Biotech Stock Mailbag: Exact Sciences

BOSTON ( TheStreet) --Friday's Biotech Stock Mailbag kicks off with an email from Ted S. concerning Exact Sciences ( EXAS) and its genetic screening test for colon cancer.

"Last Friday (July 16) on a conference call, Exact Sciences said it would release their external validation results for their genetic screening test for colon cancer by Oct. 29. What percent of pre-cancers and what percent of cancers do you believe need to be detected by the validation study for it to be perceived as a positive for Exact Sciences? Also, how big of an event do you believe this is for Exact Sciences?"

These study results are a very big deal for Exact because this will be the first validation data we see that measures the sensitivity of the company's colon cancer test, which is designed to detect small changes in DNA found in stool. These genetic mutations can be a warning sign of early-stage cancer or even of pre-cancerous polyps, in the colon.

Based on previous guidance, Exact is shooting for its test to be sensitive enough to detect about 85% of colon cancers and 50% of pre-cancerous lesions. That would put the company's test ahead of currently used fecal blood tests but less sensitive than colonoscopy -- by design.

Exact expects to announce data from the three validation studies on Oct. 29 at the American Association of Cancer Research meeting in Philadelphia. These data are very important, but they don't get Exact to the finish line. None of samples being tested are being tested prospectively, which means Exact will still need data from a large, pivotal phase III study before it can seek FDA approval. Exact plans to run that phase III study starting in the second half of 2011, with the FDA filing set for 2012.

I met with Exact's CEO Kevin Conroy at the J.P. Morgan Healthcare Conference in January and walked away impressed. At that time, I called Exact Sciences the "best small-cap story" at the conference during the busy week in San Francisco. The stock was trading just above $4 at that time. Today, shares can be bought for less than $3.50, so my hot stock pick hasn't exactly worked out that well.

I'm hoping that changes when the validation data are revealed on Oct. 29.

Mannkind ( MNKD) announced Tuesday that the FDA accepted the company's resubmission of the approval application for its Afrezza inhaled insulin device. The agency's new approval decision deadline is Dec. 29.

The Afrezza update prompted @RJPeterson123 to tweet, "Hoping for a Christmas miracle for Mannkind."

Does Mannkind need a miracle? The bears certainly think divine intervention is the only way the FDA will approve Afrezza in December. Bulls, on the other hand, are adamant (or at least hopefully optimistic) that Mannkind has finally resolved the agency's concerns, allowing Afrezza to be approved after a year's delay.

Whichever side of the Afrezza debate you're on, it's good to have a definitive date -- Dec. 29 -- upon which to focus. Mannkind's stock hasn't been doing much since taking a large step down after the last Afrezza update in March. Expect the volatility in the stock to ramp up as we near the new approval decision date. Biotech catalyst traders will get involved again and the short sellers will counter. Should be fun.

My stance? I lean bearish. Last March, the FDA issued a complete response letter to Mannkind, requesting additional clinical data on Afrezza. At that time, the company insisted that new clinical trials weren't necessary to answer the FDA's questions, yet management's responses to questions about what the FDA wanted were far from reassuring.

Since then, Oppenheimer analyst John Newman has raised more questions about the adequacy and quality of the submitted Afrezza clinical data. Newman is predicting an FDA rejection; I find his research and thesis convincing.

Anne S. emails, "We have a long-standing mantra around here. Never bet on weight loss or Alzheimer's drugs. For weight loss, it is a lifestyle drug. The FDA has very, very little to gain from approval (no life saved) and remembers what happened when Fen-Phen was given to the masses over time. As for Alzheimer's, we simply don't know enough about how the disease comes about in the brain. Until we have a better understanding of the disease, we can't make sense of the drugs. It is such a big market with the potential to save lives, research and development gets a little silly."

I touched based with a very smart buy-side analyst who was in Hawaii last week for the International Conference on Alzheimer's Disease (ICAD). He happens to be a friend and a source and someone with a darn good stock-picking track record for neuro-psych drug stocks. His boss doesn't allow him to be quoted by name, which is why he remains anonymous here, but that doesn't stop me from quoting him.

