Shorting the Blood Supply - Go LONG Cerus

Shorting is a state of mind - and I know someday there will be a crisis with the blood supply in the US, or in a developed nation, that rivals the problems of the 1980s and HIV contamination. How do you play this? Cerus (CERS).

Cerus makes something called the INTERCEPT System, a blood pathogen inactivation system that enables blood banks to essentially accept blood from anyone. Blood pathogen inactivation is the formal term for blood cleaning - cleaning of any pathogens, such as West Nile, H1N1, HIV and so on, that could be transmitted from donor to recipient. At present, the INTERCEPT System works only to produce blood platelets and is approved in many nations in Europe with Germany being the latest where Cerus is rolling out the product. In the US the company is negotiating with the FDA for a Phase III trial to obtain approval here.

Platelets are a big market but small beer compared to the $3.5 billion whole blood market - and yesterday Cerus announced its US, Phase I trial of the INTERCEPT System to treat whole blood was a success, hitting its primary endpoint, a critical first step for approval for the product. Most analysts did not think INTERCEPT would work when treating whole blood.

To quote the company press release, "The randomized, single-blind, controlled, multi-center Phase 1 clinical trial of the INTERCEPT red blood cell system included 27 healthy subjects at two clinical trial centers. Each subject received two transfusions of the subject's own red blood cells, one INTERCEPT-treated, and the other a control not treated for pathogen inactivation. The primary endpoint of the clinical trial, a mean INTERCEPT red blood cell recovery of greater than 75 percent at 24 hours post-transfusion, was met. The INTERCEPT red blood cells had a recovery of 88% compared to 90% for control red blood cells, and both INTERCEPT-treated and control red blood cells met the criteria for red blood cell recovery recommended by the U.S. Food and Drug Administration. The half-life of the red blood cells was also evaluated, and INTERCEPT-treated red cells were within the established reference range of 28 to 35 days. The half-life of INTERCEPT red blood cells was 33 days compared to 40 days for control red blood cells according to the preliminary analysis. The investigators plan to submit data from the study for presentation at an upcoming scientific congress."

At the same time the company announced a partnerhsip with France's blood transfusion agency, the Etablissement Francais du Sang (EFS). The two entities will jointly develop, with considerable cost sharing, INTERCEPT for whole red blood cells.

Cerus is light years ahead of potential competitors in platelets and whole blood - competitors who may also become potential acquirers. I can only assume the stock opened strong - I am writing this before the open - but this microcap, if it is able to follow the Phase I trial with successful follow up trials that lead to an approval - is grossly undervalued at $2 a share. Even without whole blood, current sales forecasts and the adoption of the technology to treat blood platelets make the $2 valuation ridiculous. I have followed the company and written about it in my service, ChangeWave Shorts, and like the way management has managed the company's progress, country by country, trial by trial. Take a look.

Disclosure: I am quite long Cerus.

Posted by Michael Shulman on February 9, 2010 7:47 AM | Permalink | Comments

A Bad Jobs Report - Time To Short?

The jobs report came out today and it was far worse that economists' expectations. Roughly twenty thousand jobs were lost against a consensus forecast of a 10,000 gain; revisions showed 1.2 million jobs more jobs than previously reported were lost from April 2008 to March 2009; the number of discouraged workers and dropping out of the work force (so to speak) increased by roughly a quarter of a million. The unemployment rate was 9.7%.

Other data from the household jobs report - something a bit different announced at the same time - showed a gain of people in households working and the net result was confusing.

Ignore the unemployment rate - the issue is the number of people working for that generates national income, the heart of spending and GDP. The work force continues to shrink every month, skewing unemployment numbers - but this is the data point you need to watch. And that keeps falling - statisticians just loss another million point two jobs - and with the decline in the labor force participation rate comes a decline in national income.

So yes, it is time to short barring other issues such as foreign debt, the dollar trade and so on. The jobs report tells me the foundation of a double dip - in the real world - is in place, which means reduced corporate profits and are valuation of the market. So at a minimum there are no tailwinds supporting the market.

Where to start? Where the optimists live -- high end consumer discretionary spending and retailers -- who needs a boat (BC), a motorcycle (HOG), a jewel (TIF) - , who posted good yesterday that were misleading. More later.

