Navarro’s Big Economic Picture

The financial press was all a twitter about “mixed economic signals” caused by the drop in the unemployment rate to the lowest in several years.  This after a whole slew of reports indicate the economy is slowing.  BOTH the bond and stock markets reacted negatively to the news, with bond yields spiking.

This seems kind of stupid to me.  It’s well known that the unemployment rate is a lagging indicator and that corporations often keep hiring late into an expansion long after they should be putting the brakes on.  In fact, of all the analysts, Mark Zandi of economy.com was the only one to get it right, saying that he still expected the softening economy to bring up the unemployment rate with a lag in early 2007.

That’s my view too.  That we are clearly in a softening mode and that in 2007, the economy will operate much of the year below potential output.  To me, the worst news in the last few weeks has been the brick wall hit by productivity, which is now running at an anemic pace – fueled in part by the seeming paradox of the tight labor market and declining production.

Unless the Republicans hold onto the House after Tuesday, I don’t expect the rest of this quarter to offer much for the bulls, and if I had to lay my money down (as opposed to being in cash), I’d start leaning towards the short side.

This Week’s Market Movers
It’s a pretty tame weak for economic reports.  My bet for big market mover is the trade report on Thursday.  It will be interesting to see if we get any kind of dip from moderated oil prices.  If not, look for turbulence in the bond and dollar markets as trade deficits are inflationary.

Navarro’s Portfolio Shorts and Longs 
I like cash again this week.  Short sellers will be trying to time the top – always a risky business…

Vaino’s Biotech Corner: Pardon Me While I Change My Mind

A couple of times in the past few months I’ve been asked about Dendreon Pharmaceuticals (DNDN).  Each time I’ve demurred from suggesting it was a good investment.  Over the past month, the stock has taken a nice jump from $4.40 to as high as $5.50.

Dendreon recently completed a Phase 3 study on Sipuleucel-T, a treatment for hormone refractory prostate cancer (HRPC).  HRPC is prostate cancer than doesn’t respond to standard therapy.  The drug works by enhancing the immune system.  Currently, Taxotere is the only approved treatment for HRPC.  Dendreon’s drug gives rise to fewer side effects that does Taxotere.

I initially didn’t like Dendreon based on results of a Phase 3 study published in The Journal of Clinical Oncology in July.  In the Phase 3 study, the difference in time to progression of the disease was statistically the same as a placebo.

Now, any biotech stock trading at less that $10 is risky, and this is no exception.  I was not overly impressed that the Phase 3 study missed its endpoint, and I’m also a bit concerned with the status of Dendreon’s FDA filing, in this case a biologics license application (BLA, similar to a NDA except for biologics).  According to an August press release, only two of three parts of the BLA have been submitted.  They haven’t yet submitted the chemistry and manufacturing controls (CMC) part.  The CMC section deals with assuring the FDA that they can safely and reproducibly manufacture the drug.  Discovery Labs (DSCO) got into some trouble a few months ago due to CMC issues. 

The stock’s technicals are now strong, so maybe this is worth a second thought.  While the Phase 3 study did not meet its clinical endpoint, it did increase survival.  Patients on their drug lived, a statistically significant 20% longer (3-5 months) than those receiving the placebo.  While this doesn’t sound like a long time, given the alternative it’s—quite literally—a lifetime.

Dendreon’s balance sheet is strong enough to see them through at least the next year and a half.  My take is this stock will jump ten to twenty percent when they submit the last third of their BLA.  What the FDA does, however, is a tough call.  Treatment options for HRPC are limited, and this drug does extend life.  My guess is either the drug will be approved or they will get an approvable letter. 

Encycsive Pharmaceuticals:  Stay the Course – And CRASH?
I just listened in on Encysive Pharmaceuticals (ENCY) earnings call.  Encysive took a plunge a few months ago after receiving a second approvable letter from the FDA for their drug Thelin, a treatment for pulmonary arterial hypertension.  They announced on Thursday that they submitted to the FDA a response to the approvable letter.  The stock jumped 10%.  This drug has been approved in Europe.

It may have been the CEO saying (and I’m not making this up) “stay the course” a couple of times, but I think something is up.   As in the conference call I listened to a few months ago, the CEO gave no information on what the FDA had a problem with, except to say the one remaining issue had been resolved.  Several  direct questions were asked, all were stonewalled, wouldn’t even give a broad hint as to what area (efficacy, safety, CMC) was involved.  If it really was an easy to fix problem, why wouldn’t he say so?

They should hear back from the FDA within 30 days.  My guess, and it is only a guess, is the FDA will reject and the stock will crash.

Peter Navarro is a business professor at the University of California-Irvine, and can be contacted at pn@peternavarro.com. Matt Davio is a managing partner at the hedge fund, Red Rock Capital Fund, and be contacted for hedge fund services at redrock@peternavarro.com.  Andrew Vaino is a Ph.D. chemist currently teaching at The University of Maine.

DISCLAIMER: This newsletter is written for educational purposes only.  By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever.  Trading and investing involves high levels of risk.  The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader.  The authors may or may not have positions in the financial instruments discussed in this newsletter.  Future results can be dramatically different from the opinions expressed herein.  Past performance does not guarantee future performance.