Why I'm Buying Protalix

I'm adding Protalix Biotherapeutics Inc. (AMEX:PLX) to my portfolio at the expense of half my holding in Fundtech (Nasdaq: FNDT), although I continue to believe in Fundtech as a special niche company in financial software. I'm getting into biotechnology again, which, as is well known, is a risky field but one with dreams of big profits that sometimes come true. My first experience with biotech in my portfolio, with Pharmos Corp. (Nasdaq: PARSD), ended, as will be recalled, with an almost complete write-off after failure in the decisive trial for a new drug. The second, with Omrix, ended with a highly profitable exit when the company was sold to Johnson & Johnson (JNJ) for 2.5 times the IPO valuation.

Protalix is on the final straight, about two months before publication of Phase III trials of its Gaucher disease treatment. Genzyme's (GENZ) treatment for Gaucher's disease has annual sales of $1.2 billion. Protalix's platform is revolutionary in that it produces its drug from plants: from carrots in the case of the Gaucher's disease treatment under trial, and from tobacco leaves in the cases of other drugs at various stages of pre-clinical trial development. Extraction from plants not only has great advantages for production costs; it also means low vulnerability to contamination. This is as opposed to production from animal cells, which is Genzyme's method. Genzyme's production lines became severely contaminated recently, causing its market cap to plummet.

In contrast to Pharmos's blind trial, Protalix has conducted an open trial on 31 Gaucher's disease patients around the world. None has left the trial since it began two years ago. This indicates efficacy, because otherwise those patients would have reverted to using Genzyme's product. On the other hand, only when the final results are released will we know whether the Protalix drug succeeds in causing a 20% reduction in the size of inner organs, such as the spleen, the success threshold set by the US Food and Drugs Administration in the trial protocol. In Gaucher patients, organs such as the spleen and liver become enlarged due to the lack of the enzyme needed to break down fats.

With all the risks associated with this investment, I still don't see an apocalyptic scenario such as we saw at Pharmos, whose drug was trashed as soon as the failure was announced. The worst I can see happening with Protalix is a situation in which the FDA will require further data, an additional trial, or improvement to efficacy through further development of the drug. These are certainly possible outcomes, and if they happen, the share price will crash, but an opening will be left for it to recover in the future. This often happens with biotech companies large and small that receive approval for a drug, but not before they have traversed the FDA's obstacle course.

Anyone who like me heard Protalix CEO Dr. David Aviezer's presentation last Thursday at the Canaccord Adams investors' conference in Boston will feel in no doubt that the FDA approval is just around the corner, and will give the negative scenarios I have described no chance of materializing. "The doctors are happy with what they have seen so far in the trial," Aviezer said, and the analysts who cover Protalix, Genzyme, or UK company Shire, which has its own Gaucher's disease treatment in the clinical trials stage, also cast no doubt on Protalix's chances of obtaining FDA approval.

Moreover, the FDA has now asked Protalix to expand the trial and add dozens of patients who will be otherwise be left without treatment because of the interruption to production at Genzyme, and the authorities in other countries are expected to follow suit.

If things are so good at Protalix, why did its share price fall from a peak of nearly $8 at the end of July to $5.77, its level before Tuesday's move by the FDA? In my view, the answer lies with Dr. Philip Frost, one of the largest investors in Protalix, who now has no role in the company. As reported in "Globes" on Sunday, since the end of July, Frost has sold more than 700,000 of the 9.8 million shares he owned. This is a small proportion of his stake, but enough to alarm investors. What's more, he holds such a large number of shares that, were he to sell on good news from the FDA, he would be liable to kill the upside expected from the announcement.

Disclosure: long PLX

Comments

[thirstycamel:]

Mr Cohen,

I was long 50,000 shares of PLX until a few weeks ago when I sold all of it. The reason for the sale was that Shire announced they would distribute their competing drug for free as long as there was a shortage of Cerezyme. The price of PLX topped out on that revelation. Since then, PLX has also agreed to distribute their drug for free for some period of time. At best, this is a questionable business model. PLX should have responded with the differentiation that Shire's drug did not shrink the liver as much as had been expected.

In addition to the above, GENZ is in late stage development (Phase III) of an oral small molecule that will compete directly with their own Cerezyme, and both Shire and Protalix candidates.

In your article you state that the PLX technology allows the production of drug from carrots and tobacco leaves. That is not quite correct. Their proteins are produce by direct expression from genetically modified carrot and tobacco cells. This differentiation may seem insignificant, but it is not. Protein production in actual plants failed years ago due to cost of extraction. The currnt PLX technology is light years ahead of past plant technology.

The costs of distributing free drug worries me, especially with the limited resources PLX currently has.

I'll probably own PLX again in the future. I'm just uncomfortable about the current price of the stock in this competitive environment.

Aug 19 07:26 AM

[Iaki:]

One major consideration was missing- approval of the prGCD is actually validating the PLX technology, and everybody now can stand by the PLX offices/plant and see all the Big Pharma marching in for either cooperation or acquisition ... either way- the valuation is about to explore over the $1B => over the $12 per share.
Harry-up fox.

Aug 19 08:50 AM

[rrtzmd:]

...at its current price, PLX has a market cap of around 450 million bucks...now, figure that the total revenues for Gaucher treatment is about 1.2 billion at the price Genzyme charges for cerezyme...to significantly breach Genzyme's dominance of that market, Shire and PLX will have to sell their product at a lower price...and who knows what Genzyme might do to protect their territory -- would you want to wrestle with an 800 pound gorilla for market share?...so, optimistically, you're probably looking at Shire and PLX getting access to 500 million in revenue...moreover, Shire is yet ANOTHER 800 pound gorilla...I don't know what the profit margin is but with competition I imagine it will be squeezed significantly...I suspect Genzyme and Shire will squeeze PLX out entirely -- although, again, I don't know how much PLX's drug costs to produce...but at this point, I don't think PLX is worth a dime long term...

Aug 19 10:08 AM

[rrtzmd:]

...also, is PLX's drug the one licensed from the Weizmann Institute?...if so, then Weizmann is entitled to unspecified royalties -- another drain on shareholders' equity...

Aug 19 10:27 AM

[leeb66:]

Thanks for the review.
Any idea about Keryx Biopharmaceuticals (KERX) status ?

Aug 20 07:06 AM

[Iaki:]

rrtzmd-
I guess, you don't familliar with the extreme interest that the big pharma companies find in this technology... and the plans they have to execute once the technology will be approved by the FDA .
I strongly suggest to re-assess your policy.

Aug 20 10:14 AM