sugn a buy over enmd, oxgn
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EntreMed -- the trouble with biotechs and cancer drugs
EntreMed's had a bumpy ride in development of cancer agents. Here's why the stock's still risky and a long shot -- just like competitors OXiGENE and Sugen.
By George S. Mack
Cancer patients and their families want to wake up in the morning and hear about the magic bullet that's going to cure their disease. For different reasons, investors also await the miracle. So it's not surprising that expectations get out of whack as the press tries to report on promising data.
On May 4, 1998, lots of eyebrows were raised -- not to mention the stock price of an obscure $150 million biotech firm called EntreMed (ENMD) -- when The New York Times published a story saying that EntreMed was to begin clinical trials within the next year on two cancer agents that showed great promise in wiping out tumors in laboratory mice.
EntreMed's share price zoomed 330% in a single day, ending at $51.81 a share, with twice as many shares changing hands as there were shares outstanding. Internet stocks must have turned green with envy.
The big idea was that EntreMed's molecules, Angiostatin and Endostatin, could choke off tumors by shutting down their blood supply. And it seemed to work beautifully in lab animals. These angiogenesis inhibitors -- so named because they prevent new blood vessel development in growing tissues as well as growing tumors -- were to go into the clinic for human trials within a year.
Deciding to pass
But then in February of this year, almost like a textbook lesson for biotech bulls, speculators received a dose of bad news: EntreMed's deep-pocket partner and licensee, Bristol-Myers Squibb (BMY), announced that Angiostatin was just too difficult to manufacture in large quantities with any consistency and effectiveness. So the large pharmaceutical, in effect, decided to pass.
Even with this huge disappointment, EntreMed, at a recent price of $25 per share, is still trading at more than twice the market value before the Times story was published last May. But biotechnology analyst Balaji Kavety of Fechtor, Detwiler says the $332 million EntreMed is still too rich for his blood. Although he has it rated "long-term buy," he believes the company, relative to similar stocks, is "overvalued."
Kavety says with only $26.1 million in cash and equivalents, it's doubtful that EntreMed could carry the clinical trials of both Angiostatin and Endostatin on its own shoulders. He also says halting of Angiostatin development by "high-profile" Bristol-Myers Squibb likely will discourage other pharmaceuticals considering an alliance with EntreMed -- at least for now.
"They need a partner," says Kavety. "And when that happens, their prospects will be greatly improved." He currently has no target price on the company.
So who are EntreMed's competitors, and how are they faring in this same process?
OXiGENE's approach
Kavety speaks with cautious excitement about Swedish micro-cap OXiGENE (OXGN), which is developing three technology platforms of therapy, each designed to attack cancer from a new angle. Kavety rates OXiGENE a "speculative buy" with an emphasis on the "speculative." He says the company's angiogenesis inhibitor, Combretastatin A-4, a naturally occurring plant derivative, could be very exciting.
Now in Phase 1 clinical testing, Combretastatin has been highly effective -- even in doses one-tenth the maximum tolerated dosage, explains Kavety. And 24 hours after injection, 95% of cancer cells in lab animals have died; the remaining cells are kept alive only by passive assimilation of nutrients and oxygen from adjoining healthy tissues.
He says, "There's a chance that Combretastatin could work. If it does, it's a huge opportunity, but if not, I'm not too positive on the company." With OXiGENE recently trading at $9.25, Kavety says his target price range for the company, which has a $94 million market capitalization, is $16 to $20 over the next 12 months.
Sugen's cancer drug
There's no doubt where Kavety's favor lies. He rates Sugen (SUGN) an outright "buy." "We think it's grossly undervalued," he said. On June 4, the FDA gave its approval for the company to jump its small molecule angiogenesis inhibitor SU5416 cancer drug all the way from Phase 1 to Phase 3 trials for colo-rectal cancer and some forms of lung cancer. "Skipping Phase 2 is very positive for the company," said Kavety. On April 4, SU5416 was featured in a generally favorable story on a segment of CBS' "60 Minutes."
Sugen's most-advanced drug candidate, SU101, is in a different class of drug. This small synthetic molecule inhibits certain signaling mechanisms in the cell. Today, the drug is in Phase 2 clinical trials for hormone resistant prostate cancer and may move to Phase 3 by the end of this year or the beginning of 2000. That same SU101 is also in Phase 3 trials for an aggressive form of brain cancer.
Sugen's latest candidate, SU6668, is going into Phase 1 clinical studies sometime this year. The company says that because the drug may ultimately have very broad applications, it could be the most important anti-tumor agent in its portfolio.
Rating Sugen a "buy," senior biotech analyst Richard van den Broek of Hambrecht & Quist says this latest compound gives the company a total of four ongoing clinical development programs -- three of which are anti-cancer agents. He says SU6668 belongs to a "novel class" of drugs that can stop cancer cell growth while also acting as angiogenesis inhibitors. Van den Broek, however, cautions that with several different mechanisms of action, toxicity is a concern with SU6668.
It's just too early
With regard to angiogenesis inhibitors in general, the H&Q analyst says, "Theoretically the market for these agents could be enormous in terms of treating cancer and a variety of other conditions." He mentions, as an example, age-related macular degeneration, which is characterized by abnormal blood vessel growth in the retina that can lead to blindness.
Van den Broek said stopping blood vessels from growing where they're not supposed to grow could be extremely valuable. As for the size of the potential market, he said, "Put any number on it you want -- as high as you want -- but it's too early to get excited about these therapies."
Sounds like good advice. EntreMed, OXiGENE and Sugen trade on news -- bad as well as good.
As for EntreMed, it's not all bad news. On May 17, at the American Society of Clinical Oncology meeting in Atlanta, the company announced that Phase 1 human trials of Endostatin would begin at three different cancer centers selected by the National Cancer Institute.
Meanwhile, news of any earnings won't enter the picture until far in the future. If you go into any of these stocks, expect the worst and hope for the best.
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