Stocktake

Difference of opinion on Elan Alzheimer drug

ELAN DRUG bapineuzumab is the industry’s “best chance” of countering Alzheimer’s disease, said Pfizer research chief Mikael Dolsten last week.

Pfizer and Johnson Johnson are developing the drug with Elan, which retains a 25 per cent stake. Crucial phase three data will be published within months.

Healthcare investor Nathan Sadeghi-Nejad is less positive. The stock fell on heavy trading volumes on Tuesday after TheStreet.compublished his pessimistic analysis, which argued that traders should short the stock into the trial results.

Bapi is designed to remove amyloid beta from the brain, an approach that Sadeghi-Nejad has little faith in. The stock tanked in July 2008 after disappointing phase two data, and “critical red flags” are still being ignored, he says. He cites similar failures by Axonyx and Myriad Genetics in 2005 and Eli Lilly in 2010 as well as a 2008 case report published in the Lancet which focused on a previous amyloid beta-targeted vaccine of Elan’s. (“Although immunisation . . . resulted in clearance of amyloid plaques . . . this clearance did not prevent progressive neurodegeneration.”)

Two weeks ago, Credit Suisse calculated that Elan could fall by 25 per cent if bapi disappoints while positive data could catalyse “very significant” upside. Sadeghi-Nejad sees 30-40 per cent downside and potential upside of “at least 50 per cent”.

Ultimately, he cautions against the “imbalanced risk-reward of ‘if it works’ thinking”.

Earnings down yet market soars

It’s an awful earnings season in Europe, with more companies missing analyst estimates than surpassing them. In the US, the season just ended with 60 per cent of companies beating estimates. However, it’s one of the lowest readings since the bull market began in March 2009, and also below the historical average (62 per cent). The one bright spot is the tech sector, where 68 per cent of stocks beat estimates.

Nor do Q1 earnings look good. Already 58 companies have issued negative pre-announcements, compared to 23 positives. That ratio of 2.6:1 is the worst in three years. Markets have soared however, and this is no historical freak. “Almost everything investors are taught about the relation between earnings and stock market returns is wrong,” writes trader Victor Niederhoffer in Practical Speculation, his 2003 book. Looking at 65 years of data, he found earnings recorded 43 annual increases and 22 annual decreases. Markets rose by an average of just 4.9 per cent during years of rising earnings compared to 14 per cent when earnings declined. Investors’ current nonchalance may not be as peculiar as it seems.

Public wired to buy high and sell low

The Dow’s ascent above 13,000 means the index has almost doubled since its March 2009 low. Then, retail investors ignored bargain valuations and exited en masse, with sentiment surveys revealing record bearishness and investors overweight in cash. Burned by two savage bear markets, ordinary investors have largely steered clear of stocks since then. The lesson of the last decade: valuation matters. Alas, the investing public appears wired to buy high and sell low.