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Gold Up 1%; Silver Up 4% Last Week – Maintain Upward Momentum and Challenge Resistance

admin — Mon, 06 Sep 2010 13:10:19 +0000

Gold

Last week’s early September relief rally continued this morning as equities have risen again in Asia and Europe. Gold is one of the strongest currencies in the world this morning, along with the yen. While the dollar is flat, sterling has fallen sharply against all currencies on UK economy concerns and gold in sterling terms has risen from £806/oz to £811.20/oz (see Cross Currency Table).

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Crossing the Biotech ‘Valley of Death’: From Innovation to Cure

admin — Mon, 06 Sep 2010 11:59:49 +0000

Jason Chew submits:

The term “Valley of Death” has come to describe the period of transition when a developing technology is deemed promising, but too new to validate its commercial potential and thereby attract the capital necessary for its continued development¹. During this transition, there is often a funding gap due to the weariness of risk-adverse investors. This is especially true today with the depressed market, creating limited exit strategies for early investors.

Drug discovery often begins in academic research labs; many of today’s best selling and leading edge products have their roots in academia. These include Byetta, Copaxone, Geldanamycin, Emtriva, Alimta, Taxol, and Rapamycin. But the process of translating a laboratory discovery into a drug is fraught with difficulties. There is a tremendous gap between the time of the original discovery and the time to market.

Only 0.03% of VC funding goes into the seed stage due to the very high risk of failure². For many researchers, the initial source of funding for discovery work often comes from the NIH in the form of SBIR grants. In bioscience research, the initial phase I grant can be around $150,000 for pilot research. The number of applicants for these grants has grown significantly in the past decades. In 1983, fewer than 1000 grants were sought, by 2006, there were more than 3000 applications; in that time period the percent approved remained between 20% and 30%, leaving an increasing number of applicants looking for alternative funding sources.

Universities and non-profit organizations (NGOs) also support early stage research, though for different reasons. Universities can receive millions of dollars in royalties if a product from their lab is developed. By spending small amounts and coaching their researchers, small investments may pay off handsomely in the long run. Many universities have formed technology transfer centers to help take discoveries from research labs to the hands of private companies for commercialization. NGOs typically invest in specific disease areas at an early stage in promising technologies to accelerate research toward the development of cures. Without pressure for financial payoffs, NGOs are able to take on these riskier investments.

The NIH also provides larger phase II grants of over $1 million each through the SBIR for proof of feasibility studies to assess the commercial viability of a project. Venture funding is often sought in conjunction with phase II grants. After these grants, the NIH provides no other funding for these projects. VC, angel investors, private equity, collaborations, or other government grants can all be sources of future financing.

Venture capital and biotechnology have worked hand in hand since the formation of Genentech and has been crucial to the development of the biotech industry. Between 1986 and 2008, VC biotech investors averaged net returns of 20.7%, although suffering a loss in 2008. In high risk biotech investing, 44% of VC investments ended in total or partial losses while two-thirds of winners required holding periods of five or more years³. Historically, about 18% of VC money has gone into the sector.

VC funding has dropped 33% in 2009 from 2007’s all time high, and investors have become especially conservative. While VCs have always tended to favor more de-risked assets- that is, after the proof-of-feasibility stage- they are now waiting even longer before pulling the trigger. This has left entrepreneurs in a bind, stuck between seed funding and VC funding. VCs are asking for ever-more data before investing, but money is needed to generate that data- a sticky situation indeed. Just at the point in development when costs are beginning to increase significantly, financing has become increasingly scarce⁴.

Money is flowing disproportionately to top-tier companies, with little left over for companies in the lower tiers. This has served to widen the chasm in the Valley of Death. There may be a renaissance in biotech VC investing, but until then, the industry may need to undergo some changes to ensure its continued growth.

The biotech sector is in serious need of consolidation and rationalization. Worldwide, there are 4000 private and 600 public biotechs, half of them in the US, very few profitable. In 2007, there were 2742 compounds in the clinical pipeline. Surely some redundancies can be eliminated. As we have seen, more compounds does not equate to more drugs approved. Not every idea is a good idea and deserves funding. Consolidation will ensure the best ideas will receive sufficient funding to succeed.

With the weeding out of biotechs that is likely to come (I say likely because biotechs have a way of hanging on like zombies), two business models look to strengthen in today’s business environment:

1) Hybrid biotechs with strong platform technologies, well financed, with the ability to take drugs to market. Hybrids will have strong IP in a broadly applicable enabling technology with the potential to create improved drugs. Hybrids both license this technology to others and use it to generate their own pipeline. They have a high burn rare from their operations, which is partially offset from their technology licensing.

