The Biotech Stock Mailbag is once again open for business.

Before I get to your emails, I want to make sure everyone has seen my recent event calendars listing upcoming FDA approvals and clinical trial results. There were two of the latter, which you can read here and here.

This is helpful information for health care investors, so clip and save.

The first email comes from John M., who writes, "Adam, what do you think about Cubist Pharmaceuticals ( CBST)? It seems almost forgotten. Do you think it is a takeout candidate?"

I don't know if Cubist is a takeout candidate, but I do like the stock. The company sells Cubicin, a successful antibiotic that treats the methicillin resistant Staphylococcus aureus (MRSA) bug along with other microbial nasties. The drug's sales grew 31% in the first quarter to $112 million.

At $17 a share, Cubist trades at 10 times consensus 2010 earnings estimate, which is cheap in my book, especially for a company with a drug that can do $500 million plus this year and $1 billion at peak.

The overhang on Cubist today, and the reason why some investors stay away, is the ongoing Cubicin patent challenge from Teva Pharmaceuticals ( TEVA). I believe the Cubicin patents are strong and valid. Teva is not going to win this patent fight and launch a generic Cubicin early.

Instead, Teva will be forced to concede to some kind of negotiated deal with Cubist that pushes a generic release back until very close to the Cubicin patent expirations in 2019.

When that deal is announced, the overhang on Cubist lifts, and the stock soars.

Erika P. asks, "Deerfield must see something good in Arena Pharmaceuticals' ( ARNA) obesity drug since it gave the company $100 million. Do you have any comments?"

To be precise, Deerfield Management, a New York health care hedge fund that lately has turned more biotech merchant bank, didn't just hand over $100 million to Arena for nothing. Arena gets $100 million, but Deerfield gets a 2.25% transaction fee right off the top, plus the money is a four-year loan that bears interest payable by Arena to Deerfield in regular increments.

On top of all that, Arena is giving Deerfield warrants for 28 million shares priced at a slight premium to the current stock price of $5.28. These warrants dilute the company's share count by 35%.

It's a pretty good deal for Deerfield.

But Arena is getting $100 million, and that's a positive, too, because it alleviates the company's cash crunch. Arena had less than a year's worth of cash in its coffers before the Deerfield deal. That made the company vulnerable and weak, especially as it tries to find a partner to co-develop and co-market lorcaserin, its obesity drug in phase III studies.

Now, prospective partners won't be able to use Arena's cash shortage as a bargaining chip.

But wait a second, if Arena CEO Jack Lief had serious Big Pharma interest for lorcaserin in his pocket already, why would he need to borrow money from Deerfield?

I'm going to get gruff from the Arena-iacs for stating this, but I just don't see the excitement over lorcaserin. I know, the drug met all three primary endpoints of the first phase III study, but with only 3.6% placebo-adjusted weight loss over 12 months. 3.6% isn't much weight loss.

Yes, lorcaserin appears to be safe, which is very important for any new weight-loss drug. Perhaps Arena-iacs are right in their assertion that good safety and a little bit of weight loss is enough to attract a Big Pharma partner and turn lorcaserin into a blockbuster weight-loss drug.

I'm skeptical. I certainly want to see results from the next phase III study -- results coming in September -- before changing my mind.

You knew I'd eventually get to some email about Cell Therapeutics ( CTIC), right? The first comes from Richard H., who has issues with my columns this week on the company's debt tender offer.

"You continue to state the obvious about Cell Therapeutics. Not many biotechs operate in the black until they have a developed product. Keep up the good work!"

I can appreciate Richard's sarcasm given my own penchant for snark, and he is partly correct. Most biotech companies operate for years with significant operating losses. In fact, a majority of biotech firms never make a dime.

I'm not faulting Cell Therapeutics for some red ink. The problem is that Cell Therapeutics is a triple threat -- dwindling cash, heavy debt and a ridiculously large outstanding share count. Three strikes and you're ... I think you know what comes next, right?

Next up, an email from Fareed H., who writes, "We know you don't like Cell Therapeutics, but the company has to be worth something. What's your price target on the stock?"

I did some quick calculations and came up with a fair value for Cell Therapeutics in the range of 20 cents to 30 cents a share.

This valuation takes into account the lowered debt level and assumes the cancer drug pixantrone is approved (risk adjusted to 85%) and does $100 million in peak sales. I give no value to Opaxio because I don't believe that drug is approvable ever, nor did I give the company any credit for whatever else sits in the pipeline.

Obviously, the value of Cell Therapeutics rises if pixantrone does better or if something else from the company's pipeline is a success. At this point, I believe assuming $100 million in pixantrone sales is a generous forecast.

Jonathan L. isn't impressed with my biotech stocks picks from last week or the performance of my model portfolio.

"Your portfolio was up only 21%, what a joke. I can close my eyes throw a dart and beat 21%, and you're the one with a platform to give stock advice. What a joke. The only thing you're good at is destroying the wealth of everyday Americans after the worst economic disaster since the Depression. What you do is no less than stealing food off the tables of hard working sic American investors. What a joke. Let me guess next time Cell Therapeutics or Hemispherx Biopharma ( HEB) come out with good news you're going to bash them to get the stock price down, so you're sic hedge buddies can pick up cheap shares by costing real Americans thousands if not millions. I bet you've never worked a day in your life. You look like a bleeping worm. I just had to throw in that last comment. Have a nice day."

I launched my biotech model portfolio on Sept. 15, 2008, the same day that Lehman Brothers declared bankruptcy and before the markets began the steep freefall in October and November.

I'd say a 21% cumulative return on a net-long portfolio since that black day in September is pretty darn good, all things considered. Update, the portfolio's return is now 22%.

Perhaps Jonathan does better throwing darts at penny stocks. I'm not in the business of hoping for winning lottery picks. I try to recommend investments in real companies.

Finally, Jerry S. answers my Mac or PC question from last week's Mailbag.

"Everyone knows God is a Mac and Satan is a PC."


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.

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