Volcano Corporation (VOLC) Message Board

I'm bullish myself, but it's important to know the other side--especially if something happens to invalidate the other side. It doesn't necessarily make the stock go your way, but it tells you which direction to favor in a waiting game.

The bear case on Incyte could be invalidated by substantially more sales or by greatly eased access to funding. It makes the pancreatic CA trial especially interesting because it's the only chance I see of increased income on a moderately antsy investor's time scale. The bull case requires mixed JAK 1&2 inhibitors to retain an attractive safety profile. People with MF will take risky drugs, but the larger potential markets need to see assured safety.

In the present environment, the kinds of pipeline that sell are either very early (no later than basic toxicology) or very late (phase 3 ongoing, or later). The first kind is [relatively] cheap in total dollars. The second kind can be more valuable to a big player (who can hit the market hard) than to a small player (which DOES have the advantage of often being able to get approval with less costly studies than would be expected of the big guy). We don't have specifics of early-stage drugs in the Incyte pipeline, so a bear has to assume that there aren't any good ones. Furthermore, the gradual appearance of the JAK-1 specific candidates suggests that there may have been some sort of an attempt to do a deal, and it fell through.

Recall that this is not an initial NDA. This is a response to requirements set in a CRL, which followed a positive advisory committee recommendation. The process can be expected to go a bit faster than a first NDA.

What I mostly see is Rachel McMinn's reports. Her information sources are the best around. But I can make the case. There's the on-label Jakafi business, which ought to top out at about $800MM, justifying the full market cap of the company. Presently off-label uses of ruxo, most of which will come on label eventually, ought to be bigger than that (and the general cancer cachexia possibility could get huge). A quarter of the bari market could easily be $1bln (and right now bari looks like the best of the DMARDs present or imminent). McMinn attaches a couple dollars of valuation to the "other cancers" drugs, mostly the IDO inhibitor. So the company looks massively undervalued. BUT "Show Me The Money!!" It isn't flowing yet. And all those ought-to-s in the future COULD break against us [classic poker saying: "I'm about 50-50 in situations where I have a 4 to 1 advantage"] And as we've seen with the PML scare, something like a couple arguably connected cases of, oh, necrotizing fasciitis for instance could knock the stuffing out of the price. Until there are very clear signs that money is going to flow in soon, what's the hurry to buy? Recall the incident in "Reminiscences of a Stock Operator" where "Livingston" can't afford to jump the wrong way, so he waits for a commodity to make most of a move he had predicted before he takes his position? Some of that here.

What Morgan Stanly sees is the inside of somebody's colon. Their starting point, that Jakafi is too dangerous for general use, is just false. GS I don't know as much about.

That IS the bull case. I tend to apply a "slop factor" of 4-8, which still leaves plenty of upside.

The bear case focuses on the difficulty of selling Esbriet. IPF is a rare-ish disease, so in countries where treatment tends to be community-based, many calls are needed to get to physicians treating many cases. They may in turn need multiple calls because side effects need to be managed.

If you look at the actual presentation, the results aren't as dramatic as the topline would suggest. And because this isn't a pre-designated endpoint it doesn't lead to a label claim. As stated, this is the sort of thing that reassures physicians already inclined to prescribe Jakafi. I'm a little concerned about the signal suggesting that people who aren't as well as they feel (aesthenia=weakness) are going out and having accidents. That IS a genuine issue when it happens.

For "The good tj:" survival data on PV?? People don't die anytime soon from PV. And given that Jakafi is an expensive drug usually in competition with bleeding as a PV treatment, it isn't too clear how large the addressable PV market is. My guess is that it's comparable sized to MF. The main issue for both PV and ET is safety, and there simply aren't the patient-years to talk about that with the accuracy that mostly-well people need.

So why sell?

US approval upon success of ASCEND is not absolutely a sure thing, but close. Say Sept of next year. Presumably Intermune will bring a lot of sales people in from existing markets (esp Canada) to produce a good sell-in. Say $50-60 in two and a half years. The low risk-free rate of return makes that look especially good relative to cash today.

