Campbell Soup Q1 2011 Results

Campbell Soups gave Q1 results today and they disappointed the market. I was struck by how their statement, if married with Heinz numbers -a few days earlier- create a illustrative microcosm of what is going on in the global economy.

 

Firstly, Campbell Soup talked about a difficult consumer environment in ready-to-serve and condensed eating soups. In fact, they referred to it as being subject to ‘extraordinary competitive activity’. Volumes appear to be ok, but pricing isn’t. Furthermore, whilst they had stepped up their promotional profile, they stated that they didn’t match some of the promotional activity. The latter point probably goes some way to explaining why their promotions had had limited market impact. They also referred to the need to re-assess how consumer tastes were changing.

However, it isn’t just the softness in the North American Consumer that concerns them. They also referenced upcoming commodity cost inflation.

Frankly this doesn’t surprise me, because commodity prices (particularly softs) have been rising recently. For example…

Wheat

http://futures.tradingcharts.com/chart/CW/W

Corn

http://futures.tradingcharts.com/chart/CN/W

Butter

http://futures.tradingcharts.com/chart/BU/W

…and this will inevitably put pressure on margins.

Clearly, the issue of commodity price inflation is not isolated to Campbell Soup. However, Heinz had a much more upbeat message…

 

…which was characterised by strong growth in emerging markets.

“Without question, emerging markets were the growth engine in the quarter and in the first half of the fiscal year. Emerging markets achieved double-digit organic sales growth of more than 10% in the quarter, enabling Heinz to deliver our 22nd consecutive quarter of organic sales growth.

The strong emerging markets sales growth was fueled by excellent results in China, India, Indonesia, and Russia. Overall, emerging markets generated 15% of the company's total sales in the second quarter, and have generated over 16% through the first half of fiscal 2011. “

 

So the key message is that consumer growth is occurring in emerging markets. The flipside of this is that, it is this very demand which is helping push up costs. As a general theme, the message is to be wary of commodity cost inflation, particularly if your end markets are focussed on protecting market share in Western markets.

GW Pharmaceuticals Final Results 2010

GW Pharmaceuticals gave earnings today and I figured it was a good stock to do some equity research on.

http://www.investegate.co.uk/Article.aspx?id=201011230700116258W

and announced that they had ...

http://www.investegate.co.uk/Article.aspx?id=201011230701086266W

"GW Pharmaceuticals plc (AIM: GWP) today announces the initiation of the Phase III clinical trials programme of Sativex^® in the treatment of pain in patients with advanced cancer, who experience inadequate analgesia during optimized chronic opioid therapy. This indication represents the initial target indication for Sativex in the United States."

The results were well received by the market and GW Pharmaceuticals continues to demonstrate that they can get Sativex approved across a range of jurisdictions.  My view is that the risk here is not with efficacy nor safety but rather with regards pricing. Will national medical bodies-already facing cutback pressures due to public deficit reduction plans- be willing to pay significantly in order to supply patients with a cannabinoid based treatment such as Sativex?

 Similarly, there are question marks as how to how the US would view a medicine based on cannabis. Similarly, longer term, if cannabis was widely legalised then I suspect there could be pricing pressure for Sativex. I point out the risks, because, actually, GW has made great strides in demonstrating efficacy and safety for pain sufferers with Multiple Sclerosis and Cancer.

I decided to look closer at the issues here.

Information on Multiple Sclerosis and Spasticity

MS is an incurable condition which affects between 2-150 people per 100,000 of population. It causes damage to the Central Nervous System CNS and spasticity is a symptom that affects most sufferers at some point in their lives.

According to Rizzo et al,

“In a survey, 84% of people with MS reported symptoms of spasticity. Moderate, severe or total spasticity is reported in 34% of individuals.“

Symptoms include mobility loss, stiffness, and painful spasms. It is a physically de-habilitating condition.

New Treatment for Multiple Sclerosis Sufferers

Independent research has confirmed that cannabis extracts may provide therapeutic benefit for MS spasticity symptoms. Lakhan reviewed six controlled trials reporting measures of spasticity after tetrahydrocannabinol THC and cannabidiol CBD treatments. THC and CBD are cannabis extracts.

