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Volatility, Volatility Everywhere!

By
TradeCircle
-
Fed

The final hour sellers are at it again. Though major indexes opened the day broadly higher around 1%, it was the final hour of trading that did the bulls in today as the S&P 500 (^GSPC) and the Dow Jones (^DJI) both fell over 1% in the final 38 minutes of trading.

This has happened repeatedly enough since the correction began on August 24th that one could conceivably open short positions one hour from the close and cover them in the final two minutes for a pretty reliable profit. The Volatility Index (^VIX) fed on the action quite hungrily, down 11% at the open but up over 6% by the close.

The mirror image of equities today were bonds, which began the day broadly lower with higher yields, and ended the day substantially higher as safety seekers poured into treasuries as the day drew to a close.

The volatility stretched globally today as Asian markets experiences some of the wildest days since the 2008 financial crisis. Japan’s Nikkei (^N225) saw dizzying gains of 7.7%, the most since October 2008. That month also happened to see double digit percentage falls, so Japan’s markets are clearly not out of the woods.

Chinese equities had a modest day higher with 2.3% gains, though modest only within the context of the last few months. In any other time, 2.3% gains would be considered extremely high, though now it actually seems lackluster and unconvincing.

As headlines trade tones back and forth as to whether the Federal Reserve will actually raise rates next week, daily action in the markets seems to reflect the collective guessing game as to what the Board will do behind closed doors. We all await the plumes of white smoke from the chimney of the Mariner Eccles building as the board of monetary Cardinals picks their new interest rate leader.

Until that point, the volatility is likely to continue unabated.

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Markets Are Focusing On The Wrong Side of This Biotech

By
Jennifer Aldershot
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biotech

Biotech has been hot for the past four years or so. ETFs in the space have gained as much as 500% in some instances and both incumbent and development stage companies have mirrored these gains in valuation. IPOs are at their highest ever rate, and billion dollar acquisitions and partnerships have come thick and fast. There have, however, been a few companies that have not been quite so lucky. A number of companies are down this year, having reached highs during 2014 or around the turn of 2015. One such example, and one for which the 2015 decline in its market capitalization seems unfounded, is Sangamo Biosciences Inc. (NASDAQ:SGMO).

Having hit highs just ahead of $18 a share during March 2015, Sangamo has lost nearly 65% of its value to where it currently trades at $6. At a glance, the decline looks to have arisen from a number of quarterly revenue misses and net losses. However, the company is a development stage biotech, and it is not unusual to see consecutive periods of loss in the run-up to a new drug application filing. The only reason Sangamo is generating revenues (and in turn, attracts analyst estimates) is through a couple of collaborations with larger companies, which see it able to report milestone payments as forward revenues. All else aside, the company’s fundamentals are strong, and its pipeline has the potential to expose it to a huge market. Further, we’ve got a large number of potential upside drivers throughout the latter half of this year and the beginning of next, meaning we could not just see a turnaround in Sangamo, but a recuperation of much of the loss seen this year – assuming things come out as expected. So, with this said, let’s look at what we can expect over the coming few quarters, and the implications of these expectations on Sangamo’s market capitalization.

First up, let’s address earnings to support our previous statement. For the second quarter of 2015, the company reported revenues of $8.4 million. As we have said, these revenues derived from partnerships with larger biotech organizations – namely Shire plc (NASDAQ:SHPG) and Biogen Inc. (NASDAQ:BIIB). $3.9 million came from research expenses associated with the Shire agreement, and $1.7 million came from research services associated with the collaboration with Biogen. Additionally, the company recognized $0.5 million from an upfront payment by Shire and $1.5 million from an upfront payment by Biogen. It is these two latter recognitions that markets seem to have overlooked or misinterpreted. While there are $0.5 million and $1.5 million respectively, they are recognized on a straight line and amortization basis – meaning they are actually small chunks of much larger upfront payments. Specifically, $13 million from Shire and $20 million from Biogen. Each quarter the company recognizes an equivalent portion of these upfront payments (received in 2012 and 2014 respectively) as revenues. Additionally, the company has no debt, more than $200 million cash and cash equivalents, and a burn rate of just $8-10 million.

