Chasing the Blues from Your Portfolio

The next time you hear people moan about a tough day, you might remind them they should at least be happy they don’t have a problem that doctors call psychotic major depression (PMD).

As the name suggests, this is a nasty mixture of depression and the delusional thinking or hallucinations that come from psychosis. It affects about 3 million people in the U.S.

Victims of this terrible ailment often have to be hospitalized. But there are no treatments approved by the Food and Drug Administration (FDA). The two that doctors use – a kind of electro-shock therapy or a one-two punch of antidepressant and antipsychotic medications – either have serious side effects or they don’t work well.

So psychiatrists and victims of the disease should be tuned in closely this year as a tiny and lightly-covered biotech company called Corcept Therapeutics (CORT) releases updates on studies on a drug that could offer a fix.

The company – whose researchers have links to Stanford University – believes that the compound mifepristone may help combat the disorder. Mifepristone, also used to terminate pregnancies, may work by blocking receptors for cortisol, a stress hormone that may spark PMD.

Corcept calls the drug Corlux. Early studies completed several years ago found that Corlux helps reduce psychosis in people who have PMD.

The current studies

Now, Corcept has two Phase III studies on Corlux in the U.S. and one in Europe. It also has several studies on safety and tolerability, re-treatment, and the use of Corlux against Alzheimer’s disease.

On the side, the company is working with Eli Lilly (LLY) to determine if Corlux can fight weight gain in people on olanzapine, a drug used to treat schizophrenia, bipolar disorder and dementia related to Alzheimer's disease.

The FDA has granted “fast track” status for Corlux in use against PMD. It has also offered a “special protocol assessment,” which basically means the FDA and Corcept have agreed in advance on how studies should be done so they are good enough for the FDA, at least procedurally.

Near-term catalysts

The key thing for investors right now is that Corcept may be releasing partial results from some of its Phase III studies throughout 2006. If they are positive, that will juice the stock.

The risk is that even though Corcept has other possible uses for Corlux – like treating psychosis associated with cocaine addiction – the company is in essence a one trick pony.

So by owning shares, you are essentially placing a bet that Corlux gets approved for use against PMD. This is what analysts call a “binary event,” which is sort of like betting on a coin toss – either you win or lose.

Many investors shy away from this proposition as too risky. Edward Nash, who follows the stock at Stifel, Nicolaus & Company, for example, has a hold on the stock, using the rationale against “binary events.”

Insider buys

But the significant dose of insider buying in this stock of late tilts the odds in your favor and suggests success is a better than a 50-50 proposition, I believe.

Since the end of January, insiders have purchased around $364,000 worth of the stock. True, chief executive Joseph Belanoff has been selling small amounts. But this is not too troubling to me because he owns 2.9 million shares.

Meanwhile, the company has around $30 million in cash – or about an 18-month supply if the recent burn rate is any guide. The company believes that’s enough to see Corlux through clinical development for the treatment of PMD.

How much is the market worth?

Nash, the analyst at Stifel, Nicolaus, doesn’t publish his model. But a report from him last autumn while he worked at Legg Mason Wood Walker – which was bought by Stifel, Nicolaus – shows he thought the company could earn $1.67 per share in 2008, if all went as planned. Put a conservative 15 time earnings multiple on that, and you’d have a $25 price on a stock that trades now for $4.90. A five bagger like that is usually enough to chase the blues out of your stock portfolio.

The bottom line: I can’t predict with any certainty that this scenario will play out. But earlier tests suggested Corlux works, and the insiders are lining up like that might be the outcome. As tempting as the potential upside is, however, remember to put just a small portion of your stock portfolio in a risky play like this – or less than 4%. In fact, Corcept is best suited as part of a collection of biotech companies you own with the hopes that the few big winners offset all the duds. Because I can predict this: There will always be many big losers in the biotech space.

Disclaimer

At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site.

For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.