Biotech Values

[DewDiligence]

Year-end recap:

After a great year in 2004 (#msg-4953184) and a good year in 2005 (#msg-9067419), 2006 was an off year for me.

First, the losers. GTCB, my largest position, is down by a third during the year to date and has even slipped below my average cost of 1.12. During the year, I bought between the original EMEA rejection in February and the approval in June and bought more after the approval (#msg-12212476). The latter purchases, which raised my average cost from less than a dollar to 1.12, now look unwise. Nevertheless, I think the long-awaited regulatory approval has taken a lot of the risk out of the stock and I look forward to having the share price reflect the company’s transition to a commercial enterprise.

IDIX, my second largest holding at present, has also performed poorly. I took an initial position after the big swoon in March (#msg-10442384), but I am nevertheless down almost 20% relative to my average cost of slightly less than $11. 2007 figures to be a make or break year for IDIX based on the sales ramp for Tyzeka in HBV and the clinical progress (or lack thereof) for NM283 in HCV. I think the current valuation is modest in light of the company’s cash balance and potential milestone payments.

ADH was a loser that I exited in October when GSK declined to exercise its option to license ADH’s lead drug (#msg-14005556). Fortunately, this was my smallest long position during 2006 on account of the high-risk nature of the bet.

Winners. A big biotech winner for me in 2006 was IMCL, which was my second largest holding until I sold all of it in February, making 20% in seven months (#msg-9919978). I reasoned that IMCL was too cheap in mid 2005 based on the buyout vig, and I reasoned that it was fully priced in early 2006 even after taking the buyout vig into account. All told, the gain on IMCL was probably more lucky than smart.

Another big winner on the long side was not a biotech but rather a defense company that has its own iHub board (#board-3936): ESLT. I’m still holding and am up 43% in nine months (#msg-10442384). What’s remarkable about this is that nothing especially newsworthy has happened to ESLT during the period I’ve owned it; rather, the price rise can be attributed almost entirely to the valuation correcting from an absurdly low level to a more reasonable level.

On the short side, I had a perfect batting average during 2006, going six for six. The stocks I shorted and covered for gains were (in alphabetical order): AGN, ALKS, ASPM, OSIP, TELK, and VRTX. I documented each short and each cover on this board in real time, so readers may use the iHub Search tool to find further details on these transactions.

All told, 2006 was a bad year, but I suppose it could have been worse. I did not own AVNR, COR, CORT, DOVP, GENR, GNTA, ICGN, INHX, INSM, NBIX, NEOL, NTMD, NUVO, OCCX, PRW, RNVS, THLD, VLTS, VSGN, or various other biotechs that crashed and burned during the year



Dew