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Prohost Biotech - Tuesday, May 15, 2012

The time has come for redefining the meaning of “creating shareholders value” in the biotech sector. Pinpointing the real value has become imperative. It is the road to a fair assessment of innovative biotech firms. It helps investors reap the fruits of the real value of excellent firms at the right time, rather than rush to sell extremely promising stocks while still undervalued. It makes investors think twice before throwing their shares of firms that are installing one by one the building blocks of their vision. Creating shareholders value is investing in the future. The cost of this investment shouldn’t be cause for downgrading the stocks because of overspending, which has become a normal pattern. We still see all development-stage biotech stock prices slashed following the announcement of their quarterly results. There is a big difference between spending on the future and spending because the money has been made available. Investors can know the difference. The first thing to look for is whether the firm has any program in development that is worth spending on, including buying firms having a technology that is badly required for the successful outcome of the firm’s program. This kind of investment should not be punished or treated as unnecessary spending.

A stock prices as shown daily on the ticker is not necessarily a reliable indicator of value creation, or value loss. In the biotech sector, especially the development-stage firms, the up and down stocks’ moves are currently mostly based on criteria that are used without verification to whether it is favorable or unfavorable to the firms and to their shareholders.  For example the firms' extra-spending on the future is receiving negative rating by analysts, the same as if the money is wasted on total nonsense. In the meantime, we see biotech stock prices go up because the firms were capable of trimming spending, regardless of how they did it, which in many instances is through firing important personnel, or cutting the budgets of drug development – acts that are at odds with the interests of the firms and their shareholders.

Creating shareholders value in the biotech sector is having a vision and sticking to it until realizing it. Serious firms do whatever it takes to make their vision come true, including buying firms that would complement their technologies and hiring the best personnel who demonstrate understanding of the firm’s vision and readiness to play major roles towards bringing their visions to fruition.

That’s how we looked at Vertex (VRTX) at the time when most investors were influenced by negative articles filling the Internet about this firm. Among others, the authors of these articles were reiterating their notion that the firm’s hepatitis C will not see the market’s light because of its side effects. When Vertex’ HCV drug Incivek (Telaprevir) was approved, the same authors predicted it would not sell because of itching. When the sales numbers demonstrated the drug is on its way to break the historical records, they declared it would not continue to sell because an all oral HCV treatment combination in development by another firm (still in mid-phase trials) will take over the HCV market from Incivek. It did not matter that Vertex was also working on several all-oral combinations some, including Incivek are produced in house and others through alliance with a small firm that have the oral molecules in its pipeline.

What about the cystic fibrosis breakthrough drugs, we asked? The answer was that the market is so small that it will not make a difference. It did not matter that Vertex’ cystic fibrosis franchise will be owning the market by combining its drugs, the protein corrector and the protein transporter to deal with the two protein defects that cause 65%-70% of the CF market. Wall Street did not even try to see the firm’s vision. When the preliminary results of the combination were announced, investors couldn’t be misinformed any longer by those who continue to assess the biotech firms based on the old business model, which is now considered unfit to assess companies in many industrial businesses, let alone the biotech firms.

Our portfolios consist of firms we believe are working towards creating real values for their shareholders, the society, including helping employment and healing patients. Among other firms, small and large, the portfolios Include Vertex (VERX), Regeneron (REGN), Incyte (INCY), Ariad (ARIA), ImmunoGen (IMGN), Pharmacyclics (PCYC) and many other firms with diverse technologies and products in early and late-phase clinical trials. They have all been subjected to mistaken evaluation based on parameters that do not fit the biotech business model.

We long all firms mentioned in this article.

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