Vol. 31, No.

9a MAY 3, 2013
Two Wall Street, New York, New York 10005 www.grantspub.com
Theyve looked and looked, but
Federal Reserve investigators cant
seem to detect more than a few mar-
ket excesses traceable to the monetary
policy of the Bank of Bernanke, their
employer. Traceable is, of course,
a vague evidentiary standard. Who
knows where ZIRP and QE end and
fallible human judgment begins? To
fill the investigative void, this publi-
cation will contribute the results of its
own search for grievous distortions of
asset values not unrelated to the avail-
ability of free money.
The readers of Grants are, of
course, fully briefed on low-yielding
high-yield securities and on prices
of farmland as high as an elephants
eye. They are up to date on plunging
cap rates for core office buildings
and on the return of free-and-easy
structures in tradable bank debt. But
the levitation in biotech stocks may,
so far, have eluded even their wide-
ranging notice.
It would have escaped ours, too, ex-
cept for a subscribers prompting. Our
informant, a physician who diagnoses
companies, not patients, and who asks
not to be named, specializes in selling
short the kind of biotech stock that
owes its rising price to the prevalent
speculative and monetary helium. He
says that todays market is the least
anchored to business reality of any he
has seen in 10 years (i.e., he, person-
ally, is hurting but hopeful).
To date in 2013, the Nasdaq Bio-
technology Index, a.k.a. NBI, has
climbed by 26%. It was up by 31% in
2012. The rally this year has tacked on
a cool $115.7 billion to the market cap
out positive real interest rates, get-
ting a commercially viable therapy
past the Food and Drug Administra-
tion and into CVS is no easy matter.
A 2010 investigation by Joseph Di-
Masi, Director of Economic Analysis
at the Tufts Center for the Study of
Drug Development, found that 16%
of drugs ultimately earn regulatory
approval, though even that meager
figure flatters the odds of success.
Drugs targeted to tiny market niches
(orphan drugs) and therapies nearly
identical to products already on the
market (me-too drugs) win approval
in much greater numbers than the av-
erage submission does. Thus, when
a speculator in the shares of the pro-
ducer of an unapproved therapy rates
of the indexs 118 constituent compa-
nies. Ten years ago, a bull is quoted
as venturing in the current issue of
Barrons, the human genome could
barely be decoded. Ten years from
now, one can guess that it will be done
for pennies, nearly instantaneously.
We could be witnessing a substantial
re-rating, where instead of a discount
on R&D being embedded in health-
care stocks, a premium could ulti-
mately be awarded for the potential
option value of curing a disease.
Quite possibly, this is correct. But
the fact remains that, in fiscal year
2012, two-thirds of the component
stocks of the NBI showed no positive
net income and 28% had revenue of
less than $25 million. With or with-
Memo to the bubble police
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4/25 3/1 1/2/13 11/1 9/4 7/2 5/1 3/1 1/3/12
On the meds
share prices of Isis Pharmaceuticals, Repros Therapeutics
and Sangamo Biosciences
source: The Bloomberg
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Repros
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article-GRANTS/MAY 3, 2013 2
his chances of success as a coin flip,
that individual is playing right into the
hands of our short-selling reader.
How, then, does a non-revenue-
producing biotech company keep the
lights on? Not infrequently, by tap-
ping the ATM, i.e., by issuing shares
through the technique of an at the
market offering. The shareholder
might think of the biotech ATM as
a kind of equity dilution machine.
Management announces a plan to sell
stock, and thats the last the public
hears of it till an updated, enlarged
share count is disclosed.
These companies, our bearish
reader attests, will sell stock, sell
stock, sell stock and then you wont
realize until the following Q that
theyve diluted you by 10%, 8%, 5%,
whatever it happens to be. And I dont
know why people dont have a visceral
reaction against these sorts of things.
But they dont. I dont really complain
about them too much, because its
driving the market cap of a company
up in a sneaky way. So I view that as
being lumped into the idiosyncratic
tailwind at my back for being short.
