This appeared today on Microsoft Investor. I would expect a spurt
on Monday.
How to Profit from Graft
SangStat isn't just another biotech startup with a hot molecule -- it also has a plan to quickly dominate the organ-transplant industry.
By George S. Mack
If your faltering portfolio of biotechnology stocks is ready for an organ transplant, SangStat Medical Corp. (SANG) might be a name to consider. The small-cap startup from California has launched itself around a rather brilliant business plan instead of a fancy new molecule, and has unusually strong prospects for actually making money some day.
The big idea at SangStat is that the organ-transplant process today at hospitals needs a vastly more coordinated effort of care, drugs and study than any single hospital is capable of offering. So the firm is developing both pharmaceuticals and specialty pharmacies to smooth out the procedure. Already SangStat, which would like to be known as The Transplant Co., has installed its own pharmacies complete with consultants at several of the nation's major organ-transplant centers.
The major leverage in this outfit's story, however, is the potential earnings power of its own new drugs. In a matter of only weeks, the company should be hearing from the U.S. Food and Drug Administration about its therapy for acute organ rejection. The drug, called Thymoglobulin, has an outstanding track record, having been used for a decade in Europe and Canada with experience in over 40,000 patients.
In a gesture that may have tipped its hand, the FDA has requested the drug from SangStat for over 60 compassionate uses in patients where U.S.-approved drug therapies have failed. Donald B. Ellis, a drug analyst at BancAmerica Robertson Stephens, believes final federal approval of the Thymoglobulin would put SangStat into the black -- rocketing the company from a loss of $1.26 per share in 1997 to a gain of 67 cents per share in 1998. Looking out a little further, Ellis believes the company should earn $2.25 a share by 1999; with a rather reasonable price-to-earnings multiple of 24, he puts his target price at $55 over the next 12 months.
Signs of SangStat Success
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If you wait for product approvals and earnings, you've missed a lot of juice.
-- Donald Ellis
The jewel of SangStat's portfolio, though, will be the newly off-patent cyclosporine, the active ingredient in chief competitor Novartis' highly profitable Sandimmune and a newer Novartis formulation, Neoral. The drug helps suppress a transplant patient's immune system to prevent graft rejection. Expected to receive FDA approval during the first or second quarter of 1998, SangStat's own proprietary cyclosporine preparation, Sang 35, has fared well in clinical trials -- at least comparable and possibly superior to Neoral, according to experts.
Novartis (NVTSY) -- the product of the 1996 merger of Ciba-Geigy and Sandoz -- makes everything from insecticides to Gerber baby food. Its Sandimmune and Neoral products currently gross nearly $1.3 billion per year worldwide. Because upwards of 200,000 patients in North America and Europe alone must take these drugs throughout their lives, the $7,000 to $8,000 annual cost is a heavy burden for almost any family. SangStat proposes to give transplant patients a 15% to 20% break every year, thus carving a new market out of an existing one. If the company achieves a 10% share by the year 2000, it would mean revenue of greater than $100 million -- big bucks for a company with only $500 million in total capitalization.
"Good investors own stories right before they become profitable -- before there's an aggressive ramp-up in revenues, profits and earnings. And that's exactly the story you're looking at here. If you wait for product approvals and earnings, you've missed a lot of juice," says Ellis.
Analyst Edmund A. Debler of health-care investment specialist Mehta & Isaly ranks SangStat a "preferred buy," his highest rating. Debler regards his figures as conservative and says he believes the company will earn 58 cents per share in 1998, $1.95 per share in 1999 and $2.70 per share in 2000. His target price: $40 over the next six months, and $68 over the next two years.
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This market has no room for real expansion because you're limited by the number of organs available for harvest
-- Edmund A. Debler
Debler notes, however, that the SangStat story is strong for 1998 based on near-term product news and earnings momentum growth that can only be comfortably projected forward to 2000. "The biggest risk going forward is when to exit after the run-up," he says. "At a certain point, this stock becomes pricey."
Over the longer term, Debler also sees risk that another cyclosporine competitor "would muddle what up to now has been a two-horse event." He further notes that the company could be vulnerable to competition, on the acute organ-rejection front, from an expected new product from Roche Holdings (RCHRF). "This market has no room for real expansion because you're limited by the number of organs available for harvest," Debler says. For that reason, he believes that 1998 will represent the sweet spot for SangStat; after that, he wonders whether valuations can justify continued price appreciation.
Addressing analysts' concerns of a finite market, SangStat Chairman Philippe Pouletty, M.D., says his firm will apply its technology to new problems. "We think our model of business management combining drugs, diagnostics, monitoring products and services is applicable to certain other disease systems," he says. One example: Large, well-defined patient populations with chronic autoimmunity disorders that require high-cost therapies and multiple drugs.
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Pouletty is confident that his firm can weather any potential infringement challenge from Novartis.
Pouletty won't talk share price or earnings, but you can feel his excitement. After years of research, clinical trials, FDA applications, lawyers and investment bankers, he's confident the company is on the brink of greatness.
Asked about products currently under FDA review, the SangStat chief executive observed that the active ingredients in both Sang 35 and Thymoglobulin have been used for years with hundreds of thousands of patients, so "there is less concern about unknown adverse events with these two products." Furthermore, he adds: "We're dealing with indications where life is at risk, and the need for very potent drugs is obvious."
Pouletty is also confident that his firm can weather any potential infringement challenge from a giant pharmaceutical company like Novartis. His firm has a whopping $100 million cash on its books -- representing more than 19% of total capitalization -- that can potentially tide his company over through a court battle. Neither does he worry that Novartis will slash prices in order to maintain market share. Debler, who has run the numbers independently, says Novartis would need to lose 25% to 30% of its market share before it would make sense to cut the price of Neoral.
Over 100 institutions currently own over 60% of SangStat stock, and that could represent big downside volatility on bad news. On the other hand, it's a plus to see institutional sponsorship of that magnitude in a small-cap stock. Insiders own better than 18%, with Pouletty holding a beneficial interest of nearly 4%. Money-management firm Partech International owns 6.1%, and Sequoia Capital owns 4.5%.
Every analyst agrees that SangStat has so far executed exceptionally well on its plan to offer a system of service to doctors, not just a couple of hot drugs. Just Tuesday, for instance, the company announced that biotech giant Amgen Corp. (AMGN) had agreed to distribute Sang 35 throughout the Pacific Rim. And the company has already nicely rewarded shareholders, with a 568% gain over the past three years, while the Standard & Poor's 500 Index has gained just 111% and the American Stock Exchange's Pharmaceutical Index has advanced 171%.
With the analysts saying the best is still ahead, this may be one biotech startup with a healthy future
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