Stock Preacher

ZymoGenetics Inc. (Nasdaq: ZGEN)

ZymoGenetics Inc. (ZGEN) is a biopharmaceutical company, focuses on the discovery, development, manufacture and commercialization of therapeutic proteins for the treatment of human diseases, including hemostasis, inflammatory and autoimmune diseases, cancer and viral infections. Its products include RECOTHROM, a recombinant thrombin, which is a topical hemostatic agent used for the control of moderate bleeding during surgical procedures. The Company’s product candidates in clinical development stages include PEG-IFN-l, a pegylated version of the IFN-l1 protein; IL-21 for the treatment of metastatic melanoma and metastatic renal cell carcinoma; IL-21 monoclonal antibody (mAb) to treat inflammatory diseases; and IL-31 mAb for the treatment of atopic dermatitis and inflammatory diseases.

The Company has more than 325 unexpired issued or allowed United States patents and more than 280 United States patent applications pending. Outside of the United States, it has more than 670 issued or allowed foreign patents. ZGEN has collaboration agreements with Bayer Schering Pharma AG; Bristol-Myers Squibb Company; and Merck Serono S.A.

The Company was founded in 1981 and is headquartered in Seattle, Washington.

Share Statistics Nov-10-09			FY2007	FY2008	%Chg	Q3 2008	Q3 2009	% Chg
Symbol	ZGEN	Revenue, Mn	38.5	74.0	92.2%	11.9	27.5	131.1%
Current price	$5.84	Gross margin	100%	92.3%	-770 b.p.	94.1%	93.7%	-40 b.p.
52wk Range:	$2.06-$6.71	Oper. profit, Mn	-150.8	-118.6	n/m	-34.1	-9.3	n/m
Avg Vol (3m):	270,614	Net profit, Mn	-148.1	-116.2	n/m	-28.8	-11.4	n/m
Market Cap.	$403.6M
Dil. Shares Outst.	69.1M	EPS, $	-2.17	-1.69	n/m	-0.42	-0.17	n/m

Source: Reuters.com, SEC Filings.

Financial Summary

The Company’s net product sales increased by $6.7 million to $8.5 million for the three-month period ended September 30, 2009, as compared to the corresponding periods in 2008. The increase is due to overall market share increases as additional hospitals convert usage from bovine thrombin to RECOTHROM and existing customers increased their purchase volumes of RECOTHROM.  Collaboration and license revenues were $18.5 million for the third quarter of 2009 compared to $8.5 million for the third quarter of 2008. The primary reason for the increase was incremental revenues from the PEG-Interferon lambda collaboration with Bristol-Myers Squibb. This increase was partially offset by reduced revenues from our RECOTHROM collaboration with Bayer HealthCare.

ZGEN narrowed its third-quarter net loss to $11.4 million, or 17 cents a share, from a loss of $28.8 million, or 42 cents a share, in the same quarter a year ago.

As of September 30, 2009, ZGEN had cash, cash equivalents and short-term investments of $103.4 million, an increase of $13.5 million from December 31, 2008, primarily due to receipts from Bristol-Myers Squibb totaling $130.0 million in 2009 related to the PEG-Interferon lambda collaboration and license agreement offset by cash used to fund the net loss and to manufacture RECOTHROM. This amount did not include the $70.0 million milestone received in October from Bristol-Myers Squibb related to the initiation of the PEG-Interferon lambda phase II clinical trial. In June 2008, ZGEN completed a debt financing arrangement with Deerfield Management enabling it to draw up to $100.0 million in $25.0 million increments. Until January 26, 2010, the Company still has the ability to draw $75.0 million of additional funding under its Deerfield Management funding arrangement, which is repayable in June 2013.

Analyst Consensus

Consensus estimates

	# of Estimates	Mean	High	Low	1 Year Ago
SALES (in millions)
Quarter Ending Dec-09	5	34.79	38.10	31.00	19.77
Quarter Ending Mar-10	3	24.40	33.00	16.20	–
Year Ending Dec-09	5	112.41	120.45	105.90	75.01
Year Ending Dec-10	4	123.77	159.16	95.73	108.11
Earnings (per share)
Quarter Ending Dec-09	5	-0.16	-0.09	-0.26	-0.40
Quarter Ending Mar-10	3	-0.28	-0.15	-0.39	–
Year Ending Dec-09	5	-0.98	-0.91	-1.08	-1.56
Year Ending Dec-10	4	-0.83	-0.05	-1.28	-1.22
LT Growth Rate (%)	1	0.00	0.00	0.00	–

Source: Thompson Reuters.

