Multiple Plays on Multiple Sclerosis
10/28/2005 12:00 am EST
"Biotech stock can be very volatile, due to regulatory risks," cautions Ken Kam, portfolio manager for the Masters 100 Fund. Here, he reviews a pair of opportunities that he considers special situations within the biotech sector. Both are a play on developing a drug for multiple sclerosis.
"Elan (ELN NYSE) is a biotech stock. If you look at the balance sheet and income statement of this company, there is nothing to see. They have raised a lot of money and spent a lot of money developing Tysabri, a drug for multiple sclerosis. Unless the drug turns out to be useful, it’s not worth anything. So the way to look at this company is to look at their clinical trial data. The stock had a big drop in February, when Tysabri had to be pulled from the market. However, all the data has now been forwarded to the FDA for review, and I believe there is a very good chance the drug will come back on the market.
"This stock can be summarized as a risk to reward profile. The reward side of the story is that 25% of multiple sclerosis patients have no other alternative, and who will benefit from this drug. The risk side is that there is 0.1% chance that some of these patients will come down with a fatal complication. From the standpoint of the 25% of MS patients who have failed all other available therapies, I think they are going to be willing to take that chance.
"To put this in perspective, a recently completed long-term study shows that if you take aspirin consistently over a long period of time, your chances of having a fatal complication are 0.2%. So if you are comfortable with the risks of aspirin, then I think the risk to reward for letting Tysabri back out on the market are very good. If that happens, this stock could be an easy double.
"Elan’s partner in this drug is Biogen (BIIB NASDAQ). Elan is the more aggressive way to play this story. But the great thing about Biogen is that there are other things that it does that make it a good investment on its own, and the company is already profitable even without this drug. Biogen combined with Idec Labs and, as a result, has a big franchise in a hugely successful drug for AIDS.
"So even if nothing happens with Tysabri, I still believe that Biogen will turn out to be a decent investment. If Tysabri does return to the market, then I think it will prove to be a fantastic opportunity. So if you want to have a somewhat less volatile play on the same story, then Biogen would be the stock to consider. We have chosen to hold both stocks in our portfolio at the Masters 100 Fund.
"I would add that there are some special circumstances that have added to the volatility and risk in this situation. The biotechnology industry is very heavily regulated by the FDA. However, during much of the current administration, there has not been a consistent, ongoing FDA commissioner. The current commissioner, who had only been in office for a few months, recently resigned and we again have another acting commissioner.
"Whenever there is an ‘acting’ commissioner, it is unclear whether the FDA will make controversial decisions or simply ‘put things on hold’. While that makes sense from a bureaucratic standpoint, it can be a disaster for companies. This adds additional regulatory risk for the investor. However, in the case of Tysabri, I just can’t see the FDA telling MS patients who have no other alternatives that they can’t use the drug. It might take longer, but I think that ultimately the right decision will be made."
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