Pink slips at the FDA will equate to red ink for biotech investors

Tweet Pink slips at the FDA will equate to red ink for biotech investors

David Miller

Andy von Eschenbach, FDA Commissioner, says he’ll have to issue 2,000 60-day pink slips at the FDA if Congress and the President don’t get the PDUFA IV bill passed by Friday. We think the chance that they will is good, but the early Presidential election season could very well create some unexpected events. There are more than a few folks who would like to hold this bill up for political gain.

If the pink slips go out, we doubt staffers will start running for the exits right away. The growing trend of the FDA asking for delays will increase immediately, however, as managers start changing existing review and especially meeting schedules.

One could argue some decisions might come early, but we think any such occurrences will be rare. The FDA already considers itself understaffed. Bureaucrats, in our experience, don’t work harder in the face of crises like this. They tend to want to punish those they regulate by delaying even more.

We’ll more than likely see additional delays. The silent delays will be in meetings, time to obtain SPAs, etc. The more public delays will be similar to what ZymoGenetics (ZGEN) recently experienced – 90 days here, a 2-month Class One response turning into a 6-month Class Two response there, etc.






As timelines slip, biotech valuations go down. Significant delays will start damaging biotech investor portfolios.

If the PDUFA IV legislation is tied up for quite some time – say towards Halloween no end in sight – then things will get frightening. The pharma, biotech, and financial communities will pirate the pink-slipped FDA staffers. Once Congress finally gets around to passing the legislation, Dr. von Eschenbach won’t have anyone to hire back. He’s already said the FDA is understaffed.

Even if he replaces people, the loss of institutional knowledge will be significant. Guidance to companies will shift as new people provide new opinions. Delays in regulatory decisions will abound as new review teams have to start from square one in reviewing the data.

Again, I don’t think we’ll get that far as Congress and the President know what’s at stake here. But keep it on your radar just the same.

Neurochem (NRMX)

Tweet Neurochem (NRMX)

David Miller

Keep an eye out on Neurochem (NRMX) today. The option prices have been very high on this one because it has become yet another battleground stock in the biotech sector. The company’s Alzheimer drug, Alzhemed, has been derided and praised on Wall Street, and the biotech bulls and bears have been shooting the heck out of one another for months in the name.

This morning the company announced, in quite an impressive press release, that their primary analysis of the trial had failed. They blame imbalances between the treatment arms for confounding the results. They are going to an alternate analysis, which we presume is a Cox regression analysis, that has the ability to account for and correct those imbalances.

The problem is that when a primary analysis fails, the FDA can choose to ignore any subsequent analyses. The company is careful to say in their press release that the Cox analysis was prespecified, but there can be a great deal of variation in what “prespecified” means in terms of what the FDA might accept.

Bottom line is the trial failed at the first look and it will take several weeks to get it straightened out.

Look for options players to start rolling their May positions out a strike or two and for the action in the stock to be wild. Is this the next Dendreon (DNDN)? I doubt it but we have to wait and see what the data are and hope we can get a straight story from management on exactly how “prespecified” this Cox analysis was.

Margin Rules Might Make Development Stage Biotech Financials Matter

Tweet Margin Rules Might Make Development Stage Biotech Financials Matter

David Miller
February 20, 2007

For development-stage biotechnology companies, quarter-to-quarter revenues don’t matter much because these firms – by definition – don’t have significant revenues. What revenues they do have tend to be expense reimbursements from partners or amortized partnership dollars (up-front cash and milestone payments).

This makes financial analysis of these companies a relatively easy bottom line affair – you largely ignore everything but the net cash burn.

That could change for customers of TD Ameritrade (AMTD). Some time before the end of February for “original” Ameritrade customers and at an unknown date between February and June for “original” TD Waterhouse customers, the firm is changing its margin maintenance rules on biotechnology stocks. Generally, maintenance requirements will increase for those who hold development-stage biotech companies. Those who have concentrated portfolios will be the most affected.

Thanks go out to a correspondent, who wishes to remain unnamed, for alerting me to this potential change and sharing his conversations with the Ameritrade people. I made a few calls and came up with the following information.

TD Ameritrade has had significant trouble with collecting on margin calls from investors who were overly concentrated in one biotechnology stock. Not everyone has the “benefit” of my constant harangue on diversification, so there are people out there who have sunk everything into one stock only to see it detonate. Telik’s (TELK) recent 70% overnight decline is probably one of the better recent examples of this sad phenomenon.

TD Ameritrade is addressing this by changing the maintenance requirements for holders of biotechnology stocks in margin accounts. This is more than a little complicated, but I’m going to lay this out in a series of tables. If you are a TD Ameritrade customer with a margin account, I can’t urge you enough to call them and get specific guidance about your account.

It is probably best to start with the current rules:

In addition to these requirements, TD Ameritrade has placed more stringent maintenance requirements on a few hundred individual stocks. The company is changing their web site to make the list of these stocks easier to find. Currently, select the “Trade” tab on the new interface and start looking for a link named “Special Margin Requirements.” Some users will find this at the top. I found it in the small print at the bottom of the page.

