Vaccine Value

07/15/2005 12:00 am EST

Focus:

Vivian Lewis

Editor and Publisher, Global Investing

Our goal at the Digest is to share investment ideas, not to offer opinions on moral or political issues. For those interested, we feature a review from Vivian Lewis for a biotech firm involved in vaccines, noting that its research includes the use of cells derived from human fetal tissue.

"Crucell Ltd. NV (CRXL NASDAQ) is a five -year-old, small-cap Dutch firm that is barely followed by any US analysts. The market cap is about $750 million and revenues this year are estimated at $35 million. Why am I excited? CRXL has developed yield-enhancing technology for drug companies, and they are lining up around the block to buy it. This technology allows faster and more efficient vaccine production than the current method, which uses fertilized chicken eggs to make flu vaccines. Crucell’s technology will also impact on the $35 billion biotech area where, for example, Genentech uses a 25-year old methods of using lines of Chinese hamster ovary cells to produce its HER2-Neu breast cancer drug.

"Crucell’s value comes from the leverage potential of its unique technology across a broad product range. It won’t make profits for another two years but, when it does, wow. CRXL has over 250 issued patents and signed agreements with 30 drug industry majors. With a big R&D pipeline and plenty of cash, it is less risky than other small startup biotech firms. Unlike small molecule drugs, which can be made synthetically, biopharmaceuticals (therapeutic proteins including antibodies, or vaccines) are produced using living cells like Crucell’s core technology. Crucell uses a unique population of cells derived from human fetal tissue, genetically engineered to replicate indefinitely and provide an unlimited supply of cells that can be used for the production and development of vaccines, therapeutic proteins, gene therapy vectors, or in functional genomics research.

"While CRXL stock is barely covered in the US and I'm am grateful to analyst David Talbot, investment manager of the Medical Performance Fund, LP, whom I interviewed as part of my research. He believes its growth potential is not recognized and he cites recent studies showing that CRXL’s Star technology can boost production yields eight-to-ten-fold. He also cites a deal with Sanofi as an indication of CRXL’s earnings potential. It provides for sizable milestone and other payments, plus up to a 10% royalty on final sales. Talbot estimates potential gross margins of 90%+ on this deal and, he adds, 'with a relatively thin cost structure, most of this increment should drop to CRXL’s bottom line.'

"Its best references are the companies with which it has partnerships or licensing agreements: Sanofi Pasteur for flu vaccine; Merial LLC for foot/mouth veterinary vaccine; Chiron for alphavirus vectors; Medimmune for flu vaccine; Walter Reed Hospital, National Institutes of Health, GlaxoSmithkline, and NYU for malaria vaccine; Merck for hepatitis C and HIV vaccines; Centocor (Johnson & Johnson), Biogen Idec, Eli Lilly, Roche, Merck for undisclosed antibodies; Kimron Institute for West Nile virus vaccine; Mitsubishi Pharma for undisclosed proteins.

"The biggest strategic accord is worth $1.5 billion with Sanofi’s Pasteur sub, which recent won a $97 million contract from the US Department of Health to accelerate the licensure in the US of a cell-culture vaccine and vaccine manufacturing facility for flu vaccine. The US is preparing for a pandemic or other flu health emergency. HHS has agreed to accelerate the clinical trial process by three years. Sanofi Pasteur is constructing a US plant for supplying up to 300 million influenza vaccine doses annually. An Ebola vaccine could be the first CRXL product to reach the market because developing this bioterrorism agent has been fast-tracked. Meanwhile, CRXL announced that Fidelity’s FID Growth Company Fund acquired a 5.13% interest. The stock is up sharply this year, but I think it has much further to go."

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