(Editor's note: Come see Adam Feuerstein at the Money Show in San Francisco. Adam will be speaking to attendees on Friday, Aug. 8, at 2:15 p.m. ("Biotech Investing for Individuals: How to Turn Geeky Science Into Fat Profits"); on a lunch panel on Saturday, Aug. 9, at 12:35 p.m. ("Tech and Biotech: Picks and Pans for 2008 and Beyond"); and on Sunday, Aug. 10, at 8 a.m. ("Biotech Investing for Individuals: How to Turn Geeky Science Into Fat Profits").
Let's open this week's Biotech Mailbag with something a bit different -- a Big Pharma question. Franco asks, "Do you see Pfizer ( PFE) potentially obtaining a biotech company to increase its sales?" Speculating about Pfizer's M&A strategy is a favorite biotech parlor game. Unfortunately, my crystal ball is no more prescient than anyone else's. As it stands, European and Japanese drugmakers -- Roche, Takeda, GlaxoSmthKline ( GSK) -- are taking advantage of the weak dollar to shop more aggressively for biotech than their U.S. counterparts. Pfizer was reportedly interested in buying Biogen Idec ( BIIB) but not at the price demanded by activist shareholder Carl Icahn. The company's pipeline is actually fairly deep, but the problem is that Pfizer is so big that one or two new drugs don't make much of a dent in the looming revenue cliff caused by generic-drug competition. I've long joked with friends that if Pfizer wants to really shake things up, it would just buy the entire Nasdaq Biotech Index. Does Pfizer buy Amgen ( AMGN)? Gilead Sciences ( GILD)? Does it take a run at Biogen again? I'm just guessing.
Next up, an email from Tega on this week's blockbuster news from Roche and Genentech ( DNA):
"I am writing with regards to your column titled Roche Bid Could Alter Pharma's DNA. My question is how did Lehman Brothers come up with the Roche/Genentech EPS/NPV valuation that they also used Celgene ( CELG) as a comparator? Can you explain the process on coming up with such valuation or how I can make such valuations?"There's a lot of educated guesswork when trying to determine a fair value for a company like Genentech. In a note to clients this week, Lehman analyst Jim Birchenough predicted that Roche would ultimately agree to a $105-a-share "compromise" offer for Genentech. Birchenough got there using several points of reference. A 30x 2009 EPS multiple, comparable to Celgene, supports a $120-per-share purchase price. A 35%-60% 30-day premium, comparable to other acquisitions, would support a $104-$123/share offer price. Birchenough also pegs the net present value of Genentech's commercial and pipeline products at $70 -- a 50% premium that yields a $105/share purchase price.
Next up, a related email from Hank D., who writes:
"Thanks for your focus on this sector. Question: Does Roche's move have an impact on the "change of control" clause regarding Rituxan and Genentech's partnership with Biogen Idec? My understanding is that there could be some implication."From what I've read and from what my colleague Elizabeth Trotta has learned after speaking with Biogen Idec, the Roche-Genentech deal will have no significant impact on the economic terms under which Genentech (soon to be Roche) and Biogen Idec share revenue from Rituxan. Since Roche is already a majority owner of Genentech, there is no change of control if Roche takes Genentech private. The only way that the Rituxan relationship changes is if there is a change of control at Biogen Idec.
Sticking with the big-cap theme, S.K.K. writes:
"Thank you for your terrific piece on Gilead Sciences. Question: What does 'significant decline' as a buying opportunity mean? 5 points? 10 points?"Gilead shares sold off by about 10%, dropping briefly below $50, after the company's second-quarter earnings announcement last Thursday, July 17. Investors were spooked a bit by the 2-cent per-share earnings miss for the quarter, and quite a bit more about new, higher R&D expense guidance. The weakness in the stock did bring out opportunistic buyers Friday, including our very own Jim Cramer, who saw, smartly, that the strong fundamentals at Gilead remain very much intact, and that while the operating margin may fall slightly, it still remains well above the sector average today and into the future. Cramer added Gilead to his Action Alerts PLUS charitable trust last Friday.
Did you think we could get through an entire Mailbag without someone calling me names? Well, Scott T. saves the day. He writes:
"You used to work for a hedge fund that shorted Introgen ( INGN), which is why nothing you say can be believed. You're a disgrace and a fraud. I've alerted the SEC about you and my guess is that you'll be receiving a knock on the door real soon. Have fun in jail."Scott apparently read a recent article in the Austin American-Statesman, Introgen's hometown newspaper, which included the following statement:
"Introgen has said that Feuerstein previously worked for a hedge fund that shorted the company's shares, giving him an interest in driving down the stock price."This appears to be Introgen's attempt to discredit my in-depth work detailing the myriad problems with its gene therapy drug Advexin. Introgen's slumping stock price is proof that the smear tactics aren't working, but since the company is essentially accusing me of being financially conflicted at best, or worse, some type of nefarious stock manipulator, it's appropriate to set the record straight.
On an ending note, Biovest International ( BVTI) and Accentia Biopharmaceuticals ( ABPI) reported this week that their cancer vaccine BiovaxID produced a statistically significant improvement in disease-free survival in patients with non-Hodgkin's lymphoma, or NHL, according to results from a phase III study. Where Genitope ( GTOP) and Favrille ( FVRL) failed with their respective NHL vaccines, Biovest and Accentia claim success, and as a result, a filing for Food and Drug Administration approval will be coming shortly. The news prompted some email, including one from Phil R., who writes, "Looks like we have a winner!" Sorry to burst the bubble, but I don't think so. My friend and fellow biotech commentator David Miller of Biotech Stock Monthly has dug into the BiovaxID data and finds it seriously lacking. "The deeper I look at the data, the worse it gets," he told me over Instant Messenger Wednesday. You can read some of his thoughts here so no sense in me being repetitious. I believe Miller has this one nailed.