BOSTON -- Thanks for returning to the Biotech Mailbag. Let's get right to your emails. This week:

  • Xoma ( XOMA),

  • Vanda Pharmaceuticals ( VNDA),

  • Onyx Pharmaceuticals ( ONXX), and

  • Arena Pharmaceuticals ( ARNA).

    The first email is from David R., who writes, "Has Xoma ever earned a cent? I don't think so. It's amazing that such a nothing company can survive so long."

    Yes, Xoma has earned a cent. In fact, the company posted a profit of $21.8 million, or 16 a share, in the third quarter.

    But I think I know where David is going with his question. Yes, Xoma eked out a profit last quarter, but the company is expected to lose money for the full year, and its accumulated deficit was $730 million as of the end of the third quarter.

    So, Xoma shouldn't really be thought of as a profitable biotech company just yet. But then, red ink flows like water in Biotechland, so Xoma is no different from most. I wouldn't necessarily harp on the company for this.

    I pretty much laid out the Xoma investment story in a column at the end of November, and not much has changed. The speculation that Xoma would put itself up for sale has died down. From what I hear, management seems unable or unwilling to sell the company at this point. This despite the fact that new CEO Steven Engle's employment contract appears to give him an incentive to find a buyer now that 2007 is behind us. If you want more detail, read the company's 8-K filed last Aug. 7.

    Xoma filed a $150 million shelf at the end of December, so that, plus dimming odds on a near-term takeout, has weighed on the stock, which is back under $3.

    The next best bet for a Xoma move is data from XOMA 052, one of the company's lead pipeline drugs, expected in the spring. XOMA 052 is a monoclonal antibody that targets IL-1 beta, which is believed to play a role in diabetes and inflammatory/autoimmune diseases like rheumatoid arthritis.

    Xoma is conducting two phase I studies of XOMA 052 in Type 2 diabetes patients. Obviously, there is limited information that will come from early stage studies like these, but if Xoma can show positive proof of concept with the drug, the hope is that investors (and potential partners) get excited.

    Of course, don't forget about that shelf. If the stock moves higher, don't be surprised to see Xoma raise money.

    Kris B. emails to ask about Vanda:

    "I would like to know your analysis of Vanda Pharmaceuticals. I am a realist and think iloperidone gets an approvable letter later this year and forces Vanda to run another trial examining the QTc issue. However, I am long at this current price, $5.75, and left wondering why there is very little value placed on two successful phase III drugs and over $3.50 a share in cash."

    Vanda is pitching iloperidone as safer and better tolerated than currently used schizophrenia drugs like Risperdal or Geodon. But that's not borne out, necessarily, in the phase III data presented last month.

    Iloperidone looks like a me-too drug on efficacy, with a mixed-to-worse side effect profile compared with currently marketed schizophrenia drugs. It may cause fewer movement disorders (a plus), but more weight gain and a worse metabolic profile, which puts patients at risk for diabetes (not good). I don't think the QTc (irregular heartbeat) issue is resolved, either.

    Kris succinctly articulates the bull argument on Vanda right now, which is that the stock is cheap and expectations are low, so owning Vanda seems like a low-risk bet. It closed the week at $5.27.

    That's an enticing thesis, and I admit to having been swayed in the past to write glowingly about certain biotech stocks based on the cheapness argument. But cheap stocks can get cheaper, and I fear that's a bigger risk with Vanda than investors like Kris recognize.

    I have a friend, a hedge fund analyst, who spends all his work time focused entirely on psychiatric drugs. He has a lot of credibility with me, and he's really bearish on Vanda and iloperidone. Full disclosure: He's also been short the stock. The reason: The FDA's psychiatric drug division is among the toughest to please, and it has shown no great willingness to approve me-too drugs, especially those with a safety risk.

    He thinks Vanda receives a non-approvable letter from the FDA for iloperidone when the agency renders its decision, expected around August. If he's right -- and I tend to agree with him -- Vanda doesn't look so inexpensive here. A non-approvable letter for iloperidone will be a huge setback for Vanda, which will be forced to spend a lot of time and money to rescue the drug. And they'll likely have to do it solo, because no partner will want to take on the project.

