Biotech Turning Research Into Marketed Products
By Debbie Strickland
With ever more biotechnology companiesrounding the Phase III turn and crossing the finish line to marketing approval, the sectoras a whole is poised for a re-evaluation after years of underperformance, industryanalysts said.
As a key measure of the biotechnology’svalue, analyst Mark Simon likes to compare the industry’s total market capitalizationwith that of a single pharmaceutical company: Merck & Co., of WhitehouseStation, N.J.
“The value of the biotech industry isabout $77 billion, and the value of Merck is $127 billion,“ he said. That’s amuch higher margin than the 1992-96 range of $7 billion to $20 billion, noted Simon, ananalyst and managing director for BancAmerica Robertson Stephens, in San Francisco.
“So one could buy the entirebiotechnology industry and put $50 billion in cash with it and that would equal Merck. Yet[biotech has] 350 products in clinical trials whereas Merck has about 25. The industry hasa very deep and rich pipeline.“
Analyst Peter Ginsberg, of Piper JaffreyInc., in Minneapolis, added that “the biotech companies have roughly 20 timesmore drugs [than Merck] in late-stage, Phase III trials.“
Of course, about half those Phase III trialswill fail, and companies that pass the pivotal trial by fire still face the hurdle of FDAadvisors and officials, who can turn today’s sure thing into tomorrow’s alsoran.
Just ask investors in some of 1997’s mostspectacular flameouts, whose shares each closed Dec. 31 down by at least two-thirdscompared with the year’s outset: AutoImmune Inc., of Lexington, Mass.;Cambridge NeuroScience Inc., of Cambridge, Mass.; DepoTech Corp., of San Diego;Hybridon Inc., also of Cambridge; The Liposome Co., of Princeton, N.J.; and Alpha-BetaTechnology Inc., of Worcester, Mass.
Yet these firms, all of which still haveproducts on the market or in clinical trials, were more than outnumbered by theyear’s success stories:
• Aviron Inc., of Mountain View,Calif., whose nasal-spray flu vaccine sailed through a Phase III study, helping thecompany raise $65 million in August.
• Centocor Inc., of Malvern, Pa.,whose FDA-approved monoclonal antibody anti-clotting agent ReoPro drove the company to itsfirst year of profitability.
• Genentech Inc., of South SanFrancisco, Calif., which crossed the $1 billion revenue mark for the first time as itsstock crossed the $60 barrier.
• Idec Pharmaceuticals Corp., ofSan Diego, which, along with marketing partner Genentech, won FDA approval of Ritxuan, thefirst ever anticancer monoclonal antibody to win the agency’s O.K.
• Immunex Corp., of Seattle, whoseEnbrel—tumor necrosis factor (TNF) receptor—aced Phase III trials and attracteda $100 million marketing partner, American Home Products Corp., of Madison, N.J.
• Incyte Pharmaceuticals Inc., ofPalo Alto, Calif., which turned in its first full year of profitability, established newdatabases and collaborations, and capped the year with a December deal to acquire the geneexpression microarray firm Synteni Inc., of Fremont, Calif.
• PathoGenesis Corp., of Seattle,which launched Tobi, an inhaled formulation of the antibiotic tobramycin, for treatment ofPseudomonas aeruginosa infections in cystic fibrosis patients.
• SangStat Medical Corp., of MenloPark, Calif., which has two products under review at the FDA: a version of theimmunosuppressive agent cyclosporine and Thymoglobulin, an anti-T cell polyclonal antibodylicensed from Pasteur Merieux Connaught, of Lyon, France.
Phase III Data Driving Stocks
Most of 1997’s dramaticswings—either up or down—came in the wake of Phase III clinical trial resultsand FDA product decisions.
“Phase III trials are where the mostvalue is created or taken away,“ said David Molowa, an analyst for Bear StearnsCo., in New York. “With positive results you get greater value; with negativeresults you lose the value that was built in and then some.“
Late-stage stories make for a “volatileand bumpy“ market, agreed Simon.
Still, despite the risks, “the markettended to gravitate toward those companies that had more mature products,“ Molowasaid. “The early-stage companies were off the radar screen for the most part.“
“There are enough companies now witheither late-stage clinical trials under way or products before the FDA that those types ofissues have become the driving force,“ said Mary Ann Gray, an analyst with SBCWarburg Dillon Read, in New York.
The individual companies’ ups and downs,plus other factors such as dilution and reliance on a relatively small coterie ofcontinuing investors, contributed to a flat year for the Nasdaq Biotechnology Index, whichslipped 2 percent to close at 303.10 on Dec. 31. The Standard & Poor 500 meanwhilerose 30 percent in 1997—and the major pharmaceutical stocks shot up 50 percent.
“For the group in general, it was afeast-or-famine situation,“ said Molowa. The industry “did a lot of shakin’and bakin’ but ended up pretty much neutral.“
Volatility Can’t Overshadow Fundamentals
Yet, even as volatility — and newofferings — keep the industry down vs. other sectors, biotech’s fundamentalslook better than ever, analysts said.