The first change applicable to biotechnology investors has to do with different concentration requirements. Concentration refers to what percentage a particular stock makes up of your entire portfolio. As you can see above, normal concentration requirements kick in at 70%. For biotechnology stocks, there are now three tiers with the first one beginning at 50% instead:

This is relatively straightforward thus far. The more concentrated your portfolio, the higher your maintenance requirements will become.

The complicated part is how TD Ameritrade is going to determine the margin requirements on individual biotech stocks. They’ve decided to use a price/sales ratio, the market cap of the company divided by trailing twelve-month sales. If you don’t want to do the calculation in your head, both the TD Ameritrade site and Yahoo! Finance list the price/sales ratio.

I think this is a particularly odd choice, likely made by people with limited understanding of the sector. It creates the odd situation where, for a given revenue level, low-priced stocks – arguably those the market has voted to be the most risky – have lower margin requirements than high-priced stocks the market has voted to be less risky. It’s backwards, really. Additionally, it doesn’t even make sense from TD Ameritrade’s standpoint. A 50% loss on a $5 stock is the same as a 50% loss on a $25 stock, the only difference is the number of shares involved.

I’ve written at some length how traditional valuation metrics simply don’t apply to the biotech space. This is a perfect example of that.

Nevertheless, them’s the rules. Here is how the maintenance requirements break down according to the concentration tiers noted above and the price/sales ratios:

For people with undiversified biotechnology portfolios, the change from the current maintenance rates can be as much as 30 percentage points.

I’ve pulled a few examples from our own coverage universe to highlight how reliance on price/sales ratios create some unexpected results.

Would an objective observer determine YM Biosciences (YMI) is a lower risk than ZymoGenetics (ZGEN)? Or that Targeted Genetics (TGEN) is less risky from a “could go to zero” standpoint than Repros (RPRX)?

Of course not. TD Ameritrade has chosen a blunt quantitative instrument instead of working on a qualitative analysis of the situation in the sector.

If you are a TD Ameritrade margin customer with significant biotech holdings, call the company and ask to speak with the margin department. Have them run the numbers on your account to tell you what your maintenance call will be under the new rules. This is especially important if you are over 50% concentrated in any one stock.

I’m interested to see if other brokerages will follow suit.

Disclosure: Positions in YMI, RPRX, TGEN

BioMarin Pharmaceuticals (BMRN)

Tweet BioMarin Pharmaceuticals (BMRN)

David Miller
February 7, 2007

At the end of this month, BioMarin Pharmaceuticals (BMRN) will report data from a pilot study on uncontrolled hypertension. BioMarin typically seeks to develop drugs for orphan indications, so this is their first shot at a blockbuster indication.

The drug is nicknamed BH4, and the so-called CONTROL study enrolled 116 patients whose hypertension (high blood pressure) was not controlled by other drugs. What is not commonly known is the CONTROL trial is a repeat of a successful smaller study. While not guaranteeing success, it does lead us to be hopeful about the outcome of the CONTROL trial.

BioMarin has big plans for BH4 in 2007. They will launch a proof of concept trial to treat sickle-cell anemia. A trial in pulmonary arterial hypertension should also be underway soon. Data from a 210-patient trial to treat peripheral arterial disease (PAD) should arrive in the first half of 2008. A win in that trial would be very important, because PAD is where good cardiac drugs go to die – it’s a damn tough indication to beat. A good drug there would easily sell over a billion per year in the US.

The company released data last year on a successful Phase III study of the orphan drug Phenoptin in people with the PKU enzymatic deficiency. Last month, they released positive data from a label expansion study in the same disease. This is an orphan indication, but if the drug is approved by the FDA with a preferential label Phenoptin could be bigger than most people expect. They’ll make the filing next quarter in the US and in Q3-2007 in the EU. They are partnered with Serono (Merck Serono KGaA) outside the US. BioMarin has 100% of US rights and will get $15M cash when they file in the EU and $30M more if Phenoptin is approved in the EU.

BioMarin markets the orphan drug Aldurazyme with Genzyme (GENZ) in a 50/50 joint venture. The company also markets Naglazyme for patients with the orphan disease MPS-IV. Alan Leong, who covers BioMarin for us, believes sales of Phenoptin (if approved), Aldurazyme, and Naglazyme could push the company to profitability in late 2008.

We’ve been covering BioMarin since 2004 and made them our top pick in our August 2006 Anniversary Issue. If you glance at the chart over that period, you’ll see it’s been a good performer for us. The stock ran into a headwind in January when the company cleaned up its remaining convertible debt by issuing 8 million shares. That supply seems to have worked its way through the markets, however.

Investing ahead of pivotal results is always “exciting” because of the prospect of big downside (40-60%) surprises. If the CONTROL trial is clearly positive, we doubt BioMarin will exit 2007 as an independent company. Good cardiovascular drugs are hard to find and the company’s orphan programs are profitable.

One or more members of BSR’s research team own shares of BioMarin. Check out the Disclosures pages of our website for more information.