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Biotech Stock Mailbag - 2Q Updates

Biotech columnist Adam Feuerstein answers readers' questions about drug and health care-related firms.



) --Reader Peter K. emails to ask, "Which biotech and drug stocks look better or worse coming out of second-quarter earnings season?"

In a minor departure from the regular routine, I'll respond solely to Peter's question in this week's Biotech Stock Mailbag with updates, notes and observations on a gaggle of biotech and drug stocks following second-quarter results.

Perhaps there's reason to be optimistic about

Spectrum Pharmaceuticals

(SPPI) - Get Spectrum Pharmaceuticals Inc. Report

and its ongoing efforts to remake the radiopharmaceutical Zevalin into a successful lymphoma drug?

Second quarter Zevalin sales of $6.9 million were essentially flat sequentially (first quarter sales: $6.5 million) but Spectrum said marketing was effectively shut down for two weeks in the quarter due to April's volcanic eruption in Iceland. (I hate when companies blame weather or geologic events for revenue shortfalls.)

For the first time, Spectrum offered Zevalin 2010 sales guidance of $27-29 million. Let's hope that's just Spectrum being conservative because the forecast implies another $13-15 million in Zevalin sales for the remainder of the year, or flattish growth over first half sales of $13.4 million.

I'd be much happier if Spectrum could at least double Zevalin sales in 2010 compared to 2009's take of $15.7 million. That's easily achievable if the company can resume the growth rates seen in recent quarters, excluding this (temporary?) second-quarter slowdown.

Jazz Pharmaceuticals

(JAZZ) - Get Jazz Pharmaceuticals plc Report

turned in a strong second quarter with better-than-expected growth returning to Xyrem's narcolepsy sales. The company even raised guidance for the remainder of the year.

Next up for

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TheStreet Recommends

Jazz is the Aug. 20 FDA advisory panel convened to review Xyrem (or JZP-6) in fibromyalgia

. Jazz's base business is gaining strength, which should solidify the company's valuation floor in case the FDA panel votes against the fibromyalgia application.

Osiris Therapeutics

(OSIR) - Get Osiris Therapeutics, Inc. Report

CEO Randall Mills sounded very much like a guy stalling for time.

Osiris' adult stem cell therapy Prochymal failed two phase III studies in graft-versus-host disease (GVHD) last September, but ever since then, Mills has insisted the Prochymal data were positive and strong enough for the company to seek approval from the U.S. Food and Drug Administration.

Yet Osiris can't seem to actually complete the Prochymal approval filing with FDA, which is why Mills spent a good amount of time on the second quarter conference call explaining how it's taking months to write up statistical analysis plans and schedule meetings with FDA (meetings not yet scheduled or held, by the way) so that, eventually, Osiris will be ready to file Prochymal.

Which is pretty much exactly what Mills said on Osiris' first-quarter conference call in February.

Of course, Mills doesn't want to hem himself in with an exact date for a Prochymal FDA filing. He knows but won't say that data from two failed studies in GVHD, despite all the post-hoc subgroup analyses aimed at prettying up results, stands very little chance of convincing U.S. drug reviewers to pull out the approval stamp.

So, instead, Mills stalls for time and makes excuses. Osiris filed for Prochymal's approval in Canada, where the drug was granted accelerated approval. That's likely to lead to an "accelerated path to rejection," quipped Lazard Capital Markets in a research note that reiterated a sell rating and $2 price target.

Encouraging news from


(AMRN) - Get Amarin Corporation plc Report

second quarter update. Patient enrollment was completed ahead of schedule in the phase III "MARINE" study testing the company's prescription-grade Omega-3 (fish oil) drug AMR101 in patients with very high triglyceride levels. Results from the MARINE study are expected in early 2011.

I covered

Amarin, AMR101 and the large commercial market opportunity for a prescription Omega-3 drug

in a previous Mailbag.

Meantime, enrollment in the second AMR101 phase III trial, ANCHOR, is now more than halfway completed. This study, which enrolls patients with high triglyceride levels, is expected to also read out results next year.

The second quarter update from

Cyclacel Pharmaceuticals

(CYCC) - Get Cyclacel Pharmaceuticals Inc. Report

was less inspiring. The company is still waiting on the U.S. Food and Drug Administration's acceptance of the Special Protocol Assessment (SPA) for the phase III study of sapacitabine in elderly patients with acute myeloid leukemia. Cyclacel and the FDA have been hashing out the details of the SPA since the first quarter.

Likewise, Cyclacel is still promising -- but has not yet delivered -- final data from a phase III study of seliciclib in non-small cell lung cancer.