“We’ve underperformed now for twoyears in a row,“ said Simon, “and yet while that is going on a record number ofbiotechnology products have been approved by the FDA, and there is also a record number of70 or so products at Phase III and about 25 at the FDA.
“The fundamentals of product approvalsand launches look very strong,“ he said, “and we think that should translateinto a better year in 98.“
Simon is looking to Rituxan’s late 1997 launch to set the pace for the new year.
“I think the sales are very strong—they’re going to be ahead of expectations—and we think that theIdec-Genentech launch could be a catalyst for 1998,“ he said, “as it can remindinvestors that the industry does create innovative products.“
“What we’re seeing is our whole thesis beginning to come together,“ said Ginsberg. “We project that there’sgoing to be a doubling of the number of biotech drugs on the market over the next threeyears.“
About 100 biotech drugs have been approved, hesaid, and if half of the more than 200 in Phase III trials at the beginning of 1998 hit,biotech will soon be flush with some 200 products.
Five products, each with a revenue potentialexceeding $200 million, were approved near the end of 1997, Ginsberg noted: Rituxan, Tobi,Regranex (Chiron Corp., of Emeryville, Calif., and Johnson & Johnson, ofNew Brunswick, N.J.), Zenapax (Protein Design Labs Inc., of Mountain View, Calif.,and Hoffman-La Roche Ltd., of Basel, Switzerland), Neumega (Genetics InstituteInc., of Cambridge, Mass.), and Provigil (Cephalon Inc., of West Chester, Pa.).
Of course, once a company gets a product ortwo on the market, analysts and investors soon begin to scrutinize revenues, earnings andexpenses as closely as they once pored over clinical trial data.
For companies like Idec and Protein DesignLabs, which now have products on the market, the key will be “whether or not [theirproducts] meet expectations,“ Molowa said.
“The real important message,“ saidSimon, “is that if you want to play profitable stories, it used to be that you onlyhad three to five names. Now there’s about 15 and the list is growing rapidly. Thereare a lot of companies that are being perceived as real earnings-driven stories, and thatwasn’t the case three years ago.“
Big Five Failed To Excite
As for biotech’s Big Five — AmgenInc., of Thousand Oaks, Calif.; Biogen Inc., of Cambridge, Mass.; Chiron;Genentech; and Genzyme Corp. of Cambridge, Mass. — their product sales anddevelopmental progress largely failed to excite investors in 1997.
“There’s a perception that the topfive companies are not where the action is in terms of new drug development (NDA) and newproduct launches, so those stocks underperformed,“ said Simon.
Still, there are bright spots, such asGenentech, which Simon said may be “re-emerging as one of the industry leaders.“In addition to launching Rituxan, the company hit key milestones by succssfully completingPhase III trials in breast cancer and achieving $1 billion in revenues.
A restructuring Genzyme “looks likeit’ll have a better 98,“ he said. The firm beat revenue forecasts for1997.
Molowa expects another of the five, Biogen, toturn in a “decent performance“ with its Avonex therapy for multiple sclerosisstill growing.
A dark horse in the group is Chiron, whichGinsberg upgraded early in the year to a “buy.“
“We expect a momentum shift tooccur,“ said Ginsberg. “With the new CEO hiring and subsequent moves the companywill make to streamline itself, the stock is ripe for good appreciation in 98.“
As of early 1998, the company was stillseeking a CEO to replace founder and CEO Edward Penhoet.
Companies To Watch
In keeping with the late-stage developmenttheme, the analysts will be watching closely this year companies with products nearingcommercialization or newly approved.
Simon will be looking out for milestones from AlkermesInc., of Cambridge, Mass.; Alteon Inc., of Ramsey, N.J.; Aviron; and GileadSciences Inc., of Foster City, Calif.; MedImmune Inc., of Gaithersburg, Md.;and PathoGenesis.
• Alkermes — The company and partnerGenentech likely will finish Phase III clinical trials of Genentech’s growth hormonedelivered with Alkermes’ ProLease slow-release system.
• Alteon — Data are expected inSeptember from Phase III trials of pimagedine, an inhibitor of advanced glycostatin endproducts (AGE) designed to treat diabetic kidney disease. Genentech signed on as marketingpartner in 1997 in a $200 million deal.
• Aviron and Gilead — Both havereached Phase III with flu products—Aviron’s is a vaccine, while Gilead hasdeveloped a flu prophylactic and therapeutic. Simon expects publication of Aviron’sclinical results in 1998, along with a corporate partnership. Molowa also names Aviron asa company well worth watching.
• MedImmune — Its Synagis forrespiratory syncytial virus could be on the market by the end of 1998, a major event,since Simon is estimating the potential market for the drug at $1.5 billion.
• PathoGenesis — The analyst expects$50 million worth of Tobi sales in 1998, “ and we view that as a successful launchand successful product.“
Ginsberg also likes PathoGenesis,“because we think Tobi will rapidly become standard treatment for cystic fibrosispatients.“ He expects the company to break even in the third quarter, with profits tocome in the fourth — “that will make it one of the elite biotechcompanies.“
Simon’s Robertson Stephens colleagueElizabeth Silverman covers platform technology companies and recommends Affymetrix Inc.,of Santa Clara, Calif.; Gene Logic Inc., of Columbia, Md.; Genset SA, ofParis; and Millennium Pharmaceuticals Inc., of Cambridge, Mass.
