A Tale of Two Stocks July 6, 2005January 17, 2017 So two ‘liberal reporters’ risk jail to protect Karl Rove? The irony dazzles. # Two stocks today: one that people have heavily shorted but perhaps should not have; the other that people have not so heavily shorted – but perhaps should have. But first, from yesterday . . . MARRIAGE EQUALITY Nancy: ‘Sadly our family left the Methodist Church after many years. We had experiences similar to your friend’s in Georgia. But The United Church of Christ passed a resolution yesterday calling for ‘full marriage equality.’ It’s nice to have cause to celebrate.’ ☞ And Spain now joins Canada, the Netherlands, and Belgium in granting equal rights (while leaving churches, mosques and synagogues free, as they should be, to condemn, vilify, and discriminate). In the words of Spain’s Prime Minister, Jose Luis Rodriguez Zapatero: . . . We are enlarging the opportunity for happiness to our neighbors, our co-workers, our friends and, our families: at the same time we are making a more decent society, because a decent society is one that does not humiliate its members. . . . Today, the Spanish society answers to a group of people who, during many years have, been humiliated, whose rights have been ignored, whose dignity has been offended, their identity denied, and their liberty oppressed. Today the Spanish society grants them the respect they deserve, recognizes their rights, restores their dignity, affirms their identity, and restores their liberty. It is true that they are only a minority, but their triumph is everyone’s triumph. It is also the triumph of those who oppose this law, even though they do not know this yet: because it is the triumph of Liberty. Their victory makes all of us (even those who oppose the law) better people, it makes our society better. PPD – Ouch! That’s not our ouch – we bought the January 2007 25 LEAPS March 18 at $11.80 when the stock was $35. It’s the ouch of the speculators who’ve sold 5 million shares short and who watched the stock jump $3.75 yesterday to close at $48.55 . . . putting the intrinsic value of our LEAPS at $23.55 (because the right to buy something for $25 that you can turn around and sell for $48.55 is intrinsically worth $23.55), about double what we paid. (Of course, I’m not crowing about the Comcast I suggested at $32.33 that’s now $29.54. Or the ARC suggested at $14 that’s now $13.65 – let alone the Google puts, a total wipe-out.) (But SYM has doubled in little more than a year, after accounting for its $1 a share distribution, and CMM was up to $22.81 last night, more than double its price a year and a half ago, so we can still pay the rent.) The jump in PPD’s price seems to have been occasioned by this press release. Sales are up – yet again. NTMD – Ouch! I recently sold short shares in a company called NitroMed, whose stock jumped above $22 in the last few days on the strength of its press release. Basically – if the savvy doctor who’s explained it to me has it right – they have come out with a pill that can help African Americans suffering from congestive heart failure (something any investor would rush to invest in) – but that has long been available generically (so . . . well . . . maybe not). As he explains it: NitroMed now sells a drug called BiDil that is a fixed dose of two very old drugs. One tablet of BiDil consists of 37.5 mg of hydralazine and 20 mg of isosorbide dinitrate. The fixed combination of these two is medically identical to taking the two drugs separately. Hydralazine and isosorbide dinitrate are each available generically and have been on the market for at least 20 years. BiDil was rejected in 1997 for treatment of all patients with congestive heart failure because of lack of efficacy. But NTMD received FDA approval last month to use BiDil in treating African Americans, for whom it does seem to have positive results. On Friday, NTMD announced that ‘BiDil will be priced at a wholesale acquisition cost (WAC) of $1.80 per tablet. NitroMed expects that BiDil starter samples will be available in doctors’ offices the week of July 5th, with commercial product available in pharmacies beginning the following week.’ WAC is the price to the pharmacist and does not include a mark-up the pharmacist may make to the patient or HMO. The dosage of BiDil is two tablets three times a day, although on average patients in the trial took about 4 pills a day. If you go here, you see that 25 mg and 50 mg tablets of hydralazine can be purchased for $0.13 each including shipping. The same site shows that a 20 mg tablet of isosorbide dinitrate can be purchased for $0.19. Thus, the cost of the four pills needed to replicate two BiDil tablets is 64 cents. The cost of two BiDil tablets is 2 x $1.80 = $3.60 – plus whatever the pharmacist adds as his markup. So BiDil is priced at six times the generic competition while providing no medical advantage. It is inconceivable with this pricing premium that there will be significant sales. In many pharmacies, especially those affiliated with HMO’s, there is automatic generic substitution unless the doctor specifies otherwise. In addition, the company announced on Friday that ‘NitroMed expects to make BiDil available free-of-charge to patients without insurance coverage whose annual household incomes are up to three times the poverty level. For all others without insurance coverage, NitroMed expects to make BiDil available for $25 per prescription, which is consistent with the co-payment typically charged by private insurance for tier II, or preferred branded drugs.’ It is not clear what percentage of African American patients with congestive heart failure have incomes less than 3 times the poverty level or no insurance coverage, but it must be significant. Again, these drugs are available generically and have been so for more than a decade. Familiarity among doctors should exceed 90%. There is no medical penalty for using the generics instead of BiDil tablets. I cannot find a doctor who thinks that sales of BiDil will be significant. Why would anyone want to pay six times the price for the same drug? There are 30 million shares outstanding, so at $22/share, the stock has a market cap of $660 million. It has $125 million in cash as of the end of 1Q 2005 and is burning $84 million per year. Marketing expenses will probably be much higher than analysts are estimating, while sales should be almost non-existent. The company should run out of cash within a year and half. There are no products in the pipeline that are currently in human testing. I think the stock will be in single digits before the end of the year. ☞ You really need to know what you’re doing to short stocks, lest you lose an unlimited amount of money; so don’t short this one. And if you buy the December puts (the furthest available expiration), understand that you could easily lose 100% of what you bet, even if, in the long run, this analysis proves accurate. Full disclosure: I have a stake in seeing this stock go down. You never know, but here is a company pinning investor hopes largely on one possibly dubious prospect which, if my doctor is right, would not really change the world all that much – valued at over $650 million. Meanwhile, our old pal Borealis, which is also highly speculative (okay, highly highly speculative) has several prospects, any one of which, if it ever panned out, could have a dramatic impact. And it is valued at about $50 million – a rounding error on Nitromed’s valuation. Time will tell with these two, but I like the odds.