Model Portfolio jackweyland:VALUE

The cost of health care in the United States is widely recognized to be a major societal issue.

In 2005, government and private spending for health care in the U.S. averaged $6,683 per person. It has been estimated that by 2015, health care costs could almost double to $12,000 per person and with the demographic shift towards aging baby boomers, those costs are projected to continue to rise beyond 2015. Eventually, the U.S., as a society, will have to radically change some aspects of health care in this country as it is too expensive, inefficient, and future costs will challenge fiscal sustainability. This reality creates an investment environment with significant opportunities.

Today, we live in a time where there are investment opportunities to both improve the health care system and to improve people's lives. Billions of dollars of blockbuster drugs are coming off patent over the next few years. There is amazing research that will be entering the market in the near-term that will replace current therapies. There are incredible health science assets that will reduce costs by reducing outpatient care and doctor visits. There are technologies and ideas that can change the cost structure of delivering health care to a society. There are still medical needs that are unmet by currently available therapies.

Portfolio Strategy for Health Science Opportunities Fund (VALUE):

The strategy of my Marketocracy model fund, the Health Science Opportunities Fund (VALUE), can be summarized as focused risk mitigation, value hypothesis validation through real world results, and reducing complex ideas into simple questions.

As of June 2009, my VALUE model fund at Marketocracy is positioned with what I consider some of the best drugs for treating Alzheimer's disease, diabetes, multiple myeloma, multiple sclerosis, male hypogonadism, and AML remission therapy. My VALUE model fund also has exceptional drug delivery assets and next generation vascular disruption agent for multiple forms of cancer

Mitigating Risk:

• Seek entry points in an area where sellers have dried up and signs of accumulation have been seen.
• Look for companies that are intrinsically undervalued. It can take a decade for a promising drug to go through the FDA approval process and rarely does that process go without hiccups. During that extended time generally problems, uncertainties, risks, fears, etc. arise and because the science behind these drugs and the disease can be complex, investors over-react and sell off. By identifying which drugs truly provide a significant benefit to patients and waiting for the inevitable hiccup to buy their stock at a discount gives us downside protection and can sometimes become a buyout candidate.
• The company should NOT have a high short interest. Professional shorts can often be right or they can manipulate a stock price.
• The company should serve an unmet medical need and/or improve the health care system. For example, an asset that meets both requirements is the drug Nebido. There's an unmet medical need for men with low testosterone levels as only a small amount of those thought to be afflicted are currently being treated and there are estimates that as many as 30% of those treated with current therapies stop taking their medication because of dissatisfaction. Nebido, which is expected to launch in Q4, 2009, improves the health care system by limiting doctor visits, offering proven efficacy, and improving patient's lives.
• Hedging: Using chart analysis, I look for indications that the markets appear to be over-bought. When I see those indicators in overbought areas and increased probability that the uptrend is losing steam, then I will hedge a portion of the portfolio by using leveraged short ETFs. I employed this strategy effectively in 2008.

Intrinsic Value Validated by Acquisition and FDA action:

Here are some examples of stocks that I've traded successfully and have driven much of the performance results:

• Elan (ELN): In 2005, Elan's very promising multiple-sclerosis treatment was voluntarily withdrawn from the market after two patients developed a serious brain infection called PML. Every analyst on Wall Street said the drug was dead. I came to a different conclusion. What this opportunity boiled down to was: is it possible to mitigate the risk and change the way the FDA perceives the reward/benefit profile of the drug? The efficacy was never in question. In fact, it could be surmised that it was superior to all other multiple sclerosis therapies. Well, the answer was the risk of PML could be mitigated and this was obvious if you looked at the various late stage trail results and peer review scientific articles. The people that contracted PML were immunologically compromised by other therapies.

  After a year of patients pleading with the FDA and doctors and regulators creating a path for the drug; the FDA allowed the drug back on the market in 2006. This was only the second time in U.S. FDA history that a drug was allowed back on the market for the same indication after being pulled from the market.

  Today, the drug is a billion dollar drug worldwide and instance of PML is still below label indication. There is also late stage research that may turn PML into a more easily treatable side effect.

• Iomai Corporation (IOMI): In 2006, a small biotech company pioneering vaccine delivery via a skin patch was crushed after a phase II failure. It was a big failure and the stock fell like a rock. What this opportunity boiled down to was: Is it biologically possible to deliver a vaccine agent through the skin and evoke an effective immune response?

  Institutions thought the phase II results were an effective NO. A No answer would invalidate the company as they were dedicated to bringing vaccines via this skin patch. Because the upside potential was so significant if the answer could be a yes, I followed the company for an additional 6 months. In that 6 months, the company delivered results for another late stage trial for a different indication. The answer became: Possibly Yes. Institutions didn't care and the stock continued to go down due to tax loss selling and lack of volume.

  After additional research of peer review articles and elementary immunology, my Fund began to establish a position about 8 months after the crash of the stock. Later in 2008, the company would establish a research relationship with Merck and then was bought out by a European vaccine company.

• Indevus Pharmaceuticals Inc. (IDEV): In 2008, FDA had safety concerns for a long-acting testosterone drug in the approval process. The drug has the potential to dominate a market with significant pent up demand so it had a huge impact on the value of the small biotech developing the drug. Couple this with a large amount of convertible debt due in less than a year and the stock was hit hard as investors fled. What this opportunity boiled down to was: Will an additional phase III trial be needed in order for their drug to be approved?

  Besides this one valuable asset, the company had other valuable attributes including: it was a specialty pharmaceutical company with its own sales force, it had other valuable late stage assets, and it had a unique drug delivery asset that could reduce the cost of health care.

  So, the value proposition even before the phase III question could be answered was quite compelling. Even if I'm wrong that the FDA won't need another phase III trial for this one drug for an unmet medical need indication with pent up demand and significant amount of data from Europe; my entry point in the summer of 2008 was a fantastic opportunity.

  Later, the FDA said it was comfortable with data from Europe where the drug is already approved and marketed by a different company. The company was bought out about 6 months after the Fund established a position. The Fund is currently still participating in the potential of this drug by investing in the company that acquired Indevus Pharmaceuticals.

Thank you.

I've been pleased with the performance of my Health Science Opportunities Fund (VALUE) to date, but I believe there are still more opportunities ahead. I try to take a real world, common sense approach and shut out the noise of seemingly complex events. After ten years, I continue to believe this is a good time to invest in Health Care and I am comfortably confident in where we're headed.

Posted by Jack Weyland at 1:23 AM | Permalink