Lakhan concluded: “We found evidence that combined extracts of THC and CBD may reduce symptoms of spasticity in patients with MS. ...The therapeutic potential of cannabinoids in MS is therefore comprehensive and should be given considerable attention.”

Similarly, as reported by Johnson J. et al, GW Pharmaceuticals achieved highly positive results for Sativex (a cannabinoid spray) from their European Phase III trials in MS spasticity. In this trial, 241 responding patients were randomised to be given Sativex or a placebo. The intention was decrease the levels of spasticity according to a numeric rating scale NRS test.

The results were that, after 12 weeks of trials, the treated sample achieved a significant reduction in spasticity. Furthermore, 74% of those treated achieved a greater than 30% response. In comparison the placebo treated group recorded an increase in spasticity and only 51% achieved a greater than 30% response. The data also indicated a reduction in night time incontinence.

Cannabis Based Drug Approved for MS Sufferers

Subsequently, the UK and Spain approved Sativex for MS spasticity sufferers. A decision is due for Canada in 2010. Pam McFarlane, Chief Executive of the MS Trust, welcomed the UK approval in a press release from Bayer Healthcare and said

“ We have been aware for a long time, based on comments from people with MS, that cannabis based medicines can significantly improve spasticity... ... the MS Trust has campaigned for the availability of a licensed medicine that can be properly controlled and prescribed. We have also invested money and resources in developing the body of knowledge by funding clinical research into the effectiveness of cannabis based medicines. The launch of Sativex® is therefore a milestone for the NHS and the MS Trust, and we are delighted.”

Further submissions are believed to be filed by Bayer/GW Pharmaceuticals in the Middle East, Latin America, Africa and Asia.

New Treatment for Cancer Pain Sufferers

Similarly, cannabis based drugs are in trial for cancer pain sufferers. GW pharmaceuticals completed a US phase IIB study for Sativex® in the treatment of pain in patients with advanced cancer, who experience inadequate analgesia during optimized chronic opioid therapy.

The Phase IIb trial results were significant with two of the three analyses showing results in favour of Sativex. According to GW Pharmaceuticals:

“The 30% responder analysis, which was the primary analysis specified in the protocol, was numerically in favor of Sativex but did not show a statistical difference compared to placebo. The “continuous response analysis” (an analysis of all response levels characterized by percent improvement), did show statistically significant results in favor of Sativex for both the Sativex low and mid dose groups versus placebo... ..this continuous response analysis has been the key efficacy parameter discussed in the product labeling of several recently approved medicines for pain.”

Furthermore, the study showed a statistically significant difference in reducing sleep disruption. The successful conclusion of this trial means that a Phase III trial for cancer sufferers, will begin in the US within 2010, with the possibility of a US launch by end 2013.

Source:

Bayer Healthcare Press Release “Sativex® launched in UK for the treatment of spasticity due to Multiple Sclerosis” Bayer Website 2010

GW Pharmaceuticals press release
Johnson J et al, Journal of Pain and Symptom Management, Vol 39, Issue 2, pp 167-179

Lakhan, Shaheen A. and Marie Rowland “Whole plant cannabis extracts in the treatment of spasticity in multiple sclerosis: a systematic review” BMC Neurology, 2009

Rizzo MA, et al. "Prevalence and treatment of spasticity reported by multiple sclerosis patients."Multiple Sclerosis 2004;10:589/595

Oil Stocks Exposed to Kurdistan

I thought it would be useful to look at some of the Western oil companies that are focused on Kurdistan. I think these could be good oil stocks to buy. They are interesting for a number of reasons, most of which are predicated on a successful resolution of disagreements between the central Government and the Kurdistan Regional Government (KRG)

1. They tend to be characterised by being smaller companies who moved in on the market when the central Government said they wouldn’t allow any of the companies with KRG licences to take on development projects in the rest of the country.  This means that these companies are potential takeover targets once the political issues are resolved.
2. There is likely to be significant upside potential due to de-risking once/if this process takes place.
3. Iraq is oil rich and Kurdistan is under explored. The early movers have advantages.

 Oil Companies Involved in Kurdistan

The four companies identified are DNO (Norwegian), Gulf Keystone Petroleum, Heritage Oil and Sterling Energy. I have added a link below to some Goldman Sachs research whereby you can source forecasts and outlook or these stocks.

