Navarro's Big Economic Picture
A Short-Term Trading Opportunity -- Not!

During the three years or so that I’ve been doing this newsletter, I’ve rarely gotten the market direction so wrong. All the technical signs last week pointed to a summer rally. Fundamentals wound up, however, handing those technical signs their head on a bearish platter. Glad I’m mostly in cash and holding just a few biotech positions – which only took a glancing blow.

What now? Well, the economy is slowing along with job formation. The housing sector continues to fall into the dumper as residential home builders begin to slash their work forces. Oil prices are stubbornly high. The start of the earning season suggests there is going to be quite of bit of missed earnings and downward revisions to company forecasts. The dollar remains in a weakened condition. Shall I go on?

No need really. My advice, at least to myself, is to hunker down for the long hot summer mostly in cash while I sit on a few long term buy and holds like EPIX and VITA.  That’s the strategy for July as The Well-Timed Strategy crew takes our summer hiatus. If you absolutely, positively need to make money, feel free to deviate from that strategy. On the other hand, this is the best time of the year to take some time off from the market as volatility and volume both usually are low.

This Week's Market Movers - No Xmas Cheer This Earnings Season?

It’s a relatively light calendar for economic reports.  Of the bunch, the trade report on Wednesday has the most market moving potential.  The large trade deficit continues to weigh on the markets via the inflationary dynamics of a weak dollar and the collateral need for higher interest rates by the Fed to prop it up.

That said, there’s a whole bowling alley full of earnings reports rolling down the lanes.  Alcoa on Monday, Pepsi on Tuesday, Gannett on Wednesday, and GE on Friday, just to name a few.  This earnings season is likely to be the most important in several years.  Weak numbers and downwardly revised guidance is a likely theme and the markets will HATE that.  

Vaino's Biotech Corner
INSM & TRCA - Fighting Like Two-Year Olds

Even with the VIX finally moving again, biotech stocks have been pretty quiet.The biggest biotech story of the week, for me at least, was the announcement on Wednesday that a patent dispute between Insmed (INSM) and Tercica (TRCA) would go to trial. I have written about these stocks before, and sold off TRCA in June’s market plunge. I still liked INSM so I kept it.

Both these companies have received FDA approval to sell insulin-like growth factor-1 (IGF) for the treatment of growth deficiencies in children. Tercica’s drug, Increlex, is given twice a day by injection and Iplex, Insmed’s drug, is given once a day. And note that Iplex is cleverly delivered with a complementary binding protein to improve distribution in the body.

Tercica claims that Insmed is using their patented technology to produce their drug. To read the headlines from the Tercica press release, it sounded like the court had already ruled that Insmed is infringing on their patent.  However, all the court actually did was to deny Insmed’s request for summary judgement. That is, Insmed wanted the court to rule there was no evidence to support Tercica’s assertion. Courts typically only grant summary judgment if there is no evidence to support claims. Since Tercica had evidence to support its claim, the court had no choice but to proceed to trial. Only at trial can the validity of the evidence be determined. The trial is set to begin November 6.

In essence, Insmed will be seeking to establish that the patent issued to Tercica is invalid based on prior art.  It’s now up to the court to decide if this is true or not.

A different court case in which Tercica sued Insmed for false advertising was thrown out last month. These guys just don’t seem to play well together.

While I don’t believe this is a killing blow for Insmed, it did knock the stock price down 33% from where it was last week, to under $1.30. Tercica saw a modest jump on the day of the announcement, but it’s actually down for the week.

I think Iplex is the better drug. A study published in May 2006 in Expert Opinion on Biological Therapy found protein-bound IGF had a superior safety profile as compared to the unbound. Also, Iplex is administered once a day compared to twice a day for Increlex. Ask yourself, would you rather get one needle a day or two needles a day?  Now go ask a five year old.  I’m pretty certain I know the answer.

This is a good drug, but it’s a niche product, and there likely isn’t room for two competitors anyway. TRCA is a one shot wonder (they licensed the drug from Genentech) while INSM has other ongoing clinical trials. Even if Tercica prevails in the trial, which is not certain, they’re still left with an inferior product: Insmed has patented delivery with the binding protein.

Neither INSM nor TRCA have strong balance sheets (TRCA’s is marginally better) and court cases are expensive and risky. My take, and this is definitely not for the faint of heart, is that if the trial goes well for Tercica it would still be worth their while to enter into an agreement with Insmed. The trial could well drag on for years, and Insmed will continue selling Iplex. If Tercica were to prevail and compel them to stop, the publicity of forcing little kids to have to take two needles a day instead of one likely isn’t going to be good  I might get my head handed to me, but I’m seriously thinking of buying more INSM

“Any trader or investor who ignores the power of macroeconomics over the world’s
financial markets will, sooner or later, lose more than they should—and if they are
trading on margin, perhaps more than they have.”
 -- If It's Raining in Brazil, Buy Starbucks

CONTACT INFORMATION
Peter Navarro
Irvine, California USA
Email  |  Website

DISCLAIMER: This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling, or holding of any financial instrument whatsoever. Trading and investing involves high levels of risk. The authors express personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The authors may or may not have positions in the financial instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future performance.