Tuesday, August 12, 2008

Follow-up with Ken Kam (Part 2)

This blog is the second in a series following up with Ken Kam of Marketocracy (www.marketocracy.com). Larry and I had talked with him last month about the drug industry and Elan Corporation PLC, currently conducting clinical trials on a drug, Tysabri, which could be used in the treatment of multiple sclerosis and Alzheimer’s disease, in particular. Ken predicted a bright future for Elan. Then came two pieces of bad news and Elan’s price came down 60% from its recent high. In my last blog, Ken explained what had happened and gave us his opinions. Today, he will talk about Elan’s future prospects and another pharmaceutical opportunity.

Ken Kam’s fund, Marketocracy Masters 100 Fund (MOFQX), has continued to accumulate Elan shares despite the 60% sell off. He says that a two year investment horizon is needed. By then the Phase 3 clinical trial data for Tysabri will be out and the Phase 2 data will be analyzed and fully appreciated. (See my last blog for Ken’s position on Tysabri’s Phase 2 clinical trial results.) According to Ken, analysts have a short term impact on a stock’s price, long term, it’s the multiple sclerosis patients taking the drug that affect the price.

While admitting to the risks arising from PML with use of the drug, Ken believes that it is still well below expectations and when caught early is survivable. People will have to become comfortable with its risk though. He notes that it is rare to have a new class of drug that has such a big effect on a disease that a lot of people have.

Ken was shocked at the market reaction but feels that it is a Wall Street reaction and not a real world one. In particular, Ken feels that the accusations of data mining and lying that were thrown at Elan in recent weeks were totally unfounded.

Ken’s expectations are that Elan will have to play out to the end of the Phase 3 clinical trials for optimal valuation. Meanwhile, Elan is a good valuation and could be a takeover target. Ken thinks the investment community is presently looking at the valuation differences and measuring them. He is unsure about what to hope for, a takeover bid or letting it run out.

Our opinion is that Wyeth has surely got to be interested in Elan at this price level and diminished market cap as the risk-reward levels are extremely attractive. While considered a takeover play itself, Biogen Idec may also find Elan an attractive takeover target as well.

In wrapping up, we asked Ken what other opportunities did he see in the pharmaceutical sector. He replied that he liked Novo Nordisk and their new diabetes program which is in Phase 3 clinical trials. Ken also noted that Wall Street often gets clinical trial data wrong and this is what creates the opportunities in the market.

As always, Larry and I found Ken Kam’s opinions and views interesting and a little contrarian. We’ll stay in touch with him and, again, would like to thank for taking the time to meet with us.

As always, we welcome your feedback. Please contact us at
larryrothmansblog@gmail.com. We look forward to hearing from you.

Contributed by Guy de Lastin

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