Before going any further, it should be understood that this idea is a speculative one, based on a successful resolution of the problem between the KRG and central Government. The standoff centres on licences issued by the KRG with these oil companies. The licences are based on Product Share Contracts (PSC) which central Government has consistently said it would not ratify. Naturally, as they are not ratified, export licences have not been issued. Furthermore, the PSCs may be torn up or be made subject to significant revisions in the political horse trading process with the central Government.

Kurdistan Production Share Contracts

Essentially, the PSCs are seen by some as being on more favourable terms to the Oil companies than would be the case under typical Iraqi service agreements. Furthermore, the KRG are effectively getting a subsidy from the rest of Iraq in order to pay the contractors exploration and developmental costs, because these costs are paid centrally from revenues emanating from total Iraqi production. Currently, Kurdistan’s oil production is proportionally lower than the rest of Iraq per head.

My hunch is that these licences will be ratified but there could be pressure to renegotiate contracts downwards for the contractors. With a new Government formed and the necessity of Baghdad to garner Oil revenues, I consider it unlikely that they will seek instability by not ratifying. Furthermore, Kurdistan remains a pet project of US foreign policy, even though the politically powerful Oil majors are not there yet. The pressure to get their oil industry developed will be significant. However, quantifying this viewpoint is not easy, although I note that Goldman Sachs ascribe a 50% political risking to the NPV calculations. I suspect the outcome could be more benign than the risks implied by Goldman Sachs.

Iraq/Kurdistan Oil Contract Dispute

The reason I suspect that they will be benign is that, the PSC agreements appear to be generous, but not overly so. According to Peter Wells when comparing Iraq’s Technical Service Contracts (TSC) with Kurdistan’s PSC agreements

“The contrast with the KRG is considerable. The KRG’s PSCs have been awarded by opaque, secret negotiations to companies with, in the main, very limited major international field operating experience. The profit sharing terms of the KRG PSC are simplistic by the standards of modern PSCs and yield lower revenues and value to the state than PSCs in

comparable countries.”

Furthermore, if we look at figures 4 & 5 you will see that his modelling produces 97% of state take under the PSC but around 99% under the TSC. This isn’t a huge percentage difference to the State, but it is to the contractors share. In other words, assuming $60 a barrel of oil, he might get $5bn instead of $8bn under this model.

However, in his response to this paper, Muhammed Mazeel al-Aboudi articulates the KRG position on Iraq’s TSC agreements

“The contracts are, therefore, not in the best interest of Iraq – even with the important budget needs. These will be long-term contracts and need to be properly offered, reviewed, and approved in accordance with the Constitution and an oil and gas law that is in accord with the Constitution.

In the Kurdistan Region, by contrast, IOCs will, on average, receive a “gross undiscounted profit” figure of just $1.58 (at NPV of 10%) for each barrel of oil discovered and produced from any large field discoveries – almost 40% less than $2.20/B in the case of Ministry of Oil proposed contracts. “

So, by way of contrast, the KRG argue that the Iraq TSC agreements are too generous! I’ve included a link to the KRG’s views below.

Stocks to Buy and Benefit from Oil in Kurdistan

I think the important point is that the KRG thinks –or at least they say-that their contracts are not unfavourable relative to Iraq TSC. With the political wind moving behind the KRG it could mean that they get what they have already signed up for.

Of the four companies noted, Sterling Energy appears to be an also ran. They have had disappointing results in Kurdistan and the potential uplift is minimal. Gulf Keystone Petroleum appears to have the largest upside potential from a successful resolution. Heritage Oil is very interesting but contains the added risk of a tax dispute with the Ugandan Government over the sale of some of its assets. Since the idea here is to gain exposure to Kurdistan specifically, this might preclude an aggressive position with Heritage Oil. DNO is very interesting. Although the evaluation discount does not appear to be large, they have assets in production and would give good upside potential given successful political resolution.