So what are the potential upside drivers we expect to see over the coming quarters? Well, the company uses a type of DNA binding protein called a zinc finger nuclease (ZFN) to target monogenic and infectious diseases. To simplify, the company inserts a ZFN into the gene of the patient, and the replacement stimulates the production of a therapeutic protein that replaces the enzyme that causes symptoms for whatever is being treated. The company’s lead candidate is SB-728-T, targeting HIV/AIDS, for which we got updated results earlier this year. However, the real market moving release associated with SB-728-T will be the preliminary data introduction – slated for early 2016.

Perhaps more impactful, however, will be the upcoming INDs filed as part of both its in-house programs and its partnerships with the aforementioned Shire and Biogen. The company has preclinical, promising candidates targeting Hunter and Hurler syndromes with ZFN therapy, both indications for which it expects to file INDs before the end of 2015. The preclinical data associated with this filing could attract the attention of larger potential collaborators, and an allocation in anticipation of further partnerships might be a nice exposure.

Looking beyond that, the company expects at least three further INDs next year, but potentially as many as six before H2 2016. These include a beta thalassemia, in-house during the first half of next year, and a sickle cell disease indication during the second half in association with Biogen.

Looking near-term, we’ve got an update on Sangamo’s HIV study (SB-728-1101) slated for the ICAAC conference on September 17. Decent results could prove a turning point for the company, and many initiate the shift in focus from revenue misses to forward potential.

What’s the takeaway? That markets seem to have been unjustly discounted Sangamo over the past couple of quarters based on missed earnings, despite the company being a development stage biotech. Financially the company is in sound standing, and the combination of a strong in house pipeline with promising external development partnerships makes it an attractive turnaround allocation.

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US Treasury Dump Continues in China

By
TradeCircle
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Chinese Treasury Dump

Markets were closed in the US today for Labor Day weekend, but action internationally may point at least some direction for US Treasuries in particular.

To begin with, there was further erratic and volatile action in China, as markets opened in Shanghai broadly higher, only to crash again about 3.5% on China’s S&P 500 equivalent, the CSI 300 index (00300.SS). This comes along with news that China’s central bank, the PBOC, has dumped a record $93.9B in US treasuries in a single month in an attempt to support its currency, the Yuan.

China has had record outflows of US treasury securities over the last year, with net outflows in 12 of the last 14 months, the longest sustained outflow since China’s stockpiling of US treasuries began. In order to stabilize its exchange rate against the dollar without directly affecting its money supply, this seems to be the logical move if China wants the Yuan to resist a freefall after the triple devaluation last month.

The implications for US bonds (NYSEARCA:BND) is the question, since China’s collapsing stock market could force the PBOC to keep stabilizing exchange rates, which means further liquidation of US Treasuries and further upward pressure on interest rates. Since the unemployment rate came in below the Federal Reserve’s target rate of 5.2% last week, a rate it has pinned as “full employment”, the combination of a record Chinese bond dump plus a possible rate hike on September 17th could mean excessive upward pressure on bond yields and interest rates it the coming weeks to months.

Goldman Sachs (NYSE:GS) on the other hand, is predicting that a rate hike will not happen next week, and that the Fed will continue “sitting on its hands“. Regardless, the massive liquidation of Treasuries from the largest foreign holder in the world could have the effect of pushing interest rates higher no matter what the Fed does or doesn’t do next week.

The current cycle seems to be the following: The lower Chinese equities go, the lower the Yuan goes. The lower the Yuan goes, the more treasuries the PBOC has to sell in order to support it. And the more treasuries the PBOC sells, the higher interest rates go.

In a manner of speaking then, long term US interest rates may be more dependent on the action in Chinese equity markets than on the upcoming Federal Open Market Committee meeting on September 15-17.

