buy rec for xoma in body of this...
1) ZACKS EQUITY RESEARCH
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With small-cap and mid-cap biotechnology companies finally
making notable headway in phase II and III testing, we felt it
would be an excellent time to check back with Jason Napodano,
CFA, our senior analyst covering pharmaceutical companies,
including those in the biotechnology sector. Jason was able to
help us determine what products in the pipelines are most
promising.
It appears as though biotech is finally making some solid
gains in the market. What's your take on how this is going?
The year 2006 should be another positive year for the
biotechnology industry. The momentum that started early in
2005 should continue thanks to deep late-stage pipelines and
impressive new product launches by some of the industry's
largest players. However, we expect 2006 to be the year when
several mid-cap companies come of age and become large-cap
status.
We are steering investors towards companies with significant
phase II or phase III candidates. Companies that are small in
capitalization, but have the potential to launch billion-
dollar drugs. Three in the cardiology field come to mind:
AtheroGenics (AGIX), Renovis (RNVS), and CV Therapeutics
(CVTX).
AtheroGenics is developing AGI-1067, an oral anti-oxidant
small molecule for the treatment and prevention of
atherosclerosis. Renovis is developing Cerovive, a novel
nitrone compound for the treatment of acute ischemic stroke.
Both of these markets are extremely large and highly
underserved by existing therapies. Coincidently, both
AtheroGenics and Renovis are partnered with EU-based
AstraZeneca for commercialization. We expect phase III results
on both compounds during the second half of the year.
Likewise, CV Therapeutics should be in store for a great 2006
if the company can present positive data on its phase III
candidate, Ranexa. Ranexa is a fatty acid inhibitor for the
treatment of chronic angina and acute coronary syndrome (ACS).
ACS is yet another very large and underserved market. All
three drugs, AGI-1067, Cerovive, and Ranexa have the potential
to be blockbusters (greater than $1 billion in sales).
Is this the story about biotech: small-cap companies with lots
of room to grow?
Well, we continue to like several large-cap names in biotech
also. Amgen (AMGN) made a great move in our view picking up
Abgenix (ABGX) for $2.2 billion in December. Amgen now owns
100% of panitumumab, a phase III EGFR inhibitor that looks
superior to Erbitux. There is a lot more to Gilead Sciences
(GILD) than just Tamiflu royalties! We think the anti-viral
business remains strong, and we expect Gilead to be an
acquirer of more anti-viral or anti-infectant products in
2006. Finally, Biogen Idec (BIIB) should be in store for a
great 2006, given our belief that Tysabri will be (re)-
approved by the FDA around the middle of the year.
But as I mentioned, 2006 should be the year that several mid-
cap names establish themselves as large-cap players. The
coming of age for Celgene (CELG), Protein Design Labs (PDLI),
and Amylin Pharmaceuticals (AMLN) should be fun to watch this
year. Celgene's recently approved Revlimid for myelodysplastic
syndrome (MDS) looks very strong. Additional approvals for
multiple myeloma and other hematological cancers should fuel
impressive growth over the next several years. The story at
Amylin is very similar - a strong new product should drive
well above industry-trend growth. Byetta, for type-II
diabetes, is quickly picking up market share. A long-acting
"Byetta LAR" version could offer multi-billion dollar
potential. The story with Protein Design Labs is very
different. The company has an impressive royalty stream that
consists of blockbusters Avastin, Herceptin and Synagis, but
it is the deep mid-stage pipeline that has us excited. We are
looking forward to seeing data on candidates for cancer and
inflammatory disease throughout the year.
Say I'm looking to find some small-caps with serious growth
potential. Do you have any recommendations along these lines?
We recommend two names here, Xoma Ltd. (XOMA) and Acusphere
(ACUS). Acusphere is developing AI-700, a dry powder,
biodegradable synthetic polymer to be used for ultrasound
contrast imaging. The candidate is in two phase III trials in
the U.S., with data expected around mid-year. For Xoma, the
company continues to sign up licenses for its proprietary
Bacterial Cell Expression (BCE) technology. Xoma also receives
royalties on sales of psoriasis drug Raptiva at Genentech, and
will receive royalties on two new products: Genentech's
Lucentis (macular degeneration) and UCB's Cimzia (Crohn's
disease) once they gain final approval.
What companies should investors be mindful to steer clear of
at this time?
There are several names we would stay away from. We would
avoid investment in Mannkind Corp (MNKD) for the time being.
The company is developing an inhaled insulin product called
Technosphere. We don't see any significant data on
Technosphere in the near-term, and the product is not expected
to reach the market until 2009. By that time there could be
three or four other inhaled insulin products on the market.
We would also avoid ICOS Corp. (ICOS). Development outside of
tadalafil (Cialis) has been limited, and the erectile
dysfunction (ED) market is just not expanding the way we hoped
it would. We still see Cialis as the best-in-class drug, but
until ICOS can branch out beyond the ED market we see a risky
long-term profile.
Going against the grain a little, we would be sellers of
ViroPharma (VPHM) at the current level. ViroPharma, a stock
that was up 500% in 2005, is driven by sales of its leading
antibiotic, Vancocin Capsules. Sales growth of Vancocin is
driven primarily by price increases, and we see the risk of
generic competition emerging sooner than expected. From the
lows of 2005, ViroPharma's stock is up over 1000%. We think it
may be time for a pullback.
Sepracor's (SEPR) Lunesta has been very strong since its
launch early last year. Yet Lunesta will face new competition
in 2006 from Pfizer and Neurocrine Biosciences with Indiplon.
Also, Sanofi-Aventis is heavily marketing a longer-lasting
version of its blockbuster Ambien called Ambien CR. Sepracor
shares have been very choppy of late, and we think it is the
coming competition that has investors spooked.
Finally, we would avoid investment in Trimeris, Inc. (TRMS).
Sales of the company's leading product, Fuzeon, have slowed
over the past few quarters. Competition is emerging from
fusion inhibitors under-development at Schering-Plough and
GlaxoSmithKline.
What are your final words on expectations in the biotech
industry this year?
All in all, we look for 2006 to be a positive year. Several
companies are on our "potential takeout" list, including the
three mid-sized biotechs working on the cardiology products we
discussed above. Two final names we recommend investors keep
an eye on as potential takeout candidates are ACADIA Pharma
(ACAD) and Arena Pharma (ARNA), two small biotechs working on
drugs for central nervous system disorders. ACADIA is looking
to enhance the treatment regimen for schizophrenia and
Parkinson's disease, two rather large markets that attract
major players in the pharmaceutical market. Likewise, Arena
has a phase II candidate for obesity under development that we
see several larger-cap pharmaceuticals potentially interested
in acquiring.
Jason Napodano, CFA is a senior analyst covering the
pharmaceutical industry for Zacks Equity Research. |
