Biotech Stock Mailbag: Sequenom

BOSTON (TheStreet) --You might not think it, but Sequenom (SQNM) and Pets.com have something in common.

Ten years ago, on March 10, 2000, the dot-com bubble burst. The tech-heavy Nasdaq peaked at 5,132 and then proceeded to slide downhill fast, taking with it the fortunes of investors who naively thought that anything with the letter "e" in front its name was a golden ticket.

The online pet supply "e-tailer" Pets.com came to mind as I was putting together this week's Biotech Stock Mailbag and reading through a dozen or so emails of reader comments about my coverage of Sequenom.
Mailbag

Pets.com was a very hot stock back in the early days of the aughts. (Remember its mascot, the talking sock puppet?) Never mind that it really didn't make much sense for pet owners to buy large bags of kitty litter and puppy chow online and wait days for delivery. Forget that Pets.com relied on discounted shipping to attract customers, and the company actually lost money on every order. Back in 2000, e-tailers were a hot ticket on Wall Street and investors were more than happy to overlook the obvious and fatal flaws in Pets.com's business plan.

Today, investors seem to have imbued Sequenom with some of that reckless disregard for reality. The troubled developer of non-invasive fetal gene tests, which blew up last year when data for a Down's Syndrome test had to be thrown out, is nonetheless enjoying a stock resurgence, with shares essentially doubling since last December. The stock closed Thursday at $8.01.

But as BNET's Jim Edwards summed it up nicely this week, Sequenom investors are "projecting their wildly optimistic expectations onto a real blank slate of a company."

I wonder how much angry email he got for that remark? I know my inbox filled up fast after my last Sequenom column in which I dissected Sequenom's fuzzy math being used by one analyst to justify her newly minted $16 price target.

"Gofigure" writes, "So, what are you saying here is? Sequenom will not have any viable test out this year? What is your proof of it? Are you shorting the stock?"

"Stockfundmanager" takes Jim Cramer and me to task for being "wrong about Sequenom since $2.55 up until the current $8.60 and you keep bashing instead of admitting you are wrong. You are becoming suspect of having a motive to your bashing... My price target is $25 versus Cramer's of $3. We will see who is right me or Cramer."

Slow down, folks. I'm not trying to bash Sequenom. Let's go back to what I wrote in mid February about Sequenom and its Down's test:

"The big unanswered question, however, is whether Sequenom, or anyone else, can develop a reliable, accurate and non-invasive genetic test that can read that fetal DNA or RNA and allow doctors to diagnose a host of diseases, most notably Down's syndrome.

"Sequenom's blow-up last year calls into serious question the company's ability to turn the science into a viable commercial test product. Certainly, Sequenom's credibility after the 'data mishandling' fiasco is in tatters so it's going to take large and independent clinical trials to give anyone confidence in a prenatal gene test from the company's labs."

What worries me is that today's Sequenom bulls are looking at the direction of the stock price only and ignoring the fact that Sequenom 1) is the target of ongoing FBI and SEC investigations; 2) still hasn't explained what happened last spring to cause the old Down's test to blow up; 3) is involved in a legal fight over the ownership of at least some of its technology; 4) needs to raise money soon; and 5) very likely faces increased FDA regulation that could delay the launch of any gene-based test for years.

"Billz," another commenter on this Sequenom column who says he's an obstetrician/gynecologist, thinks I'm being too risk averse.

"I should tell you I understand pregnancy, pregnant patients, genetics and biochemistry pretty well. I've also read the patent issued in February to Sequenom. I also immediately understood the significance of the Rh test, and the XY test that was announced -- the technique for isolating fetal DNA is sound," he says, referring to two new fetal gene tests that Sequenom plans to launch while it works on rebuilding the Down's test.

Billz adds, "I've been stalking Sequenom since the debacle in April, having missed the boat then, I thought this was a very interesting story -- the obvious question being fraud or inexcusable sloppiness. Once the lawsuit was settled in stock, and the two tests were announced I had everything I needed to connect the dots and jumped into the stock and options with all guns blazing."

