Replies to post #1597 on Biotech Values

[canapeas]

WR Hambrecht

raised genr's FY04 R&D expense to $16.2 mil from $11.3 mil and FY EPS to a loss of .26 from .16, thus explaining today's action?

26 March 2004, 10:24am ET

GENR: Reit Buy - Investment Conclusion: We are reiterating our Buy rating and price target of $9 after Genaera reported Q4:03 results and, importantly, indicated it remains on track with development of its lead drug, Squalamine, for wet AMD. Genaera filed the IND for Squalamine in March and we believe will begin US Phase II trials in Q2:04. This anti-angiogenic drug has demonstrated safety and efficacy in treating wet AMD, and is likely to attract a lucrative pharmaceutical partnership. As a reminder, Squalamine is one of the only drugs for AMD that can be administered systemically rather than by injection in the eye, making this product particularly attractive. We continue to expect its anti-IL-9 antibody for asthma to gain greater visibility as its partner, MedImmune, filed the IND in Q4:03 and should initiate Phase I trials shortly.

Pipeline developments on track - Squalamine IND has been filed. We anticipate initiation of larger, controlled Phase II trials of Squalamine in the U.S. in Q2:04, marking a major step forward for Squalamine and potentially accelerating ongoing discussions for a high value partnership.

Genaera has shown impressive positive Phase I/II results for Squalamine in wet AMD, placing its lead candidate in strong competition with the current leaders in the field. Management also stated additional data on Squalamine for non-small cell lung cancer may be presented at the June 2004 ASCO meeting.

- Reports Q4:03 results. Genaera reported revenue of $0.1 million, in-line with our estimate of $0.1 million, and EPS of a loss of ($0.10) versus our estimate of ($0.05) primarily driven by $2.0 million in higher R&D expense related to pre-IND Squalamine developments. We are maintaining our 2004 revenue of $6.6 million but expect a continued higher level of R&D expenses in 2004. We are raising our FY04 R&D expense to $16.2 million from $11.3 million and our EPS goes to a loss of ($0.26) from a loss of ($0.16).

[DewDiligence]

Re: The management change and the IL-9 program:

>> It is redundant for a 20+ employee company to have both a CEO and a COO. <<

I agree and posted to that effect on Yahoo. Between Levitt, Armstrong, Skolas, and Vogel, GENR has more than enough managerial firepower for a small company.

>>…the CMO [Vogel] is only there in an "Acting" capacity. This implies less of a rational transition and gives the move the feel that it was done with a sense of urgency, before a smooth change could be put in place. <<

Again, I agree. I think the departure of Holroyd adds yet another piece of circumstantial evidence to the case that the IL-9 program is in trouble. Let’s review:

1. The IL-9 phase-1 trial was initially scheduled to begin in 4Q03. Then it was delayed to 1Q04, then to the first half of 2004 and, most recently, the guidance slipped to an unspecified time during 2004 (presumably not the first half).

2. On March 8, GENR announced an extension to the IL-9 collaboration with the Ludwig Institute (#msg-2545526). This announcement would have been an obvious place to clarify the relationship between GENR’s Ludwig collaboration and GENR’s MEDI collocation but, alas, GENR’s PR contained barely a mention of MEDI. To the consternation of some GENR longs, I interpreted the Ludwig PR as an indication of trouble in IL-9-land (#msg-2551636).

3. The following day (March 9) I called MEDI’s IR for clarification (#msg-2559463). I tried to ascertain if there was a technical problem of some kind with starting the IL-9 trials. The answer was that there wasn’t –the program was delayed because, well… because it was delayed. The tone of voice and hesitation suggested something was up. I thought then that the FluMist debacle had perhaps led MEDI’s B.O.D. to order a rationalization of MEDI’s entire drug pipeline, and this scenario seems even more plausible today.

4. Yesterday, GENR released its 2003 financial results and corporate achievements. The reference to the MEDI collaboration was minimalist and boilerplate. Later in the day, GENR filed the 2003 10K report, which cast further doubt on the timing of IL-9 program. Although SEC filings are notorious for emphasizing risks and uncertainties, the language in GENR’s 10K about the IL-9 program surpassed the usual caveats.

5. Today, we have the departure of one of GENR’s top officers who also happens to be a pulmonologist.

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Conclusion: you don’t have to be Kojak to see a pattern here.

I think GENR’s IL-9 program would hold great interest to another partner; if MEDI doesn’t want to play, I hope they will decide promptly so GENR can get the ball rolling with someone else.

>> Management's biggest failing since I have been following the issue is their inability to close a deal. Maybe this was laid at Holroyd's door…<<

This is possible, but I think the simpler and more obvious explanation for Holroyd’s departure is the status of the IL-9 program.

>> To conclude, if the shuffle clears the way for a deal, this is a big positive. <<

If losing Holroyd as a full-timer is what made it possible to hire Vogel and still stay within the budgeted cash burn, you may be right about the management swap being a big positive.