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Here Are Five Recession Proof Stocks

By
Jennifer Aldershot
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recession

Uncertainty is the overwhelming emotion surrounding global markets at the moment, as the potential for a rate hike in the US, and China’s seeming inability to maintain consumer demand weighs heavy on sentiment. That we are approaching another recession is becoming an increasingly popular opinion, and investors are looking to reallocate capital in order to reduce exposure to any potential downturn. With this in mind, here are five companies that could gain strength, not lose it, as equities markets weaken.

Wal-Mart Stores Inc. (NYSE:WMT)

First up we’ve got Wal-Mart. The company has had a tough year to date, currently trading more than 25% down on its January open, but it’s cheap prices and all-encompassing offerings make it an attractive recession stock. When times are hard, consumer preferences shift all too quickly from more upmarket food retail outlets and Wal-Mart has positioned itself to benefit from the shift. The company suffered alongside pretty much every other as a result of the broader market sell-off we saw back in 2008/2009. However, it recovered quickly and during the three years to 2012 gained 55% on post-recession lows. With $485 billion revenues recorded last year for $16 billion in earnings, Wal-Mart is as steadfast a downturn allocation as they come. Not high growth, but unlikely to give away too much of its valuation.

The ADT Corporation (NYSE:ADT)

Next up, ADT. ADT is another company that has had a tough year – at least over the last couple of quarters. From April highs of more than $42 a share, the company now trades for a little over $31 – a 27% discount across a matter of months. A third quarter earnings miss at the end of July compounded the bearish momentum, but a weakening global economy could be what’s required to initiate a turnaround. The company specializes in home and commercial security systems and personnel. Data has repeatedly shown an increase in crime rates during serious recession, and this could play into the fortunes of ADT going forward.

McDonald’s Corp. (NYSE:MCD)

McDonald’s proved the standout stock of the last recession, recovering from 2008 lows around $53 to hit $100 before the end of 2011 – an 88% gain at a time when wider equities markets were in turmoil. The gains show that McDonald’s is an enjoyable enough experience to leave the house for, yet not prohibitively expensive – even at times of downswing. The company lost nearly 10% of its market capitalization in the August price crash, illustrating that it is not immune to a wider market selloff. However, this might be a bonus as it allows for a well-timed allocation to offer a discounted exposure to what could be another half decade of growth for the fast food behemoth.

Teva Pharmaceutical Industries Limited (NYSE:TEVA)

We’ll draw the list to a close with two potentially rewarding biotech exposures. First up is Teva – an Israel-based generic drug incumbent. Healthcare spending is relatively inelastic to macroeconomic conditions (indeed, it often increases during times of recession) and this puts a large portion of the healthcare industry as potentially rewarding recession-proof exposures. Teva has an edge, however, rooted in the fact that it develops and markets generic drugs. This makes its end user product (generic treatments) much cheaper for consumers, and reduces the cost of development of these products considerably. Healthcare spending may be relatively inelastic, but as household budgets decline, the cheaper alternative to a necessary pharmaceutical product will generally outsell (from a volume perspective) its more expensive, branded counterpart.

DaVita HealthCare Partners Inc. (NYSE:DVA)

Finally, we’ve got DaVita. DaVita operates a network of kidney disease and dialysis treatment centers in the US, treating just shy of 200,000 patients every year. Demand for dialysis does not correlate with risk appetite in the equities markets for obvious reasons, which makes DaVita a safe haven allocation in any portfolio. This company’s post-recession gains outpaced those of McDonalds, gaining more than 140% between 2008-2012. Annual revenues came in at $8, $11 and $12 billion during 2012, 2013 and 2014 respectively and quarterly reports this year suggest another annual expansion, while analysts are almost unanimous in their support of this bias. Even without the potential for a recession around the corner, this would be one to watch.

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Five Stocks Insiders Are Buying Right Now

By
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Stocks buying right now

Insider buying can be a great indication that a company is doing well, purely because it indicates that those involved in its operations are happy to take a position on its growth. Here are five of the latest standout insider buys, alongside a brief analysis of the companies involved.

