In summary, assuming that the data presented by the company represents the genuine effect of R788 on patients’ blood pressure, it does not seem likely that this issue will have a material impact on chances for regulatory approval or market acceptance. There are many approved drugs that result in increased blood pressure, but as long as this side effect can be dealt with by standard drugs, the benefits of these drugs outweigh the risk. With respect to market acceptance, a slight elevation in blood pressure is not something that may deter patients and physicians because, unlike other side effects, it can be easily monitored and treated. Even if a small minority of the patients has a meaningful increase in blood pressure, it will be detected very early in the course of treatment, without any risk to the patient.  There is obviously plenty of risk with any clinical program, as larger trials that involve prolonged dosing typically uncover more side effects. However, like the company’s CEO said at the ACR presentation, the real risk is in safety issues that might emerge in larger trials rather than the minor safety issues that have been observed so far.

Rigel’s next challenge will be striking a partnership deal for the development of R788, which the company expects to have in place in the first quarter of 2009. Rigel was wise enough to raise capital earlier this year ahead of any licensing negotiation, so it is coming to the negotiation table with more negotiating leverage than most companies in this position usually do. Based on the current stock price, the market is obviously factoring in a substantially less attractive deal, or even a failure to get a licensing deal done by that time frame. On recent company events, company’s officers were going out of their way to reassure investors that the terms of the anticipated deal will not be affected by the ACR fiasco, and that they are still on track for having a partnership in place early next year.

Based on the data presented at the ACR meeting, the excitement around the field of oral drugs for RA, and management remarks, there is a high likelihood that Rigel will sign a lucrative licensing deal it hopes to get. After all, there is a real need for promising drug candidates and there are many companies which would love to get their hands on the second most advanced oral RA drug, right after Pfizer’s compound. It is also noteworthy that potential partners were probably familiar with the data before it got published, so not a lot has changed, fundamentally.

It seems that Rigel managers are not the only ones frustrated by market reaction to the data they submit. CV Therapeutics (CVTX), another company in our biotech portfolio announced last week that its flagship product, Ranexa, had been approved by the FDA as a primary treatment for angina. Ranexa is already approved as a second-line angina treatment, with an annual sales rate of over $120 million, but the recent change should substantially increase its use, particularly given the broad labeling that allows the combination of Ranexa with standard angina drugs and the potential anti-diabetic effect. Despite management’s excitement with this approval, the market and analysts gave CV Therapeutics the cold shoulder, based on the company’s “disappointing” revenue guidance and weak balance sheet.

The company has rights for Ranexa in the US and Japan, after licensing the European rights to The Menarini Group. Although sales of Ranexa are expected to grow at a fast pace, the real near-term catalyst for the stock could be a licensing deal that includes the marketing and distribution of Ranexa outside of Europe. This may also enable CV Therapeutics to better cope with its convertible debt obligations, which amount to $330 million, higher than the company’s expected cash balance for year-end 2008.

We decided to go against the market this time and increase our holdings in Rigel and CV Therapeutics, based on expectations for large partnership deals in the first half of 2009. In addition, we are initiating a new position in Allergan (AGN) and selling Gilead (GILD), Poniard (PARD) and ROSG (ROSG).

Biotech Portfolio as of November 7th 2008