“They all share really superb managementteams, and that’s the first criterion I use,“ she said. “And they havetechnologies that position them very well for scientific developments that are going tooccur in the field of genomics.“
The platform companies, Silverman said, tendto be more stable than the product-focused companies, on which so much rides on theoutcome of “binary events,“ such as clinical trials and FDA panel hearings.
“These [platform] companies also tend tobe well-financed by the pharmaceutical industry, so they are not cash poor and they havegood balance sheets,“ she said. “I view them in a down market as the haven forlife-science investors.“
New Deals, New Products Dominate
As for the 1998 outlook, Silverman predicts a“very, very active“ period with more products and more deals.
Gray likes SangStat, along with ConneticsCorp., of Palo Alto, Calif., and Triangle Pharmaceuticals Inc., of Durham, N.C.
Connetics, Gray wrote in a January report, isundervalued for a company with a pending NDA for a product (betamethasone mousse forpsoriasis) with $200 million in sales potential.
The company’s plunge from about $10 ashare to below $5 followed the failure of gamma interferon for atopic dermatitis at thePhase III level.
In December 1997, Connetics acquired rights tomarket London-based SmithKline Beecham plc’s Ridaura for rheumatoid arthritis.
“With a sales force and marketinginfrastructure in place,“ Gray wrote, “Connetics is well-positioned to bring itslate-stage internal products to market as well as acquire additional marketed products.Connetics is fundamentally strong.“
As for Triangle, the company “is not verywell covered [by analysts],“ she said, “partially because most of their productsare in early-stage clinical trials, but they have a broad portfolio of products for AIDSand viral diseases.“
To some extent, the company’s low profileis intentional, Gray said. The firm was founded by viral experts from the former BurroughsWellcome, now part of Glaxo Wellcome plc, of London.
“They run Triangle in a big company way,especially when it comes to raising expectations.“
The company should release interim data fromseveral clinical trials this year, with big news likely this summer.
In addition to PathoGenesis, Ginsburgrecommends Inhale Therapeutics Systems Inc., of San Carlos, Calif., whichspecializes in inhalable powder formulations of protein drugs, as a “strongbuy.“
“We believe that pulmonary drugdelivery—delivery of drugs by inhalation—is going to be an important newmodality for delivery of large-molecule drugs like insulin,“ said Ginsberg. “Wethink Inhale is the leader in that potentially $10 billion market.“
Like Simon, Molowa is watching Aviron, butalso pointed to Vertex Pharmaceuticals Inc., of Cambridge, Mass., and LigandPharmaceuticals Inc., of San Diego as companies with major product-development andregulatory milestones coming up.
At Vertex, the key product is amprenavir(formerly VX-478), an anti-HIV protease inhibitor partnered with Glaxo Wellcome and KisseiPharmaceutical Co. Ltd., of Matsumoto, Japan. With Phase III trials well under way,the companies anticipate a third-quarter NDA.
Ligand is poised to file an NDA for Panretin,its topical treatment for AIDS-related Kaposi’s sarcoma, in early 1998.
Among earlier-stage companies, Molowa likes SynapticPharmaceutical Corp., of Paramus, N.J., which has a migraine drug in Phase IIa trialswith partner Eli Lilly and Co., of Indianapolis, and a Merck-partnered alphablocker for benign prostatic hyperplasia ready to enter the clinic this year. Synapticclones human receptors for use as targets in the design of drugs, specializing in areceptor superfamily known as G protein-coupled receptors.
Milestones Not Always Achieved
A look back at the BioWorld BiotechnologyState of the Industry Report 1997 offers a reminder that milestones are a hit-or-missaffair. The companies then nearing completion of Phase IIIs included The Liposome Co.,Alpha-Beta Technology, and AutoImmune, all of which disappointed.
Other companies highlighted in the reportfared better. GelTex Pharmaceuticals Inc., of Waltham, Mass., found a partner andfiled an NDA for RenaGel, non-absorbed phosphate binder for the control of elevatedphosphate levels associated with chronic kidney failure. The company also advancedCholestaGel, a cholesterol-management product, to Phase III.
Isis Pharmaceuticals Inc., of Carlsbad,Calif., was another company that advanced its cause, with various antisense drugsperforming well in Phase II and Phase III trials.
One of the few earlier-stage companies notedin the report, Vical Inc., of San Diego, launched its naked DNA technology into theclinic, intitiating with partner Merck a Phase I test of a preventative influenza vaccine.The company’s unpartnered anticancer drugs, Allovectin-7 and Leuvectin, continuedtheir progress through mid-stage clinical trials.
While the Vicals, Triangles and Synaptics of biotech havegenerated a healthy swell of interest, the big gains—and losses—in 1998 willalmost certainly come from investments in firms that are either generatingrevenues—and, in many cases, profits—or on the brink of productcommercialization.