Biotech Names With Big Potential

Today we continue our discussion with Zacks senior drug industry analyst Jason Napodano, CFA, who has been so kind as to run down his top Buy recommendations for us. We focus on biotech names in this second half of our discussion.

Now I know you have a Buy on Genentech – which has worked out quiet well by the way…

…Thanks for noticing!

And we’ve recently blogged positively on both Amgen and Biogen. Are those part of your blue-chip strategy, or is that the other direction you’re talking about?

Well, we still like Genentech (DNA). We think a higher bid from Roche is coming eventually. We’d hold onto DNA until that plays out. As for Amgen and Biogen (BIIB), we like both as core biotech holdings, but our alternative strategy for investors is more focused on smaller, mid-cap biotechs.

OK, so for a little more risk-tolerant investors?

Exactly! If you want big safe names, go with Abbott (ABT) and J&J (JNJ). If you want a little more bang for your buck, and you can stomach some volatility, we’ve got two names for you.

The first is Isis Pharmaceuticals (ISIS). This is probably one of the best positioned biotech companies in world. It’s also our top-pick overall right now in healthcare. They are a leader in antisense technology.

Explain antisense for us, Jason…in the simplest terms, please!

Sure. Antisense drugs are short, chemically-modified complementary nucleotide chains that bind to a specific area of mRNA in order to inhibit translation (protein production). Basically, it’s a way to target disease at the genomic level. Instead of waiting for an errant gene to over-produce or under-produce a protein, enzyme or hormone, antisense drugs go directly after the genetic code. And so the possibilities are enormous because you are knocking out the cause of the disease instead of just treating the symptoms.

Isis’ technology is at the forefront of this revolutionary development platform. Isis has collaborations with the “who’s who” of healthcare – Merck (MRK), J&J, Eli Lilly (LLY), Novartis (NVS), Teva (TEVA) and Genzyme (GENZ). Because you are going after the gene, Isis can develop drugs over a wide scale of diseases.

The pipeline at Isis is enormous, and holds both proprietary and partnered compounds for cardiovascular disease, metabolic disorders, cancer, inflammatory diseases and infectious diseases. Take a look at the pipeline chart we have in our research report, it’s pretty impressive.

The leading candidate is in phase III trials for high cholesterol with partner Genzyme. This drug, mipomersen, has multi-billion dollar potential in our view. Other agents for diabetes, cancer and multiple sclerosis are also potential blockbusters. The pipeline fundamentals are particularly solid.

But the main thing we like about Isis is that the company is extremely well capitalized. Isis should exit 2008 with over $450 million in cash. Management should be able to raise another $190 million in 2009 by selling its Ibis biosensor business to Abbott Labs. That puts the company in an exceptionally solid financial situation to go along with the solid drug discovery / development fundamentals. Add the two together and you can see why it’s our top-pick right now.

Sounds like something investors should definitely look into. What’s the other idea you’ve got in mid-cap biotech?

It’s a name we’ve talked about in the past, Mark: ViroPharma (VPHM). This is one of our favorite names right now for several reasons. Firstly, management is among the best in the business. They’ve done a great job in building up ViroPharma through acquiring and in-licensing products over the past few years.

The leading product is Vancocin, a powerful antibiotic used to treat a life-threatening disease resulting from the infection of C. difficile. The story with Vancocin is that the drug was previously used only as a “last resort” for C. difficile infection [CDI, but recent clinical data, at a competitor nonetheless, shows that Vancocin is superior to the first-line therapy, call metronidazole, for severely infected patients.

So now management is out there spreading the world that Vancocin should be used in a greater percentage of patients other than just last resort cases. And they’re gaining traction because the IDSA (Infectious Disease Society of America) and SHEA (Society for Healthcare Epidemiology of America), two key scientific member organizations for infectious disease, are drafting guidelines that agree. So Vancocin continues to drive strong cash flow generation at ViroPharma.

And ViroPharma is profitable, if I remember correctly, right?

Correct. The second quarter 2008 was the 14th in a row of positive earnings. That’s an impressive feet for a mid-cap biotechnology company. But what all that strong cash flow generation has allowed ViroPharma management to do is build an impressive late-stage pipeline around Vancocin.

There are two candidates in late-stage development, maribavir for protection against cytomegalovirus [CMV] infection during stem cell and solid organ transplant, and Cinryze for hereditary angioedema [HAE]. Maribavir is currently in two phase III trials with data expected in 2009. The phase II data on the drug has been very impressive, with patients showing 100% protection against CMV infection and a significant decline in transplant rejection, or something called graft vs. host disease (GvHD).

We think maribavir demonstrates a significant improvement over the current standard of care, a drug called ganciclovir made by Roche. Not only is it more efficacious, but the tolerability and safety profile is also superior. It could be a real breakthrough for patients undergoing stem cell transplant [SCT] or solid organ transplant [SOT]. It’s also what’s known as an “orphan” indication, meaning ViroPharma will have strong pricing power and an exclusive market for at least seven years in the U.S. It’s a $500 million potential opportunity.

The second drug, Cinryze, also an “orphan” indication drug, is under regulatory review for HAE. HAE is a nasty inflammatory disease that results in significant swelling around the face, abdomen, hands and feet. The attacks, which could occur as often as 2-3 times per week, usually come without warning, and can be fatal if they occur inside the mouth or trachea. There’s a significant unmet medical need for a drug that can treat, or even prevent, these attacks. It’s another $500 million opportunity, in our view.

ViroPharma acquired the drug through the acquisition of Lev Pharmaceuticals earlier this year. The U.S. FDA is schedule to rule on the use of Cinryze as prophylactic (prevention) for HAE in October 2008. Given that an advisory panel previously recommended approval of the drug by a unanimous 21-0 margin in May 2008, we feel very good about the approval coming in October.

So by 2010 we think ViroPharma can have both maribavir and Cinryze, two orphan drugs each with $500 million potential, on the market. They’ve got an estimated $300 million in cash still even after the Lev Pharmaceuticals deal, and as of now, Vancocin remains patent protected.

Now that’s a potential risk with ViroPharma, correct? There is a patent challenge to Vancocin?

Yes, that’s the risk right now. But that risk has also created an opportunity to pick up ViroPharma on the cheap. A generic pharmaceutical company is looking to bring a bio-equivalent oral vancomycin to the market as soon as next year. However, ViroPharma has filed what’s known as a citizen’s petition, questioning the methods on which the generic company will look to prove bio-equivalence. It’s a strategy that has paid off well, having delayed the generic alternative since 2006 while the FDA’s Office of Generic Drug [OGD] looks into the issue.

It’s inevitable that a generic oral vancomycin will eventually come to market. Our financial model assumes it happens in 2010. You should know, that will cause a hit to earnings when it happens. But we think that investors should focus more on maribavir and Cinryze than when a generic Vancocin may come to market. The company should be able to maintain its strong history of profitability assuming both maribavir and Cinryze pan out. Given what we’ve seen so far, we like their chances.

Jason Napodano, CFA is a senior analyst covering the pharmaceutical and biotech industries for Zacks Equity Research.

Comments

[User 268071:]

I've owned this stock in the past. The company seems pretty positive about the prospects for their new drugs and is ramping up overseas operations. I think that tells you something given all the risk regarding "forward looking statements" these days.

2008 Sep 23 04:55 PM

[User 268071:]

I meant Viropharma, my bad: duh.

2008 Sep 23 04:56 PM