Clearing out More Positions

As we gird our loins for what appears to be an extremely unsteady market -- though whether it will go up or down, I have no idea -- I've taken the opportunity to simplify my investments a little bit.

What does that mean?

Well, in my case, it means selling some of the more vulnerable, long-shot, non-profitable or highly valued companies in my portfolio -- particularly the small positions that I never got the urge to fill out with more cash.

So I've sold a half dozen or so of my smaller holdings in the last few days, a few at more or less break even and most at significant gains (these are primarily stocks that I've held for more than a year, most cases significantly longer).

And as with some of my earlier sell decisions, many of these are more personal than stock-related. I do not have specific news or numbers that make me want to sell these, but they don't fit what I want with my portfolio right now.

So what have I sold?

Myriad Genetic (MYGN) -- I bought this one because of the high growth of the genetic testing business and the promise of their early-stage drugs, but the story has changed somewhat. This has more than doubled for me, almost entirely on the promise of their Alzheimer's drug, Flurizan, that I wasn't all that confident about. That makes me extremely nervous -- many nice news articles and analysts have touted Flurizan as the most promising Alzheimer's drug currently out there, which may be true, but that's kind of like being the best dressed guy at the tractor pull -- Alzheimer's drugs are extraordinarily costly to get through FDA approval, and so far almost none of them have worked at all. I'll take my profits here instead of bucking the odds -- I might be wrong, but this small position isn't worth chewing my fingernails over. If Flurizan takes a big hit and the shares fall hugely on the news, I might reconsider my initial investment thesis and get back in.

Blackboard (BBBB) -- It's lovely to have a monopoly, which is why these shares are up quite nicely for me ... but I wouldn't buy more here, and it's a small position. They have so far had some difficulty in turning their near-monopoly into real profits, though it hasn't been that long since they took out their competitor, and I'm a little bit worried about higher education budgets moving forward. Out they go.

Barrett Business Services (BBSI) -- This one has mostly treaded water for me. I bought it because they had an appealing regional-to-national story unfolding and because they had piles of cash on the books and had recently instituted a dividend. That story still holds, but the difficult undercurrent is that they are still primarily a California staffing business, and they are going to have some serious difficulty making up for all the construction business that's falling by the wayside out West. They may get through this fine, they may not, but I wasn't going to add more to this small position unless it got hit for no good reason ... and if it hits now, I'm afraid it will be for a good reason. I'll keep this one on the watchlist to maybe get back in if the economy really tumbles and puts them on sale.

Akamai (AKAM) -- Oh, how sad I was to see this one go. Again, mostly for personal reasons -- I'm not terribly comfortable holding any significant amount of margin in my accounts right now, and stocks that are richly valued are vulnerable. Akamai is the titan of their industry, but there are lots of little guys nipping at the heels and I'm not confident that their growth is guaranteeed ... or that they will be able to continue to charge relatively high prices. I could certainly be wrong, and I like the company very much, but I would prefer to book my 100%+ gains at this point (even though I missed the chance to sell it all at the top).

Universal Display (PANL) and Harris and Harris (TINY) -- these are both relatively small holdings that I've had in my portfolio for a long time. PANL gave me a nice profit, TINY I'm selling at about the same price I paid for it ages ago. Why? Neither one is going to show a profit for a very long time, so while they may be in an important business segment (Organic LED lighting and display, and nanotech venture capital, respectively) I have no particular confidence that they're going to weather a bad market or become profitable in the near future. Expensive and uncertain seem to me to be the wrong holdings to focus on right now, so I'll move along to shares that I'm more confident in.

So ... for the first time in a long time I'm using no margin and have some cash available. Hopefully, many of the companies I'm most interested in will go on sale soon, but at least I do feel more insulated from some of the shares in my portfolio that had been the most likely to falter on bad company or economic news. I remain significantly overweight foreign companies, now at more than 50%, and have also pared back my long options positions significantly.

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Quiet Outperformance for Myriad Genetics (MYGN)

Myriad Genetics (MYGN) released earnings yesterday, and they're losing more money than ever before!

