Idec Is an Ideal Biotech Holding
September 05, 2001 00:09:17 (ET)
In the biotech sector, big companies aren't excluded from potential explosive growth.
IDEC (IDPH, Trade) is one of the giants of biotech with a market capitalization of $9 billion. There's an obvious reason the company is so highly regarded -- it's solidly profitable and was one of the first companies to have a monoclonal antibody approved for use.
Although the company may not offer all the excitement of a smaller biotech, IDEC should be in any serious biotech investor's portfolio.
The shares are relatively expensive at $60 share, or 67 times next year's estimated earnings. However, there are hopeful estimates and then there are realistic estimates. It's highly likely that IDEC's earnings will grow at a very high rate. Its lead drug, a monoclonal antibody called Rituxan, has increased its sales extremely quickly, yet there there's still a long way to go.
Boosting the Dosage Rituxan was originally approved for non-Hodgkins lymphoma (NHL). Although there is still room for growth in that there are still patients that aren't receiving Rituxan, a bigger opportunity comes from a better label that the FDA approved in the Spring. The new label advises doctors to increase the dosage and expands its use to more types of NHL patients. This means, of course, higher sales for IDEC. Although the label was approved in the Spring, its full effects probably haven't fully appeared.
Even better, the drug has shown to be very effective against another form of cancer called chronic lymphocytic leukemia. Only about a third of these patients currently are treated with Rituxan.
Sales rose 86% in the last quarter but it's unlikely they will rise as much in the present quarter because the base is so much higher. Analysts estimate that sales growth is likely to fall to around 70%. Considering that most costs in drug making are fixed, this makes analysts earnings estimates of 15 cents per share in the next quarter look extremely conservative, considering this is the amount IDEC earned last quarter. IDEC is likely to beat estimates this quarter.
Earnings are really starting to kick in for another reason as well. As typical for the type of agreements that biotech's fashion with larger companies, royalties increase as drug sales rise. Since Rituxan has been such a strong seller, IDEC's partner Genentech (DNA, Trade), receives the higher rate now and will likely to continue receiving the higher rate in the future.
Cloudy, but Cash-Rich Future What's more, there's a very strong chance that IDEC's next generation of the antibody will receive approval from the FDA by December. This antibody, called Zevalin, is tagged with a radioactive isotope to improve power for killing cancerous cells. Although Zevalin shows effectiveness, it's doubtful that the new version will replace Rituxan; the side-effect profile (because of the radiation) will probably limit its use to cases where Rituxan has lost effectiveness.
Less encouraging is IDEC's pipeline. The company has three drugs in phase II trials: two for psoriasis and one for rheumatoid arthritis. Although they are aimed at large markets, I am not so keen on the indications.
Psoriasis has been a graveyard for various drug candidates, yet pharma companies continue to be drawn to this extremely complex autoimmune disease. Until someone succeeds, I'll remain skeptical. As for rheumatoid arthritis, any new drug will be entering what is likely to be a crowded field.
This flaw is hardly fatal for the shares. IDEC has a very large cash cushion to expand its research or launch collaborations with other biotechs. It currently has over $800 million in cash and cash equivalents on its books. Even better, operating cash flow is adding (and will be adding) quite a bit more to this pile.
Given this cash pile and the near certainty of Rituxan's sales growth, IDEC looks like a relatively low-risk way to play biotech. It's a good one to pick up, especially on any weakness in the shares' price.
Cyran doesn't hold positions in any of the companies mentioned.
Fred |
