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Industry Analysis
Mar 08, 1999
Biotech/Drugs: Cancer Drugs: A Great Day for Mice (and Men)
Analyst: Bob Hirschfeld
I picked up some incredibly useful information about investing in biotechs and companies doing work on cancer compounds that I thought would interest you.
I recently attended the Cancer Research conference at the New York Society of Security Analysts and the Bio/CEO conference, held at the New York Palace.
Speaking at the Society, Steven Tighe, a Merrill Lynch pharmaceutical analyst urged investors in cancer compounds to be skeptical. He reminded us that only a small number of cancer treatments achieve $500 million in sales, save for Bristol-Myers Squibb's (NYSE:BMY - news) Taxol and a few others, and the chance of success in a developmental compound is 'very low.'
'A Great Day for Mice'
Tighe cautioned that analysts and investors should 'talk to large companies,' since they usually know very well what compounds the smaller companies are working on.
For example, on the day that EntreMed (NASDAQ:ENMD - news) announced the success of its compound in curing mice tumors, Tighe spoke with the research head of Bristol Myers, who was fully aware of the chemistry, and said: 'It's a great day for mice and we'll see if it's a great day for men.' The Bristol guy was fully aware of EntreMed's chemistry all along.
Tighe advised checking out the intellectual property claims that relate to a compound. You may be surprised. Tighe said he is a 'heavy user' of the U.S. Patent Office web site, and reminded us that some companies, like Merck (NYSE:MRK - news) , are heavily into oncology, though they tend to wait for good late Phase II or Phase III results before they announce news.
Once you start checking, it becomes clear that Merck's oncology patent estate is huge. They simply don't tell the public what they are up to. In contrast, Tighe said many smaller companies trumpet each early-stage success because they need to attract investors.
Tighe's theme amounts to this: while we all want to hit home runs on small biotechs that might double or triple, that's a tough game to win.
Eric Hecht, Merrill Lynch's highly respected biotech analyst, told conference attendees that, while the investment landscape is littered with failed biotechs,' the cancer 'business nonetheless exhibits some very favorable characteristics.'
Hecht said that cancer compounds can be quick to market, given expedited FDA approvals. Cancer is an easy-to-penetrate niche market and there is great pricing power, given the strong demand for good compounds, he added. The life cycle for compounds can be long Hecht said. Indeed, Taxol has been on the market for over a decade.
Late Birds Can Catch Worms Too
Hecht offered investors the following advice: don't try to be too early. Good investment returns tend to be available, with reduced risk, after good data is presented.
Hecht cited the example of Medimmune (NASDAQ:MEDI - news) , which ran from $6 to $12 (pre-split) on speculation about its results, then languished at that level for months, after the efficacy of its results was known to all. The stock then ran to around $50. Hecht's point is that Medimmune, at $6, was far riskier than it was at $12, a level at which it still offered huge returns. This wisdom is worth remembering.
Fast Growing Market
Speaking at the conference, Tony Butler, a Lehman analyst, said his firm projects that the market for cancer treatment will grow to an incredible $70 billion by 2030 from about $6 billion in 1998.
Butler said cancer is driven by demographics, since 80% of all cancers are found in those 55 and older, a growing age segment that is expected to reach 30% by 2025, up from 21% in 2000.
Butler said there are a plethora of new approaches to researching and treating cancer and that from a valuation perspective, shorter clinical trial progression times at the FDA boost the net present values, or NPVs, of compounds under consideration. From an investing perspective, all of Butler's points are positive.
Bill Bradner of Research Advisers reviewed the FDA's thinking behind some recent approvals of cancer compounds. One drug, called Camptosar, from Pharmacia Upjohn (NYSE:PNU - news) , was approved upon the failure of the standard drug, even though it triggers significant side effects and produces only a 15% response rate. The point is that the approval was guided by mercy, since the 'FDA saw nothing left for these patients.'
Bradner also mentioned Gemzar, an Eli Lilly (NYSE:LLY - news) compound that was approved for pancreatic cancer following the failure of the standard regimen. This compound also produced a low response rate, though trials showed an improvement in 'clinical benefit,' a quality of life score, on which measure, the compound showed a 22% improvement, versus 4.6% for standard.
Neither product ultimately showed a huge clinical benefit. One tended to prolong life for a few months, while the other helped patients feel better. Still, both products were approved and are on the market.
The point for investors to draw is that the regulatory backdrop for companies with cancer compounds in development is extremely favorable.
All told, both conferences were illuminating. As investors, we learned to be a little more suspicious of small companies than their larger brethren, and to wait for positive Phase II or Phase II results before buying stock.
As analysts, we took note of the positive regulatory backdrop, favorable demographics which will draw more money into cancer treatment R&D and the fact that shorter approval cycles mean higher compound valuations.
Bottom Line:
While no company has the proverbial 'cure for cancer,' you'd be making an enormous oversight not to notice that the current environment for cancer treatment is pretty darned favorable.
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