The Gap, Inc. (NYSE:GPS)

First up we’ve got some huge insider buying in Gap. Most reading this will be familiar with the company, but for those not, it a close to fifty-year-old global clothing chain based out of California. As of August 28, 2015, three brothers, board members and sons of the company’s founder picked up a combined 13 million shares. William, John and Robert Fisher bought 4.92 million, 5.02 million and 3.08 million shares respectively for a combined value of just over $430 million. Gap is a strong buy across a range of analysts at the moment, having recently beat earnings estimates to post $3.65 billion Q2 2015 revenues and net income of $239 million. Furthermore, stock can currently be had for a circa 25% discount on yearly highs.

Opko Health, Inc. (NYSE:OPK)

Dr. Phillip Frost is renowned for his financial support for companies in which he is involved, and a recent insider purchase of Opko reinforces this reputation. On September 3, 2015, Frost picked up a total of 9,000 shares valued between $10 and $11 to bring his total Opko holding to a little over 157 million shares. Opko is down close to 50% on yearly highs, having lost more than 30% of its market capitalization during August alone, but the company has an impressive pipeline, and with the pending FDA decision on Rolapitant, its lead cancer therapy expected this week, could be due an upside pop. Wednesday or Thursday is the slated announcement date, so Frost is likely piling up his exposure in anticipation of an approval. Fortunes have been made piggy backing Frost’s allocations, and now could be a good time to do just that.

Regis Corp. (NYSE:RGS)

Regis is a global hair salon company that has had a tough few weeks. The company missed on Q4 earnings estimates pretty much across the board, and is currently trading about 25% down on August highs as a result. Its Director, Patrick Williams, however, looks to be taking an opportunity to pick up cheap shares on the dip – as illustrated by a 10,000 total buy over 48 hours (2nd and 3rd September, 2015). The buy averaged out at $11.28 apiece and brings his total holdings to just shy of 50,000 shares. $11 marks strong historic support on this one, so with the last close a little over $12 now might be a good time to grab an exposure in anticipation of a medium term reversal.

Dollar General Corporation (NYSE:DG)

When Dollar General hit markets back in 2009, the company priced at $21 a share and looked well positioned as a discount retail outlet to take advantage of the recession. Fast forward six years and the company hit 2015 highs of a little of $80 in July, before dropping 10% on the recent market-wide selloff. Michael Calbert, member of the board of Directors at Dollar bought a total of 38,000 shares at between $72and $72 on the 1st and 2nd of this month, adding to the 10,000 he picked up at IPO for $21 to bring his total holding to a little over 55,000. The company missed on its Q2 earnings last month, but with $282 million net income on more than $5 billion of sales Dollar looks strong – an impression shared and demonstrated by the recent insider pickups. At a time when global markets are looking fragile, this company could again benefit from a weak economy, and looks to be a good allocation as we head into the final quarter of 2015.

Epizyme, Inc. (NASDAQ:EPZM)

Bringing things back to biotech to close out the list is Epizyme – a cancer focused pharma that specializes in gene therapy. Over the last few weeks the company’s chief development officer Tai-Ching Peter Ho has picked up a little over 2500 shares at between $16-17 apiece to bring his total holding to 3522. While not a massive buy, it demonstrates confidence in the company’s lead investigational therapy tazemetostat, the acceptance by the FDA of an IND for which was the driver behind a 10% jump that saw the company avoid the broader market selloff last week. $20 flat is the level to keep an eye on with this one. This price has offered up both support and resistance in the past, and a break below it early August makes the company an opportune target for a discounted allocation.

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Five Small Caps That Shouldn’t Be Small Caps

By
ME Staff
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small caps

Markets are continuing to struggle in the wake of last week’s decline. After a tepid recovery, it looks as though the major indices have returned to an overarching bearish trend, as investors rush to reduce exposure to their more risky assets. What better time, then, to try and find some hidden gems. Here are five fundamentally sound small caps with little or no analyst coverage that look undervalued at current prices.