Analysts polled by Thomson Reuters consider the “Hold” strategy for ZGEN.

Analyst Detail	Buy	Outperform	Hold	Underperform	Sell	No Opinion
Latest	1	0	5	0	1	0
4 weeks ago	0	0	6	0	0	0
2 months ago	0	0	6	0	0	0
3 months ago	0	0	6	0	0	0
Last year	4	0	6	0	1	0

Source: http://markets.ft.com/tearsheets/analysis.asp?s=zgen

Investment Highlights

The Company’s first internally developed product candidate, RECOTHROM^® Thrombin, was approved by the U.S. Food and Drug Administration in January 2008 for use as a topical hemostat to control moderate bleeding during surgical procedures and is now being marketed in the United States. Simultaneously, ZGEN entered into a co-promotion agreement with Bayer Healthcare LLC under which Bayer is assisting the Company with the promotion of RECOTHROM in the U.S. for up to four years, ending in March 2012. In August 2008, Bayer submitted the Marketing Authorization Application to the European Medicines Agency for approval to market RECOTHROM as a topical aid to control surgical bleeding. RECOTHROM sales continued to increase in the third quarter. Hospital demand increased by approximately 25% in the third quarter of 2009 compared to the second quarter of 2009.

At the beginning of 2009, ZGEN and Bristol-Myers Squibb Company announced a global collaboration for PEG-Interferon lambda, a novel type 3 interferon for the treatment of Hepatitis C, and its related development program. Under the terms of the collaboration, Bristol-Myers Squibb agreed to pay ZymoGenetics an upfront cash payment of $85 million for the development and commercialization rights to PEG-Interferon lambda, and to pay an additional license fee of $20 million in 2009. ZGEN could receive additional payments of up to $430 million based on pre-defined development and regulatory milestones for PEG-Interferon lambda in Hepatitis C, up to $287 million in development and regulatory milestones for other potential indications, and up to $285 million based on pre-defined sales-based milestones. In early November, the companies presented final results from a phase 1b clinical trial. Overall, the results of the study support moving to dose-ranging phase II studies in treatment-naïve HCV patients.

ZGEN initiated the phase II clinical trial of PEG-Interferon lambda and ribavirin in treatment-naïve patients with chronic hepatitis C virus infection (the EMERGE study). The first patient has been dosed in the study, triggering a $70 million payment to the Company from Bristol-Myers Squibb Company, pursuant to the terms of a previously announced collaboration agreement. The EMERGE study is an international, randomized multi-center clinical trial that will enroll approximately 50 patients in the first, open label portion that will explore a wide range of doses to be tested in the second part of the study. The second part of the study is designed to enroll approximately 500 patients.

The Company’s Interleukin-21 (IL-21) is a cytokine with potential use in the treatment of cancer. ZGEN has retained all rights to IL-21 in North America and recently reacquired rights in the rest of the world from Novo Nordisk A/S. In August 2009, the Company completed enrollment in the phase II study in metastatic melanoma. The single-agent study is evaluating IL-21 in patients with no prior systemic therapy for metastatic melanoma. The Company continues to anticipate progression-free survival and overall survival results to be available in early 2010.

A federal court in Tennessee recently slapped the Company with three temporary restraining orders related to marketing and promotion of Recothrom. Four companies, including rival King Pharmaceuticals Inc., are suing ZGEN in that court, accusing the Company of unfair competition, false advertising, trademark infringement and related claims. The Company said it disputes the allegations and asked the court for an immediate hearing to lift the orders.

Since 2003, the global biotechnology market has witnessed a significant growth across different geographies. The global biotechnology market generated total revenues of $171.8 billion in 2007, representing a compound annual growth rate (CAGR) of 10.7% for the period spanning 2003-07. The performance of the market is forecast to decelerate, with an anticipated CAGR of 9.9% for the five-year period 2007-12, which is expected to drive the market to a value of $275.8 billion by the end of 2012. Several factors favor the long-term growth of biotech companies. These include an aging population, rising incidence of cancer and other degenerative diseases, and growing recognition that biotech products offer the best solutions for management of these diseases.