Source:

Al-Aboudi, Muhammed Mazeel ‘Iraq’s TSC And PSC Agreements – A Good Deal For Iraq?’ http://mepep.com/postedarticles/oped/v53n03-5OD01.htm

Goldman Sachs Research http://www.oilbarrel.com/fileadmin/content/pdfs/Brokers_Notes_Oct_10/50%20E%20and%20Ps%20to%20change%20your%20portfolio.pdf

Kurdistan Regional Government Website

http://www.krg.org/articles/detail.asp?smap=02010100&lngnr=12&anr=30161&rnr=223

Wells, Peter ‘Iraq’s Technical Service Contracts-A Good Deal for Iraq?’ http://www.iraqoilforum.com/wp-content/uploads/2009/12/Iraqs-Technical-Service-Contracts.pdf

Biotech Stocks Developing Vascular Disrupting Agents

Anti-angiogenesis drugs are well known as being a growth area in oncology therapeutic development, however vascular disrupting targets or agents (VDA) are relatively unknown. VDA’s are a novel class of drug with the opportunity to have a greater efficacy in fighting cancerous tumors. This article looks at some of the VDA drugs in clinical development trials and the potential chances of success of this type of cancer treatment.

Anti-angiogenesis and Vascular Disrupting Agents in Oncology

In 1971, Dr Judah Folkman outlined the concept of fighting cancer by targeting the blood vessels that nourish the tumor by providing oxygen and nutrients. Anti-angiogenesis drugs are believed to work by regressing and preventing the formation of these blood vessels and ultimately limiting cancer tumor growth. Anti-angiogenesis oncology drugs such as Roche’s Avastin (bevacizumab) have been approved for fighting solid tumors in cancer treatment.

VDA’s work in a complimentary way to anti-angiogenesis drugs, but they have a different mode of action. VDA’s work by directly attacking the endothelial cells, that line the inside of blood vessels, and cause them to die via apoptosis. This is seen to work because tumor blood vessels have a high dependence on endothelial cells as opposed to normal blood vessels which have more support from connective tissue and muscle. The VDA is believed to bind to the tubulin protein found in the endothelial cells and as this binding builds up it causes the blood flow to diminish to the tumor. They are usually used in combination with chemotherapy and in particular are seen as working in lung cancer.

VDA Drugs in Development for Cancer Treatment, Notably for Lung Cancer

Whilst being a novel class of drug, there are and have been a few development programmes for VDA’s

• ZD6126
• OxiGene’s Zybrestat CA4P
• Antisoma’s ASA404 (DMXAA)
• Nereus Pharmaceutical’s Plinabulin (NPI-2358)
• Sanofi Aventis Ombrabulin AVE8062
• MediciNova MN-029
• D6126 was discontinued according to Sui X. Cai
• ZD6126 (ANG453) was discovered by scientists at Angiogene Pharmaceuticals and licensed to AstraZeneca for development. However, it was reported recently that AstraZeneca has discontinued the phase II clinical trials of ZD6126 “

Antisoma ASA404 Phase III for Lung Cancer

Antisoma’s ASA404 was the first VDA to enter Phase III but was discontinued during disappointing trials for non-small cell lung cancer NSCLC in combination with chemotherapy agent Taxotere (docetaxel). Antisoma stated "the planned interim analysis of data from the ATTRACT-1 phase III trial of ASA404 in previously untreated non-small cell lung cancer(NSCLC) has shown that continuation of the trial would be futile, as there is little or no prospect of demonstrating a survival benefit with ASA404 in this setting. The ATTRACT-1 trial will therefore be halted.’

This setback to Antisoma’s lead compound, caused a dramatic fall in their share price and was disappointing because Phase II results in NSCLC were encouraging. However, ASA404 had previously disappointed with Phase II results in ovarian cancer. The ovarian cancer results failed to improve either median time to tumor progression or one year survival rates, as opposed to chemotherapy (Taxotere) treatment alone.

Oxigene Zybrestat (CA4P) Phase II for Anaplastic Thyroid Cancer

OXiGENE have a VDA, Zybrestat (CA4P or fosbretabulin), in development which is being evaluated for solid tumors in multiple trials. Zybrestat works in a typical mode for VDA’s and OXiGENE are developing it for treatment in anaplastic thyroid cancer. Whilst Antisoma’s ASA404 was being tested with Docetaxel, Zybrestat is being tested in combination with a Roche’s anti-angiogenesis drug AVASTIN.