    I haven't spent any time on Vanda's other pipeline drug, VEC-162 for insomnia, but it also has the mark of a me-too product. In this case, it looks like Takeda's sleep drug Rozerem. A phase III study is underway, with data expected in the third quarter. Rozerem hasn't turned out to be a particularly strong player in the ultra-competitive insomnia drug market, so I'm not sure if there is much to get excited about with VEC-162.

    This email came in from WCK: "Hollings Renton, president and CEO of Onyx Pharmaceuticals, is retiring. How do you view this at this stage of their success?"

    I spoke with Renton last week at the JPMorgan Healthcare Conference (you might have seen the video I shot. Videography is not my strong suit.) Off camera, I asked him about the retirement thing; he said the company was still searching for his replacement. His body language didn't say to me that he was planning his retirement party any time soon, so perhaps finding a new CEO has been difficult.

    I don't know what this means. Renton announced his plans last October to retire in 2008. My immediate read was that it was a negative because it signaled that there would be no acquisition by Onyx's partner, the German drug firm Bayer. But that didn't stop the stock from going higher, finishing the year as the best-performing stock in the biotech sector.

    This year hasn't been as kind. On Thursday, Onyx shares had fallen to just over $50, the stock is down around 9%, compared with a 2% gain for the Nasdaq Biotechnology Index.

    It's been hard to pinpoint an exact cause for the weakness. There is some profit-taking off the fantastic gains of 2007. There is worry about upcoming fourth-quarter results, i.e., that a big ramp in R&D costs tied to new Nexavar clinical trials might lead to a greater-than-expected loss.

    And there is some anxiety about Nexavar use in liver cancer patients. Is the commercial opportunity in liver cancer as big as many investors hope? This is especially important since Onyx's current valuation, even here, bakes in a lot of liver cancer revenue.

    Assuming that the liver cancer opportunity is real, the relevant Onyx story is still the ongoing Nexavar lung cancer phase III trial, with an interim analysis in the first half of the year and a final analysis in the back half. The simplistic way I look at the scenario, Onyx is a $40 stock if Nexavar lung fails; it goes to $90 to $100 if it works.

    From Oliver C.:

    "Let me just say that your articles are very much appreciated. I am an experienced investor, but I'm by no means a biotech expert, so I appreciate all the valuable advice on the space. Have two quick questions for you. 1. Altus Pharmaceuticals ( ALTU): the big drop in December (after partnership with Genentech ( DNA) was dropped) seems overdone. The company has two viable late-stage products (Trizytek, ALTU-238) and is trading at slightly above cash. Any thoughts?

    "2. Arena Pharmaceuticals: With the stock nearly cut in half and the very important 12-month lorcaserin review coming in early March, this stock looks interesting. Any views on the safety data and expected stock-price reaction?"

    Thanks for the note and the kind words, Oliver. I'm not going to spend any time on Altus here because I have nothing new to add from my Dec. 21 column .

    I agree that Arena is worth a look now. Recall that the stock ran up nicely last summer as investors anticipated good news from a six-month safety review from the phase III trial of the company's obesity drug lorcaserin. After the drug passed through this check clean in September, the stock sold off, accelerated in part by an 11 million share offering in November.

    Now, a 12-month lorcaserin safety review is coming up in March. The stock is already moving higher, though it pulled back Friday to $7.88. Banc of America Securities analyst William Ho upgraded Arena to buy from neutral on Jan. 15. He believes the 12-month safety review will also be positive and recommends investors get into the stock now.

    Independent health care research shop SummerStreet Research Partners made a similar call last month, reiterating its buy rating and $24 price target.

    "We expect the next safety check to be positive, as was the six-month check -in the third quarter. We believe that partners will be interested at this point to co-develop the product. Recall that with Fen/Phen many patients have heart valve damage as early as three months. Field checks reveal that lorcaserin is well tolerated and patients appear to be losing weight."

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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; click here to send him an email.