I understand that speculating in risky stocks is a legitimate and potentially very profitable exercise. I'm not calling Sequenom a total fraud in any way. But I remember the sock puppet and the analysts of the dot-com era who assured investors that online "eyeballs" were more important than profits. I lived and worked through those heady days and the nightmare that followed when it all fell apart.

Tech investors got in trouble in 2000 because they mistook hot stocks for profitable businesses. Sequenom investors shouldn't make the same mistake, so start demanding more accountability, transparency and data from the company before believing again.

Via Twitter, @Trevorr68 tweets, "Did you catch that bizarre press release from Cel-Sci ( CVM) regarding the $125,000 payment from Byron Biopharma?"

Yes. Cel-Sci's announcement Wednesday was noteworthy only in that the company once again failed to disclose anything about the identity or corporate history of Byron Biopharma, which owns South African marketing rights to Cel-Sci's experimental cancer drug Multikine.

The partnership between Cel-Sci and Byron is unusual because Cel-Sci, which owns Multikine, actually paid Byron to acquire South African marketing rights. (The payment came in the form of discounted Cel-Sci stock and warrants, which Byron was later free to sell at a substantial profit.)

Normally, companies sell the rights to market their proprietary drugs -- they don't have to pay a partner to do so.

Wednesday's $125,000 payment from Byron back to Cel-Sci, therefore, isn't much more than a rebate on Byron's realized profits. Call it a Multikine tax, if you want. The payment does nothing to disprove the allegation by a current Cel-Sci shareholder that Byron is a ghost company (most likely a front for a hedge fund) that Cel-Sci used to raise money and improperly sidestep anti-dilution provisions in previous financings.

David Y. asks, "Any thoughts on A.P. Pharma ( APPA)?"

Not many, other than to note that the company faces an FDA approval decision date on March 18 for APF530, a drug to treat nausea and vomiting in patients undergoing chemotherapy treatments for cancer.

The stock had a big move from 90 cents in December to more than $2 in mid February, but it has since retraced back the $1.60-range. A full approval from the FDA is likely to move the stock higher once again, but I don't know enough about APF530 to predict the agency's decision.

I will say that the commercial market for drugs to treat chemo-induced nausea and vomiting is rather crowded, including cheap, generic drugs. APF530 is itself a reformulation of an existing generic drug. Thus, tread lightly with any revenue assumptions.

More email from Dendreon's ( DNDN) P Baggers. This time they're shaming me for writing about Sanofi-Aventis' ( SNY) experimental prostate cancer drug cabazitaxel.

Steve writes, "With all due respect, your article touting Sanofi-Aventis' prostate cancer drug coinciding with Dendreon's Provenge update shows you are deeply captured by Wall Street crooks. Why would anyone want to take chemotherapy and suffer through awful side effects? Time will prove Provenge and Dendreon's platform works. We know it, and I bet you know it too."

Provenge and cabazitaxel, if both are approved, will be able to co-exist quite well. The two drugs do not compete. Provenge will be administered to patients with advancing but mildly symptomatic prostate cancer before they ever receive a single dose of chemotherapy. Cabazitaxel appears to be a very promising drug for patients with more advanced prostate cancer, after Provenge and after tumors start growing again despite initial treatment with chemotherapy.

One cancer, two different drugs, both treating patients at different stages of the disease. P Baggers should understand that prostate cancer isn't a zero-sum game. It's not Provenge or nothing.

Stanley B. asks, "What do you think of Arena Pharmaceuticals ( ARNA) and its obesity drug?"

Lorcaserin has two main things working in its favor. First, the drug appears to be safe, based on the data publicly available. Second, lorcaserin is a single, new molecule, which might be looked upon more favorably by regulators and potential marketing partners than the dual combinations of existing drugs being developed for weight loss by competitors Vivus ( VVUS) and Orexigen Therapeutics ( OREX).