Zybrestat has provided good results in Phase II trials for ovarian cancer and in Septenber 2010, reported initial results for its phase II trial in anaplastic thyroid cancer. Unfortunately, the trial was only able to enrol 80 patients, as opposed to the intended 180. This means that the results of the trial cannot be declared to be statistically significant.

Patients were treated with a combination of zybrestat and chemotherapy and demonstrated a median overall survival of 5.1 months compared 4.1 months for similar patients treated with chemotherapy alone.
Whilst the results are positive, they are not a statistical demonstration of efficacy.
OXiGENE intends to release more analysis of the trial results later in 2010 or early 2011.

On November 19, OXiGENE released more data from the trial in NSCLC

"The updated analysis showed that the median time to progression for patients receiving ZYBRESTAT plus bevacizumab and chemotherapy was 9.5 months, compared with a median time to progression of 8.8 months for patients receiving bevacizumab and chemotherapy alone. Of the patients in the study arm (ZYBRESTAT combined with bevacizumab and carboplatin/paclitaxel chemotherapy), 50% achieved a partial response, compared with the control arm (bevacizumab and chemotherapy) of the trial, where only 38% of patients achieved a partial response. The combination regimen including ZYBRESTAT was observed to be well-tolerated with no significant cumulative toxicities when compared with the control arm of the study."

Nereus Pharmaceutical Plinabulin (NPI-2358)

According to Cai in ‘Small Molecule Vascular Disrupting Agents,’‘NPI-2358 is a synthetic analog of diketopiperazine phenylahistin (halimide), a natural product that was isolated from a marine and a terrestrial fungus Aspergillus’

Plinabulin binds to the colchicine-binding site of tubulin preventing polymerization and disrupting the microtubule network. Preclinical studies indicated plinabulin had a favorable safety and activity profile leading to the initiation of clinical trials.

Favorable data from early clinical studies lead to the initiation of a randomnized Phase II clinical trial in combination with docetaxel. This is similar to Antisoma’s ASA404 trial discussed above. The Nereus trial is ongoing and has an estimated primary completion date set for November 2010.

Sanofi Aventis Ombrabulin(AVE8062)

Ombrabulin is currently being investigated in phase III in refractory advanced soft tissue sarcoma. It is derived from the South African willow bush (Combretum caffrum), with potential vascular-disrupting and antineoplastic activities. In common with other VDAs Ombrabulin binds to the colchicine binding site of endothelial cell tubulin, Phase III studies are taking place in non small cell lung cancer, by Sanofi Aventis. In a phase I clinical trial, Ombrabulin in combination with docetaxel, proved well tolerated and preliminary anti-tumor activity was observed.

Prospects for VDAs, a Novel Class of Drug

The failure of the first drug in Phase III , Antisoma’s ASA404, has cast a cloud over VDA’s and on November 11 Antisoma declared that

"a scheduled interim analysis showed that the ATTRACT-2 trial should stop as ASA404 was unlikely to provide any benefit as a second-line treatment for non-small cell lung cancer."

When probabilities of a drugs success are to be calculated, it is often the mode of action and class of drug that is important rather than the target indication. Therefore, VDAs should still be classed as a novel type of drug.

Nevertheless, Plinabulin in Phase II has a primary completion date set for late 2010 and at a similar time Zybrestat has Phase II results to be fully analysed in anaplastic thyroid cancer. Initial results for Zybrestat are inconclusive due to trial size. Most exciting of all, is that a large cap Pharma, Sanofi-Aventis is trialling Ombrabulin in Phase III. However, despite large cap pharma co’s being more successful in Phase III, it should be noted that Ombrabulin is being tested in the same difficult target indication (NSCLC) as ASA404 proved unsuccessful in.


Sources:

Antisoma RNS
Cai, Sui X. "Small Molecule Vascular Disrupting Agents: Potential New Drugs forCancer Treatment” Recent Patents on Anti-Cancer Drug Discovery, 2007, 2, 79-101
Folkman, Judah ‘Tumor Angiogenesis, a Therapeutic Approach’New England Journal of Medicine, 1971.
OXiGENE website
Thorpe, Philip E. "Vascular Targeting Agents as Cancer Therapeutics" Clinical Cancer Research, Vol. 10, 415–427, January 15, 2004