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  Wednesday, 08/13/08
Posted 08/14/08,  10:43 am ET

(Scroll down to see Jim's comments below)

 
 
Today's date:  Wednesday, 08/13/08

  Dow Jones: 11,532   - 109
  NASDAQ:   2,428   -    2
  S&P 500:   1,285   -    3
 
 
 
 
 
First Segment
   
Opening Segment 1 Title: 'Cure All?'

.  .  .  .  .

Featured Stock(s):

Vertex Pharmaceuticals Incorporated (VRTX)

See VRTX's official investor relations' site here.
See the Yahoo! Finance profile for VRTX here.

See Opening Segment 2, below...

[Jim started with general market comments.  The Vertex recommendation comments follow below... ]

 
After this segment, you can see Jim's Lightning Round picks here...

Introductory - GENERAL MARKET - comments:
Before his recommendation, Jim had the following opening comments...

Jim:   We've got four tales of a bullish tape, despite a 100-point decline in the Dow and I want to tell them to you...

First...
The endless downgrades of the brokerage industry, timed perfectly with the suspension of the rules that banned manipulative bear raids on the group... thanks SEC, for killing all of our viewers... seemed to have reached their peak...   The stocks got slammed, of course, again but then they bounced a little, which is amazing, because oil went up, and that had been a negative for the financials.  I know the shorts will manipulate some of the group down.  It's just such easy pickings... but, with the SEC off the beat... in other words, the cops off the beat... it is amazing that we could see bear raids that will cost us a fortune.  You see, the shorts can now easily wipe out banks that must then be bailed out by the FDIC, including a couple that are around $2 bucks (a share), that I think you will see runs on soon, because of the shorts.   I do believe the estimates for the brokers are still too high, but the worst of the number cuts and the downgrades may be over... and that's why the stocks were able to bounce.

The Second Tale...

Macy's (M)...  Retail so wants to go higher here, even if it shouldn't.  Nothing is more emblematic of that than how little damage all of the negative things that Macy's had to say about its own stock, which opened down, and then rallied... despite 1) the fact that it was already up about 15% in the last few weeks and 2) again, an increase in oil.   I'm not calling for a bottom in retail.  I am saying that the estimate cuts don't seem to hurt anymore, and you might get a bottom out in a few weeks when you see that gasoline's going lower.

The Third Tale...
Toll Brothers
(TOL)...  Initially, the market didn't get at all how good Bob Toll, the CEO's comments were about cancellations were on the decline...  that's right, fewer people are cancelling once they bought a house... and the stock got hit.  Anyone that watched our interview with Bob Toll knows that he's changing his tune...  he's getting more positive.  The reversal is a loud and clear statement that things are getting statement that things are getting better, not worse, because a decline in cancellations - unlike what the newspapers say - means that mortgage money is more plentiful...  Stop reading those articles.  They're just plain wrong...

Finally, the Fourth Tale...

The Nasdaq just won't quit.  Apple (AAPL) is still rallying...  The market believes that Applied Materials (AMAT) really has seen the worst of things, even though, of course, it wouldn't be the first time that AMAT has said that things have bottomed.  In fact, the big surprise was that Google, Inc. (GOOG) didn't rally today, even though this is an incredible company.

.  .  .  .  .

[Start of Vertex Recommendation comments... ]

JJC:    No, not "Shark Week"...  "Biotech Week"... 

Right now, I believe you could buy even the most shunned biotech stock... one of the worst underperformers in the group... just because of the deflationary environment, coupled with our whack-a-mole bank market...  make even the least sexy biotech stock thrilling to most managers, as long as it's got a decent pipeline, and isn't all hit-or-miss on one drug... like the biotech stocks you see dropping 50% in that morning... and you come out and say, holy cow, what happened to that company.  Well obviously, it only had one drug, and it didn't make it...

Case in point... 

Vertex Pharmaceuticals (VRTX).  Since July 1, the whole biotech sector has been completely in bull market - house of pleasure - mode, and the Biotech HOLDRs Index (BBH) is up 17.7%.   Now, in that same period, VRTX... laggard as it has been... has actually fallen 16%.

The stock is almost the exact opposite of Genzyme Corp. (GENZ), recommended last night, which has been a great performer, with a host of seemingly terrific and terrifically-expensive drugs that are already on the market.

We know
VRTX has underperformed, but I think it's been knocked down for the wrong reasons!...  VRTX is what I call a 57 varieties play...

It may be a bad house, but the worst house in a great neighborhood is better than the best house in the "out of favor" sections.

What do I think makes VRTX so special?... It managed to sink, even as nearly every other biotech stock was soaring... VRTX's biggest drug, Telaprevir, for the treatment of chronic hepatitis C virus - a huge market - a drug that's currently going through Phase III studies, the last hurdle before the FDA can approve it - got hit with what looked like some really bad news back on August 4th... news that knocked the stock down from $32.70, at the close of one trading day, to $28 at the open of the next...