Enzymotec Ltd. (NASDAQ:ENZY)

First up we’ve got Enzymotec. This company produces a range of pharmaceutical foods that it sells globally. In the US, its products fall under the medical foods category (regulated by the FDA) and outside the US it forms partnerships with pharmaceutical companies and licenses its products for resale. Its portfolio includes food based treatments for ADHD, elevated triglyceride levels (an early onset symptom of heart disease) and memory impairment. Based in Israel, the beauty of this company is its current market capitalization. The market values Enzymotec at a little over $235 million – despite average annual revenues over the past three years of circa $50 million and 2014 net income of $7.8 million. With a trailing 12-month (ttm) price/sales of 5.23, and a forward P/E of 19.44, alongside just short of $40 million cash and cash equivalents and no debt, this is a real fundamentally sound operation.

EMCORE Corporation (NASDAQ:EMKR)

Here is one of that might be controversial. EMCORE fell from grace spectacularly following 2008, having peaked out around $60 a share now trades for just $6.80. However, and despite a number of institutional selloffs over the last month or so, the company reported Q3 revenues of $21.2 million and GAAP net income of $2.4 million. Further, it completed a Dutch auction buy back of $45 million worth of shares of its own common stock back in June. Operationally the company builds and provides raw materials for semiconductor systems and the fibre optics market. Annual revenues came in at $174 million last year – bang on its current market capitalization. Price/sales (ttm) comes in at just 0.92, and once again, with more than $140 million cash and cash equivalents and zero debt, the company looks well set to expand its bottom line going forward. The next big release will be its 2015 year-end, which we should get in October (year-end to September for this company).

Perion Network Ltd. (NASDAQ:PERI)

Another one based out of Israel, Perion is a data company that provides analytics primarily for the mobile advertising space. The company posted second-quarter net income of a little over $8 million at the beginning of this month on revenues of $48.6 million. Annual revenues are forecast at just shy of $200 million for FY 2015. Despite this, the company’s market capitalization is just $169 million, currently trading for just $2.30 a share. The mobile advertising industry is set to expand to just shy of $60 billion by 2017, and Perion looks well placed to take advantage of this growth. The company has some debt on its books – circa $40 million. However, with cash and cash equivalents of hundred and $27.9 million translating to a current ratio of 2.92, operational spend shouldn’t be a near-term problem.

Bellatrix Exploration Ltd. (NYSE:BXE)

Alongside the majority of the oil and gas industry, Bellatrix has suffered over the past few years – at least as far as the equities markets are concerned. Having reached nearly $10 a share in early 2014, the company has since collapsed to trade just shy of two dollars a share at last close. On revenues of $72.3 million during Q2 2015, the company reported a loss of $19.9 million – likely as a result of the decline in the price of natural gas. Additionally, the company is highly leveraged, with more than $500 million debt versus cash and cash equivalents of $7.7 million. However, with the pending interest rate hike at US, we could well see a turnaround in commodities prices. If this happens, oil and gas companies trading for less than five times revenues will be tough to find. A little more risky than some of the others, this one, but worth a look nonetheless.

Genco Shipping & Trading Ltd. (NYSE:GNK)

Finally we have Genco. Genco is a New York head quartered company that ships commodities and dry-load cargo globally. The company up listed to the NYSE mid-July and having debuted around $7.6 a share, currently trades for $5.4 – a 25% discount on its up listing price. The decline comes on recent earnings that revealed a net loss for Q2 2015 at just over $40 million on revs of $34.6 million. However, analysts forecast annual revenues of $234 million this year, and an improved dryload environment should feed into this expansion. Further, a recently completed merger with competitor Baltic Trading should help to consolidate costs and streamline operations going forward. With this said, this one really is an asset value play. The company has vessel assets of more than $1.2 billion, and current liabilities of just $63 million. In other words, its share price is diminished through overarching industry decline, but if it can ride out the storm, it could be set for a rapid revaluation.