Vanda Pharmaceuticals

(VNDA) - Get Vanda Pharmaceuticals Inc. Report

continues to suffer from the slow and disappointing commercial launch of Fanapt, the company's schizophrenia drug that is marketed by


(NVS) - Get Novartis AG Report


Second-quarter Fanapt sales were a paltry $700,000 after Novartis filled the inventory channel with almost $21 million of the drug in the first quarter. While Vanda says monthly Fanapt prescriptions reached 4,000 in June from just 500 in February, at approximately $500 per prescription, it's still going to take a long time before demand works through existing inventory.

Neither Vanda nor Novartis is providing Fanapt sales guidance and new promotional marketing materials approved by FDA in May have yet to accelerate Fanapt prescriptions.

Vanda's valuation is buoyed by $207 million in cash, most of it coming from Novartis' $197 million up-front licensing payment for Fanapt. However, the company is still waiting for a ruling from the Internal Revenue Service over whether or not this Novartis payment is taxable income. Vanda wants to use its large net operating losses to offset any taxes, but if IRS says no (due to ownership changes at Vanda in 2008), the company will need to write a large check to the government.

How large? Assuming a standard 35% corporate tax rate, Vanda will owe the U.S. government roughly $69 million. Various state tax implications come into play as well, but suffice to say that a negative IRS ruling will hit Vanda in the pocketbook hard.

Vanda's stock will suffer too. The current $7-8 a share valuation floor (buoyed by the cash) gets knocked down to $3-4 a share.

Vanda expects a ruling from the IRS in the next couple of months, which makes this a more important near-term event for the company than Fanapt sales.

More fuel for the fire over


(MNKD) - Get MannKind Corporation Report

this week: The company announced a plan to raise new cash by selling up to 18.2 million shares to an investment firm known as Seaside 88.

Under terms of the deal, Seaside will buy 700,000-share blocks of Mannkind every two weeks at a price equal to an 8% discount to the volume-weighted average trading price over the previous ten trading days. The deal also has a $6.50-a-share floor under which no stock will be sold.

Assuming Mannkind's stock price remains around $7, the Seaside deal will yield the company about $30 million a quarter, which is about $10 million less than the company's current quarterly burn.

The new money does provide Mannkind with some additional breathing room, as long as the stock price stays near where it is today or goes higher. The deal also provides a temporary respite for Mannkind founder and chief money source Al Mann, who's been writing checks non-stop to fund the company's business activities. Mannkind owes Mann more than $250 million to date. (More on that in a bit.)

Pre-Seaside, the company's current cash and borrowing was enough to last into the first quarter 2011. Today, the cash runway could extend another three quarters, or through all of 2011.

The pros and cons of the Seaside financing will be rendered moot if FDA approves Mannkind's inhale-able insulin device Afrezza on or before the agency's deadline of Dec. 29. If approved, Mannkind's stock will soar, making it much easier for the company to raise more cash through Seaside or some other route.

If FDA delays or rejects Afrezza, Mannkind's stock price takes a big hit. In the likely event that the stock falls below $6.50, the Seaside money spigot gets turned off.

Mannkind still has not signed a long-promised marketing partner for Afrezza. Mannkind bulls say the new money puts the company in a stronger position at the negotiating table with prospective partners. Bears say there are no prospective marketing partners, which is why Mannkind is forced to raise money through Seaside and dilute shareholders once again.

I haven't seen Mannkind bulls comment on the choice of Seaside as a funding partner, but bears are growling (happily) about the investment firm because of its reputation as a money source for desperate and/or low-quality companies. Seaside is not a committed, long-term investor. Instead, the firm makes money by arbitraging the difference between the discounted price it pays for stock and the higher, market price at which the firm flips shares back to retail or other investors.

If there was real institutional investor interest in Afrezza, why did Mannkind choose to raise money with Seaside?

Back to Mann and his $250 million in loans: Mann has decided to accept Mannkind stock in matching increments to the Seaside purchases in lieu of cash repayment. Mann will accept stock at market price (undiscounted) and with a $7.15-a-share floor. If Mann "purchases" all 18.2 million shares under the agreement, Mannkind's debt would be reduced by approximately $130 million.

I'm taking a victory lap after


(VRML) - Get Vermillion Inc. Report

reported disappointing second-quarter sales of its OVA1 ovarian cancer test totaling $45,000. Back in March, I

questioned the utility and commercial potential for OVA1 and said Vermillion

, at $32 a share, was toppy and should be a source of funds for investors who'd profited from the stock's rise.

Vermillion shares were down to $7 intraday Thursday after the company reported paltry OVA1 sales.

-- Reported by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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