Until Coronado Biosciences (CNDO
on the Nasdaq), for instance, can con-
quer Crohns disease, its principal line
of business would appear to be selling
stock. Thus, in the first four months of
the year, it issued 3.3 million shares.
On Monday, it served notice of intent
to sell four million morea prospec-
tive 14% dilution on top of the earlier
13% dilution. Last year, the company
showed a loss of $26.6 million on zero
revenue. A mitigating fact of interest:
CEO Harlan Weisman bought 20,000
shares in January.
The cases of Sangamo Bioscienc-
es (SGMO on the Nasdaq), Repros
Therapeutics (RPRX on the Nasdaq)
and Isis Pharmaceuticals (ISIS, also
on the Nasdaq) bear further witness
to the anti-gravity forces at work in to-
days monetarily medicated markets.
Theres no denying the success of
their respective share prices. Its the
success of their respective products
and businesses that the thoughtful
observer must wonder about.
Grants, let us declare, has noth-
ing to contribute to the scientific de-
bate over any particular therapy. We
leave scientific judgments to others,
including the FDA and our short-
selling reader, credentialed both as an
M.D. and a Ph.D. In the case of San-
gamo, which lives in Richmond, Ca-
lif., we only note that its HIV/AIDS
treatmentSB-728 by nameis in
phase 2 clinical trials, that every other
Sangamo product is in the formative,
pre-clinical phase of development and
that the company makes representa-
tions about currently available HIV
treatments that our informant disputes
(he says that SB-728, even if it could
be shown to be effective, would not
likely displace existing medicines).
In fiscal 2012, Sangamo showed
$21.7 million of revenue, derived
from research grants and partnership
agreements, on the way to making
a loss of $22.3 million, or 43 cents a
share. The market cap is $546 million,
net debt stands at $20.2 million and
the short interest amounts to 15.3%.
Sangamo shares have returned 258%
since the start of 2012. The company
was founded in 1995 and went public
in 1999. Edward Lanphier has been at
the helm since Day 1.
Not in its 18-year existence has
Sangamo successfully brought a drug
to market. No insider has bought a
share since 2010, whereas several
have lately sold, including Lanphier
himself (38,790 shares since January).
A would-be investor in a biotech
company, observes colleague Char-
ley Grant, short of arming himself
or herself with a degree in medicine,
could do worse than to watch what the
insiders do, instead of what they say.
Repros Therapeutics, a Woodlands,
Texas, developer of Androxal, an ex-
perimental drug to restore normal
testosterone levels in men with hypo-
gonadism, recorded a loss in 2012 of
$18.2 million, or $1.15 a share, on zero
revenue. Net cash and equivalents at
year-end stood at $24.2 million. Since
the start of 2012, the stock has re-
turned 322% on the way to its current
market cap of $379 million, not bad
for a company that raised $1 million
in a secondary offering in September
2009 at 65 cents a share. At last report,
29.1% of the outstanding shares were
sold short, although the short inter-
est was, no doubt, culled on March
28 when the price of a share of RPRX
spurted by 76% to $16.10.
On that red-letter day, Repros an-
nounced the results of a study show-
ing that 79% of men who were treated
with Androxal reached a 24-hour av-
erage testosterone level in the normal
range. So far, so good. Less satisfactory
were the results in that portion of the
study designed to show that Androx-
al does not contribute to a reduced
sperm count. Listeners-in on the con-
ference call heard the long-serving
CEO, Joseph Podolski, muse that the
disappointing data had something to
do with the prevalence of Cubans at
one of the companys testing sites.
