Vertex takes the lead (VRTX)

Vertex Pharmaceuticals has now taken the top dog spot in my portfolio away from Google and Protein Design Labs with a near-double since my purchase. This was a MF recommendation from one of my newsletters, but it's really catching on with investors this summer and this past week in general, for a few very good reasons.

Vertex Pharma (VRTX), bought January 20, 2005 at 10.57 and June 16, 2005 at $14.14.

First reason, Vertex has first-mover and possibly best-in-class drugs moving into mid-stage clinical development for some huge diseases. The CEO recently spoke at a conference (info at their website, www.vrtx.com including webcast and slides) and indicated that he believes VX-950 for Hepatitis C and VX-702 for inflammation/rheumatoid arthritis both have the potential to be multi-Billion dollar drugs (annual sales). Both of those drugs are in active and fairly short trials and data comes out somewhat frequently, with some more data releases expected throughout the fall. (And there are plenty more compounds where those came from -- after years of work in the lab that didn't trickle down to the clinic and disappointed early investors, the pipeline is now stocked with some very promising stuff.)

VX-950 in particular is what sent Vertex on it's first big jump up this year, as the phase I trial indicated that this might be the first genuinely effective HCV drug -- and not just effective, but dramatically effective at reducing or eliminating Hepatitis C infection. Since HCV is one of the most widespread and least treatable diseases out there (with current drugs), that's excellent news both for investors and for HCV sufferers, many of whom are not even being treated at all, they're just waiting around for a good treatment to appear.

VX-702 is a little more complicated, but again hits an extremely large market for anti-inflammation drugs and might enter clinical trials for many different maladies. Again, huge potential and so far good indications from the clinic for this one.

And second reason, likely trailing behind the first, is that analysts have apparently listened to these presentations and gotten to know Vertex again ... and don't want to miss out on the next bump up, so they're all upgrading it and setting higher price targets. This is significant because as of my first purchase last winter, Vertex was still pretty much hated by the analysts thanks to very indifferent performance since their IPO. Sometimes with biotech you have to wait for the


pipeline to show promise, and if you get impatient and jump out before the train starts moving you miss out. The analysts all jumped out last year, and this year are running like crazy trying to catch up. That releases a huge demand for the shares, as incidated by the stock price over this summer and, indeed, over just the last week. I'm also holding a couple 2008 options at $15 that I bought as a long term leverage play, but I'm going to have to sell soon -- being that far in the money doesnt' give you much leverage so I might just as well sell the options and buy more shares, though perhaps I'll hold on to the options long enough to get a year's holding in and cut my cap gains tax.

The shares I'm holding for the long term -- Vertex is planning on going it alone with VX-950, which means they'll get all the profits, and if the next clinical trials show the same promise or even half the promise of the first one, those profits will be massive come 2008 or so.

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Ranexa's competition weakened? (CVTX)

There was a bit of news out yesterday from a JAMA-published study that leads me to think the road to riches for CV Therapeutics may have been slightly smoothed.

CV Therapeutics has a drug called Ranexa that's in the midst of phase 3 trials for chronic angina, and CVTX is hoping for label expansion to treat other kinds of heart disease. One of the major treatments for these heart problems today is a class of drug called Beta Blockers, which are widely available in many generic forms.

Now, word comes that Beta Blockers may be dangerous for some people with specific genetic makeups -- and not just a small number, but a large class of people -- possibly up to a million people a year who are hospitalized for minor heart attacks.

Here's a quote from one of the doctors involved in the study, by way of a Bloomberg article: ``Some people are genetically predisposed to benefit from beta-blocker therapy, and others are unlikely to receive benefit and might even be harmed by these commonly used drugs,'' said Howard McLeod, a professor of medicine at Washington University School of Medicine in St. Louis who was involved in the study, in a telephone interview today.

That adds to the need to approve and get to market an alternative treatment for those people, of which Ranexa may be one, so it possibly means approval might be easier to come by since there is a weakness in the currently available treatment, and it also increases the market for such a drug (not that there was a need to increase the market for chronic angina drugs for this to succeed, demographics are doing that for us).

Now, this may not make a real difference, but I haven't seen other folks mention it's possible significance for CVTX so I thought I'd put it out there. If I'm misinterpreting, I hope someone will correct me.

And as an aside, the other finding from this study is that genetic testing can be of significant therapeutic benefit in determining which treatment(s) will be effective for some diseases for particular individuals, or may even be lifesaving on an everyday treatment basis. Because there are genetic markers that determine whether or not beta blockers will help or hurt a patient, it's quite likely that testing for those markers could become a signficant business. Who might make those tests? Way too early to tell, or at least I haven't heard an answer, but why not Myriad Genetics (MYGN), another of my portfolio companies and the market leader in lots of different genetic tests. Something to think about.

Not sure if this news warrants considering an additional purchase of CV Therapeutics once I've got the funding available ... but maybe. I was already pleased with the potential for Ranexa to make significant inroads as a new treatment option for various heart ailments in the years to come, and the fact that new weaknesses have been identified in some of the existing treatments might tip the scale a little more in their favor. As always, take my opinion with a grain of salt, I have no more capacity to comprehend medical or genetic testing than the next guy.

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Recapping how they EXEL

Just got a comment from a reader, " Did you hear the EXEL CC call by Bank of America? quite an impressive presentation" -- I did hear the call, and I agree. Thought I would call it to all of your attention.