Posted by Michael Shulman on February 5, 2010 8:42 AM | Permalink | Comments

Why We Feel The Way We Do

I usually write about stocks, market segments, the economy - today the mood of the nation got to me and I have spent the day positing - to myself, I work alone - various reasons we are the way we are, feel the way we feel, all vital to an understanding of why the economy will remain sluggish, at best and the markets will face headwinds. At best.

And I think I hit on an answer but in the true spirit of blogging wanted feedback from anyone and everyone. So I ask everyone who reads this to respond - and in a day or two I will follow up with answers to the questions below. Please, no scatological comments about Pelosi or Beck, no digital Hyde Park corner tirades. Think, and respond.

Here goes.

We are the wealthiest nation in the history of the planet. We enjoy the greatest supremacy in military power in the history of the planet. We are, arguably, the most politically free people in the history of the planet. More than two thirds of the people in the country think we are going in the wrong direction and ninety one percent think the economy is getting worse. Why?

We are borrowing money, collectively, as individuals and in the form of our government, more than any people in the history of the planet. Why?
Twenty five percent of our children eat because of food stamps. Why?

More than twenty percent of our citizens are out of the work they want - unemployed, dropped out of the work force, partly employed. Why?

One sixth of the population lacks health insurance. Why?

Interest rates available from the central bank are effectively zero yet most small and medium sized businesses without overly substantial collateral cannot get a loan. Why?
Our elections are by far the costliest the world has ever seen yet more than 90% of incumbents routinely get elected. Why?

The government has just spent in excess of one trillion dollars to stimulate the economy and the central bank has printed more than one trillion dollars in new money yet, in the real world, the job market continues to shrink and there is, essentially, no economic growth. Why?

One think tank believes without stimulus GDP would have fallen more than seven points rather than grow more than five points. Yet there is doubt about the ability of the Congress to pass another stimulus package, Why?

The military can plant a bomb inside someone's pocket from ten thousand feet and can deliver Pepsi - cold - to the mountains of Afghanistan. But it cannot subdue less than ten thousand illiterate tribesmen. Why?

We put a man on the moon forty years ago but cannot afford to do it again. Why?
We have an overabundance of domestic energy supplies - coal and natural gas - yet import more energy than any other nation uses. Why?

We claim to have a progressive tax rate but the average American household pays a higher percentage of their income in taxes - income, sales, property, other - than the average American millionaire. Why?

China abuses, strangles and executes its people, manipulates its currency to maintain exports, destroying tens of millions of jobs around the world, periodically threatens the world when Tibet or Taiwan become a headline, steals intellectual property as if it were Halloween candy and supports rogue regimes going nuclear in North Korea and Iran yet we call them a friend. Russia has made a great transformation from authoritarian dictatorship to quasi-free state, given up an empire peacefully, and is now willing to sign a treaty to radically reduce its nuclear arsenal yet we remain wary of them and they are not part of our economic universe. Why?

Adam Lambert was the best performance artist and had the best natural voice of any contestant ever on American Idol. His premier album was not as well received as his performances on American Idol. Why?

There is one answer to all of these Whys. What is it?

Posted by Michael Shulman on February 3, 2010 4:27 PM | Permalink | Comments

Dendreon - To Short or Not to Short

I "made my bones" with a bullish and complicated call on Dendreon (DNDN) several years ago, predicting it would get a thumbs up from an FDA panel for its advanced prostate cancer treatment Provenge, Only one other biotech analyst with a public audience agreed with me - and the panel, sure enough, voted yes. The panel meeting itself was a mess and it was clear the FDA staff was going to fight like hell to make sure Provenge did not get an approval. I told my subscribers to get out - the stock had run from $4 and change to as high as $27 - and a few weeks later the FDA said no, we need more data.

Since that time, Dendreon has released data from a subsequent trial that shows it met its primary end point for the trial, giving bulls their way and driving the stock to $30 and change - it is now around $28. The company is expecting an FDA decision - and approval - on or near May 1. Analysts peg Provenge sales at around one billion by 2018. The puts the current market cap is $3.25 billion.

