by Travis Johnson, Stock Gumshoe | June 17, 2009 4:37 am
It’s been a few weeks since we looked at a teaser from Dr. Stephen Leeb, and I sure do see his name out there a lot, so I thought this one might be interesting for a quick once-over.
And incidentally, yes, if you insist on using the Dr., I’ll try to remember to throw it in when I write about you — that goes for you, too, Dr. Skousen, and any other newsletter writers who like to tout their educational achievements. In return, I think it’s only fair that you call me “Master Gumshoe.” I never did get that PhD, but still…
Ah, I kid because I love. Dr. Leeb, by the way, does actually have a doctorate — and it’s in psychology, so perhaps that makes him a keen observer of the mass of human foibles that is the stock market, I don’t know. I do know that lots of my readers have argued about his prescience over the years, and that the most frequent phrase I hear uttered when it comes to Leeb is “Peak Oil.”
But today it ain’t about oil, it’s about drugs — this teaser ad is for his Aggressive Trader service — he’s got a pharma stock picked out for our attention, and all he asks in return is, well, a thousand bucks or so for a subscription to his service. We don’t have any subscriber reviews in yet for Aggressive Trader, but if you want to see what other folks think of some of the other Leeb letters you can click here.
So, um, how about we try to figure this out for a price that’s a bit more, shall we say, free-ish?
Here’s the pitch:
“You know that for some time I’ve been optimistic about the long-term prospects of certain health-related stocks. Now, with President Obama pushing for more affordable healthcare, companies that provide treatments for illnesses that plague the old should see their earnings multiply within a few years.
“In fact, healthcare is one industry that should prosper regardless what happens in the economy. People just can’t afford to stop spending money on health.”
I more or less agree with that point — I do think healthcare stocks are likely to perform better than most investors fear right now — but it’s far from a slam dunk. I don’t quite get the logical connection between “pushing for more affordable healthcare” and “see their earnings multiply,” though, especially for stocks that don’t specifically make products that cut costs or increase efficiency (like electronic medical records, or generic drugs). But we’ll give him the benefit of the doubt for a moment.
“Now, I have to confess that for several years I’ve been watching one company in particular which has an exceptionally exciting story. I’ve traded it a few times, with a good deal of success. But I believe its moment of truth will occur sometime within the next six months.
“This company owns several drugs which appear to be the most revolutionary and effective treatments for adult diabetes and obesity in existence. Both of these conditions are widespread among the elderly and middle-aged – which gives the company a tremendous potential market.
“Like most stocks, this one suffered from last fall’s sell-off. Plus, it has been hampered by various board members fighting for control of the company (who could blame them?). Consequently, you can now buy the shares for 25% what they sold for a year ago, and a smaller fraction of their long-term potential.
“But now the internal strife in the company has been resolved. It has a collaboration agreement with Eli Lily and several other pharmaceutical firms, which should help it develop and market its treatments faster. And it has developed a drug delivery method that should appeal more strongly to patients.
“Overall, I see this stock as highly undervalued. I expect sometime within the next six months, its price will make an unexpected and stunning leap forwards.”
OK, so that’s a decent little crop of clues. I think we can sniff out which company it is … but he does say that he’s not picking the stock here …
“Right now, I am encouraging participants in my Aggressive Trader program to take a position in this stock – but to do so in a leveraged way. Rather than buy the shares outright, we are plunking down a small amount of cash upfront. If I’m wrong, and the stock goes nowhere, we will lose very little. However, if I am right, our profits could be much higher….
“The thing is, while I’m confident this biotech will reward us handsomely, I cannot pinpoint an exact date when the shares will take off. It could start three months from now, or tomorrow.”
OK — so it sounds like we’re buying call options here, not the stock. And if we’re assuming that it will move sometime in the next 3-6 months there’s no way that I can guess exactly which option contract it might be, but we can look at a couple of them.
And I can at least tell you the name of the stock — this almost has to be …
Amylin Pharmaceuticals (AMLN)
Heard of them? Yes, they get into the news quite a lot, especially for a relatively small and unprofitable biotech company — they have a market cap of under $2 billion, and they do indeed focus on diabetes and obesity drugs (which are often connected), including a few new technologies and compounds that could, depending on your perspective, be considered “revolutionary and effective.” The shares aren’t quite going for 25% of what they traded for a year ago, but they’ve come close to that margin in recent months (and if you extend that comparison out to 20 months or so instead of a year, they’re still there now, way below their highs). That fall is partly a result of the market crash and the shareholder tumult, but it’s largely due to the growth rate for their primary drug, Byetta, falling off a cliff in the face of side-effect concerns, heavy competition, and, perhaps, the quick consumption of low-hanging fruit in the available patient base.