2) Virtual biotechs are comprised of a core management team with completely outsourced operations, and maintain their focus on speed and cost, which fits well with the mindset of many VCs today.

Virtual biotechs may be well suited to take inventions from labs to a validated stage where additional capital can be found to complete development of a project. A validation point can be successfully developing a compound through Phase I or Phase II POC. Compared to laboratory startups, they have the advantage of strong management teams and the ability to lower risk by taking on multiple projects at once. Lean operations provide greater flexibility and a better chance of bringing a project to POC on a low budget. Most of all, they have the financial muscle to bridge the translation gap- the Valley of Death.

With virtual biotechs, there is no need to constantly form new companies for the purpose of developing a single invention- both risky and a highly inefficient use of resources. Spinning off a company from an academic institution requires the build up of infrastructure, no matter how small. The researcher also bears the cost and risk of a project’s failure, lacks expertise in navigating regulatory pathways, and management of outsourcing contracts. Allowing a dedicated drug development company to take over a project allows the academic researcher to offload significant risk while maintaining the ability to participate in the upside.

References:

Venture Funding and the NIH SBIR Program, National Academies Press (US); 2009.
Challenges in a Biotech Startup, Kellog School of Management 2006
The Cost of Capital of Early Stage Biotechnology Ventures, Boston University, Harvard Universty
Desperately Seeking Cures, Newsweek, May 15, 2010

Disclosure: Long RHHBY.PK

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Gold and Silver Market Suppression Failures Flash Buy Signal, Part 5

admin — Mon, 06 Sep 2010 10:09:42 +0000

Robert Kientz submits:

Gold and silver, like other commodities, have an intrinsic value, which is not arbitrary, but is dependent on their scarcity, the quantity of labour bestowed in procuring them, and the value of the capital employed in the mines which produce them.

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Arena’s Lorcaserin: Weighed Down by Qnexa and Meridia

admin — Mon, 06 Sep 2010 09:44:33 +0000

Joseph Krueger submits:

Before the FDA review panel’s of Vivus’s (VVUS) drug Qnexa, I expressed significant doubt that the panel review would be positive based primarily on the safety issues surrounding one of its ingredients topiramate here. The safety issues had to do with contraindications between topiramate itself as well as contraindications with the other ingredient phenteramine. I made the following statements:

With so many contraindications and side effects of phentermine and topiramate, who can safely use Qnexa?
Given the FDA’s historic stance on the safety of weight loss drugs, and the long list of potential safety issues with phentermine and topiramate, is it likely that the FDA will allow its marketing?

I concluded (accurately) that Qnexa efficacy was never in question, and that these safety concerns would be the outstanding issues that would prevent Qnexa approval (PDUFA date is Oct 28, 2010). After the review panel vote, it appears that the only hope for Qnexa approval in October is that the FDA feels the safety risks are worth the clear weight loss benefit.

Finally, I finished up this discussion with this statement:

Investors should also consider the effects of any VVUS events could have on other companies developing obesity drugs. The outcome of the Qnexa panel review will have an impact on the trading of Orexigen (OREX) and Arena Pharmaceuticals (ARNA) obesity drugs up for review before the end of the year.

In this brief analysis, I compared Orexigen’s (OREX) Contrave to Arena’s (ARNA) Lorcaserin and hypothesized how the Qnexa panel could affect the share prices of OREX and ARNA. I stated:

Between these three drugs, Qnexa is perhaps the most effective but also by far the one facing the most potential safety concerns. A favorable review for Qnexa is logically likely to rally VVUS but also OREX and especially ARNA stocks as it would demonstrate the review panel’s willingness to endorse an effective weight loss drug even in the face of potential side effects. An unfavorable Qnexa review is logically likely to cause a short term gut-response sell off in both of these stocks. However, a little further out I would expect ARNA not to recover (due to the safety concerns) but a rally in OREX could occur (due to its strong efficacy and very safe profile) as it demonstrates a continued concern over safety, and the elimination of its competitors.

