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Feuerstein's Biotech-Stock Mailbag

Adam Feuerstein

04/12/08 - 10:19 AM EDT

The big news this week was Takeda's $9 billion acquisition of Millennium Pharmaceuticals MLNM. The deal, or rather my perceived coverage of it, prompted a complaint from Rod R.

"So Adam, the biggest biotech rally in many months, like up 3% or better, and you have nothing to report? Maybe the hedgies are looking for virgin territory? It certainly deserves commentary. Got nothing?"

Rod, you need to subscribe to RealMoney, our subscription site! I was posting there all Thursday, discussing the Millennium takeout and the broader effect on the biotech sector.

In last week's Mailbag, I talked about the recent strength in the biotech sector, so clearly, the acquisition of Millennium, especially at a significant premium, helps further improve sentiment, if nothing else. Much of Thursday's gains in the sector, however, were given back Friday due to the broader-market pummeling.

For those without access to RealMoney (huh?), here's what I had to say this week.

Takeda is paying about 16 times 2008 (expected) sales of $570 million to buy Millennium. On a trailing basis, Takeda paid just under 17 times '07 sales. That's a big sales multiple either way you look at it. (Looking even further ahead, it's 13 times '09 sales expectations, still a hefty multiple.)

Millennium does have net operating losses, so I assume that brings down the "real" price a bit -- by how much, I'm not sure. As with the AstraZeneca AZN-MedImmune deal of 2007, which was also seen as pricey, overseas buyers appear to have no problem spending big to buy a piece of the U.S. biotech pie.

Naturally, the Takeda-Millennium deal will get tongues wagging about who's next in biotech to get bought out. Is a 50% takeout premium the new comp? What about 16 times sales?

If that's the case, and I don't really think you can count on it, U.S. Big Pharma, handicapped by the weak dollar and poor credit markets, will have a tough time matching up against their overseas competitors.

But maybe foreign drug firms really want our U.S. biotech assets, just like foreigners used to crave our commercial real estate and were willing to pay top dollar and then some.

All of this should be good news for investors in small- and mid-cap biotech stocks. Short-sellers have had their way with these companies this year, so perhaps the Millennium deal is enough to scare them a little bit.

Last week, I threw a bunch of potential M&A stocks out there, but of course, I didn't mention Millennium, which just continues my dismal track record for prognostication. But why not just forge ahead: If you use the Millennium sales multiple, or something even a bit lower, and apply that to stocks like Onyx Pharmaceuticals ONXX, United Therapeutics UTHR or ImClone IMCL -- all potential takeover targets -- you get some really big numbers.

Onward. Did everyone see the historic news out of Antigenics AGEN this week? The company received approval in Russia for Oncophage, its kidney cancer vaccine. This is the first approval for any cancer vaccine in the world. Wow! (And yes, I'm wearing my snarky pants.)

Of course, readers want to know what I think about Antigenics. Sandy P. writes: "Adam, you've been skeptical about cancer vaccines, but isn't this Antigenics approval in Russia a good thing? Why wouldn't the FDA approve Oncophage?"

The Russian approval of Oncophage is nonsense. The vaccine doesn't work, which was shown quite convincingly when the phase III study failed. Of course, that didn't stop Antigenics from fishing around the data for something positive in order to keep the company's lights on (and the CEO's paychecks rolling in).

This is the oldest biotech trick in the book, and the story always ends badly. The only twist here is the Russian approval, which Antigenics managed to parlay into some nice publicity last week. CNBC couldn't help itself, serving up steaming piles of Antigenics hype to the uninformed masses. And then you get misguided, hilarious columns like the one written by Michael Shulman for Seeking Alpha. Read it for comic relief.

The only thing you really need to know about Antigenics is that, less than 24 hours after announcing the Russian approval of Oncophage, the company went out and raised $21 million through a PIPE, or private placement sale, through Rodman & Renshaw. Shameless.

Oncophage is junk. The Russian approval is essentially a publicity stunt, aiming only to tap into this ongoing meme that the FDA is hostile to cancer vaccines, or that the regulators here really want cancer patients to die, which is why they won't approve cutting-edge, life-saving products like Oncophage.

What a bunch of garbage. Amusing garbage, but still stinky.

The disclosure this week that some patients using the inhaled insulin Exubera were diagnosed with lung cancer laid waste to shares of Nektar Therapeutics NKTR and MannKind MNKD.

However, Frank Z. is interested in Generex GNBT, which he says "has an asthma pump-like product that goes in the buccal cavity. It's already being sold in India and South America. Are you familiar with the company? Can they be the winners from this debacle?"

I don't know much about Generex, but from what I can glean from its Web site, the company is just starting phase III study of Generex Oral-lyn, which is an oral insulin spray that is absorbed in the lining of the mouth.

Interesting idea, I guess, in that this would avoid the potential safety problems found when insulin is absorbed in the lungs. There isn't anything new about buccal administration of drugs either; painkillers are administered in this way, too, for example.

However, and this is a big however, oral insulin of any kind is really a blue-sky concept at this point. Generex isn't the only company trying to accomplish this, and so far, there have been no winners, just lots of losers.

I'd stay away.

Naturally, my article Monday on Elan ELN, Wyeth WYE and their Alzheimer drug bapineuzumab caused a certain amount of anger, especially among the Elaniacs who spend way too much time on message boards.

Linda L., a lovely woman I'm sure, felt the need to vent:

This, your latest attempt at derailing Elan, is just incredibly sad. Do you really think people will listen to your rehashed nonsense, when those with true insight and scientific bona fides (Barron's, Chris Jenner of T. Rowe Price, William Tanner of Leerink Swann, David Faber of CNBC) illuminate the truth?

Elan is in the process of unleashing the most important drug in the history of biotech. Within that context, your puny denunciations sound breathtakingly childish, petty, and churlish. You've sold your (already faltering) credibility pretty cheaply. And to what end? You've achieved what may be a personal all-time low. Pitiful.

In all seriousness, I think my stories on Elan's use of the Neuropsychological Test Battery (NTB) to measure the efficacy of bapineuzumab have raised some important questions -- and highlight risks that weren't being discussed before.

Reasonable people can disagree, and ultimately, the data that we see later this year on bapineuzumab will hopefully tell us a lot about the potential of this drug to treat Alzheimer's, or not.

But I find people like Linda entirely unreasonable in that they're drinking the Elan Kool-Aid by the bucketful. It must be a tasty beverage, judging by the vitriol directed against anyone who dares question Elan's tactics or the potential of babineuzumab. (The same goes for its multiple sclerosis drug Tysabri.)

Elan is the textbook definition of a cult stock. And for natural-born skeptics like me, cult stocks are the most fun to cover. So, Linda, thanks for sharing.

Let's close this week's Mailbag with a note from Pir M. "Could you please comment on the outlook for Pozen's POZN Treximet i.e. the possibility for approval and stock outlook?"

The FDA is expected to issue an approval decision by April 15 on Treximet, which is Pozen's migraine drug being developed in partnership with GlaxoSmithKline GSK.

I touched on Treximet in a previous Mailbag, and unfortunately, the drug's fate has gotten cloudier as we get closer to the FDA decision.

Honestly, I don't know what the agency is going to do with this one. If you force me to go one way or the other, I'd have to be very cautious, if for no other reason that Pozen's track record with the FDA is lousy, and these days, the agency doesn't seem too eager to approve drugs with dangling question marks.

Would it surprise anyone if the FDA punts, deciding to delay a decision past April 15? Not me.

If you do own Pozen and believe Treximet will be approved next week, I'd hope you're appropriately hedged, just in case the FDA decision goes the other way or is delayed yet again.