winners were: Arqule (ARQL) up 6.67% at $5.44, Biomarin (BMRN) up 2.4% at $22.10, Cubist (CBST)up 3% at $22.83, Exelixis (EXEL) up 4.2% at $3.72, Micromet (MITI) up 3.9% at $6.67, Nektar (NKTR) up 2.3% at $13.78, Seattle Genetics (SGEN) up 3.2% at $12.37,and Targecept (TRGT)up 6.27% at $21.50. ETF’s such as IBB and FBT also rallied about 1.8%. Smaller biotech stocks are recovering from July lows, are way below April highs but are entering the more bullish Q4 seasonality.

Biotech stocks perked up today emboldened by a new month and ISM data including some positive growth from China’s manufacturing sector. Apple headlines with the iPOD and Apple TV helped catalyze the NASDAQ move. Biotech went along for the ride with most ETF’s up 2%+ and our Mid-Cap Biotech Index up 2.25%.Some notable movers within the Rayno Life Science Portfolio up 2.5% overall are:

Alera (ALR) up 4.4%, Alnylam (ALNY) up 5%,Cephalon(CEPH) up 3.7%, Nektar (NKTR) up 4.4%, Micromet (MITI) up 6%, and Neogen(NEOG) up 5.5%.

Genzyme (GENZ) stock was flat at $70.50 as the Sanofi-Aventis (SNY) takeover appears stalled because of  Genzyme’s management rejection of the SNY $69 offer.An analyst at Sanford Bernstein, Geoffrey Porges upped his price target to $76 saying that Genzyme has the upper hand with a likely price in the  $77 range. One big issue is Genzyme’s manufacturing problems which took the stock down to the $50 level, so the bulls are saying that GENZ is well on their way to quality improvement and getting product sales and profitability back in a growth mode. The five year high on the stock is the $77 range. From Yahoo current monthly data out of 20 analysts 14 have a hold and 4 have a strong buy. For those holding the stock who want to hedge, sell  the January 70 calls for $4.50.

Exelixis (EXEL) looks like a speculative buy in here at $3.30 as it is making a technical bottom,has a broad pipeline of products, strong partners and heavy insider buying. Market cap is $350M. More on EXEL later.

See Part One of the August review regarding the “bondfest”.

We’ll spare you the review of what happened in August but now you know what worked- bonds and gold.

Gold ended the month up 5.61% as it survived a correction under 1200 and brought in investors as fears of double dip and a waek dollar prevailed.We are near the 12 month  high of 1250:

Rayno Life Science Portfolio: Biotech Outperformed Tech

The Rayno portfolio was down about 4-5% for the month after  a great July led by Tools and Diagnostics stocks.We urged caution and hedges on August 11 and since then most biotech indices are down 5-8% for the month despite a little M&A activity. Smaller caps were beaten up a lot more. Stocks in the portfolio that have held up well in August and YTD are:

Biogen (BIIB) $54, Cubist (CBST) $22,Arca Biotech ETF (FBT) $32.11, Illumina (ILMN) $43.50, NeoGen (NEOG) $29, Sequenom (SQNM) $6.10, Targacept (TRGT) $20.7 and ViroPharma (VPHM).