For all the debate about possible reform to the U.S. medical system, it is easy to forget that the majority of major innovations in drugs and medical devices come from America.  It is worth remembering that even with all the problems troubling the health care system, innovation continues to be a bright spot.  Three of the biggest gains among individual stocks on Monday were from U.S. companies in the pharmaceutical sector largely because of this sort of innovation.. 

The biggest winner in today’s action are investors in Human Genome Sciences (HGSI) which is up more than 30% in afternoon trading following the completion of their second successful late stage clinical trials for a treatment of Lupus.  We first wrote about this company after the completion of their first major trial on this drug in July (HGSI’s Lupus Drug Shows Great Potential), and the stock is up huge again after positive results for this difficult to treat disease.  The stock is hitting multi-year highs above $24, and the stock is up more than 600% since the first trial was completed.  With a lack of alternatives for those that suffer from Lupus, HGSI’s Benlysta could be a major source of revenue for the company if it can now get approval from regulators.

 Amylin Pharmaceuticals (AMLN) is also trading higher today by nearly 10% after this weekend the company announced that it has agreed to co-develop and commercialize compounds for obesity with Japan’s Takeda Pharmaceuticals.  Amylin will get $75 million up-front for the deal, but it could be much more lucrative if the partnership reaches certain benchmarks for sales of the compounds.  In addition to this partnership, the FDA approved extended use of Amylin’s Byetta as a standalone treatment.  Both of these developments are targeting treatment for those suffering from diabetes, an amazing 7.8% of the population according to the American Diabetes Association.  Amylin is positioning itself to gain market share in this huge area of need and we believe that this stock continue to have tremendous potential going forward.

 Vertex Pharmacueticals (VRTX) is the third drug company on the move today after receiving positive results from a Phase II trial of its experimental hepatitis C treatment Telaprevir.  The treatment was administered twice day as opposed to three times, which will be more convenient for consumers.  VRTX investors hope this will give it a competitive advantage over other treatments, and the stock has traded more than 8% higher on the day.  This drug is extremely important to the Vertex pipeline of drugs and they hope to seek regulatory approval 2H 2010 to possibly be available in 2011.

So, if Monday’s news is any indication America innovation in health care is alive and well, and at least today, investors are seeing the benefits.  As for Ockham, our valuation methodology has both HGSI and AMLN as Undervalued, but Vertex was recently downgraded to Overvalued.  While these events are unlikely to affect our rating going forward (because they have no impact on current fundamentals) this does illuminate what the future of these companies will look like.  It is extremely difficult to predict the outcome of these sorts of trials like HGSI and VRTX just went through, but for some investors this is a risk worth taking.

Proxy battles are all the rage these days.  On the heels of a major proxy battle between Bill Ackman and Target (TGT) last week (Ackman Missed His Target), the results of the fight between Biogen Idec (BIIB) and Carl Icahn appears to have ended in a draw.  Icahn, a well known activist investor, was trying to get four board members elected to BIIB’s Board of Directors, and after preliminary results were released it appears that two of them were elected in a contentious battle.  Icahn had been busy with a similar attempt to replace members of the Amylin (AMLN) board last week, he succeeded in getting two of his appointees seated as well. 

The two newest directors of Biogen will be Dr. Alexander Denner and Dr. Richard Mulligan, who are the same two that Ichan put on the board during his 2006 proxy fight with ImClone.  ImClone was later sold to Eli Lilly (LLY) for $6.5 billion.  Icahn envisions splitting Biogen and Idec into two companies, but that will likely be difficult with only two likely advocates on the board.

Not everyone was prepared for the fireworks that the Biogen shareholder meeting would produce.  Reportedly, the actual meeting did not disappoint for drama, according to the Wall Street Journal.

“Wednesday’s meeting was marked with unexpected acrimony. The company’s chairman, Bruce Ross, recessed the meeting for more than three hours over shouted objections from Mr. Icahn’s nominees.

In an interview, Mr. Icahn called the delay “despicable.” “What’s wrong with Biogen is, they just run it as a country club,” Mr. Icahn said. “They can’t have the class to say we won one or two seats.” He issued a news release saying Biogen was “hijacking the election.”

A Biogen spokeswoman said the company’s actions involved “absolutely no procedural foul.”

During the recess both sides began to lobby major shareholders to support their side.  This is the second such attempt by Icahn to get his preferred board members installed at Biogen.  Last year, Icahn was roundly defeated garnering just about 20% of the votes.  This year however, more shareholders shared Icahn’s distaste for the performance of the company.  Through the turbulent year so far in the stock market, Biogen Idec’s share price has been fairly range bound between $44 and $52.  This is unacceptable to Icahn who owns more than 5% of the biotech company’s stock.  For Icahn, BIIB has simply too much potential as they have nine drugs in the late stages of development.

As you can see from the historical valuation chart for Biogen Idec, Ockham has been positive on the shares for nearly two years and it currently receives our most bullish rating of Greatly Undervalued.  The strong fundamentals of Biogen are easily apparent, earnings are expected to come in at about $4.15 for this fiscal year and growing slightly to $4.33 in FY2010.  The company earned $3.66 per share last year, and BIIB has met or beaten earnings expectations each quarter dating back to 4th quarter 2007.  Currently, we find it somewhat surprising that the vast majority of Wall Street analysts that cover Biogen Idec have a neutral or hold rating on the shares and the average price target is right where shares are currently at $53.

The market is not trading on fundamentals, at least not at for the time being, but at Ockham, we believe that Biogen Idec has strong earnings and sales trends.  If the company, now with more influence from Icahn, can start to rollout some of its new products successfully its likely the market will start to look more favorably on BIIB.  The proxy battle has dominated the headlines, but analysts being lukewarm on the shares could be an opportunity to buy into this stock with significant appreciation potential.

“That I’ve been following a lot of headlines crossing related to Nasdaq traded point out what is going on with Biogen. Carl Icahn waged a proxy fight to win board seats on the company board. The “Wall Street Journal” confirming that Carl Icahn has won two board seats on Biogen Idec board. Trying to not only sell the company but shape up the company, and the investors liking the prospect he is will bring to their future.” Fox Business Network 6/3/2009