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Brian Nichols, NicholsToday (513 clicks)
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What is it that produces the best gains in biotechnology? If you look back on companies such as Pharmacyclics (PCYC) and Jazz Pharmaceuticals (JAZZ) you will see a history of massive returns in a short period of time, which began during the clinical development process. Therefore, what is it that produced such large gains? There are countless biotechs that go through the clinical process which fail to produce gains in the multi-1,000 percentile, so what sets these few companies apart?

In this article I am looking at the criteria that sets these companies apart by assessing stocks that I feel are the best biotechnology investments in history. These are companies that made small investments; performed proper research; effectively developed a product; and then proved all the naysayers wrong. In the process you will see that large gains are a perfect combination of risk, due diligence, and in some ways faith, in the market's most volatile industry.

Cougar Pharmaceuticals' Rare Find

Most folks don't know the story of Cougar Pharmaceuticals. It was a company that acquired an unknown prostate cancer candidate for about $1 million, which then went on to be known as a highly promising approved cancer therapeutic. The company's prostate cancer drug, CB7630, later became known as Zytiga, and was purchased by Johnson & Johnson (JNJ) for almost $1 billion, about a year after Cougar's investment. So therefore ... is this not the best investment EVER?

Cougar turned a $1 million investment into a $1 billion return by performing unparalleled research and executing before purchasing the product. At one time the acquisition of CB7630 was considered a sign of desperation; because after all, no $1 million dollar product could ever become a success (according to some). However, looking back, this is definitely one of the very best investments ever.

In the first nine months of 2012, sales of Zytiga were about $700 million, and most analysts believe it could reach sales of $1.7 billion in the next three years. Accordingly, it looks as though Johnson & Johnson may have gotten itself a good deal for the product as well. And unlike many billion-dollar purchases in biotechnology, Zytiga might be a win for all parties involved.

Is There a Better Historical Investment?

Looking back on history there are countless deals that have created wealth from small investments. But there is something special about a biotechnology company that accomplishes such a feat. Cougar had operating costs of $63.1 million in 2008, following the acquisition of CB7630; but overall it still returned a monster of a profit from its $1 million investment.

There is something extraordinary about a company that sees a product that no one else wanted and then properly develops it, and finally turns it into a blockbuster. Such is the case with Cougar Pharmaceuticals; and despite it being one of the top investments ever, there might be one more that is even better…

Another contender for best investment ever with a deal that may be better (or definitely equally impressive), is Questcor Pharmaceutical (QCOR) and its purchase of Acthar in 2001.

Quesctor: Currently the Best Biotechnology Investment Ever?

Acthar was a product that no one wanted, that had been passed on by every large pharma company, and was finally "given" to Questcor by Aventis. At the time, the complexity to its components and manufacturing compared to its limited sales potential made Acthar "junk" back in 2001. However, as Questcor was facing an imminent bankruptcy, Questcor acquired the product for just $100,000 (basically a giveaway in biotechnology). Back when Questcor purchased Acthar, it was intended to treat infantile spasms, but has since evolved into a treatment for MS, arthritis, and kidney disease.

In the last five years, Acthar has produced sales of $865 million, including $424.30 million in the last 12 months. When you compare the $865 million in sales to the $100,000 purchase price you can see that Questcor's purchase was probably better than Cougar's. As it relates to investors, the stock has returned a gain of 5,000% since the purchase, and had returned gains of more than 12,000% earlier in 2012 when the stock was trading at 52-week highs. Hence, a $5,000 investment could've been more than $500,000 in less than 12 years.

Today, Questcor has seen some selling pressure as insurers have tightened coverage on Acthar. Seeing as how the company has produced such large sales, and such strong gains, it's logical that the stock would pull back on any concerns. However, this remains a product that is growing by more than 100% year-over-year-a product that some analysts believe could achieve annual sales of $1.0-$1.5 billion. Consequently, with a forward P/E ratio of just 6.65 and a complex manufacturing process that prevents generic pressure, it is possible that QCOR rises in 2013 and once again becomes a top investment after investors take gains off the table ahead of regulatory changes.

Is There Another Questcor/Cougar in the Market?

I own Galena Biopharma (GALE), and I've never made it a secret that I believe it could return Questcor- like gains, with a product that reminds me of Zytiga. Keep in mind, it's easy to live in the present and look back on the past and say that Zytiga was a "no-brainer". However, some analysts looked down upon Johnson & Johnson's acquisition of Cougar, and most investors were very critical of Cougar in the infancy of CB7630's (Zytiga's) development.

