April 1, 2006 (Vol. 26, No. 7)
New Technologies and Expanding Pipelines
The 2005 bull market in biotechnology stocks continued to run through the end of February. Biotech stocks tend to do well in the November–February time frame, and 2006 has great momentum so far. Driving this strength are a number of fundamental factors, such as M&A, overall market strength in small- and mid-caps, earnings growth, new product milestones, and increased weighting of biotech in healthcare portfolios. The institutional factor may be the most pronounced, as more money from all types of funds is being invested in biotechnology stocks.
The biotechnology investment model of the past few years remains intact, best described as a food chain effect whereby life science R&D creates product pipelines that are licensed or acquired by larger players, especially big pharma. Investment in the space is also driven by the need for specialty pharmaceuticals to replace revenues lost to generic drugs, since it is estimated that $21 billion worth of drugs are coming off patent in 2006 alone.
Biotech drugs also address niche markets with products that are difficult to copy and manufacture. Thus even big pharma is directing more R&D expenditures toward biotechnology products.
YTD performance with exchange-traded funds in the sector as of March 4 are: IBB $85, up 9%; PBE $19, up 8%; BBH was at $195, down 3%, as smaller-cap issues outperformed large-cap stocks, such as Genentech (www.genentech.com) and Amgen (www.amgen.com),which were both down about 7%, YTD. Among the larger biotech funds Fidelity $68.26 is up 8.9% and the more diversified T. Rowe Price Health Sciences $26.9 is up 7.3%.
IBB exceeded its post 2001 bubble high of $84 but has not approached its all-time high of $102. IBB needs to stay above $70 during the usually weak March–April period to confirm a longer-term track that could exceed all-time highs achieved in late 2000.
The larger-cap weighted BBH $194 hit an intermediate bottom in March of 2005 of $136 (almost a triple bottom from August 2004 low of $130), then soared to a high around $210 in November of 2005. The all-time high was $240 in September 2000.
Scientific breakthroughs, strategic partnerships, and positive clinical results have increased the value of biotech product pipelines, boosting demand for small- and mid-cap stocks.
In this article, we profile four companies that have already captured the market interest, are well funded, have strong pipelines, and are poised to advance to the next tier of biotech market capitalization, assuming positive clinical developments.
Alnylam Pharmaceuticals (www.alnylam.com) is involved in the development and commercialization of therapeutic products, utilizing RNAi technology. The company has fundamental IP, covering structure and function of synthetic RNAi products and is applying its technology to medical needs that it feels cannot be addressed with small molecules or antibodies.
In January of 2006 its IP leadership was supported by allowance of the Tuschl II patents. Its lead program is a Phase I product for respiratory syncytial virus. The firm’s Direct RNAi platform is being directed toward ocular, CNS, and respiratory diseases, while the Systemic RNAi technology can be directed to oncology, autoimmune, and metabolic diseases.
In February, Alnylam announced a collaboration with Novartis (www.novartis.com) to advance RNAi toward pandemic flu. Other strategic partners for Alnylam are Merck (www.merck.com)for ocular diseases and Medtronic (www.medtronic.com)for drug/device combinations in neurogenerative diseases.
Exelixis (www.exelixis.com) is focused on the discovery and development of new drug therapies for cancer and other proliferative diseases. The company is leveraging its fully integrated gene-to-drug platform to expand a broad pipeline now consisting of 12 compounds of which at least seven are in clinical trials.
XL119 is in a Phase III clinical trial for bile duct tumors, XL874 will soon enter a Phase II trial for renal disease, and XL999 is in Phase II for variety of solid tumors.
XL999, a spectrum selective kinase inhibitor, is a potent small molecule inhibitor of key receptor tyrosine kinases, implicated in tumor vasculature and proliferation of some tumor cells. Proof-of-concept from many of these trials are expected in the 2007.
Partners committed to about $400 million of R&D funding include GlaxoSmithKline (12 programs), Genentech, Bristol Myers Squibb, Helsinn, and Wyeth. In December the company signed an agreement with Wyeth for the farnesoid X Receptor, a nuclear hormone and bile acid receptor.
Tanox (www.tanox.com) specializes in the discovery and development of Mabs for treatment of immune-mediated diseases, inflammation, infectious disease, and cancer. Tanox’ Xolair is reportedly the first antibody approved to treat moderate-to-severe confirmed allergic asthma. Xolair generated annual royalties of $29.5 million in 2005 with annual sales of $300 million in 2005.
The company also has a promising pipeline with three products in the clinic. TNX-355, a humanized anti-CD4 Mab, is an HIV viral entry inhibitor that had positive results in a Phase II trial when given in combination with an optimized background regimen.
An IND was recently filed for TNX-650 for treatment of Hodgkin’s lymphoma that is refractory to chemotherapy and radiation. Other programs include TNX-832, an antitissue factor antibody in Phase I/II for acute lung injury and acute respiratory distress syndrome. The company reported net income of $9.8 million for Q4.
tics.com”>www.zymogenetics.com) is focused on the development and commercialization of therapeutic proteins for treatment of diabetes, hemostasis, hemophilia, and autoimmune disease. Products sold through the company’s partner Novo Nordisk (www.novonordisk.com) include NovoLin and NovoRapid for treatment of diabetes, NovoSeven for treatment of hemophilia, and Regranex for wound healing.
The company also has three products in clinical development. rhThrombin recently entered Phase III for control of bleeding during surgical procedures. TACI–Ig is a soluble receptor for treatment of autoimmune diseases, and preliminary Phase I data indicated it was well tolerated for multiple myeloma with no dose-limiting toxicities.
The company also has a strategic alliance with Serono (www.serono.com) for novel protein and antibody therapeutics. Revenues from licensing and royalties were $43 million in 2005.