The Best Unknown Biotech in the World

If I told you that there is a Swiss Biopharmaceutical Company that has an enviable success record that even Genentech (DNA) would be proud of; that it was founded in 1997; has revenues in excess of a billion dollars a year; gross margins in the high 80s; and that its stock has not lost any value if you held it from Jan 1, 2008 to today; and while Fidelity owns 6% of the outstanding shares of the company, it is tracked by TWO US based analysts (that includes me), could you name it?

It has partnerships with Glaxo SmithKline (GSK), Hoffman LaRoche, Merck (MRK), and its most significant future product candidate is an orexin receptor antagonist/almorexant that is supposed to restore sleep. In other words, it will be [if successful], the next best thing for sleep since Ambien. It is in Phase III. Its arithmetic chances of success is less than ten percent, but given the fact that I am familiar with a bit of the research, I give it a one in three chance of success - which will vault our Swiss biotech into the rarefied world of Gilead Sciences’ (GILD) valuation.

Here are the financials:

(in CHF thousands) EOY Dec 31	2003	2004	2005	2006	2007
Product sales	300,315	455,346	647,556	924,141	1,292,083
Contract revenue	7,229	16,534	16,033	21,532	25,309
Total net revenue	307,544	471,880	663,589	945,673	1,317,392
Operating expenses:
Cost of sales	31,816	45,873	65,635	90,594	137,748
Research and development	79,173	136,288	171,547	211,814	292,137
Marketing and advertising	79,828	101,710	140,012	185,491	234,052
Selling, general and administration	69,645	95,703	132,087	185,075	266,083
Amortization of acquired intangible assets	1,756	1,721	2,018	4,510	19,950
Write-off of acquired in-process research and development	46,990	5,000	–	–	224,820
Total operating expense	309,208	386,295	511,299	677,484	1,174,790
Operating income	(1,664)	85,585	152,290	268,189	142,602
Cash EBIT	57,694	105,018	178,648	320,375	471,443
Other operating income:
Interest income	946	1,036	2,989	8,386	20,408
Interest expense	(885)	(405)	(152)	(163)	(233)
Amortization of debt discount and issuance costs	(1,500)	(7,448)	(7,836)	(8,410)	(4,090)
Other financial income/expense, net	2,567	3,079	(11,294)	10,724	9,587
Income (loss) before tax and minority interest	(536)	81,847	135,997	278,726	168,274
Income tax	(830)	(4,276)	(10,459)	(37,636)	(43,688)
Income (loss) from continuing operations before share in loss of affiliates	(1,366)	77,571	125,538	241,090	124,586
Share in loss of affiliate	(1,089)	–	–	–	–
Income from continuing operations	(2,455)	77,571	125,538	241,090	124,586
Income from discontinued operations, net of tax and minority interest	(7,461)	9,648	–	–	–
Net group income	(9,916)	87,219	125,538	241,090	124,586
Diluted income per share (continuing operations)	(0.09)	0.68	1.11	2.05	1.00

For the last nine months ending September 30, 2008, the numbers were phenomenal.

Net Profit

In the first nine months of 2008, the net profit of CHF 238.9 million (9m 2007: CHF 36.1m) includes interest income of CHF 16.1 million, interest expense of CHF 4.9 million, a non-cash charge on the Convertible Bond of CHF 1.3 million, foreign currency losses of CHF 25.5 million (predominantly the result of valuation losses on cash flow hedges) and an income tax expense of CHF 20.8 million.

Cash and cash flow

In the first nine months of 2008, our biotech generated net cash flow from operations of CHF 410.7 million (9m 2007: CHF 252.6 m).

Haven’t guessed the name of the company yet? How about the last teaser - the company’s biggest product is Tracleer - the best targeted product for Pulmonary Arterial Hypertension. This drug is very sophisticated in attacking the problem at hand [specificity] as opposed to the previous generations of sodium and calcium channel blockers - which were kind of ineffective when it came to PAH. It has two other approved products - Zavesca for Type-1 Gaucher Disease [Genzyme became a real biotech by inventing the first enzyme treatment for Gaucher Disease], and Ventavis - which is an inhaled formulation for PAH.

The company - Actelion (ALIOF.PK). Its potential - bigger than Gilead’s [as of now]. The down-side - watch out if the insomnia drug - the orexin modulator fails or even shows signs of failure in trials. The stock has done well since its IPO. Its latest financials are here. Currently, about 60CHF. My price target is 120CHF by Jan 1, 2011 - assuming that two of the company's drugs in Phase III make it to approval. Plus, Tracleer has not reached its full potential yet. As more cardiovascular specialists prescribe this specific/effective drug, it has the potential to exceed $2 billion a year by 2012.

Disclosures: No positions in Actelion [yet]. The stock is listed in the pink-sheets, and carries risks associated with biotechs, and additionally, currency fluctuations.

Comments

[StateofConf...:]

While you do make a lot of good points and Actelion could prove to be a winner, I would say the best unkown biotech would be Nanoviricides (NNVC).

They have world changing technology that can destroy nearly every virus. It will still take 2 to 3 more years to get their approvals but the technology is easily adapted to different viral diseases and can be developed fast for pandemics. It is also highly unlikely that a virus can become resistant to these drugs.

Jan 18 10:48 PM