This solution — and I’m pretty sure it’s the right one — was sent in by Gumshoe reader Harold Kinney before I had even looked at the ad, so we’ll stop to give him some quick kudos.
OK then, moving on …
… the stuff about boardroom drama is a perfect match — Carl Icahn and some other outside investors won a couple board seats in a contentious proxy battle that came to a head just about two weeks ago, and, perhaps most importantly, one of the board members ousted was the Chair, who Icahn has been calling out on the carpet for some time. The company fears that Icahn will try to sell the company, which, if true, could also move the share price — and Icahn and Eastbourne (an institutional investment firm that also fought the board) will probably at least push for more cost-cutting and efficiency measures, particularly if these lead drug candidates don’t pan out as well as hoped … and they did, for whatever it might be worth, get the backing of Amylin’s former CEO. Amylin has already been doing this, particularly in paring back their sales force. Here’s the update on the board election if you’d like the details.
And as to the timeline of drug developments for Amyiin, always of big import if we’re dealing with biotech options? They are hoping to see approval for their extended release exanatide, which is a once-weekly oral version of their twice-daily injectable drug Byetta, in March of next year. That’s not necessarily a slam dunk, Amylin sounds confident but Byetta itself has had its share of stumbles that have slowed sales growth, and the FDA could always ask for more info. If you want to catch up on the details there was a good article by a Zack’s analyst last week, including updates from their presentation at the American Diabetes Association meeting.
So that major development, while it faces potentially very significant competition (including from Eli Lilly, which is partnering with Amylin as well as working on its own similar compounds), could certainly be expected to move the share price — and if the buzz builds, it might easily do so well before the FDA response next year. And just to throw one more (albeit small) wrench into the works, a little company called Intarcia is also trying to develop yet another delivery system for exanatide, which it claims doesn’t impinge on Amylin’s patents, using an implantable pump (instead of oral time-release or the current regular injections).
The extended release action for Byetta is provided via technology from Alkermes (ALKS), in case you’d rather have a somewhat more indirect (and currently profitable) play on this potential drug.
The obesity drugs under development at Amylin are of much less import than their flagship product Byetta, at least so far, but the one that seems to get the most attention is a drug they picked up from Amgen a while back, Pramlintide/Metreleptin. I don’t know much of anything about that, but there’s a pretty good article about it from last Fall, and you can catch up on the details on Amylin’s Pipeline web page. Weight loss is a key side effect of many diabetes drugs, too, since weight gain is a big risk factor in diabetes, so who knows, maybe they can even hit up the same patients with buy one/get one specials.
So … what to do? I don’t know what Leeb’s options trading typically looks like, or if he really does stick with short term movements for his Aggressive Trader subscribers — if so, options are available for July and October on this name, so one fairly conventional approach would be buying the October $12.50 call options, which at the current price of $1.60 means you’re counting on AMLN getting above $14 within the next four months (that’s about a 30% gain from the current price, which is around $11.60). Alternatively, if you really think the stock won’t move until the Byetta extended release drug approval is given (or not given) next March, you could get a little big fancier with a calendar spread using the LEAP options — sell the January 2010 options and buy the January 2011 options, which at the $15 strike price would cost you about $1.70 (Buying the Jan 2011 15 strike for $3.20, selling the Jan 2010 15 strike for $1.50). In that case, you’d like AMLN to stay below $15 until January, then shoot up to the moon later in 2010. Just a thought, I don’t really know what options Leeb would pick for this trade, and there are endless permutations that you could consider (and risks in any trade, of course).
So whaddya think? Byetta has been a disappointment recently, will the new oral version beat out the competition (assuming it’s approved?) Will their obesity drugs, both in mid-stage development, take off and bring yet more investor attention? If you do think AMLN is a great play for some biotech volatility, what announcements do you think are likely to be important, and what options trade would you try? Let us know with a comment below.
And as I noted above, we’d love to hear from more subscribers to this or any of Dr. Leeb’s newsletters — click here to see other Leeb subscriber reviews and add your own.
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