Protalix BioTherapeutics: This Dream Could Take Time to Manifest

Karmiel-based drug development company Protalix Biotherapeutics Inc. (PLX) currently has a market cap on Wall Street of $1.773 billion. This is 4.3 times higher than that of Elron Electronic Industries Ltd. (ELRN).

It is also ahead of ECI Telecom Ltd. (ECIL) which currently has a market cap of $994 million, and it is higher than the combined market cap of Pharmos Corp. (PARS), Given Imaging Ltd. (GIVN), Savient Pharmaceuticals Inc. (SVNT) and Keryx Biopharmaceuticals Inc. (KERX), and it is even higher than the market cap for companies such as Ormat Technologies Inc. (ORA), and Syneron Medical Ltd. (ELOS).

Protalix is classed as a biopharmaceutical company at the clinical stage, that is to say a start-up that has commenced initial trials of products that it is planning or hoping to produce. To put it in a nutshell, Protalix is still a dream company, and anyone buying its stock at $27 a share should know that he is investing in a company whose chances of business success are fewer and more distant.

Is there is any justification at all for the company's current $1.77 billion market cap? I'll start by trying to spell out exactly what it is that the company does. Protalix engages in ingredient recombinant technologies, which have become the cornerstone of the biotechnological medical industry. There is a tremendous demand in the medical world for DNA compounds such as proteins, vaccines and antibodies.

According to a study published on BioWorld (the news and information site of the Biotech world) in 2006, the biotechnological drug market will be worth more than $100 billion in 2010, and reaching this target sum will depend to large extent on the success of such compounds. One of the biggest challenges is the development of generic versions of such drugs, and these are processes that are far more difficult than those required to develop generic versions of regular drugs. Companies that have managed to develop industrial processes for the production of protein compounds are the ones that will compete for the massive generic biotechnology product market.

Teva Pharmaceutical Industries Ltd. (TEVA) has placed substantial focus on this area and among other things, it has already forged a business relationship with Protalix. The two companies signed an agreement for the joint development of two recombinant proteins. Most of the processes for the production of these types of protein entail the use of animal products.

Protalix has developed a unique plant cell culture technology for the production of proteins. This is actually the company's claim to fame, since it is known that the production of protein from plant cells, which is harder and more complex than the production from mammalian cells, is better, more efficient and economical and, most important of all, there is virtually no competition in this field. The company's management believes that it has managed to develop humanlike proteins, and its lead product prGCD is designed for the treatment of Gaucher Disease, a human lysosomal storage disorder. In July 2005 Protalix received U.S. Food and Drug Administration [FDA] approval to commence Phase I clinical trials of prGCD, and it plans to proceed to Phase III trials during 2007.

The company's CEO is Dr. David Aviezer, a man with vast experience and academic knowledge, a cell biologist by training but one who has come a long way in this field. He is assisted by an extremely able team of professionals. Protalix's chairman is Eli Hurvitz and alongside him are Dr. Philip Frost, the main shareholder in the company and the founder of Ivax, and vice chairman of Teva, Dr. Jane Hsiao, former vice chairman and the brains behind Ivax, and Dr. Yoseph Shaltiel, Protalix's founder and VP R&D, and also one of the world's leading experts on biochemistry processes and in plant tissue culture technologies. Also on the company board is Ituran Location and Control Ltd. (ITRN) CEO Eyal Sheratzki as well as other important executives.

Protalix got a higher-than-expected value when it was merged with the market shell Orthodontix, owned by Philip Frost (who sold Ivax to Teva two years ago), so that it could be traded on Wall Street's American Stock Exchange [AMEX]. It began trading at the start of 2007 with a market cap of $1.5 billion, but this was actually an artificial value derived from the merger with the market shell. Protalix originally sought a listing on Nasdaq at a value of $150-200 million, several months before its merger with Orthodontix. The entry of Philip Frost as an investor was construed as a significant vote of confidence in the company and raised its value as a result. It should also be noted than when the company first started trading after the merger with the shell, only 0.42% of its share capital was marketable, so the $1.5 billion market cap was clearly inflated, and it prompted parties at interest to buy shares in order to inflate their value.

I am stating here what I personally would do. At the current price levels, I will not be going near this stock, even though it could continue to climb. I will most certainly be continuing to follow its progress, and will be waiting for a crisis. In a stock of this kind, the crisis could come from several directions, starting from hitches during development, to hitches with the FDA, and competitors with programs that the biotech community on Wall Street find more interesting. We might even see the appearance of all sorts of smart alecs digging for all sorts of dubious links between Teva and Protalix, Hurvitz and Protalix, Frost and Hurvitz and so on.

I believe that the progress of Protalix on Wall Street will be similar to that of Imclone Systems Inc. (IMCL), provided that its first drug is a success. If it isn't, you will have a repeat of the events surrounding Pharmos, which collapsed amid a loud fanfare following the failure of the trials of dexanabinol. Those people that are capable of differentiating the astronauts on Wall Street from the levelheaded people on Main Street have an excellent chance of succeeding with Protalix. For now, however, this is game for speculative money only. You would be ill advised to sell Elbit Systems Ltd. (ESLT) or Teva in order to free up money for Protalix.

PLX 1-month chart

Published originally by Globes [online], Israel business news - www.globes.co.il
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

Comments

[razormd]

According to my Daily Graphs chart service there are only 5.83 million shares outstanding giving it a market cap of 169 million versus the almost 1.8 billion listed in your article...are they incorrect?...also, it might be worth looking up LSBC -- they were using plants to make human proteins such as lysosomal acid lipase...they're now bankrupt company still listed in the pink sheets...they still have a website "lsbc.com" if you're interested.