The biggest buzz at ICAD -- from a Wall Street perspective -- came from a private company, he said. Avid Radiopharmaceuticals presented late-stage data on a radioactive dye that can accurately detect clumps of the protein known as beta amyloid in the brain of Alzheimer's patients. These beta-amyloid "plaques" are thought to play a role in cognitive decline and memory loss of Alzheimer's patients.

Right now, the only way to accurately detect beta amyloid in the brain is through an autopsy. Obviously, that's a tad late, so doctors will be very eager to use Avid's dye -- which shows up when patient undergo a non-invasive PET scan -- to get an early indication of beta amyloid plaque formation in patients.

"Avid is going to be a very hot IPO," said my buyside friend/source. The company, he said, is already getting acquainted with institutional investors in New York and is expected to go public before the end of the year.

My buy-side buddy is a growling bear when it comes to handicapping the prospects of all the current Alzheimer's drugs in phase III studies. Nothing he saw or heard at last week's ICAD meeting dissuades him from that skeptical opinion. Bapineuzumab, the Alzheimer's drug co-owned by Johnson & Johnson ( JNJ) and Pfizer ( PFE) (this is the drug formerly owned by Elan ( ELN)), has little chance of success in its ongoing phase III studies, he said. (Data from those bapineuzumab studies was expected next year, but now it's looking like 2012 at the earliest, he added.)

The same can be said for other late-stage Alzheimer's drugs from Pfizer, Eli Lilly ( LLY) and Baxter ( BAX), he added. Given the failure of Medivation's Dimebon earlier this year, a new, effective drug for Alzheimer's is still a long way off, he said.

On July 14, Cell Therapeutics ( CTIC) filed a series of Form 4s with the Securities and Exchange Commission disclosing zero-cost stock awards to the company's top executives and all its directors. Approximately 29.5 million free shares were handed out, including 9.96 million shares awarded to CEO James Bianco.

The SEC filings by Cell Therapeutics prompted "Regina" to ask via email if the stock awards "have any impact on shareholders."

The shares represent potential dilution, so yes, that does impact shareholders, but at this point, these stock awards have not vested and will not vest unless Cell Therapeutics achieves certain corporate performance goals set out last December by the company's board, according to Cell Therapeutics spokesman Dan Eramian. (He was granted about 3 million shares of restricted stock, by the way.)

In order for Bianco and his crew to vest their free stock, Cell Therapeutics has until Dec. 31, 2011 to meet one or more of these performance goals:

European or U.S. approval of Opaxio; fiscal year sales of $50 million or $100 million; U.S. approval of pixantrone; break-even cash flow in the fourth quarter of 2010; fiscal year earnings greater than 5 cents a share; or achievement of a Cell Therapeutics stock price equal to $2.94.

I find it difficult to see how Cell Therapeutics is going to achieve any of these goals in the next 17 months, but then, I'm not exactly a big Cell Therapeutics fan.

I'm happy to hear from Cell Therapeutics that these stock awards don't vest unless one or more of the performance goals are met, but why was the free stock given to executives and directors now? Why not wait to award the stock until after meeting the performance goals as called for in the rules set forth in the stock bonus plan filed with the SEC on Dec. 18, 2009?

James W. asks, "How come there's no talk of Gilead Sciences (GILD) as an M&A target? I know there are concerns over patent expirations and some pipeline setbacks, but the market cap at the moment seems to be less than the remaining potential revenues of their AIDS regimens alone -- notwithstanding the Quad, the J&J collaboration and other drugs either here or on the horizon. Is there something an ordinary investor is missing?"

It makes financial and strategic sense for Johnson & Johnson to acquire Gilead Sciences. That's not a new or original thought and I have no idea if such a deal would ever happen. Gilead's antiviral research and marketing expertise in HIV and hepatitis B (and to some extent, Hep C) slots in very well with J&J's Tibotec unit. (And as James alludes to, Gilead and Tibotec/J&J are already working together on the HIV drug Btripla.) Given J&J's slowing growth and the highly profitable nature of Gilead's business, an acquisition should be accretive to J&J relatively quickly.

