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"Drano for the Arteries"

02/04/2005 12:00 am EST


John McCamant

Editor, Medical Technology Stock Letter

The Medical Technology Stock Letter, which focuses exlusively on the biotechnology sector, is one of the most exciting and interesting newsletters around. Here, editor John McCamant looks at a cardiac play that could be developing a "Drano for the arteries."

"AtheroGenics (AGIX NASDAQ) represents an intriguing investment opportunity for those of you who are more risk inclined. We realize that volatility and risk go hand in hand with the entire biotech sector, but this is a particularly high-beta event that we are waiting for. AGIX Phase III oral small molecule, AGI-1067, looks like a ‘Drano for the arteries,’ and we feel the company is not only significantly undervalued, but a potential blockbuster partnership looms on the horizon. If AGI-1067 can indeed reduce plaque volume, then we think that this stock could be an easy double from current levels. This is a risk that we are willing to take.

"For now, AtheroGenics’ road through Phase III testing and on to commercialization of AGI-1067 is one that still needs to be traveled. The fact remains that inflammation is widely regarded as the fundamental driver of coronary artery disease (CAD), however, and with AGI-1067, AGIX is positioned as the most advanced company in the clinical development of a compound with the potential to reverse CAD. This once-a-day, oral small molecule is currently in the midst of the 6,000-patient Phase III ARISE trial.

"AGIX recently proposed amendments to the FDA regarding its study. The company felt that by increasing the overall size and power of the study, that they would, in turn, increase the overall quality of the final data. AGIX expects to hear back from the FDA with regards to. If all goes as planned, then AGIX anticipates completing enrollment of the trial by the middle of this year, and completing the trial in the first quarter of 2006. The stock took it on the chin when they submitted amendments to the FDA, as Wall Street dislikes uncertainty, and even small delays are often met with harsh selling and shorting reactions by investors. But at the end of the day, for a therapeutic like AGI-1067, which is an oral agent that has shown the ability to reverse atherosclerosis, we have little problem waiting an extra quarter or even two for the data. The wait should well be worth it.

"Meanwhile, AGIX recently completed a private placement of $200 million of Convertible Notes to qualified institutional buyers. With this offering now done, AGIX now has well north of $200 million in their coffers, and an anticipated burn of $85–$89 million in 2005. As such, we feel they are in fine shape to finish their trials with or without a partner. Plus, they have significantly increased their leverage in their partnership negotiations. We don’t think Big Pharma is going to wait around for the ARISE results; in our view the results to date are compelling enough to warrant significant interest from potential suitors. The product has way too much upside potential, and a lucrative deal sometime this year is highly likely. Overall, we believe that AGI-1067 has enormous potential. AGIX is a buy under $25."

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