Some reasons for my choices:
(1) Sepracor (SEPR). Even though it has more than doubled from about 40 in late June, SEPR, IMO, has the best risk-reward ratio of any stock I know, although maybe it's not a 6-month or 12-month shooting star. It probably will have a huge income stream starting in 2001 or 2002, maybe $12-$15-$20/share or more in earnings by 2003, with much lower risk than most development-stage med/biotechs, since those revenues will flow from royalty and co-promotion agreement already executed.
SEPR has isolated and patented the single isomer or active metabolite forms (Improved Chemical Entities, or ICE's) of a number of already FDA-approved and big-selling drugs that were developed and marketed in dual-isomer form, where one of the two mirror-image molecules produces the therapeutic effect, and the other is apparently responsible for undesirable side-effects. These include ICE's for: Seldane (now replaced by SEPR's ICE Allegra), Prozac, Claritin, Propulsid, Hismanal, Albuterol, and a couple of dozen others. In some cases, SEPR licenses the ICE to the maker of the "parent drug," getting a licensing fee plus a royalty that will probably average above 10% of sales, and in other cases it will market the ICE itself or co-promote with a larger partner. SEPR's ICE's are immensely attractive to the parent drug makers, whose biggest worry is how to replace the revenue streams from blockbuster drugs whose patents are near expiration. SEPR's ICE's offer a much-extended patent life (the ICE has its own patent, issued more recently than the parent drug's), as well as in many cases a better-selling drug with fewer side effects. The parent drug makers are thus prepared to pay handsomely in a licensing or co-promotion deal, and deals are in place for five of the six drugs mentioned above, with another several under negotiation. These deals may well bring SEPR royalties or co-promotion profits on five or six billion-plus dollar drugs by 2003 or so, with another handful in the years after that.
I like the high potential reward, but I like it even more that SEPR's ICE strategy carries much less risk than most drug-development work. (1) Because SEPR is improving drugs that are already scientifically well-understood and FDA-approved, the risks of bad results in clinical trials and of FDA rejection are much smaller than for wholly new drugs. (2) The cost of FDA clinical trials (extremely expensive for new drugs) is much smaller, because much of the clinical data required by the FDA was amassed (a) when the parent drug was reviewed and approved by FDA, and (b) during its post-approval use in large numbers of patients; accordingly, less money is risked on each potential new drug. (3) Clinical trials take much less time, also because of the previously-compiled clinical data; the successful improved drugs thus reach market much more quickly than wholly new drugs. In addition, risk is reduced because SEPR has a broadly diversified collection of ICE's, so that the failure of a couple or many of them will not hurt SEPR much, and it has a dozen or more chances at blockbusters.
SEPR has an excellent website sepracor.com and a pretty good investor's package. There is also an excellent SEPR thread on SI Subject 7382 -- look especially for PeterSuzman and James Silverman posts. SEPR is also discussed occasionally on the VD's Model Portfolio thread Subject 14492
(2) Monsanto (MTC) has sought to remake itself from an old-line commodity chemicals company to the premier "lifesciences" company, and is probably succeeding. One measure of value is that last spring, AHP agreed to acquire it at about $60/share, but the deal later fell apart. MTC has a large variety of biotech (prominently including ag-biotech) products in the pipeline. MTC's Searle Pharmaceutical unit is near FDA approval for Celebrex, the first of the "COX-2 inhibitors," the next generation of pain medications, and probably a billion dollar drug. Although I think MTC will climb over the years, I'm less sure it will soar in 1999. Good MTC thread on SI Subject 4442 . |