Exelixis is still quite early in the process of becoming a big company, and I've written about them before, but anyone who's interested would do well to check out the webcast from the BOA conference (link here) . It's reassuring the hear a confident, mature CEO talk when you're invested in a company that is still quite a ways from becoming profitable.

The key takeaway? In my opinion, it's this [shortened] quote from CEO George Scangas, "Our goal is really to become a top-five biotech company ... we don't make this statement lightly ... I believe we have a legitimate chance to meet that goal" And they've designed the company for that long term goal, this is not a pie-in-the-sky hope.

And the other key takeaway, no kidding, is "this is a bit of a small group, so I'll take questions during the presentation" -- translation: No one loves EXEL yet, so we do not yet have to pay for the hype if we want in. Looks like the next potential chance for EXEL to get a lot of attention from the market will be when they release data from three early stage trials in early November.

EXEL is doing it the right way, conservative management of a very large (especially for such a small company) pipeline of drugs that is organically growing at a steady clip.

This mature but still small company is not betting the farm on a blockbuster drug, though they may come up with one someday -- they're also going after known targets with novel approaches or techniques in their compounds, and they're going after big diseases, with a primary focus on cancer. You can hear about some of them in the conference call, but, for example, one of their promising cancer drugs, XL999 , targets the same basic mechanism as Genentech and Protein Design Labs' Avastin (which, recent news notwithstanding, has proven itself as a spectacular drug for at least some cancers) even as it tries to improve upon that drug. Potential blockbusters that break new ground with higher risk make up part of the pipeline, and compounds that follow established targets or strategies and have lower risk of failure make up the rest -- that's a smart way to manage a pipeline, in my wholly uninformed opinion.

Exelixis is also not taking the other popular path of the small biotech company, betting on becoming a lucrative takeover target so the big boys will bail them out. Instead they're partnering compounds and coming up with smart and innovative financing to lessen their risk, and they're trying to develop and bring to market themselves and in coordination with their partners a large number of effective drugs. This is a company that believes it has a good future on their own, and I agree.

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Intuitive Surgical, Wish List Graduate (ISRG)

Well, I've now purchased the first stock that I had previously written about in my wish lists (as I watched ISRG and its meteoric rise from the sidelines following their last earnings report). I have been continuing to follow them, and read up on the stock with hopes that it would drop so I could feel comfortable buying in.

Well, it didn't drop much, but it did dip below $70 for the first time in a while and I had some cash, so into the portfolio it goes (as with my other recent purchase, it of course dropped a bit more after I bought in ... c'est la vie).

Bought Intuitive Surgical (ISRG) at $69.54 on September 22, 2005.

Intuitive Surgical sells Da Vinci robots, which are the super-expensive high-precision robots that hospitals are using more and more for delicate surgery. Robotic surgical gear like this allows for the surgery to be a bit more precise, which can often mean better results and easier recovery (there's lots of debate about this, so it's certainly not a home run for all kinds of surgery).

And Intuitive sells not just the super-expensive machines themselves, but the necessary accessories and service that go along with such a high-end medical device -- just like in the rest of the medical and surgical world, lots of the tools and Da Vinci attachments are disposable and the more durable ones that can be sterilized still only last through a limited number of surgeries.
So like Imax with movie theaters, the more big-dollar installations the company does (and makes big up-front profits from), the more installed operations there are that require service, maintenance and supplies that they can leverage to maintain an ongoing and growing revenue stream (whether those supplies are surgical attachments and equipment, or Hollywood movies). Like Imax, ISRG owns the technology and will supply all of the necessary goodies at a nice price.

Intuitive is definitely a risk. As I noted when I put it on my wish list, it's pretty freakin' expensive, and became more so when that earnings release sent them up from the $50 range to above $70. But I think we pretty much have to pay up if we want this kind of earnings growth and potential -- sales up almost 100% year over year, earnings growing faster than that, and the installed base of machines continuing to ramp up significantly. We run some significant risks in paying for this kind of growth -- but I think they're short term risks if you believe in the potential of the business. Paying up for growth is nothing new for my portfolio, just see Chico's if you want a recent example.

If ISRG has a bad quarter this time around or the growth stalls or even slows somewhat, the stock price is likely to drop nearly as fast as it climbed. But they think they've not yet even reached 10% of their potential installed base, and they are the market leaders in an emerging technology with real benefits (not to mention the fact that they are only approved for a few narrow varieties of surgery so far, and I bet that breadth will grow significantly over time) -- so over the next several years, the surprises are much more likely to be on the high side.

I expect to hold ISRG for many years, and if we do see some hiccups in the growth pattern I'll be seriously considering buying additional shares. For now, it's a pretty small position and I'm looking forward to learning more about the company.

I've committed a pretty significant portion of my speculative portfolio to biotech with MYGN, PDLI, VRTX, CVTX, EXEL and now, with the addition of ISRG, medical devices. ISRG is a pretty small company, just like the biotechs I'm invested in. Is investing too much in that sector a risk? Probably so, but I think of these as all on the speculative edge of an industry, health care, that is relatively untethered from the arc of the general economy -- these companies could all fail, though I don't believe they will, but it won't be because their industry is hurt by a tepid economy, and therefore this part of my portfolio shouldn't be hurt by the same things that might hurt my other holdings that rely more on consumer spending or other economic factors.

Or at least that's the theory. I guess we'll find out, eh?

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