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Allergan Announces Game Changer for Avycaz

By
Jennifer Aldershot
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allergan

A few hours ago, Allergan plc (NYSE:AGN) hit markets with the latest results from a phase 3 study of AVYCAZ – it’s antibiotic treatment targeting complicated urinary tract infections (cUTI). The FDA approved the treatment way back in February this year, but – due to a lack of safety and efficacy data – only approved it for patients that have not responded to all other treatment alternatives. This limiting factor reduced the potential patient pool considerably, and in an attempt to widen the indication, Allergan teamed up with AstraZeneca PLC (NYSE:AZN) to conduct further trials. These trials – RECAPTURE 1 and RECAPTURE 2 – focused solely on safety and efficacy, and from both the perspective of the FDA and the EMA were considered as one individual trial. The goal now is for a supplemental new drug application (sNDA) to head towards both regulatory authorities, and get the indication widened. So, what’s next?

First, let’s have a quick look at the drug itself. The drug is a combination of two elements – ceftazidime and avibactam. The former is a widely used and already well-established antibiotic used to target gram-negative bacteria. These types of bacteria cause some of the most serious infections – primarily as a result of their impenetrable cell wall making them hard to treat and prone to antibiotic resistance. They produce what’s called lactamase, which is an enzyme that breaks down antibiotic treatments. This breaking down is at the core of antibiotic resistance, and at the root of AVYCAZ’s efficacy. Avibactam is a lactamase inhibitor, meaning it protects the ceftazidime antibiotic from the lactamase. In doing so, it makes the bacteria no longer resistant to the ceftazidime antibiotic – ergo sum, increased efficacy. The treatment acheived accelerated review, but as part of this acceleration and approval there was not enough safety and tolerability data available to approve it across a wide indication. Alongside the FDA approval announcement, we got this statement:

“It is important that the use of AVYCAZ be reserved to situations when there are limited or no alternative antibacterial drugs for treating a patient’s infection.”

With the announcing of the RECAPTURE trial results, it looks as though this limited indication is about to expand. The trial compared AVYCAZ to a placebo arm across than 1000 hospitalized cUTI patients in 30 countries. The FDA and the EMA had two separate definitions of success across the trial, but both definitions were met and proven as being statistically significant.

David Nicholson, Executive Vice President & President, Global Brands R&D at Allergan, had this to say alongside the announcement:

“We are very pleased by these results, which we plan to submit to the FDA to further support the use of AVYCAZ as a treatment option for patients with these serious and life-threatening complicated urinary tract infections.”

So what’s next? Well, now comes the sNDA. The FDA will accept the supplementary documents and take into consideration the updated results when considering an expansion of the treatment’s potential indications. The key thing here is that safety and tolerability were what both arms of the trial focused on, and with these met, it is difficult to see why the FDA wouldn’t expand the treatment’s indication. Especially when the lack of data to support these two elements of the approval were what restricted it in the first place. It goes without saying that nothing is guaranteed, but markets will likely price in this extended approval going forward in advance of its announcement.

Despite the positive release, Allergen is trading slightly down for the day, while Astrazeneca is up 2.5% at time of writing.

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Another Rocky Day for Stocks as Crude Inventories and Beige Book on Deck

By
TradeCircle
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Beige Book

Here we go again with the ups and downs. All major indexes opened the day with a sharp gap down, the fall continuing until the final 14 minutes of trading. Since breaking support at 2040 two weeks ago, the S&P 500 (^GSPC) has consistently had a flourish of volatility in the final hour of trading or so.

We saw it on Thursday, August 27th, with stocks moving 2% in less than an hour into the close. On Wednesday, they moved up 2.3% in an hour and forty minutes. The day before, the index fell 3% in an hour, the Dow Jones (^DJI) had fallen 3.2%. Very large players seem to be making very large trades at the close lately.

Even the calmer days have looked more like jagged mountain ranges, with even small changes taking very large slopes in either direction.

