Navarro’s Big Economic Picture

The (almost) annual Fall rally continues on the wings of moderating inflation, falling oil prices, a probable (Dead Cat) bounce in the housing market as mortgage rates continue to deflate, and last but not least, a rush to the buy side by any money managers still left on the sidelines and hoping to meet their nut for the year.  This excerpt from Barron’s says it all:

“PERFORMANCE ANXIETY CAN BE a paralyzing affliction. But on Wall Street, it is both a mobilizing force and a cause for celebration. As stocks climb and bonus time beckons, money managers who can't afford to trail the market have had to suspend their skepticism and catch up to the crowd.

The path for the buying throng widened last week as familiar obstacles fell by the wayside. Crude oil slipped to $55.81 a barrel, down 6.3% to its lowest level in 17 months. Declining gas costs drove down consumer prices for a second straight month in October, and a gauge of core inflation inched up at its slowest pace in eight months, fanning hopes that the Federal Reserve might soon relax its inflation fight.

On top of that, a slew of announced deals encouraged the notion that stocks are cheap, providing a measure of motivation the buy-the-dip crowd didn't really require.”

This Week’s Market Movers
It’s a holiday-shortened week without much of any data coming up of interest.  Only the University of Michigan Consumer Sentiment survey on Wednesday has any potential market moving action.  Otherwise, watch carefully the results of retail sales for the day after Thanksgiving and the weekend.  It’s usually a harbinger of the strength of the holiday season. 

Navarro’s Portfolio Shorts and Longs 
In this space, I’m reprising an entry by Andrew Vaino in the Daily blog that needs some highlighting.   His INSM bet seems to be an interesting one.

“I wrote a few months ago about Insmed (INSM) and Tercica (TRCA), each of whom has a drug to treat children with growth hormone deficiency who don't respond to administration of human growth hormone.   As I mentioned, this is a small market (~6,000 cases in US), but both are small companies.

Tercica sued Insmed for patent infringement.  The case is underway and is scheduled to wrap up on November 27th.  The winning stock is certain to get a big boost.  I read some of the motions filed by both sides, and think Insmed has a pretty good chance of winning.  Of course, my legal knowledge doesn't extend past reruns of "LA Law" and this is a complex case.  I think the jury will have a difficult time deciding the verdict.

The Markets, at least, seem to be favoring Insmed.  INSM is showing strong technical signs while TRCA's technicals look bad---the case has been ongoing since November 6th.  So, if Markets are truly efficient (i.e. all information is known) then INSM should win.  I'll leave quotes about "knowns" and "unknowns" to Donald Rumsfeld.  We should know the verdict in a couple of weeks. 

In a worst case I think even a complete loss for Insmed will just result in them paying royalties to Tercica, and Insmed definitely has the better product.  While this is speculative, I think INSM trading near $1.40 looks pretty good right now.”

Vaino’s Biotech Corner: Does Momenta Have Momentum?

I like technical stock analysis, I really do.  I spend money every month subscribing to a website that provides, what I think is, excellent advice on technical analysis.  I’ve been pretty happy with it, all in all.  But, just as I mistrust theoretical calculations in chemistry in the absence of experimental data I also mistrust technical analysis of stocks in the absence of fundamental value.

Case in point.  Yesterday the technical stock service to which I subscribe suggested that, technically, Momenta Pharmaceuticals (MNTA) was a buy.  This particular stock seems to have the technical analysts bedeviled.  To wit, on October 3rd the stock, trading at $13.05, was downgraded to neutral from long.  After climbing to $14.30 on October 5th it was downgraded all the way to avoid and promptly continued rising to $15.56 on October 19th when it was upgraded to neutral from avoid.  With this upgrade the stock then fell back down to $13.59 on November 3rd before starting to move up again.  It closed at $16.47 yesterday and has been upgraded to long.

Momenta’s financials look pretty good.  Current assets have been increasing steadily for the past few quarters, and they are as secure as any biotech company.  They recently signed a major collaboration with Novartis (NVS) that gave the stock a spike.

I think Novartis has some great scientists working for them (in case my buddy Andreas is reading), but I’m not so sure about their acumen at making deals with biotech companies.  Idenix (IDIX) was purchased by Novartis and was working on developing hepatitis drugs.  Their stock plummeted 60% in March after a clinical failure.  Novartis also signed a deal with Anadys (ANDS), also for hepatitis.  Anadys plunged 70% in June of this year on a clinical failure. After Novartis inked a deal with SGX Pharmaceuticals (SGXP) to develop some kinase inhibitors the stock fell 60%, again on a clinical failure. 

To be clear, Momenta is a different company.  Their technology involves identification of sugars in complex carbohydrate drugs.  Their most advanced drug candidate is M-Enoxaparin, a generic version of the anticoagulant heparin derivative Lovenox.  Using their technology Momenta was able to identify the structure and produce a generic version of Lovenox. 

Momenta has filed an Abbreviated New Drug Application, where an ANDA is equivalent to a NDA for a new drug with the FDA.  If the application is accepted they will be able to sell the drug.  Trouble here is it’s a generic. Now annual sales for Lovenox are close to $3B, which is appealing.  But, as a generic competitive, threats are almost assured.  An inviting aspect of pharmaceutical research is the patent protection that provides twenty years of monopoly.  This doesn’t exist in the generic market.  Viropharm (VPHM) found that out earlier this year when their stock plummeted on rumor another company was going to introduce a generic version of their drug Vancocin.

But it gets worse.  Not only is their sole near-term product likely to be subject to competition (they just started a Phase 1 clinical trial on another drug), but there is some uncertainty as to whether they will have the right to sell it at all.  Rights to low molecular weight heparin are the subject of a patent dispute between Sanofi-Aventis and both Amphastar Pharmaceuticals and Teva Pharmaceuticals, both of whom have submitted ANDAs on similar generics.  In June 2005 a District Court ruled that Sanofi-Aventis’ patent was unenforceable.  An appeal is set to begin in December.  If the Appeal Court overturns the district courts ruling, commercialization of M-Enoxaparin would be further delayed even with FDA approval.  Given that the basis for the ANDA is cutting edge technology this could present difficulties with an organization as conservative as the FDA.  Worse yet for Momenta, it means there are other generic drug makers out there with whom they will likely have to compete.  Competition is great for a lot of things, but a profit margin is not one of them.

I think the science behind Momenta is excellent, and carbohydrates will be the drugs of the future.  But, aside from a single generic drug, whose prospects are far from certain, I don’t see any possibility of a product for years.  Once the market stops booming, I think this will be a good short candidate.

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.