Nola E. Masterson
Managing director, Science Futures (www.sciencefuturesinc.com)
The biotech stocks underperformed the broader market indices in 2007. The sector had continued volatility led by hedge funds, which now play a major role in the ownership of biotech stocks. The American Stock Exchange’s biotech index, which tracks several bellwether stocks, rose about 5%. The Nasdaq Stock Market’s biotech index, which covers a broader range of small- and mid-cap stocks, rose about 5.6% in 2007.
Historically, pharmaceutical companies have been defensive plays that would have done well in chaotic markets, because their earnings are somewhat immune to economic downturns. Biotech and pharma firms are now indistinguishable as a group, and the path to new molecule approval is just as difficult for big and small companies alike. The American Stock Exchange’s pharmaceutical index slipped 2.4% on the year.
It is accepted wisdom in biotech investing that prices climb as development-stage hurdles are cleared and so does a firm’s value. As risk declines, value increases. Over the last few years, however, this wisdom has been tested by a large number of companies that have not been rewarded by the market until late in the process. FDA approval to market a new drug is now needed to lure backers. In fact, even the agency’s requirement of postmarket data can influence the price of the stock.
The need for financings remains high for biotech companies. Approximately 20% of the firms burning cash in the BioWorld Stock Report universe have less than a year’s worth of operating cash on the balance sheet, and 60% have less than two years cash. Also, approximately 36% of these companies are burning around $2 million per month.
Big pharma, on the other hand, is flush with cash. The 15 companies in the Amex Pharmaceutical Index collectively hold $87 billion. Six other major companies based in Europe and Japan have an additional $58 billion in cash.
Many companies have completed stock offerings this past year, and more will be available in 2008. Introducing new institutional investors, however, did not propel the stock price. U.S.-based institutional and individual investors no longer back public development-stage biotech companies. The remaining European institutional investors are now redeeming from biotech/healthcare funds at an unprecedented rate. This makes it unlikely the current depressed prices in development-stage biotech firms will change significantly in 2008.
Secondary activity will continue to exceed IPO issuance in the coming year. Rule 415 interpretations are likely to slow private investment in public equity activity. Public biotech companies will need to access the capital markets over the next 12 months without regard to market conditions, possibly leading to market terms that deteriorate from current levels.
Strategic activity will be magnified in 2008 by modest public valuations relative to the supply of quality M&A targets having late-stage compounds validated in large clinical trials. In general, M&A-induced demand for equity products will continue. By October 2007, there was over $25 billion in equity removed from U.S. markets through cash acquisitions.
Recommendations for 2008 include:
• Amgen lost 31% during 2007, as the FDA slapped its toughest warning label on Aranesp. Also, Vecitbix failed to show increased survival in colon cancer, and the company laid off 1,500 employees. It may be a good time to accumulate, as sustained earnings will be maintained by cost-cutting measures, and the company posseses a great pipeline of clinical-stage compounds through it recent acquisitions.
The company’s principal products include Aranesp, Neulasta, Neupogen, Epogen, and Enbrel.
• Biogen Idec has four products: Avonex, Rituxan, Tysabri, and Fumaderm. Cell Therapeutics (CTI; www.cticseattle.com) has completed its acquisition of Zevalin® from Biogen Idec, giving CTI sole responsibility for marketing, sales, and development of the drug in the U.S. The drug will continue to be sold outside the United States by Bayer Schering. Zevalin was approved in 2002 to treat patients with relapsed, indolent non-Hodgkin’s lymphoma.
Biogen Idec’s gross margin is more than 91% of other companies in the biotechnology and drugs industry, which means it has more cash to spend on business operations as compared to its peers. As indicated by the operating margins, the company controls its costs and expenses better than 94% of its peers. Tysabri, the firm’s expensive treatment for MS will continue to gain momentum in 2008, and the company expects to have 100,000 patients enrolled by 2010. With the failure of Biogen Idec to find a buyer for itself, the stock has been depressed. Yet it earns over $3 a share. This stock may be a bargin if it continues to slide while looking for a buyer.
• Generex Biotechnology (www.generex.com) is an undercovered gem working in the research, development, and commercialization of drug delivery systems and technologies. It is engaged in the development of technologies and formulations of large molecule drugs delivered to the oral cavity, using a hand-held aerosol applicator. The company has products in development for metabolic and immunological diseases.
The stock has been quite volatile, as the company has made announcements that its Oral-lyn insulin product had been licensed for commercial use in India. In October, a similar license was obtained in South Africa. The company is in the process of securing approvals to market the product in various Middle Eastern countries. The glucose spray products utilizing RapidMist buccal delivery technology have been launched in retail outlets in the U.S. and Canada. Currently Oral-lyn is in Phase III testing in North America.