But I guess that could be the headline for pretty much any development-stage biotech. The interesting thing is that a look at Myriad's chart shows a fairly steady and pretty dramatic climb over the past two years (and a nice near-double for me in about 18 months), a time during which their testing revenue has certainly climbed significantly, but they've failed to have any breakthrough drugs or deals.

So why is the stock going up?

Well, it's important not to discount the genetic testing division -- their sales of BracAnalysis and Colaris and other genetic tests that are used to determine risk factors for breast cancer and colon cancer and other maladies are on a tear. Sales, which are almost entirely from this division, have climbed 36% in the past year ... and their profit margin on the testing side is pretty impressive at better than 75%.

So now, although they're still losing about 8-9 million dollars a year, they've upped the inflow significantly.

But this is a company with a market cap of $1.5 billion now -- even with good growth of 30-50% in their diagnostics revenue, you'd still be looking at a money-losing company that's trading at about 40 times sales. So there must be something else, even with those great margins.

And of course, there is -- and it's the place they've been spending all their hard-earned cash flow from the diagnostics business: Flurizan, their lead drug in the clinic.

I've mentioned Flurizan in the past, back when I first filled out my position about a year and a half ago, and last January when I did an annual checkup ... despite the fact that it doesn't really garner any headlines for outstanding results or get much attention from investors, it continues to bull its way through the FDA approval process.

The news this week is good but non-specific: Flurizan is going to continue through it's full 18 month clinical trial, without a 12-month interim review. And I guess the reason that's good is because this decision was made in consultation with the FDA, which probably means there's no compelling bad safety news from the early trial results.

When the company was priced at about half a billion dollars, it seemed a pretty safe assumption that investors were discounting the fact that Flurizan wouldn't be approved ... but now that we've gotten further through the approval process, and problems still haven't been found with the drug (at least as far as I know), maybe there is a nice boost to the bottom line coming on the horizon. I'm guessing that's the core reason for the shares climbing to the impressive levels we see today.

What's that? Moving just because a drug that might be only mildly effective hasn't shown any safety problems? Oh, I didn't mention, did I, that Flurizan is aimed at possibly the largest underserved market in medicine: Alzheimer's disease.

Flurizan is the first of a new class of drugs called Selective Amyloid Lowering Agents, which reduce the level of "toxic amyloid beta" (the ones that initiate plaque deposits) without harming the standard, non-toxic amyloids.

And the fact that they're going after Alzheimer's seems to significantly alter the playing field. If you look at the results Flurizan has seen, which have been positive but, to a layman, fairly tepid all along the path through the clinic, you would definitely hesitate to count on this drug making any serious money. So far, all you can really say about Flurizan is that it seems to offer some benefit for people with very mild early-stage Alzheimer's. An explanation of the drug and the basic results from the Phase II trials is available from the Alzheimer Research Forum.

Which doesn't really make your fingers itch on the "buy" trigger.

But if you consider the fact that there aren't really any drugs that seem to be effective at delaying or curing Alzheimer's (there are a few approved drugs that are commonly prescribed, though they generally help with symptoms without slowing or preventing the disease) -- despite hundreds of millions of research dollars spent by the feds and private researchers over the past couple decades -- and you consider the size of the market, that finger may start to get just a little itchy after all.

There are about 4.5 million people with Alzheimer's today. That number is expected to triple over the next 40-50 years, and I expect everyone's favorite generational cohort, the baby boomers, will alone bring a big bump to the numbers of people suffering from this disease. The biggest risk factor, after all, is simply advancing age.

And Alzheimer's health care costs about $25 billion dollars a year right now (not including caregivers). That's without any prominent drug treatments.

So, in case you needed convincing, there's certainly a big market there if any drug is shown to be effective -- and lots of drugs have been tested and will be tested, but the past history of drug development for Alzheimer's is littered with expensive failures that had debilitating side effects or very risky profiles. This is, after all, the chemistry of the brain we're talking about.

So even if your drug might not be all that effective, if it's at least not harmful or packed with negative side effects there may well be millions of people that would want to try any possible solution that promises to deliver, with low risk, even a relatively brief delay in the onset of the disease. From my perspective, that's the Flurizan story that's beginning to get baked in to Myriad's results, though I think it's probably all conjecture until we actually hear more about the current Phase III trials (there's one currently underway in the US, another one now enrolling internationally) .

