Biotech Values

[DewDiligence]

Year-End Recap

After having a great year in 2004 (#msg-4953184), a good year in 2005 (#msg-9067419), and a bad year in 2006 (#msg-15709983), I was hoping for 2007 to resemble 2004-2005. 2007 turned out to be not as good as those years but very much better than 2006.

Let’s take the bad news first. GTCB, which I’ve owned since 2004, declined from 1.11 to 0.87 during 2007. I added a sizable amount at 0.89-0.90 on Dec 13 (coincidentally the same day CEO, Geoff Cox, bought shares) and again today at 0.83-0.85, lowering the average holding cost from 1.12 to 1.08 (#msg-25275427, #msg-25646505, #msg-12212476) and yielding a 19% loss for the aggregate GTCB holding during the year.

I continue to be bullish on GTCB’s prospects for 2008 and beyond. Top-line data from the phase-3 US ATryn trial are due any day, and a US ATryn partnership may follow soon thereafter. For further discussion, please see the ReadMeFirst at #msg-25521116.

IDIX was an unmitigated disaster in 2007 as the share price declined 69% from the failure of the company’s drug for HCV. I averaged down in July after the bad news (#msg-21674462), but even those purchases are slightly underwater. To make matters worse, I sold ELST in order to buy more IDIX and ended up incurring a big tax hit as a result.

IDIX has been my biggest biotech mistake in the past several years. I’m still holding all of my shares but, unlike GTCB, the prospects for the company have clearly worsened during the past year. The best hopes for a turnaround are positive clinical data for the early-stage HIV drug, IDX-899, and greatly improved sales of the HBV drug, Tyzeka/Sebivo, on which IDIX earns worldwide royalties from NVS (#msg-24674470).

The good news. MNTA is a company I had closely followed since 2005 despite never having owned it until a month ago. I’ve always thought MNTA had intriguing technology but, until recently, I considered the valuation frothy.

What changed? I strongly believed—and continue to believe—that the precipitous price drop on Nov 6 was an overreaction to the FDA non-approvable letter for generic Lovenox. I bought aggressively on Nov 6-8 and MNTA became my second-largest holding (#msg-24357847). The average holding cost is 5.46.

The MNTA holding finished 2007 with a gain of 31%. At year-end prices, MNTA was nearly tied with GTCB in total position size.

The cursory rationale for buying MNTA buying is spelled out in #msg-24321280; however, there is much, much more to the story than that. In particular, I’m bullish on the prospects for the company’s proprietary anticoagulant, M118 (#msg-24457684). There is no ReadMeFirst for MNTA, but my rough expectations for the share price in 2008 are outlined in #msg-25373113.

I realized a 30% gain on COR (#msg-21222908) from a relatively short holding. I was very lucky to be out before the bad news hit in October, insofar as I thought it unlikely the FDA would deny the company’s IND for a phase-2 trial in ADHD. Over the past three years, I’ve bought COR a few times when I thought the valuation was dirt cheap, but I’ve never been fully convinced that the company’s Ampakine platform had bona fide commercial potential.

I logged a 34% realized gain on ARAY (#msg-23930622) from a holding period of just under two months. I like ARAY’s radiosurgery system, and the valuation became quite cheap after the company’s FY2007 results announced in August were not up to Wall Street’s expectations. However, I remain thoroughly unimpressed by the company’s management and I doubt I would buy back absent a change in that regard. A special thanks goes out to TinaMarie for bringing this company to the attention of the Biotech Values board.

I cashed out a 75% gain on ESLT in July, half of which accrued during 2007 (#msg-21674667). ESLT is a low DD holding compared to a typical biotech, and I bought in early 2006 for the simple reason that the valuation seemed much too cheap. I sold because the valuation had become considerably less cheap, but selling in July to buy more IDIX was my biggest mistake of the year insofar as ELST continued to go up, IDIX continued to go down, and I ended up with a large tax liability to boot. C’est la vie.

I did not short any stocks during 2007. This was a big change from 2006, when I made good money on the short side. However, the stocks I most wanted to short in 2007 — ARTE and THRM — were not available for shorting whenever I was looking to pull the trigger.

All told, my non-income investment portfolio, which includes the aforementioned holdings and excludes my muni bonds, REITs and closed-end funds, finished 2007 up 14%. This outcome would have been very different without MNTA, but it’s typical for my results in a given year to be heavily influenced by one or two stocks because I generally take large positions in a small number of companies.