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The Best of Biotech
05/20/2005 12:00 am EST
I went to Las Vegas with high expectations for Scott Gottlieb and his new Forbes/Gottlieb Medical Technology Investor. My assessment? When it comes to intelligent, well-informed, and insightful investment advice, it just doesn’t get any better than this.
Dr. Gottlieb has an intriguing background, beginning at a boutique Wall Street research firm where he specialized in healthcare. He left Wall Street for medical school, and afterwards, became director of medical policy at the FDA, followed by a role as senior advisor on new drug development to Medicare/Medicaid. He explains, "This background in policy impacts the way I look at biotech, a sector, that is very dependent on decisions made in Washington. So in my evaluation of biotech stocks, I look and think very heavily about how regulatory situations will impact individual drugs and individual stocks." Here, he explains how he assesses biotechs and highlights some of his current favorite investment opportunities:
"There are over 1,000 biotech stocks. To limit this universe, we try to break that into three categories of companies, based on the various risks that you are taking in buying those stocks. The first category is discovery stage companies, which have drugs in very early development. They are either pre-clinical, which means they are still in the laboratory and haven’t yet been put into human testing, or they are in the very earliest stages of human testing. What you are really doing here is making a bet on the science of the company, believing that the company will be successful inside their laboratory in terms of finding effective drugs, and moving them into clinical studies and through those studies. So it’s a scientific bet.
"A company that we like in the discovery area is Vertex Pharmaceuticals (VRTX NASDAQ). We first bought at 10 about four months ago and it has since traded up to 13, based largely on news regarding one of their very early stage clinical candidates for Hepatitis C. The data, for which they have only released partial results, probably were the most exciting data I’ve seen on Hepatitis C drug ever. It was a very early stage trial, so this has to be put in context. But the drug looks very effective against the virus, and this is a virus that is a huge market worldwide–and one for which there really isn’t a very effective treatment. Current treatments are only about 50% effective, and they are not well tolerated. If Vertex could come up with a more effective and better-tolerated drug, they could really capture a large part of this market.
"The second area we look at in biotechnology is the development stage. These, in our definition, are companies that have products already in clinical development, usually in later stages, like late Phase II or Phase III. With these companies you are making two bets. One bet is that the drug is going to have a successful path through the FDA process and ultimately get approved, which is why you need some insight into the regulatory process. The second bet you are making is that if it is successful, that eventually the drug will have a broad market. Here, you need to be a long-term holder, because you really won’t know for a few years.
"One company that we like in the development stage is Kosan Pharmaceuticals (KOSN NASDAQ). This is a company we first bought about three months ago and it has since traded up about 25%. This is a cancer-focused company, with less target risk. This means that they are not going after highly novel drug targets, but rather are going after those that have already been validated in other applications. And while they take less risk in the laboratory, their drugs should have a significant market if they are successful in bringing them through development. Importantly, the company has a lot of ‘data points’ to be released over the course of the year. In other words, they will have a lot of news flow. These events will impact the stock based on the success or failure of those results. In the development stage area, investors are playing these news events, and this company has a lot of them coming up.
"The third area we look at in biotech is market stage firms. In this stage, you are really making a bet on the market for the drug. You are saying, these are companies who have drugs that are newly approved or about to come onto the market, and you think that this drug will have a wider market potential than what Wall Street is currently anticipating. Again, because you are betting on a trend over time, you need a longer term view. We also look for drugs where we expect that over time the label will be expanded and be approved for more applications than its original approval. That’s been the story of a lot of biotech products, where they get approved in one indication and they ultimately go on to prove their worth and value in many different diseases, some of which could never have been anticipated.
"One stock we like in this market stage area is OSI Pharmaceuticals (OSIP NASDAQ). Its lead drug, Tarceva, is a pill that inhibits something called EPGR, which is the same molecular target of Imclone’s drug Erbitux. Traceva was approved for lung cancer and it’s now up for FDA approval for pancreatic cancer, which I think will be successfully filed. I think ultimately it will go on and prove its benefit in other cancers. This is a company that could have a very positive new flow. We’re bullish on the drug and we’re bullish on the company. The stock has traded down from the 60s to the 40s, basically on valuation. It was probably overvalued at 60 and it's undervalued now at 40. Over time, I think it will continue to trade up, as the science proves its effectiveness in a wide range of cancers.
"A second company in this market stage phase that we like is Amylin Pharmaceuticals (AMLN NASDAQ), which recently had two products approved for diabetes. One could be a real significant advance in diabetes care. I think the benefits for patients and doctors will outweigh the negatives. The main drawback is that it needs to be injected everyday. (Ultimately, they do have a drug in development that is a long acting version that will only require weekly injections.) What are the positives? Currently, when patients are put on insulin, they begin to gain weight as a function of the drug–and the weight gain eventually makes the diabetes harder to control. But this drug does not promote weight gain and may even lead to weight loss. Any diabetes drug that doesn’t cause patients to gain weight is a significant advance over insulin.
"In addition, this drug may promote some pancreatic regeneration. You get diabetes because your pancreas stops working and secreting insulin. This drug, in some early stage studies, has shown that it can help the pancreas regenerate and start producing insulin again. While early, we can be sure that Amylin is following up on these studies. And at the very least, it suggests that the drug may halt the decline of pancreatic function, which on its own would be a significant advance in diabetes care. The long-term trend for these drugs and this stock look very strong."
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