In the early years, following Cougar's initial studies and interim results, all data looked good, but there was nothing to show Zytiga as having a meaningful overall survival benefit. Furthermore, when it was purchased by J&J, people questioned Cougar's decision to sell itself for a premium of just 16% on the prior day's closing price, as if the company were in a hurry to rid itself of the drug.

Now, fast-forward to Galena and you will see a similar picture. No one really doubts the potential sales of its lead product, NeuVax, if approved. However, much like Cougar and Questcor, the price paid to acquire NeuVax is what makes the company so attractive, but is also what makes it so controversial.

Galena Biopharma acquired NeuVax for less than $7 million, and it has higher sales potential than either Zytiga or Acthar. Since the acquisition, shares of Galena have been on a tear, with a 225% return in 2012, trading with a market cap of $115 million. The company has now partnered with Leica Biosystems and Teva (TEVA) Pharmaceuticals to aid in the clinical development; it has earned numerous patents and intellectual property; and finally it has announced strong clinical data and is beginning a Phase III trial that was built off the strengths of NeuVax.

NeuVax's purpose is to prevent the recurrence of breast cancer, and in December the company announced final results for its Phase II trial that showed only 5.6% of patients' cancer recurred when treated with NeuVax, compared to 25.9% of those who were not vaccinated. Now, we await interim Phase III results in 2013, and there are three factors that give Galena a high probability of success, which could also lead the stock to becoming one of the best investments ever:

  • NeuVax was used to treat both node-positive and node-negative patients in its Phase II trial. However, in the Phase III PRESENT trial it will only be tested on node-positive patients. NeuVax was much more efficient on this patient population. For this reason, the Phase III trial is built around the strengths of the vaccine and the results could actually be better than in its Phase II trial.
  • All of the patients in the Phase III trial will be optimally dosed. In the Phase II trial only one-third of patients were optimally dosed. This was because the folks at Galena were still trying to determine the best way of using the vaccine. After sorting through the results, Galena and the FDA found an optimal dosing level and determined that all patients in the Phase III trial should be dosed with the most efficient level of NeuVax; or the one that showed the best response.
  • All patients will receive booster shots of NeuVax. These boosters have shown a meaningful impact at preventing recurrence as a long-term treatment, and will be incorporated into the Phase III trial. It should be noted that only half of the Phase II patients received booster shots.

So what do these three factors mean? According to Dr. Peoples, "…the overall results of the Phase III trial may be better." If NeuVax is successful, then Galena prepares to enter a large market as the sole treatment and return incredible gains on its investment. However, like all clinical stage biotechnology investments, the key words are "if successful".

Galena bulls have often compared NeuVax to Herceptin (which are being tested together in a Phase II trial). Herceptin is Roche's $6 billion per year blockbuster drug that prevents recurrence in breast cancer patients that express high levels of HER2. As of now, Herceptin targets about one-third of breast cancer patients; NeuVax is believed to target up to 50% of breast cancer patients.

You can do the math: NeuVax was purchased for less than $7 million. It was then examined and redeveloped as a treatment based on its strengths. If successful we're talking about a vaccine that "could" return sales north of $4 billion, possibly $6 billion. This is a stock that began 2012 with a market cap near $30 million due to the cheap purchase price of NeuVax (much like Questcor). Therefore, it's easy to see how Galena could become one of the best investments ever. However, everything depends upon the success of NeuVax and its interim results, data that may be the most highly anticipated of 2013.

Conclusion

Cougar Pharmaceuticals was smart enough to see a product that others considered "junk", and in this competitive market, such an accomplishment is special. It's almost like the New England Patriots and the Washington Redskins finding Tom Brady and Alfred Morris, respectively, in the sixth round of the NFL draft. With such talented experts in the biotechnology industry, such finds are rare, but they do occur.

As we begin a new year, you can rest assured that such a find will occur. It is very likely that the next blockbuster return is in development right now. Or maybe there's a company that recently acquired a product that will result in that company becoming the next Questcor. Either way, these are high risk/ high reward investments. The good news is that it only takes a tiny investment to have a high payoff. But you have to perform your due diligence, think outside the box, and be willing to take a small risk when and if the opportunity presents itself-much like Questcor and Cougar did with two of the best investments ever.

Questcor is facing turmoil, but its accomplishments cannot be discarded. Nor can those of other companies that have successfully succeeded with this strategy. The bottom line: It doesn't take a large investment to return a large gain in companies that succeed in developing a cheaply-acquired biotechnology product. If you can find the next company with this level of potential, then the sky is the limit for your potential gains, while the downside is limited.

Source: What Makes For A Market Leading Return In Biotechnology?