Oil (NYSEARCA:USO) keeps rising and falling as if in hysterics. One of the few assets rising with any sort of calm regularity has been gold (NYSEARCA:GLD), sneaking its way up another 0.35% today as if nothing out of the ordinary is going on at all.

Tomorrow could be even more volatile for oil, as the nearly schizophrenic commodity will certainly respond to the crude inventories report, scheduled for release at 10:30AM EST. This will be followed three and a half hours later by the Fed’s Beige Book, which will give a basic summary of economic conditions over the last of the last six and a half weeks.

All of this is noise, and investors should expect the volatile whipsawing action to continue until the Fed makes a decision on whether or not to raise rates. The best indication of what they will do on that front will be the unemployment numbers for August, to be released on Friday morning, September 4 at 8:30AM.

Any number below 5.3% will increase the chances of a rate hike, so don’t be surprised if the market reacts negatively to low unemployment numbers. It will look strange, but there is a method to this madness. Just keep holding on to your hats.

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Biotech 101: Drug Development and the FDA

By
Jennifer Aldershot
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NDA

Investing in biotech is unlike investing in any other sector of the market. Much of the time, investors will look to take a position in companies that aren’t yet generating revenues, but have drugs or therapies in development. Instead of earnings and sales driving the valuation, therefore, markets must look to the development process of the therapies in question. You can think of clinical trials as milestones in a new drug development process – they follow a set pattern, a relatively similar structure across therapies and the company must successfully complete one before moving onto the next. As development stage biotech investors, it’s important to understand what the completion of each stage means for a treatment’s prospects. So, with this said, let’s take a look.

Discovery and Preclinical

Everything kicks off with the discovery phase. Discovery is ongoing, and more often than not takes place in University or College research laboratories. During discovery, scientists test thousands and thousands of compounds each year in order to ascertain whether any are worth carrying forward into development. The vast majority of those tested go no further.

The small number that do pass discovery go in to what’s called preclinical testing. Essentially, this is testing on animals (often mice or primates) in order to gauge the safety of a compound. It is worth mentioning that efficacy isn’t really under scrutiny here and – as a result – few investors get excited about preclinical testing. Next up is where the real action begins.

Trials Begin

Phase 1 trials are for those compounds that have shown the potential for efficacy in discovery and proven they are safe enough to be administered in humans – albeit a small sample. It is not unusual for phase 1 trials to consist of a single or low double-digit sample size, but they can run up to a maximum of triple digits for a treatment with a potentially large-scale application. Once again, here, efficacy is not that important. When things reach this stage, the company developing the treatment will set “endpoints” – generally primary and secondary. Primary is the main goal of the trial, while secondary are extended (but often less important) goals. The primary endpoints of phase 1 trials and generally safety and tolerability. Simply put, the company is looking to confirm the conclusion of the preclinical safety data, while establishing a tolerability level – or dose, in other words. Efficacy is often no more than a secondary endpoint at this stage.

If the treatment is successful in its phase 1 trials (i.e. it meets its primary endpoint) it will generally then head into phase 2. The aim of a phase 2 trial is to show the treatment is effective across a reasonably sized sample. There is no set number associated with the sample size, but they normally involve triple digits, with the general rule being the more common the targeted indication that higher the sample size. Once again, the developing company will set primary and secondary endpoints before heading into trial – with the primary being a specific efficacy endpoint related to a predefined marker. The market varies depending on the nature of the indication. For example, for this phase 2 trial of AstraZeneca PLC’s (NYSE:AZN) glioblastoma treatment MEDI4736, the primary endpoint was efficacy as judged by overall survival rate at 12 months. What this means is if at 12 months the rate of survival is higher in patients treated with MEDI4736 than those not, the trial has met its primary endpoint.

