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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: Twitter: Dereklowe

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April 28, 2004

Foaming Up Over the Edge

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Posted by Derek

It's been a wild time recently in the oncology field - well, not so much scientifically as financially. OSI took a huge leap the other day on good clinical news about Tarceva, the drug they're developing with Genentech. I'll gloss over the fact that I owned OSI stock at one point, and sold it in the 30s. Watching it go straight up to 90 in one day caused me a bit of a twinge, although I really don't think it has any business being that high. If I had still owned it, I'd have been knocking over things on my desk trying to get to the phone to sell my shares.

To further illustrate the fact that I should not be managing my own hedge fund, readers may recall that I was short Imclone stock earlier this year. I shorted at $40, and got out in March at $46, having been first ahead and then behind on the position. By the time I got out, the famous Erbitux had been approved, and it looked as if people were going to allow themselves to believe a lot of good things about its prospects.

That they have. The stock hasn't pulled an OSIP, at least not yet, but there's been a lot of sustained buying. As of today, Imclone stock is around $70, and who knows how far it'll go? After all, the same mindset that takes it to that price from $40 is perfectly capable of going to $100 from here. No problem at all - hey, on a percentage basis, that's less of a haul than what's been accomplished so far. I'm glad that I decided not to stand in front of that particular train.

But what kind of track are the current buyers standing in the middle of? Guys, Erbitux is a drug that does some good for some people with some kinds of tumors. There's nothing wrong with that at all - in fact, it's a valid description of every form of cancer therapy on the market. But there are a lot of interesting therapies out there already, and there are a lot more coming. An antibody that costs thousands of dollars a month cannot possibly rule that world, not with that kind of efficacy. I wholeheartedly agree with Charly Travers over at the Motley Fool, who says:

"I really have to wonder who is buying this stock and just what the heck they are thinking. ImClone's Erbitux is approved as third-line therapy in patients with metastatic colorectal cancer that expresses the epidermal growth factor receptor. Taking into account this population size and assuming 30% market penetration and a drug cost of $10,000 per month, I arrive at a peak U.S. sales figure near $600 million. With a 39% royalty on those sales due to ImClone from partner Bristol-Myers Squibb (NYSE: BMY), ImClone's revenues would be near $225 million. Adding in a royalty on European sales from partner Merck (NYSE: MRK), my ballpark figures for peak ImClone revenues from worldwide sales of Erbitux are $275 million to $325 million."

Problem is, that means that Imclone is already priced at between 50% and 100% higher than it probably should be at its peak. When you buy a stock like this, aren't you buying it in the expectation of growth? Where on earth is that going to come from? Today's buyers can only hope for people who can't do math to come along and relieve them of their shares. More likely, the mathematically impaired are already in there buying right now, which will gradually limit the target audience for a profitable resale to either pretechnological tribesmen or the crews of recently arrived UFOs.

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