What do I think happened?... Schering-Plough (SGP*), a charitable trust name that I have stuck by with, even though everyone else has deserted it... released Phase II data for its own hepatitis C drug... Now that's a drug that wasn't supposed to be a competitive threat to VRTX's Telaprevir... it supposedly showed SGP*'s drug was actually more effective at suppressing hepatitis C than VRTX's drug. In this study, SGP*'s drug had a sustained viralogical response rate of 74%, compared to 61% for VRTX's drug. That freaked everybody out and sent all the investors scrambling away from VRTX. They didn't ever want to hear it again, because Telaprevir is VRTX's big drug...

The problem here is epistemological... the Street thought this Schering-Plough study was a reason to sell the stock (of VRTX). It thought it was very bad news for VRTX. Now I think you take a closer look... I don't think that's really true. You can't do an apples-to-apples comparison of the Schering-Plough study with the studies that VRTX has done for Telaprevir, that showed it was the better drug. First of all, the number of patients in the Schering-Plough studies were relatively small. There were lower drop-out rates. That could have skewed the results. But I think the main reasons this comparison doesn't work are that the study designs were not parallel...

You know, you hear about these studies all the time, and you can't take everything at face value... that's cost a lot of our viewers a lot of money...

The viralogical response rates of the control arm just weren't the same. In addition, the main side effect of VRTX's drug were skin rash with mild anemia... SGP*'s drug demonstrated a greater increase in the rate of anemia...

Plus, here's a huge distinction...

VRTX's Telaprevir works for patients with treatment-resistant hepatitis C. The data Schering-Plough released showed that its drug doesn't do that. 300,000 people in the United States alone are treatment-resistant... plus VRTX's Telaprevir is in Phase III. Its launch is expected in 2011, much sooner than SGP*'s drug. That's still only in Phase II... that's a while away... that's not even in my numbers that I use for SGP*...

So what?... The Street still thinks VRTX is a stinker...

So what's going change people's minds?... Why am out here recommending it, if everyone hates it?...

First of all, I don't even know if their minds need to be changed. I think the prospect of a biotech stock, as cheap as VRTX with decent prospects and a good Cystic Fibrosis pipeline... remember, I told you, they don't only... it's not one of these binary plays... in addition to their hepatitis drug... It's going to have plenty of fund managers salivating down here.

But, if the big-money still need convincing, there are two sets of data on Telaprevir scheduled to come out at the American Association for the Study of Liver Disease conference, that goes from October 31st to November 4th... Mad Money will be all over that conference... We'll see interim data from Telaprevir bid dosing trials, as well as 2008 Prove-3 data, and Phase I and II data on competitive protease inhibitors. Plus, VRTX is starting two new studies on regular and treatment-resistant patients this quarter. That could act as catalysts for the stock...

In other words, you've got a break here that they moved it (i.e., the stock price) down, ahead of these conferences. Look, even if the competition is tougher than expected, I still expect Telaprevir becomes a blockbuster drug...

Peak sale estimates?... How about $1.2 billion? VRTX should get peak royalties from EU and Asian sales of about a billion bucks.

Look, this company is not a Genzyme Corp. (GENZ) that we profiled last night. It's probably even not as good as Onyx Pharmaceuticals Inc. (ONXX) that we profiled on Monday... But it's got a drug with blockbuster potential and a rich pipeline. In this environment, I believe even a lesser biotech like VRTX will work.

Remember, why are we doing Biotech/Shark Week?... Because biotech was the best-performing group in 1990, during the last bank crisis, and these companies are being acquired left and right... I think, once we get more data on VRTX's lead drug later this year, it's going to be a takeover candidate. It's just too darn cheap!...

While I'm at it, Shawn in Florida, who stumped me the other day with the Medarex Inc. (MEDX)... another underperforming biotech like VRTX... I've got to say, MEDX is too risky for me... No track record with the FDA, two of the main diseases it's developing drugs for, Melanoma and Prostate Cancer, are notoriously difficult to treat. It does have an interesting pipeline but, if you're going to own a laggard biotech, will you please reach for VRTX, not MEDX?...

Here's the bottom line...

.  .  .  .  .

The Bottom Line!:     In this environment, the fundamentals are so favorable for biotech stocks, that even a laggard play like Vertex Pharmaceuticals (VRTX) that's been underestimated by the Street is going to look plenty sexy to most money managers. 
I say get in.  Use the 3.5% decline to buy some VRTX.

 

   
 

Stock Snapshots - Includes all stocks mentioned above

 

 

Jim
Cramer's
rating on
this stock

STOCK
SYMBOL

Closing
price
that
day

Opening
price
next
day

Full Company Name/Comments
(see comments above for each)


VRTX

28.87

na

Vertex Pharmaceuticals Incorporated (VRTX)


MEDX

8.86

na

Medarex Inc. (MEDX)

 

 



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