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Technology Stocks : Blank Check IPOs (SPACS) -- Ignore unavailable to you. Want to Upgrade?

To: Glenn Petersen who wrote (2322)	10/15/2010 11:33:32 AM
From: Glenn Petersen	Read Replies (1) \| Respond to of 3862

Altucher's original WSJ piece: One Biotech Stock, Three Catalysts By James Altucher Wall Street Journal June 30, 2010, 10:30 AM ET Two recent articles in The Wall Street Journal have detailed the battle between the major players in the Anthrax vaccine space: Emergent Biosolutions (EBS) and Pharmathene (PIP). This June 9 article and this one on June 28 focused on the recent announcement of the GAO (Government Accountability Office) that they were rejecting EBS’s protest of a contract awarded to PIP. The $78 million contract awarded has now gone through and PIP began receiving its funding. I think this creates an enormous opportunity for investors and several catalysts are at work here that could make PIP the biotech stock of the year. Some background: according to the June 28 article, “a federal commission on weapons of mass destruction in January gave the Obama administration an “F” for bioterror preparedness.” Anthrax is considered the number one bioterror threat by the Department of Defense and, in fact, nine years ago there were five deaths from envelopes being sent around containing Anthrax. The US is required to have a stockpile of 75 million doses of vaccine. Right now, the only approved supplier of doses of vaccine is EBS, which has a long-approved first-generation vaccine that requires 5 doses over 18 months and costs $120 per dose. PIP’s second-generation vaccine requires 3 doses over 60 days and costs about $45 a dose, according to Eric Richman, the CEO of Pharmathene. EBS’s vaccine uses live anthrax to make the vaccine, which increases the cost of and loses scalability versus a second-generation version. EBS is wokring on its own second-generation version. PIP has a huge catalyst in earnings potential. When it was initially awarded the $78 million contract from the DoD, the stock went from $1.41 to a high of $3.45 the very next day. When EBS lodged its protest, the stock fell to $1.50. It’s about $1.60 now despite the GAO saying no to the protest and approving the funding. Initially, PIP and EBS each were up for a $600 million contract from BARDA (Biomedical Advanced Research and Development Authority) but BARDA came out and said neither side would get one because they felt there was a reasonable chance neither group would have FDA approval within eight years for a new vaccine. This may or may not be the case. Now it appears BARDA is breaking the contract into components: first this $78 million for PIP, then presumably another payment, and then actual procurement/purchasing of dose of the vaccine. In the initial $600 million RFP, BARDA did not required FDA approval before the vaccine would be purchased. My guess is procurement can start once this stage and the next of funding is completed, establishing that PIP can manufacture the vaccine at the scale that BARDA and the DoD needs. The government is not providing $80 million for the fun of it. They want this to work: They’re on record as needing second generation anthrax vaccines in the Strategic National Stockpile, which has 75 million doses in it and the shelf life of a dose is approximately three years. PIP has already tested for safety (no issues) and efficacy in animals (depending on the test, they are 85-100% effective. Assuming Pharmathene can build out the manufacturing processes in three years and their experimental studies continue to produce good results, a dose would cost $45. Since the only customer is the government, this essentially eliminates sales and marketing costs as well as research and development costs. Most biotech firms (think: DNDN, GENZ, GILD, HGSI) enjoy 85% margins on their products because they have to absorb those costs. PIP won’t have to — although it beholden to a single customer. Let’s assume 20% net margins, or approximately $10 per dose. Let’s assume the government buys 25 million of its 75 million dose requirement from PIP (remember, there is only one other competitor). That mens $250 million in earnings in three years. This alone could easily justify a stock jump to the $7-10 level, or even significantly higher. Also, once the U.S. starts buying, there will be demand from outside the country. This does not factor in significant government funding for several other products including Protexia, a nerve gas vaccine. A second catalyst involves another legal action, this one by Pharmathene itself. The company is suing SIGA, the Ron Perelman-backed public company that makes a smallpox vaccine. Several years ago Pharmathene and SIGA were negotiating a merger agreement. As part of the merger agreement, Pharmathene was to be granted a license to the SIGA vaccine (to be negotiated on in good faith if the merger agreement fell through). The merger agreement fell through when data about the smallpox vaccine was released in an SEC filing and SIGA’s price shot up. The good faith negotiations fell through and PIP sued to get the license on the vaccine as well as damages. From a report put out by Noble Financial: “In January 2008, the court of Chancery denied SIGA’s motion to dismiss these claims. In 2009, PharmAthene amended the complaint and SIGA filed an answer to the amended complaint denying the claim. It is estimated that PharmAthene’s alleged damages could amount to up to $1.0 billion.” (Emphasis mine.) SIGA has again made a motion to dismiss. The same judge who rejected the claim before is ruling again on it on July 22. This alone could catapult the stock to the $7-10 range. My guess is the case gets resolved with a settlement or they re-engage with merger talks, particularly if the judge rejects the claim like he did two years earlier. A third catalyst is insider buying. There have also been several insider buys lately from directors (John Pappajohn, Darius Schaeffer, Mitchell Sayre) and from the CEO Eric Richman (who was previously on the management team of Medimmune, acquired by AstraZeneca (AZN) ). Here are the details. Approximately $350,000 worth of stock has been bought at prices similar to the current price. It’s not so often I find a stock that has so many catalysts suggesting a significant move higher. I also like the fact that the stock has barely moved while the market has gone down 10% since April 23. It’s uncorrelated, and it’s a biotech with big earnings potentoial and insider buying that can avoid most of the stresses (and money) associated with traditional FDA approval. (Disclosure: I have at times owned shares of both EBS and PIP and currently own PIP). blogs.wsj.com