Technical Analysis

Source: http://stockcharts.com/h-sc/ui

ZGEN is trading above its 13-day moving average. While this is normally considered to be a bullish sign, the moving average is downward sloping which means that investors have been liquidating shares during this time period and tempers the bullishness of the signal.

The Company’s MACD is currently indicating a weak bullish signal. Although the MACD is trending above the signal line, the indicator is still below 0, which suggests that the underlying moving averages are bearish.

ZGEN’s recent volatility has been greater than normal. This is evidenced by the increased distance between the upper and lower Bollinger Bands. These bands measure volatility using standard deviation and a large width is due to high volatility. Additionally, ZGEN is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

Comparative Analysis

Since early 2008 the Company has taken several important steps to bring its costs down and improve its cash position. These include headcount reductions, restructuring the Atacicept collaboration with Merck Serono and entering into the Bristol Myers-Squibb transaction. Since the beginning of January 2009, ZGEN has tried to revisit every strategic and tactical element of the RECOTHROM brand. As a result, it has instituted several strategic and tactical changes within the brand with more expected to follow over the remainder of the year. The Company successfully completed phase 1b clinical trials of PEG-Interferon lambda and initiated the first phase II clinical trial. Taken together with the expected increasing trend in RECOTHROM sales, we expect to see continued improvement in the Company’s bottom line.

Company Name	Ticker	Price per	Mrkt. Cap.	P/E		P/S
Nov-11-2009	symbol	Share, $	$ Mn	2009	2010	2009	2010
Bristol Myers Squibb Co	BMY	23.05	45,660	11.35	10.53	2.11	1.99
King Pharmaceuticals Inc.	KG	11.42	2,830	10.29	11.31	1.59	1.67
Human Genome Sciences	HGSI	28.30	4,670	n/m	n/m	16.93	20.65
Onyx Pharmaceuticals Inc.	ONXX	26.66	1,660	39.79	28.36	6.51	5.29
Amgen Inc.	AMGN	54.91	55,790	10.87	10.70	3.79	3.62
Johnson & Johnson	JNJ	60.75	167,620	13.29	12.35	2.74	2.79
Median				11.35	11.31	3.27	3.20
ZymoGenetics Inc	ZGEN	5.84	403.6	n/a	n/a	3.59	3.26

Source: Thomson Financial, Yahoo! Finance, Analyst estimates.

Insider Trading Activity

Net Share Purchase Activity

Insider Purchases – Last 6 Months Shares Trans Purchases N/A 0 Sales 10,000 1 Net Shares Purchased (Sold) (10,000) 1 Total Insider Shares Held 31.57M N/A % Net Shares Purchased (Sold) 0.0% N/A

Net Institutional Purchases – Prior Qtr to Latest Qtr Shares Net Shares Purchased (Sold) (7,382,060) % Change in Institutional Shares Held (32.8%)

Data provided by Thomson Financial

Report Disclaimer

DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority.  We are neither licensed nor qualified to provide investment advice.

The information contained in our report should be viewed as commercial advertisement and is not intended to be investment advice.  The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities.  We distribute opinions, comments and information free of charge exclusively to individuals who wish to receive them.

Our newsletter and website have been prepared for informational purposes only and are not intended to be used as a complete source of information on any particular company.  An individual should never invest in the securities of any of the companies profiled based solely on information contained in our report.  Individuals should assume that all information contained in the report about profiled companies is not trustworthy unless verified by their own independent research.

Any individual who chooses to invest in any securities should do so with caution.  Investing in securities is speculative and carries a high degree of risk; you may lose some or all of the money that is invested.  Always research your own investments and consult with a registered investment advisor or licensed stock broker before investing.

Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934.  Subscribers are cautioned not to place undue reliance upon these forward looking statements.  These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated.  Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC.  You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements.

We are committed to providing factual information on the companies that are profiled.  However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions.  We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so.  Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable.

To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).

We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www.finra.org.

Popularity: 1% [?]