I'd say that so far I look spot on. Initial drop. Transparently ineffective attempts at competition. We haven't seen what serious competitors are going to come up with yet. We certainly haven't seen a business impact on Myriad. Come back in a year, and if the company is hurting you get to crow.

I've been puzzled by the recent run-up. The stock price is still above the $25 and change it was at when we last exchanged notes.

It will end ongoing litigation expense. A total victory would have motivated anti-gene-patent forces to sue again with different legal arguments. Myriad's effective monopoly is based on infrastructure, trade secrets and a great trademark. The patents were expiring soon, anyway. The main reason they continued the litigation was contracts with The University of Utah.

The BRACAnalysis trademark now carries most of the value. This decision ought to end the substantial ongoing litigation expense Myriad was obliged by its contracts with University of Utah to undergo.

The market seems to reflect an opinion similar to the one I expressed here a while ago. The Supreme Court decision is close to optimal for Myriad because it will end the litigation (a total victory wouldn't have) while preserving the company's ability to market a unique test.

About the no love. Morgan Stanley is pretty influential, and their analyst (I think his name is Friedman, so I'll call him Morgan Stanley to avoid confusion) has laid his cards on the table: he considers Jakafi a bad drug and the market size topped out (which seriously impairs financing the pipeline). On the other hand, McMinn at BoA/ML is enthusiastic, and also influential. Incyte is a very institutional stock, so to the extent that sell-side analysts matter at all, Morgan Stanley is likely to get a better hearing.

Has Jakafi topped out? I can tell you what sorts of side effects to watch out for: serious bleeding incidents and superficial infections progressing to loss of limbs (consequences of drops in platelets and neutrophils). We aren't seeing them so far. Without those, Jakafi is tried by at least 2/3 of medium risk and 1/2 of high risk MF, which is still some expansion.

I guess, if you buy the whole Morgan Stanley case, it makes some sort of sense to attach no value to the pipeline. Accepting my dissection of Incyte into Jakafi, royalties and drug developer, if Jakafi yields little profit and royalties run OOM $25MM annually, the drug developer is barely being kept active.

I've ranted about this before, but it isn't unusual. It's the old (I AM old enough to remember this ad campaign) "Certs is a candy mint...NO! Certs is a breath mint" problem. Incyte is a biggish little drug developer with a lot of valueless gene patents, some late stage candidates and a pretty rich (if not very varied) pipeline of early candidates. NO! Incyte is a financially insecure drug company with only one product. NO! Incyte is a drug company that loses money in its normal course of business. This just isn't the season for looking at a company through more than one filter.

My favorite way of looking at Incyte is as the Jakafi company (myelofibrosis treatment business only; US only) + the Jakavi licensing business + the drug developer. There are still overlaps (if the separation was perfect, off-label use of Jakafi wouldn't make money for any part of the combination, but would improve the prospects of the drug developer. The overlap that exists pretty much reverses that--Jakafi company makes money and it's potential business unavailable to the developer).

This division focuses attention on one of the big real issues: the drug developer has a practically unlimited call on the money the other two pieces can raise.

I don't know the mechanics. Yeah, over the next month a lot of the short interest should go away because of the conversion Except that there would be no reason to free a company in this position of long-term debt AND effectively pre-pay interest on the debt if you were planning to just manage things into the future. Something is going on.

The inputs I can see are the newish drug candidates, the by-indication exclusivity deals with Lilly and Novartis and Dr Paul's desire to show that he's at least as good at business as at drug discovery. I can't guess what comes out.

Since the negotiated conversion by itself would be a silly move, I have to believe that the stability of the stock price means that portfolio managers expect something to happen soon that gives an explanation.

Be surprised if we don't know what's going on by the weekend. Remember the dilutive financing followed by '424 and '050 partnerships? I don't think anyone saw that coming, however much sense it made in retrospect. So we'll know once it happens.