Scimitar Equity Blog

Over 6000 people piled into the Westin St. Francis Hotel in San Francisco for the 28th Annual Conference. Investors, Company presenters and entrepreneurs were emboldened by  good biotech sector returns in 2009 of 18-28% with many stocks reaching new highs. Seasonality has been a factor with the so-called “January effect” where  small cap stocks tend to spike up due to a number of factors but this Conference has been paramount. For example the IBB ETF is up about 6% from November levels.

Although financing opportunities are still limited for smaller companies due to a closed IPO window there is renewed optimism due to explosive scientific developments in molecular biology immunology and genomics and how this will result in more targeted drugs and diagnostics.

As an example here are some of the big movers on Monday:

AMAG up 7.9%, Array (ARRY) up 8.5%, Biocryst (BCRX) up 4%, Helicos (HLCS) up 4.6%, Ideninx (IDIX) up 9.2%, Quidel (QDEL) up 4.5%, MITI up 11%, NovaVax (NVAX) up 14% and Seracare (SRLS) up 6.7%

Here are some of the broader themes and market trends gleaned from Company presentations:

1. There is a shift from small molecule drug development to biologicals and vaccines. e.g. Pfizer (PFE)
2. “Bolt-on” acquisitions of smaller companies are being done to bolster product portfolios and emerging market positions. e.g. GSK
3. There is increasing synergy of diagnostics and pharmaceuticals. e.g. Roche
4. A migration of diagnostics out of the Lab to the Home and “point of care” will  attack on chronic diseases such as obesity and diabetes to a more “holistic” approach in the way medicine is practiced. e.g. Inverness (IMA)
5. Pure-play personalized medicine companies are  targeting  cancer treatment though genomics. e.g. Genomic Health (GHDX).
6. There continue to be an Increasing number of partnerships between pharma and biotech.
7. Pharmacogenomics -getting the right drug to the right patient-continues to get traction. e.g. CVS/Caremark (CVS)
8. On the healthcare refrom scene a luncheon presenter, Thomas Scully, an ex-CMS administrator, said the “reform” impact will be an expansion of insurance benefits  that will be positive for the industry in the short term due to increased demand  but create federal budget problems in the long term(2013 time frame).

Here are some brief notes from important companies presenting at JPM:

Genzyme (GENZ)

Genzyme had a difficult year with serious manufacturing problems in its Allston MA facility caused by FDA (483)  issues related to GMP’s and viral contamination in its Cerazyme manufacturing process.

An overloaded operations was one of the causes. To correct the situation GENZ has hired a new GM for Allston  and strengthened Regulatory and Compliance staff. Cerazyme manufacturing was restarted in November 2009 and Fabrazyme is expected this week. Also new  capacity will be brought on from 20Kl in 2009 to 32Kl in 2011.

Chairman and CEO Henri Termeer said he is confident that “Genzyme will emerge as a stronger Company”. Revenues are in the $4.5B range with a CAGR of 19%. The Company is a leader in genetic diseases (Lysozyme Storage Disease) with a diversified product line. Guidance for financials in 2010 will be given on February 17. In the meantime Carl Icahn owns 1.5M shares and is looking for a Proxy fight. Q4 Revenues slipped to $1.04B due to the plant shutdown helped by the osteoarthritis knee pain drug Synvise-One and the oncology drug Mozobil which were launched in 2009.

Gilead (GILD)

Gilead is the leader in the treatment of HIV and AIDS with $4.7B in 2009 revenues up 26% from previous years. HIV testing will be mandated or encouraged resulting in 5 million more tests in the U.S. providing increased drug demand because HIV  is now a manageable disease with daily drug therapy.

The Company also has the leading antiviral, Tamiflu for treatment and prevention of FluA  and B sold through their partner Roche with sales of $2.7B and royalties to GILD at $195M.

Viread another major drug, a reverse transcriptase and polymerase inhibitor was approved in Europe in 2008 for chronic HBV infection.

A broad pipeline of  products  include: Quad (GS9350) regimen of the integrase inhibitor which recently met goals in a Phase II trial; GS9450 Caspase inhibitor for HCV in Phase II; Aztreonam inhalation for cystic fibrosis with pending market applications; and other Ph. II products for HCV, CF and Pulmonary Arterial Hypertension as well as several others in preclinical and Phase i stages.

Dendreon (DNDN)

Dendreon is gearing up to launch Provenge (sipleucel-T) an active cellular immunotherapy for treatment of asymptomatic, metastatic and androgen-independent treatment of prostate cancer.

Commercialization is expected by year-end with full capacity by mid-2011 supporting sales in excess of $500M. In the pipeline are products for bladder cancer and renal cell carcinoma as well as other cancer types. This new class of therapy uses the power of the patient’s own live cells, by isolating and activating antigen presenting cells(APC’s) in an autologous therapy 3X a month.

Three cell processing centers will be set up but the existing service infrastructure will be used. A partner for Europe may be sought.

125 domestic sales reps will be hired to call directly on 3000 urologists and 5000 oncologists.

The Company has a cash position of about $600M.

Illumina (ILMN)

Illumina appears to have weathered the brief slowdown in purchases of genetic analysis systems with a preliminary financial report that states Q4 Revenues above Street estimates at $176M.2010 guidance is revenues of $800 and earnings close to $1.00/sh. The stock took a big hit last quarter down to the 26 range after it issued a warning on October 28 about weak Q3 sales. Shares are now $39-40.The Company recently received an order for 128 HiSeq 200 sequencing systems from the Beijing Genomics Institute(BGI) some of which will be installed in their state of their art genome center in Hong Kong beginning in Q1. This new system will have a price tag near $700k and can sequence an entire human genome for about $10,000.The HiSeq 2000 can generate 200Gb of data per run with a new standard for ease of use and cost effectiveness.

LifeTech(LIFE)

The merger of Invitrogen with API has created one of the largest biotech “tools” companies with revenues of over $3B focused in molecular, genetic and cellular markets. Over $1B of sales revenue comes from eCommerce and 50% of their revenues come from NIH and other government life science research funding. The Company has a patent estate valued at $100M and efforts are underway to leverage that technology through licensing and partnerships. Longer term the Company will pursue synthetic biology, animal health, food testing and molecular diagnostics. The vision is to apply single molecule sequencing and other technologies as a basis for medical treatment. The Company announced it signed a definitive agreement to acquire AcroMetrix, a provider of molecular and serological QC products, a strong fit with the current high growth $300M molecular diagnostics product line.