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Fifty Years of Suppressing Silver

admin — Mon, 06 Sep 2010 09:09:27 +0000

Jeff Nielson submits:

Sophisticated precious metals investors are well-aware of the rampant manipulation of the gold and silver markets. They are also generally aware of the reason for such manipulation. A rapid rise in the price of gold and silver is like an economic “warning siren” – alerting savers that their wealth (i.e. the purchasing power of their currency) is being rapidly eroded by the monetary depravity of bankers.

In a world with a “gold standard”, this isn’t a problem. With currency which is redeemable in gold (or silver), the value of a currency (i.e. its purchasing power) is anchored by the gold and silver backing it. However, in a world of nothing but “fiat currencies” (i.e. money backed by nothing), a loss of public confidence in paper “money” is the worst nightmare of bankers.

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Mining Juniors Take the Gold Bull Lead

admin — Mon, 06 Sep 2010 08:09:00 +0000

Marco G. submits:

The Gold price has been on a tear this summer since July 26^th, 2010. Gold has moved from $1155 USD to a peak of $1255 USD reached on September 1^st, 2010. That is a move in the price of Gold of about $100 or 9%. As the author types on September 5^th, Gold is sitting at $1551 USD.

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Gold Resource Corp: The Power of Dividends

admin — Mon, 06 Sep 2010 07:08:45 +0000

I’ve been an investor in Gold Resource Corporation (GORO) since October 2006. I advised them for just under two years, bought shares in the open market, and have since watched their dream become a reality. The stock itself is arguably the best performing gold stock during the 2006-2010 timeframe. The GORO story has everything you look for as a gold stock investor: 1.) A new low cost gold producer 2.) High grade deposit that is still 98% unexplored 3.) Low cost production (sub $200/oz cash cost) 4.) Management owns 20-25% of the company 5.) 1/3 of cash flow going to a dividend [already paid two special dividends since 7/1/10] 6.) Fantastic share structure 7.) 9 year mine life which will be expanded.

First years production is anticipated to be 70,000 oz at a $200/cash cost increasing to 200,000 ounces at a 0 cash cost by year 3. At $1,000 gold, with just over 52 million shares fully diluted, GORO will have $1.07/share in operating cash flow in year one, growing to over $3.81 OCF/share by year 3. Management’s goal is to pay 1/3 of operating cash flow out as a dividend so one could expect dividends to grow from $0.36 – $1.27 per share during this 3 year timeframe. The company has already announced $0.06 in dividends since the start of commercial production on July 1, 2010 which tells investors management is serious about paying them.

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A ‘Stealth Rally’ in Solar Stocks

admin — Sun, 05 Sep 2010 19:45:18 +0000

Dr. Duru submits:

OK, by “stealth” I really mean I have not paid close enough attention to the rallies in several solar stocks. 2010 has been a year of true divergence for solar stocks. Some solar stocks have been in year-to-date rallies and others have been declining all year. The net result is an awful -25% year-to-date performance for the Claymore/MAC global Solar Energy Index ETF (TAN). The winners are even more notable given the general stock market is down for the year. This year’s best performers are Renesola (SOL) and Solarfun (SOLF) which are well-ahead of the entire sector. LDK and Trina Solar (TSL) cling to small to marginal gains for the year after experiencing big losses earlier this year. First Solar (FSLR) rounds out the list with a flat performance year-to-date.

ReneSola (SOL)
I wrote about SOL several times last year as bullish options activity brought the stock to my attention. I completely lost track of SOL this year. Too bad. SOL has nearly doubled this year and is sitting at two-year highs. I cannot recall the last time I could say something like that about a solar stock!

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Genzyme, Sanofi May Eventually Come to Terms: Focus on Biotech Deals

admin — Sun, 05 Sep 2010 14:03:02 +0000

The Burrill Report submits:

By Marie Daghlian

Sanofi-Aventis (SNY) made a formal offer to acquire Genzyme (GENZ) for $69 per share, an offer that was unanimously rejected by Genzyme’s board of directors as unrealistic and opportunistic.

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Another Big Bet on Obesity: Takeda Puts Orexigen on Solid Ground

admin — Sun, 05 Sep 2010 14:03:02 +0000

The Burrill Report submits:

By Michael Fitzhugh

Japan’s Takeda (TKPHF.PK) is placing summer’s second major bet on an obesity drug with a $50 million investment in Orexigen’s (OREX) Contrave, a combination drug meant to help people tackle the biology and behaviors behind overeating. Payments of more than $1 billion await Orexigen if it hits unspecified regulatory and sales-based milestones in the United States, Canada, and Mexico, the countries covered by its new deal with Takeda.

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