The number of Indians with diabetes is projected to reach 73.5 million in 2025. The direct and indirect costs of treating such patients are currently about $420 per person per year. If these costs remained the same as they are now, India’s total bill for diabetes would be about $30 billion by 2025.
As its economic wealth grows and standards of care improve, though, treatment costs are likely to rise. The U.S. spends an average $10,844 per year on each patient with diabetes. If India’s per capita expenditure rose to just one-tenth of this level, the total cost of treating all patients with diabetes would be $79.7 billion by 2025.
• Genomic Health (www.genomichealth.com) is focused on the development and commercialization of genomic-based clinical diagnostic tests for cancer. The company’s first instrument, Oncotype DX, is used for early-stage breast cancer patients to predict the likelihood of cancer recurrence, the likelihood of patient survival within 10 years of diagnosis, and the likelihood of chemotherapy benefit.
Government insurance plans, as well as many private insurers, already cover the test for early-stage breast cancer patients. The test became a standard of care this year by ASCO, which means it will be used extensively over the coming years.
Genomic Health developed Oncotype DX using a multistep approach, conducting clinical studies on tumor specimens from more than 2,600 breast cancer patients. Oncotype DX has been clinically validated for node negative (N-), estrogen receptor positive (ER+), tamoxifen-treated breast cancer patients.
Oncotype DX measures the expression of 21 genes of an individual tumor to generate a Recurrence Score result that quantifies the likelihood of recurrence and the magnitude of chemotherapy benefit for a large portion of early-stage breast cancer patients. Its genetic test can help predict when chemotherapy is likely to benefit women with breast cancer that has spread to the lymph nodes.
Researchers ran the test on hundreds of tissue samples from a breast cancer trial that began in the late 1980s. The study also used survival data from the prior trial. Results showed that the test could aid in deciding when to give chemotherapy to tamoxifen-treated, postmenopausal women with so-called estrogen receptor positive breast cancer that has invaded the lymph notes.
The company also reported positive results from a study showing that the Oncotype DX Recurrence Score provides additional prognostic information in patients with early-stage breast cancer beyond that derived from Adjuvant Online, a tool that evaluates clinical variables to help physicians and patients assess the risks and benefits of getting additional therapy after surgery.
• Gilead Sciences is a leading biopharmaceutical company that discovers, develops, and commercializes therapeutics in areas of unmet medical need. The company primarily focuses on the development and commercialization of human therapeutics for life-threatening diseases. Gilead announced European Commission approval of Atripla for treatment of HIV. Commercial launch is expected in early 2008. Gilead had a great run up in 2007 and it could see more upside as the products continue to expand market share.
Gilead’s products include Truvada, Viread, Atripla, Emtriva, Hepsera, AmBisome, Vistide, and Flolan. The company receives royalties from other drugs including Tamiflu, Macugen, and DaunoXome. Gilead has operations in North America, Europe, and Australia. In August 2006, the company acquired Corus Pharma. In November 2006, Gilead acquired Myogen and Raylo Chemicals.
• Illumina (www.illumina.com) develops manufactures and markets next-generation, life-science tools and systems for the large-scale analysis of genetic variation and biological function. The company estimates it will reach a net income between $69 million and $71 million for the year on revenues between $354 million and $358 million. The past five years have seen this stock grow 250%.
Illumina’s products and services are low-cost, high-value with good accuracy, which have, therefore, become the operating system for diagnostic tests in genomic and personalized medicine. The company provides a line of products and services that serve the sequencing, genotyping, and gene expression markets. Its customers include genomic research centers, pharmaceutical companies, academic institutions, clinical research organizations, and biotechnology companies. The company’s tools allow researchers worldwide to perform genetic tests needed to extract valuable medical information from advances in genomics and proteomics. In January 2007, Illumina completed the acquisition of Solexa, which develops and commercializes genetic analysis technologies used to perform a range of analyses including whole genome resequencing, gene expression analysis, and small RNA analysis.
• La Jolla Pharmaceutical (www.ljpc.com) is engaged in the R&D of technology and potential drugs to treat antibody-mediated diseases. The company’s lead product in development, Riquent, is designed to treat lupus renal disease by preventing or delaying renal flares. The FDA has given Riquent orphan drug designation specifically for the treatment of lupus. European regulators have granted Riquent a similar form of protection but for 10 years. The company recently raised $38 million in a secondary offering and has supporters who are willing to hold long.
