Seeking Alpha
, CP Reports (1 click)
Long/short equity, special situations, research analyst
Profile| Send Message|
( followers)  

This is the story of some of our most respected drug companies, their mistakes, and the real winners: small but smart biotechs like Medgenics, Inc. (NYSEMKT:MDGN) that respect science and uphold the medical oath to "do no harm". Medgenics has a knack for going after big markets that are currently served by harmful drugs or have dangerous drugs in their development pipelines. Hepatitis and anemia are two of these markets. Some of the world's most heinous diseases are treated with drugs so vile that patients stop taking them because they find that the cure is worse than the sickness. And sometimes good drugs working toward being approved are overlooked by investors, so that market caps lag far behind what I believe the companies are potentially worth. The rush to boost pipelines at all costs, even the loss of life, has been causing drug makers to make bad decisions.

Investors, like doctors, are ready for something new that works and doesn't kill people. Medgenics has it. Medgenics's INFRADURE Biopump™ uses a patient's own tissue so it is safe. The Israel Ministry of Health just approved the first human trials for hepatitis C and has so much confidence in this technology that one of the trials will be for patients who haven't had any treatment at all. I believe that these trials will speed up approval of INFRADURE in the US.

In contrast, last month, Bristol-Myers Squibb (NYSE:BMY) announced that the FDA put a stop to all its trials of a new drug for hepatitis C after eight patients were hospitalized and one died. This is an outrage on several fronts. The first lawsuit filed against Bristol-Myers for negligence states that there were, "clear signs of heart malfunctions or damage for those enrolled in the trials", and that one woman experienced heart and liver failure just four weeks after taking the experimental drug. We ask where the due diligence was when Bristol-Myers was negotiating to buy Inhibitex for a whopping $2.5 billion? Was it so obsessed with being the first to enter the $20 billion hepatitis C market that it overlooked some of the drug's risks? The patient who did not make it died of heart failure. Court documents show that Bristol-Myers knew that some of the clinical trial subjects had heart problems, but didn't stop the testing. And what about the FDA? It knew there was trouble at the beginning of August, but waited until someone dropped dead before it would act.

For that matter, this agency, protector of the American public from unscrupulous and greedy drug firms, only then took a harder look at the others testing similar drugs - the NS5Bs. Idenix Pharmaceuticals (NASDAQ:IDIX) quickly got slapped with a halt to its own trial of an NS5B not once but twice since the Bristol Myers tragedy, the second time for a preclinical trial, where the drug wasn't even in humans yet. That smells like fear to me.

While Bristol-Myers was desperately trying to beef up its drug pipeline by spending billions to buy not one but four of the dangerous and probably useless NS5Bs, a competitor, Gilead Sciences (NASDAQ:GILD) stepped it up a notch with an $11 billion purchase of Pharmasset, acquiring a bunch of the same compound. How long before the FDA takes a look at them? Gilead isn't alone - Vertex Pharmaceuticals (NASDAQ:VRTX) and Achillion Pharmaceuticals (NASDAQ:ACHN) have similar drugs in clinical trials.

The beauty of Medgenics's technology is that it uses an old standard for hepatitis C - interferon - but as the body's natural protein. PEG-interferon sold today has what is basically a string of nylon molecules attached to the protein that is then injected into the bloodstream. The side effects make Lou Gehrig's disease look like a day at the beach. The website for Pegasys, the leading hepatitis C drug sold by Roche Holdings AG (RHHBY.OB) has a frightening list of possible problems, the least of which is fever and chills. People taking the drug can develop autoimmune diseases like rheumatoid arthritis and lupus. They can develop diabetes. The drug can cause death of a fetus and heart attacks. Mental health problems can also be caused by PEG-interferon. I found a terrifying report from the FDA's Center of Biologics Evaluation and Research written during a review of the PEG-interferon application from Schering-Plough, now owned by Merck & Co. (NYSE:MRK). It lists, among other things, suicide with no history of depression, suicide attempts, murder, relapse into drugs, and lots of depression. And this drug was approved!

Between the time of PEG-interferon and the NS5Bs, a period of ten years, the only new thing to hit the market was Incivek, a joint venture of Merck and Vertex. As pointed out recently by Sharon di Stefano, my respected colleague of many years, all they did was add what is basically a drug for HIV to interferon, which ratcheted up the side effect profile to include explosive vomiting and anal rash. Still, this wonder drug posted sales of half a billion dollars last year.

No wonder Israel and the US want something better for this awful disease, when approximately 1.4 million cases of acute hepatitis A are reported every year while the number of chronic hepatitis B cases is 350 million and hepatitis C is 170 million people worldwide.

Medgenics just got approval to start new trials with EPODURE for anemia, where the most popular drug is Epogen made by Amgen, Inc. (NASDAQ:AMGN). Besides carrying the FDA black box warning that might as well be a skull and crossbones, Epogen is quickly falling out of favor since respected scientific journals showed a 57% better chance of life-threatening blood clots, and big lawsuits could hit soon. Just last month the company announced it will be closing a major manufacturing plant that makes the drug. Even on the drug's website, the risk of faster tumor growth and death is clearly stated.

Does Affymax, Inc. (OTCQB:AFFY) have a better drug with its new release that hit the market last spring? It may be more convenient because of fewer injections, but it still carries a high risk of heart attack and stroke. The EPODURE Biopump does not have these problems, and does not depend on patients giving themselves painful shots at the right time to keep their hemoglobin levels in a safe range.

Only 20 clinical trial subjects are needed to show if EPODURE works as well as the Phase I trial proved, so I think we could see this exciting new product out very soon. When it becomes available, I expect it to corner the medical market for anemia patients who are on dialysis, a $20 Billion industry in the US alone.

I always based my confidence in Medgenics' on its platform technology targeted at very large world markets. Here are just two - hepatitis and anemia - moving along toward their goals. Next in line for the company are hemophilia, expected to be a $10 billion market by 2017; multiple sclerosis, $9 billion and growing; growth hormone deficiency, $3 billion; and diabetes, an industry in itself where managing the disease costs $41 billion expected to soar by 18% per year.

Risks, however, cannot be ignored and the biggest is failure in a clinical trial. In this case, the study might have to be redone at much added expense. Regulatory authorities may not be cooperative. This is a totally new technology that may not be adopted. Medgenics may run out of money before products can generate sales. I always look for reasons these risks can be softened and because Medgenics' management has delivered on many of its promises, particularly where its science is concerned, I am confident of this young biotech. I do however believe that the prospects of this small biotech have been dramatically validated by the recent addition of Sol Barer, former Chairman and CEO of Celgene (NASDAQ:CELG) as Chairman of the Board. That coupled with the support of board member Isaac Blech bring and amazing track record to Medgenics. I believe that this addition will be key factor in the company's future potential in gaining Pharma partnerships and quality financing.

I recommended Medgenics in February 2012 when it was trading at $3.50 per share. Shares have traded since to a recent high of $16.43 and closed Friday at $10.61. Like with any biotech, news will move the shares and Medgenics is in a good position to generate a lot of positive news. I'm looking for $20 as a conservative short-term target price.

Source: Medgenics' Bulging Pipeline Of Blockbuster Indications Takes On Big Pharma's Harmful Drugs