The story could easily change for Myriad Genetics -- I bought shares because they have an interesting pipeline of very early stage cancer drugs and a nice revenue stream from testing that can help pay for research. I found the argument compelling that if they're the ones building the genetic tests, they also may be able to more effectively develop promising treatments for those same diseases (most of their other clinical trial candidates are for cancer, though they're all well behind Flurizan in development).

That story still holds, but at the current market cap it's clear to me that investors are now also counting on Flurizan having a much better chance of making some serious money in a few years. For the sake of my portfolio as well as the future prospects for fighting this awful disease, I hope they're right.

disclosure: I currently own shares of Myriad Genetics and do not plan to buy or sell in the near future.

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Biotechs taking off again (VRTX, MYGN)

Great biotech news today in my portfolio on a couple fronts.

Vertex (VRTX -- click to register for free RT streaming quote) released more midstage data that confirms (with a tiny sample of 12) the effectiveness of VX-950, their potential blockbuster HCV drug. The dozen patients given VX-950 in combination therapy with existing standard treatment ALL had their virus count reduced below detectable levels (which is basically as close as we can get at this stage to calling the treatment a "cure").

Not unexpected news here, since VX-950 has been blowing people away since the Spring with it's results, but I'm very happy to see confirmation here in Phase II trials -- and especially that the combination therapy seems to be even more impressive than the monotherapy Phase I trials. It'll still be a couple years before FDA approval, assuming that there are no safety issues, but Vertex is certainly continuing to drive my portfolio higher and help make up for Google's recent dip. I haven't considered buying any VRTX lately since it's so hard for me to justify paying almost three times my cost basis for a new position, but this long-maligned biotech finally seems to be seeing the incredible pipeline production that we all expected from them many years ago.

Myriad Genetics (MYGN -- click to register for free RT streaming quote) also released information today -- earnings, in this case, and they were also very encouraging. No news on their drug development to speak of, and none was expected, but their primary cash-generator (genetic testing) is doing much better than expected and their cash burn is therefore much better than expected. Things are looking up -- but this is a very long term hold as we wait to see how their clinical trials shake out in the next few years. I'm getting more curious about Flurizan as we move forward -- I continue to expect very little from that drug, and the market seems to have discounted it pretty significantly since Alzheimer's treatments have been where small biotechs have gone to die, but there is certainly some potential upside there if it continues to show even tepidly good results in trials.

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Annual Checkup -- MYGN

Myriad Genetics (MYGN -- click to register for free RT streaming quote) has been a solid performer for me this year but not a spectacular one. This is a speculative investment on MYGN's long term potential to develop a strong portfolio of drugs. There has been no recent news that compels much interest in MYGN among the investing pundits, so the stock has been relatively quiet this year, especially for a biotech company in the year of biotech enthusiasm. I haven't written about MYGN much recently, I posted my reasons for buying them when I added to the position back in September and when I first bought into MYGN on a newsletter recommendation back in July. Those two purchases give me an average cost of about $19.30 a share, so I'm sitting on a small gain that I have no intention of realizing anytime soon. MYGN's recent news has all been about Flurizan, their somewhat uninspiring Alzheimer's drug that's just now enrolling for a phase 3 study -- fortunately for MYGN, the market's expectations for Flurizan are quite low and, Alzheimer's being as difficult to treat as it is, the hurdles are quite low for approval. Flurizan has shown some potential to help patients with early stage Alzheimer's, and that might be enough to get approved and reach a respectable level of sales -- but any profit from this drug is gravy. What I'm interested in are the incredibly strong growth of their genetic tests, especially for hereditary cancers, and in their research programs to develop drugs for some of those same cancers -- they have several cancer drugs in phase 1 and 2 and any success there is many years off, but could be dramatic. Considering the portion of my portfolio that's already committed to MYGN, I am not inclined to add more -- I think it's fairly priced here, and at the moment I'm content to wait for results. Any selloff on bad Flurizan news could change my mind and give me a buying opportunity, but I don't expect that to happen.

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