Biotech Wizards Load Up on Two Biotech Stocks; Insiders Bullish on the Pullback; Plus One High-Risk Trade

By Michael Brush
Exclusively for InvestorIdeas.com
November 15, 2007

The last time we checked in on two secretive hedge fund managers known as the Baker brothers, it was because they were buying boatloads of a biotech company called Genomic Health (GHDX) back in February.

Since then, Genomic Health has traded up 20%. Not bad in this year’s tough market.

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Genomic Health shot up in mid-October because it announced positive results on a genetic test that can determine whether women are susceptible to recurrent breast cancer. Knowing this is important for doctors – because then they can understand which breast cancer patients to put through the trials of chemotherapy treatment.

But to anyone who has checked out the record of the two hedge fund managers who were buying Genomic Health in a big way back in February -- Julian and Felix Baker – those returns may not be such a great surprise.

In my February piece on these two, I outlined four of their big successes in biotech. I describe these brothers as secretive because of their penchant for staying out of the press. But you don’t need to talk with them to know that their record speaks volumes. Plus their buying patterns tell you what they think is interesting at the moment.

This week, their buy list includes two other biotech companies. They purchased $8 million worth of a biotech company called Incyte (INCY), and $9 million worth of another one called ViroPharma (VPHM).

My guess is both are worth buying right here along with the Baker brothers – as long as you have the patience to hold these stocks for the long term and ride out the inevitable ups and downs that will occur before they put in meaningful gains.

Here’s a quick look at their two most recent catches.

Incyte (INCY)

Incyte has a rich pipeline of compounds that look like they may treat everything from inflammation diseases and cancer, to human immunodeficiency virus (HIV) and diabetes. The company also has a key partnership with Pfizer (PFE) to develop anti-inflammatory drugs.

“We’ve now built a broad and deep pipeline that offers tremendous opportunity to create value for both patients and shareholders,” Incyte chief executive Paul Friedman told investors in the company’s most recent conference call. He chalks it up to his research team, which on a “pound-for-pound basis” is “by far the most tenacious, disciplined, and uniquely talented group with whom I’ve had the privilege to work.” Here’s a quick look at what they have been working on.

Anti-inflammatory drugs

When the body experiences an injury or inflammation, it secretes proteins called chemokines near the problem area. They attract white blood cells such as monocytes. Once on the scene, monocytes morph into macrophages which normally scavenge foreign organisms or injured tissues.

But they can also get out of control and damage tissue and cause chronic inflammation. By blocking receptors on monocytes – receptors that go by the code CCR2 – it’s possible to slow down the process. We’re not talking about making it easier to deal with your sprained knee. Instead, out-of-control macrophages can do things like accumulate in multiple sclerosis lesions, causing severe nerve damage. So this could be big stuff.

Incyte has a second inflammation therapy meant to inhibit what’s known as janus-associated kinase (JAK) 2 enzymes, which are critical components in cell signaling.

Again, sometimes these enzymes get out of control and play a key role in the development of inflammatory diseases, “myeloproliferative disorders” in which the body produces too many blood cells, and some cancers. JAK inhibitors may also work against rheumatoid arthritis and psoriasis.

For its CCR2 program, Incyte has a partnership with Pfizer that could allow it to collect up to $743 million more in milestone payments.

HIV

To enter cells, the HIV virus uses a chemokine receptor called CCR5. Clog up that receptor, and you may be able to slow down the spread of HIV in the body. Incyte is developing compounds that do this, known as HIV entry inhibitors.

Type 2 diabetes

One reason people may get type 2 diabetes is because an enzyme called 11ßHSD1 converts steroid cortisone into cortisol. Cortisol can be bad because it can block insulin, contributing to diabetes. Incyte is working on an 11ßHSD1 inhibitor with the code name INCB13739.

Cancer therapies

Here, Incyte is developing a compound that blocks pathways or proteins that are critical for the growth of tumor cells. This compound is known as a “sheddase inhibitor” because sheddase is an enzyme believed to activate cell pathways that are fundamental in tumor growth. The compound goes by the code name INCB7839.

ViroPharma (VPHM)

ViroPharma develops products used to treat and prevent the spread of serious infectious diseases and viruses. The company generates revenue from one product called Vancocin, a potent antibiotic used to treat colon infections and inflammation of the intestine.

ViroPharma is also developing a compound called maribavir for the prevention and treatment of a herpes virus called cytomegalovirus, or CMV. It’s also developing a hepatitis C treatment called HCV-796. And it has the U.S. and Canadian license rights for a third product used to treat picornavirus infections. This product is called pleconaril.

The bottom line: Not all biotech companies work out, of course. But we’ve seen that the Baker brothers have a knack for finding the ones that do. So these two biotech companies may be good additions to your portfolio.

Updates on the market and Industrial Enterprises of America (IEAM)

Everyone’s in a panic again about credit market problems. But just like last time around, insiders are signaling the selling is overdone. Buyers outnumbered sellers by a wide margin in the past week when “insider sentiment shot to its best levels since the tail end of the August insider-buying binge,” according to InsiderScore.com. Tech stock insiders, however, haven’t yet joined the buying binge.

Our Industrial Enterprises of America (IEAM) got hit hard last Thursday when the company revealed that it had double-sold some inventory and then had to issue stock to buyers who weren’t going to get their share of products, as part of a settlement.

So the company got nailed twice. Expected revenue vanished, and the share count went up by 10%, diluting earnings. But the problems did not stop there. The company parted ways with its chief financial officer, and it’s late on its filings. Plus credibility took a nose dive, to say the least.

None of this looks very good, which is why the stock has sold down to about 70 cents from $4 in early October.

The good news is that former chief executive John Mazzuto is back on the scene to help pull together the data needed to produce filings. And the company still has as underlying business that seems to generate enough cash so that Industrial Enterprises can meet its debt obligations.

Unless there’s another shoe to drop – which is entirely possible – I’d guess the selling is a bit overdone. So I’m a buyer here in what can only be described as a high-risk trade. In fact, there are so many unknowns that make this such a risky trade, I’m going to make an exception and suspend my self-imposed three-day trading restriction after mentioning a stock in this column. I want to have the freedom to get out of this risky trade fast, if need be.

Disclaimer
At the time of publication, Michael Brush owned shares of Industrial Enterprises of America. Mr. Brush is an independent columnist for this web site. For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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