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The Best of Biotech
10/08/2004 12:00 am EST
The Medical Technology Stock Letter has long been one of my favorite newsletters. Editor John McCamant does an exceptional job of leading investors through the complex, fascinating, and often-risky world of biotechnology. Here's his overview of the sector and some top picks.
"We believe in finding growth investments within the drug development space and we believe biotechnology represents the real sweet spot for that type of investing. The current market cap of Pfizer is $235 billion. The market cap for the entire biotech sector is only $270 billion. So for just a little more than the price of Pfizer, you can buy the entire biotech industry. There are 350 drugs in late stage development and this is what offers us the opportunity. It is late stage results that create the sustainable value. When a company passes the Phase 3 data and shows that a drug works, that allows them to prepare applications to the FDA to get their products approved. These are spots where we can create sustainable long-term value.
"Meanwhile, biotech is dealing with very large and underserved categories. Cancer is a tremendous opportunity. Things like rheumatoid arthritis and osteoporosis offer major opportunity. As for the long-term outlook, I don’t think it has ever been better. We have more companies that have gotten products approved. There are many more in late stage development. The merger and acquisition trends appear to be positive. We have biotechs buying other biotechs. We have big pharmacuetical firms coming in and buying biotechs. Big pharma area has undergone major consolidation in the last several years. One of the things they do when they consolidate is to cut a lot of their research and development and focus on earnings, which keeps Wall Street satisfied. But that makes it very difficult to keep growth going long term, and that leads to them using biotech companies to develop their pipelines.
"You need to diversify within the biotech space. One way is to have a basket of names and own 5 or 10 names in order to spread some of the risk but still find some big winners. In addition we suggest you diversify with different tiers of market caps within the industry. We want to look for sound science. And one of the keys to that science is patents. That’s one of the most important things that comes with partnerships or acquisitions. Any partner will want to make sure that intellectual property is strong, as they will not license a product where someone else can compete. Management, management, management. We see many times where interesting products do not make it to the market because of bad management. On the other hand, we’ve seen companies with almost no pipeline transform themselves into interesting companies."
Here are some highlights from his Medical Technology Stock Letter , covering several of McCamant’s favorite biotechnology plays:
"GenVec (GNVC NASDAQ) is developing gene-based products for the treatment of major diseases, including cancer and cardiovascular and ophthalmologic diseases. Its lead compound is TNFerade, a gene therapy approach to cancer treatment, which works in combination with radiation therapy. TNFerade has produced encouraging data in both the pancreatic and esophageal cancer settings. A pivotal trial in pancreatic cancer -- one of the most difficult to treat cancers -- is slated to begin later this year and wrap up by late 2005 or early 2006. Even a slight improvement in survival will likely get the drug approved, given the dismal prognosis for pancreatic cancer patients and the drug's mild side effect profile. GNVC's market cap of under $130 million certainly does not do justice to the value of their pipeline, and the stock should provide nice returns to investors over the next 18-24 months.
"Allos (ALTH NASDAQ) is a biopharmaceutical company focused on the development and commercialization of small molecule drugs for cancer treatment. The company's lead product candidate is Efaproxyn, is designed to increase the oxygenation of tumors, thereby potentially increasing the efficacy of standard radiation therapy. Furthermore, the ability of Efaproxyn to increase oxygenation means that it may have potential outside of the cancer area, such as in the treatment of myocardial ischemia and stroke. Efaproxyn's mechanism of action offers a key advantage over most drugs, because it does not have to cross the blood brain barrier to treat brain metastases. At a market cap of just over $50 million, this is an attractive long-term opportunity.
"BioCryst Pharmaceuticals (BCRX NASDAQ) has a robust pipeline of product candidates, with a current focus in the areas of cancer, inflammatory disease, and various viruses including SARS, West Nile, and hepatitis C. Lead among these is forodesine, which selectively destroys activated immune system T-cells. Forodesine is in multiple Phase I and II trials in intravenous and oral formulations for T-cell leukemias, non-T-cell malignancies, and other refractory cancers. BCRX' current market capitalization does not even come close to reflecting the strong underlying fundamentals of the company, and we strongly urge you to establish or add to your positions in this stock.
"Millennium (MLNM NASDAQ) has historically been known as a genomics company, however, they have made the transition into a biopharmaceutical, with two products already approved, Velcade and Integrilin, and a deep pipeline of other clinical candidates in the oncology, inflammation, and cardiovascular areas. Right now, all eyes are focused on Velcade. This drug was approved for the treatment of multiple myeloma in the spring of 2003 just four months after the company filed for approval -- the fastest turnaround by the FDA in the history of the sector. Its first approved product, Integrilin, is a platelet aggregation inhibitor approved for use in patients with acute coronary syndrome and for patients undergoing angioplasty, and has the broadest marketing label of the approved drugs in its class. MLNM is a solid long-term opportunity.
"Amylin (AMLN NASDAQ) has made a strong commitment over the years to treating patients with diabetes and other metabolic diseases, and we believe that that commitment is going to continue to result in healthy returns. The company has two first-in-class diabetes product candidates, exenatide and Symlin, that are in late-stage development to treat diabetes -- a disease which needs no introduction, and which has become a global epidemic. The company met their main goal for the first half of 2004 when they and partner Eli Lilly filed for marketing approval of exenatide, their novel injectable which not only lowers blood glucose levels, but also lowers body weight in type 2 diabetes patients. AMLN is our favorite pure play in the diabetes area.
"Nuvelo (NUVO NASDAQ) is a successful transition story, thanks to Mr. George Rathmann, who salvaged the company from its failing genomics business model and helped turn it into the thriving drug development company that it is today. He was the founder of ICOS, and before that, biotech juggernaut Amgen. NUVO has done a great job of filling out their cardiovascular drug pipeline. Lead among these is alfimeprase, their clot dissolving agent which is partnered with Amgen, and which is set to enter pivotal Phase III testing in both peripheral arterial occlusion and catheter occlusion by the end of this year or early 2005. NUVO is without a doubt our favorite pure play as a cardiovascular investment.
"Onyx Pharmaceuticals (ONXX NASDAQ), which is focused on the development of orally active small molecule cancer therapeutics, has fast emerged as one of the most exciting and promising participants in the cancer treatment arena. Their lead product candidate, BAY 43-9006, is an orally active signal transduction inhibitor that exerts its anti-cancer activity by two different mechanisms of action -- by blocking both tumor cell proliferation and angiogenesis (the formation of new blood vessels, which help feed cancer cells). BAY 43-9006 is one of the most exciting anti-cancer therapeutics in development, and could be a homerun for ONXX and their shareholders if approved, and we believe it will be."
"Incyte (INCY NASDAQ) has the formula for success - experience, regulatory know-how, solid science, and a sound financial footing. Its lead product candidate is Reverset, for the treatment of HIV. This could be a major drug, if it can treat patients with mutations. The key player is Dr. Paul A. Friedman, who joined the company in November 2001. In the early ‘90s, he headed the AIDS at Merck Research which brought Crixivan to the market. In 1994, he joined DuPont Pharmaceuticals as president of R&D where he and his team brought Sustiva to market. Dr. Friedman has attracted the vast majority of his team to come and work with him at Incyte. We have the chance to invest in a undervalued biotech company which is run by Big Pharma veterans who have successfully navigated drugs to market. Buy under $10."
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