Shorts would love to cream this stock. Bulls would love to see a great big spike if and when the FDA grants an approval. What is more likely? Some thoughts.
• My original bullishness was based on the need for the FDA to approve some form of cancer immunotherapy in order to launch a new technology into the marketplace, the composition and biographies of members of the panel and the location of the regulatory process - inside the biologics group at the FDA, not CDER, the hard core cancer people who are more concerned, at times, with statistics than human life. The CDER people won the first round - but there is a new and respected FDA administrator and new trial results to consider.

• The problem with the trial data submitted for the initial panel meeting was size - very small trial - and structure - the company blended results to get their final data in a way not valid for FDA statisticians.

• The new trial results - different trial - published by Dendreon last year hit the endpoint by a seemingly health amount to some, a spit to others - and the question will be is this good enough and how did they construct the data to reach this endpoint? The trial was not well constructed - it was not poorly constructed either. I am more concerned about how the company constructed the results. The FDA is very unforgiving - -and they should be - with companies that obfuscate or overly manipulate data.

• Why the skepticism? Because DNDN management is outrageously aggressive and insensitive to the FDA and I am openly skeptical of how they constructed the data. And given what I know of the FDA, that agency will be even more skeptical given management's approach to the approval process. The dunderheads - that is a nicer word than moron - at DNDN are already putting out Provenge sales projections - not a smart move and something the FDA frowns on for drugs not yet approved. Roche/Genentech can get away with something similar when discussing Curis' (CRIS) new Hedgehog pathway drug because they are an understated company and they are providing dates for hitting the marketplace if approved, not sales numbers. Dendreon is not Roche and this can only serve to anger the FDA.

• Why any bullishness? The FDA really does need to approve a cancer immunotherapy, a treatment that uses the patient's immune system to attack the cancer cells and Dendreon is the nest bet right now. It is clear that the treatment works very well on a subset of patients and the challenge in the future is to determine how to identify the characteristics of this subset before treatment. If I were FDA commissioner I would send my statisticians to the back of the classroom and do everything I cold to get the drug passed this spring.

• There is a political component to this approval - there were serious protests and legal action by prostate cancer victims when the FDA overturned the panel decision. This will have an impact on FDA actions.

Bottom line: 65/35 for approval.

Some other things to consider about valuation:

• Provenge is not a lifesaver - it extends life a bit more than 4 months longer in patients receiving the current standard of care. And it is going to be horribly expensive given comments by DNDN management and the cost of preparing the treatment. Provenge is not a drug - a patient has blood drawn, it is sent to a factory, the blood is treated with Provenge and the treatment is sent back to the physician and injected into the patient. It is very capital in intensive and expensive to produce. It will be a while before reimbursement is set in the US and it is very possible it will not be approved for reimbursement in most European countries.

• Unlike many new cancer drugs on the market or in trial, such as Curis' Hedgehog pathway treatments, Provenge is not easily extensible to other tumor types. Moving Provenge to another patient set - such as breast cancer - requires new research and development work and wholly new trials and those will take many years.

• Based on history, DNDN management will over-sell the potential of the drug and disappoint investors.

Does that make the stock a buy or the options?

• For a day or two or maybe a month - but longer term the approval of Provenge and aggressive sales success are already priced into the stock. If Provenge gets approved and the stock moves like OSI did on the approval of Tarceva, it will settle in at five times sales. I focus on Tarceva because it is a very promising cancer treatment, is expensive and the core technology is not easily extensible. OSI now sells for five times sales - in part because of an ill-fated acquisition - but five times sales is a fair valuation for a cancer treatment company. That gives DNDN a five billion dollar market cap in 2018 - long time from now - and that translates into a $45 stock price. In 2018.

So, is DNDN a short or a buy?

• For a trader, and if the 65/35 potential for approval is correct, it is a potential winning trade for a few days - and options traders know this, premiums are high.

• For the investor, the current valuation has future success baked in and if the stock migrates to five times sales and those sales are a billion in 2018. You are looking at less than 6% appreciation per year. That number speaks for itself given the risk of the FDA saying no.

• For the short seller, you can get killed - or make a killing - and take a look at puts, despite their potential of expiring worthless, they do not generate margin calls the way a traditional short position does when things go wrong. One potential trade is a binary trade - a way out of the money call, a way out of the money put, each with a potential of more than

Posted by Michael Shulman on February 1, 2010 9:48 AM | Permalink | Comments