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Stock of the Day
Sep 01, 1999
BioChem Pharma: Looking to Join the Party
BioChem Pharma (Nasdaq:BCHE - news) seems to have all the characteristics of a top-tier biotech stock --
profitability, multiple products on the market, a multibillion dollar market cap, and a pipeline that will diversify its target
markets. Yet the stock has seriously lagged the biotech rally of the past two years. One issue has been its dependence
on Glaxo Wellcome to sell its products. BioChem Pharma hopes to change that.
This Quebec-based company developed the top-selling HIV drug in the world, lamivudine, marketed as 3TC, Epivir
and Combivir. Late last year lamivudine received FDA approval to treat another potential blockbuster indication,
Hepatitis B. But BioChem Pharma licensed the marketing rights to Glaxo Wellcome (NYSE:GLX - news) in all but Canada and only receives royalties on
sales of these formulations.
Now the company is trying to transition from a research oriented, royalty supported biotech firm into an integrated biopharmaceutical company. With its
own sales and marketing force, BioChem Pharma would stand to benefit much more from its pipeline of new products. Biogen made a similar transition a
few years ago and shareholders liked the results.
As part of this transition, BioChem Pharma announced a deal in June to buy back part of Glaxo's stake in the company, paying $160 million for 8 million
shares of BCHE. These shares will be retired, and Glaxo's stake in BioChem Pharma will drop to 5.3% from 12.2%.
The evolution to an integrated biopharmaceutical company will take several years to occur and is dependent on the successful commercialization of new
drugs for which BioChem Pharma retained the marketing rights. The company has a new HIV drug with Phase II trial results expected later this month,
and a cancer treatment expected to move into Phase II trials soon. BioChem Pharma is also actively developing a vaccine pipeline including a nasal spray
flu vaccine.
Until those new products navigate the lengthy road through FDA approval, BioChem Pharma will have to depend on royalties from sales of lamivudine.
As an HIV treatment, 3TC/Epivir is expected to ring up $1 billion in sales this year. As a treatment for Hepatitis B, Zeffix got off to a slow start.
Disappointing Zeffix sales earlier this year hurt the stock, but regulatory approval in China and expected approvals throughout Asia and Europe lay the
groundwork for a very big market opportunity.
The market for treating Hepatitis B virus is astonishingly large. The World Health Organization reports that Hepatitis B, which can lead to fatal liver failure,
is the ninth leading cause of death. Approximately five percent of the world's population, or 350 million people, are chronically infected. An estimated one
million cases of chronic Hepatitis B exist in the US, and only a small percentage of patients have received treatment. BCHE's drug is not only more
effective than the current standard treatment in preventing the virus from replicating, but has fewer side effects and is much cheaper. Sales of lamivudine
for treating Hepatitis B could ultimately dwarf the HIV market.
Meanwhile, 3TC sales are expected to get a boost from recent advances in combination therapies for HIV patients. Only a third of potential users
currently use 3TC, so the introduction of several new therapies with which 3TC could be used in combination should boost the market for the BioChem
Pharma/Glaxo drug.
Analysts are forecasting earnings growth in the neighborhood of 25%, both for this year and over the next five years. The stock price has shown some life
in the past few months, but BCHE is still trading at a significantly lower P/E multiple than the big names in biotech. Near $26 currently, BCHE has a
Price/Earnings ratio of 28.5 using the 1999 consensus estimate, compared to Amgen (Nasdaq:AMGN - news) at 41.3 and Biogen (Nasdaq:BGEN -
news) at 56.8.
While BioChem Pharma is not quite in their league yet, the recent upswing in the stock price may reflect a growing appreciation for its existing and
potential blockbuster drugs. Perhaps as its current pipeline of drugs nears commercialization in the next few years, the market will give BCHE credit for
more than its HIV drug franchise.
The transformation into an integrated biopharmaceutical company will take several years to accomplish, but if BioChem Pharma's pipeline comes through,
its days as a laggard stock may be numbered.
- James Hale
The Online Investor
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