The albatross around Arena's neck is that lorcaserin doesn't help obese patients lose much weight. In the phase III studies, lorcaserin-treated patients only lost about 3% body weight, placebo adjusted. Vivus' Qnexa, by comparison, helped patients lose about 8-9% of their body weight.

The FDA is very concerned about the safety of weight-loss drugs, but then, efficacy (or lack thereof) cannot be ignored. It's a tough call, but I'd probably rank Vivus at the top of my list of obesity drug stocks, Arena second and Orexigen third.

The FDA is already reviewing the drug applications from Arena and Vivus, with approval decision dates of Oct. 22 and Oct. 28, respectively. (Orexigen is expected to file its drug for approval soon.)

Obviously, those are important dates to keep in mind, but I'd expect the FDA to convene an advisory panel to review both lorcaserin and Qnexa well before its October deadlines. This as-yet-unscheduled FDA advisory panel will be very closely watched by investors.

Wendy O. asks, "Is there more upside in InterMune's ( ITMN) stock price?"

Yes. It's not hard to make a case for InterMune being worth $40-plus, but the easy money has already been made in the past week. Shares zoomed from $14 to the high $30s after an FDA panel voted Tuesday to recommend approval for pirfenidone as a treatment for idiopathic pulmonary fibrosis. I wouldn't necessarily chase the stock. A pullback might make for a better opportunity to buy, especially if InterMune raises money. Anticipation of a financing may explain Thursday's selloff.

Some analysts are throwing around $50-plus price targets for InterMune. I guess that's possible, but the assumptions inherent in those forecasts are very rosy. Not impossible, but maybe a bit early.

If you want to play around with InterMune valuation scenarios on your own, start with 100,000 IPF patients in the U.S., of which approximately 60% have mild to moderate disease (the target patient population for pirfenidone.) Pricing is a bit tricky but figure a range of $50,000 to $70,000. For penetration rates, assume 40-50% at peak. InterMune plans on selling pirfenidone on its own in the U.S., so don't forget to factor in the costs of selling the drug.

I don't know the prevalence of IPF in Europe, but the company has designs on getting pirfenidone approved there, too, albeit through a partner. I'm not a fan of InterMune's hepatitis C drug, but it deserves some value, if even just a little. Finally, the company has about $1 in net cash (minus convertible debt) at present.

What's a Biotech Stock Mailbag without an email or two about Cell Therapeutics ( CTIC)?

Chet writes, "Cell Therapeutics looks like it should be on major dilution watch. Two fake stories to rev up the stock price as much as possible in the wake of (or in advance of...) their miserable FDA review coming March 22 so that they can raise enough cash to scrape by. I'm thinking this dilution will be even bigger than ever and that they'll try to finance another year of their pathetic business. Oh well, I figure the shorts are the people buying all the stock right now anyway considering just how predictable CEO James Bianco has gotten. I find it sad that this company only pursues preserving their crap company (and huge paychecks) and seemingly couldn't care less that they don't have a single worthwhile drug that will actually be able to save anyone with cancer someday. Please, Adam, don't stop exposing how bad this company is, but try not to waste your breath on them too much."

Let's just say I'm looking forward to March 22 and the FDA's advisory panel for pixantrone. I've long been bearish on Cell Therapeutics even working under the assumption that pixantrone is approved. I don't think that pixantrone will ever generate enough revenue to bring meaningful profits to the company. Yet after reading the FDA's scathingly critical review of pixantrone, I now think the chances of the drug ever getting approved in the first place are fairly low.

On the other side of the divide, Alfred K. writes, "I think it is time to write a decent report about Cell Therapeutics, a good chance to win back readers' confidence and trust? I value most of your reports, but as a big shareholder of Cell Therapeutics I didn't appreciate the permanent negative sidekicks, which gave many of us an impression. . . you know what I mean. I just don't want to name it, because I know every analyst has likes and dislikes. But at the end of the day, you will be judged by your readers."

I think Alfred is too polite to label me a "basher."

-- Reported by Adam Feuerstein in Boston.

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Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. 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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