[W]e have to understand that Cu-
ban men have a lot of sex, Podolski
said. It also turns out that they cater
to gay Cubans. So interesting concept,
I guess if I were ever to run a study
looking at the impact of our drug or
testosterone product on libido, that
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Beloved and otherwise
Nasdaq Biotechnology Index (left scale)
vs. Market Vectors Junior Gold Miners ETF (right scale)
source: The Bloomberg
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biotech index:
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Junior Gold ETF:
$12.85
article-GRANTS/MAY 3, 2013 3
might be a group that wed want to
study. Fortunately, in 302 [an upcom-
ing sister study], where we have sites
kind of in the north and other parts
of the country, weve got a bunch of
old married men, and libido has been
beaten out of us over the years. Our
anonymous biotech investor responds:
I bat 1.000 when I exclude my outs.
Let it be acknowledged that the Re-
pros insiders are not selling (the chief
financial officer actually bought 1,000
shares at $11.89 on Feb. 1). Then, too,
past performance is no guarantee of
future success. Just because Repros
has never brought a drug to market
after more than 20 years in business
with the same CEO in place doesnt
mean it cant.
Isis Pharmaceuticals is our final
example of the bull market in medi-
cal and monetary miracles. Isis, re-
siding in Carlsbad, Calif., has had
a pretax loss in every year since its
1991 IPO. Its shares, however, have
returned 210% since the start of
2012 and its stock-market cap today
tops $2.2 billion. At year-end 2012,
net cash and equivalents stood at
$148 million. It was a year in which
Isis managed to show a $65 million
net loss on $102 million in revenue.
Short interest amounts to 14.4% of
the shares outstanding.
Isis has 28 drugs in its pipeline,
far more than Repros and Sangamo.
Then, too, one of its drugsKynamro,
an example of an orphan medicine
won approval in January to treat a rare
kind of high cholesterol called homo-
zygous familial hypercholesterolemia.
But theres a catch. Isiss seeming
abundance of therapies, save one,
rely on a technology that the com-
pany calls antisense. Antisense,
according to Isis, is much less costly
and time consuming at the drug dis-
covery and early development stag-
es than traditional small molecule
drugs. We can translate what we
learn from the testing of one anti-
sense drug to future antisense drugs
and reduce the potential for failure
in early stages of development, thus
creating significant competitive ad-
vantage for the platform.
But use of a common platform
means that 27 seemingly distinct
drugs are not, in fact, distinct. They
are correlated by virtue of the shared
technology. It is the risks that you
dont seein this case, a highly cor-
related pipeline with abundant fail-
ures in the pastthat hurt you, our
biotech bear says. Maybe this time
is different, maybe not. Anyway, to
a laymans eye, the current product
pipeline looks very much like the
ones listed in annual reports five and
10 years ago.
Like the management team at San-
gamo, the Isis front office has been
selling stock. CEO, chairman and co-
founder, Stanley Crooke, unloaded
30,000 shares last week at a price of
$22.16. To find the last insider open-
market purchase, scroll back to the
year 2006.
Extraneous or not, here is the
track record for public equity inves-
tors expressed in compound annual
rates. Since 1991, Isis has returned
2.7%. Since 1993, Repros has lost
1.6%. Since 2000, Sangamo has lost
0.25%. For perspective, since 1991,
the S&P 500 has returned 9.5% with
dividends reinvested.
Compare and contrast the biotech
business with the gold mining busi-
ness, Grant winds up. A biotech
firm seeks the next medical miracle,
the gold explorer the next great de-
posit. For the would-be gold miner,
the road to riches may or not be in the
ground. For the aspiring pharmaceuti-
cal producer, the miracle drug may or
may not be in the petri dish. At any
rate, the payoff, if any, is years away.
Pending the achievement of positive
cash flow, someonean investor
must pay the bills. The defining dif-
ference in 2013 is that Mr. Market
believes the promises of the lab coats
and doubts the representations of the
hard hats. With dividends reinvested,
the Nasdaq Biotechnology Index has
returned 50% since the start of 2012.
The Market Vectors Junior Gold Min-
ers ETF, the notorious GDXJ, has
lost 46% over the same span. What do
they say about past performance?
s
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