Finally, if a treatment is successful in phase 2, it will head onto a phase 3 trial – the final phase of the process before the company is able to file a new drug application (NDA) the FDA. More often than not, the primary and secondary endpoints in a phase 3 trial are similar if not identical to those in the phase 2, but the goal is to replicate phase 2 results across a much wider sample size. In a common indication, the sample can range up to thousands. In an ongoing Alzheimer’s trial conducted by Biogen Inc. (NASDAQ:BIIB), for example, Aducanumab will be administered to an estimated to 2700 patients across a period of five years. Delivering a drug on this scale also forces the company to prove that it can manufacture and distribute a treatment safely and effectively if required as part of a post approval, scaled up, administration regime.

NDA Submission

Between 25 and 30% of phase 3 drugs demonstrate efficacy across a wide scale population, and become eligible for submission as part of a NDA. Essentially this is where the company brings together everything it has learnt and proven about the treatment in question, and submits it for consideration by the FDA.

The remit of a successful NDA is that it must allow the FDA to answer three questions concerning the treatment. First, is the drug is safe and effective (also, does its benefits outweigh its risks?). Second, does the drug’s packaging clearly display the information patients and consumers require to make informed decisions? Third, can the company in question manufacture the drug and distribute it without interfering with safety and efficacy demonstrated at small scale administration?

If the answer to any of these questions is no, the FDA will generally return the NDA to the development company to request revisions – either that or decline the drug outright. However, if the FDA is satisfied, it will approve the drug and the development company can take the treatment forward to the marketing stage – essentially it can start to generate revenues.

A Final Consideration…

Remember, a drug’s approval does not guarantee success in the market. There have been numerous failed introductions, with one famous example being Pfizer Inc.’s (NYSE:PFE) inhalable insulin treatment Exubera. What looked like a potentially $5 billion blockbuster proved not to strike a chord with its target market and ended up costing Pfizer nearly $3 billion!

And there we have it. Aside from ongoing trials (sometimes called phase 4) that monitor a drug’s efficacy and safety for an extended period of time after the marketing phase, this pretty much sums up the development timeline. How an investor approaches each of these develop phases, and what they look for in clinical trial results releases, is something we will address in a later article. For now, however, get to grips with this structure and you will have a firm grounding in how a drug gets to market.

Image courtesy of Raymond Bryson

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Today’s oil move could be signalling stagflation

By
TradeCircle
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StagFlation

Today’s trading was very unique. Nevermind oil’s (NYSEARCA:USO) third consecutive day of monster gains. That is the obvious anomaly that will be pointed out by everyone. In fact, oil has had its biggest 3 day gain since August 1990 when President George H.W. Bush invaded Iraq.

What was even more interesting though is that treasuries (NYSEARCA:TLT), equities (^GSPC) and the US Dollar (NYSEARCA:UUP) all traded down together. Stocks and bonds usually trade inversely as the latter is generally considered a safety trade when stocks are tanking. And on the rare occasions when they do trade down together, the dollar usually still climbs, as that is another alternative safety net when both stocks and bonds are down in the same day.

Very rarely are all three moving down together.

This could be a one-off thing, but if it continues, it is a signal of stagflation. Stagflation is when the entire Keynesian system of lowering interest rates in order to stimulate economic growth is flipped on its head. It is a combination of high inflation with recession, and it only happened once for any sustained period during the mid 1970’s, particularly during the oil embargo of 1973.

If the dollar, bonds, and stocks are headed down together while oil and commodities are moving up (the entire commodity complex moved up together with oil today) then this means that the dollar is losing purchasing power, interest rates are rising, the stock market is falling, and the cost of living is going up. Hence stagnation plus inflation, or stagflation.

In the current environment, it is generally considered a good thing and a sign of economic growth when the price of oil rises. It implies there is a higher demand for oil and hence a growing economy. But the other factor that can cause a rise in oil prices is simply a fall in the purchasing power of the dollar, or in other words a fall in the demand to hold cash as cash.

If the rise in commodity prices is being fueled by higher demand, then that would mean economic growth. But if it is only being fueled by a falling dollar, then it means stagflation.

One day of trading like this is no big deal. But if it continues, big trouble could be ahead.

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