Such a deal would be expensive, upwards of $40 billion or more, a lot of money even for J&J. And perhaps J&J believes, as do many Gilead bears, that the company's HIV business shuts down in 2018 when key HIV drug patents expire.

If I'm Gilead management today, I probably don't want to sell the company with my stock price as low as it is. That's like admitting defeat. Better to wait for the stock to rebound before considering a sale.

While we're discussing Gilead, this week's ugly second-quarter earnings report and the analyst downgrades and price target cuts that quickly followed appear to have set a bottom in the stock. (For now, at least.)

Gilead bought back 44 million shares in the second quarter as part of a previously announced share repurchase plan. The buy-side chatter now is whether Gilead will go one step further and announce a tender offer for its own stock.

Recall, Biogen Idec ( BIIB) used a tender offer for its common stock in the summer of 2007 to great effect on its stock price.

Scott J. writes in with a follow-up question to my recent Mailbag post on Somaxon Pharmaceuticals ( SOMX) and its insomnia drug Silenor, which I don't believe will find a marketing partner or ever amount to much commercially.

"How would you respond to the recognition that the run-up in price was institutionally based on huge volume and the subsequent decline has been simultaneous with the wicked May-June period on much lower volume? A bullish read on this behavior would argue the shorts have had a field day on the generic thesis, but there must be some merit to the FDA ruling in making Silenor a protectable franchise for the right marketer."

Scott adds, "Another observation: It's hard to imagine the 6.9 million shares sold at $8.25 by Jefferies after the FDA announcement was all dumb money. The extended list of new positions taken by institutions after FDA approval is staggering. That is a lot of dummies."

I do see an increase in the number of institutions and hedge funds taking reporting ownership stakes in Somaxon since the FDA approved Silenor in March, but I don't know (and neither does Scott) how many of those positions are true longs or if they're boxed short positions. For some of the hedge funds on the list, I suspect the latter.

I'm also more inclined to believe that retail investors and momentum traders were responsible for the big run in Somaxon's stock price following the Silenor approval. From what I remember, the stock was very difficult, if not impossible, to borrow short, which also helped.

Last Wednesday Somaxon announced the hiring of a contract sales to sell Silenor in advance of an October launch of the drug. That news, moreso than examining Somaxon's shareholder base, tells me that Somaxon is far, far away from landing a marketing partner for Silenor. I'm very content to remain bearish on Silenor's commercial potential.

Allan F. writes, "I was wondering what your feeling is about Allos Therapeutics (ALTH) now that it has come down from $9 to $5.50 a share?"

The stock is cheaper. You want a bit more insight than that? A few concerns are pressing on Allos these days:

The commercial launch of Folotyn as a treatment for peripheral T-cell lymphoma (PTCL) is not as robust as previously thought, in part because doctors are using the drug initially on sicker patients. This means fewer cycles of Folotyn per patient, hence less revenue. As doctors gain more experience with Folotyn, doctors are likely to use the drug in more and "less sick" PTCL patients, but that takes some time. (The sell-side firm Leerink Swann lowered its Folotyn sales estimates this week.)

Allos reports second quarter results on Weds. July 28. The Street is expecting Folotyn sales in the range of $11-12 million.

Investors are uncertain about upcoming results (this quarter) from a phase II study of Folotyn in non-small cell lung cancer. Can Folotyn show a meaningful benefit in lung cancer, perhaps a trend toward better survival? And in what sub-population of lung cancer patient will Folotyn work? Investors are waiting for the answers. On the plus side, expectations for this study have been dialed way back recently.

Potential competiton. Celgene ( CELG) is running a phase II study of its drug Istodax, currently approved for cutaneous T-cell lymphoma in PTCL patients.

-- Reported by Adam Feuerstein in Boston.

Follow Adam Feuerstein on Twitter.

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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