Riquent was developed based on the company’s Tolerance Technology and comprises a lupus disease-specific epitope attached to a carrier platform. La Jolla Pharmaceutical has designed Riquent to suppress the production of antibodies to double-stranded deoxyribonucleic acid (dsDNA) in lupus patients without suppressing the normal function of the immune system. In March 2007, the company announced positive interim antibody results from its double-blind, placebo-controlled, randomized Phase III trial of Riquent.
• Pharmasset (www.pharmasset.com) is committed to discovering, developing, and commercializing novel drugs to treat viral infections. The company’s primary focus is on the development of oral therapeutics for the treatment of HIV, HBV, and HCV. Its R&D efforts focus on a class of compounds known as nucleoside analogs, which act to inhibit the natural enzymes required for viral replication.
Pharmasset has three product candidates, two of which it is developing alone, and one of which the company is developing with Roche (www.roche.com). The three compounds include clevudine for the treatment of HBV, Racivir for the treatment of HIV in a Phase II trial, and R-4048, a prodrug of PSI-6130 for the treatment of HCV. The company has a small market cap of $300 million, so good news and good data should help propel the stock higher. The company is sitting on approximately #65 million in cash and a big pharma partner to take on the clinical costs. This was one of the best IPOs of 2007.
The analog drug is a small chemical variation of the natural nucleoside that inhibits the activity of the enzyme leading to disruption in replication. This approach has an edge, because the natural nucleoside gives it a great starting point for developing a drug in addition to a potentially low side-effect profile and resistance to mutation. The disadvantages include limited potency and slow metabolism.
The hepatitis C program utilizes a prodrug, which means it gets metabolized into the active drug after it enters the body. The company released data in the fourth quarter showing positive Phase I data, with a 2.7 log reduction of viral load after 14 days in patients that have failed to respond to standard therapy.
• Sirtris Pharmaceuticals (www.sirtrispharma.com) is focused on discovering and developing orally available, small molecule drugs with the potential to treat diseases associated with aging, including metabolic diseases such as type 2 diabetes. The stock has recently been hit with venture selling and the value of the stock is in the low end of its range.
The company’s drug candidates are designed to mimic certain beneficial health effects of calorie restriction, without requiring a change in eating habits. The compounds do this by activating an enzyme called SIRT1, a member of a class of enzymes called sirtuins. SIRT1 activators lowered plasma glucose and improved insulin sensitivity in a preclinical model of type 2 diabetes as well as or better than sitagliptin, a DPP-4 inhibitor. In addition, in an intraperitoneal glucose tolerance test, Sirtris’ SIRT1 activator was shown to control glucose exclusion as well as sitagliptin in this preclinical model of type 2 diabetes. In contrast to DPP-4 inhibitors, which lower glucose, SIRT1 activation appears to both lower glucose in these models and also sensitize them to insulin.
• Repros Therapeutics (www.reprosrx.com) is focused on the development of new drugs to treat hormonal and reproductive system disorders. It addresses the limitations of existing medical/surgical treatments for women in particular. Repors is developing Proellex, a selective blocker of the progesterone receptor in women, for the treatment of uterine fibroids and endometriosis. Its second drug, Androxal, for secondary hypogonadism, has shown data that may extend its use into metabolic syndrome and diabetes. Based on the two drugs with multiple indications this company appears undervalued and looks to be an attractive investment opportunity for small-cap healthcare investors.
The company’s development program has shown promising safety and efficacy data for Proellex. The outcome of its type B meeting held with the FDA in November 2007, put Proellex in Phase III trials for the treatment of uterine fibroids. In addition, Repros also discussed conducting clinical trials for a new indication as a short-course treatment of anemia due to excessive menstrual bleeding associated with uterine fibroids.
During the course of the meeting, FDA agreed that Proellex, indicated as a presurgical treatment for the correction of anemia associated with excessive bleeding due to the presence of uterine fibroids, is acceptable. The agency suggested that this indication would be best considered under a separate IND application. Repros will submit an IND application to commence two Phase III studies for the indication as soon as possible.
The company also reported top-line Phase III results on Androxal demonstrating that the drug increased blood serum testosterone levels to normal physiological levels more effectively than both placebo and the leading marketed competitor, Androgel.
Wyeth is one of my shorts for 2008. The company’s shares are falling on concerns that its blockbuster heartburn drug, Protonix, could face generic competition sooner than expected. Earlier this week, Teva Pharmaceutical Industries (www.tevapharm.com) reported the launch of a generic version of Protonix, even though Wyeth’s patents are not due to expire until July 2010. Wyeth said in December 2007, that it plans to sue Teva for patent infringement. Any lost profits sustained because of the launch would make for unrest in the stock.