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A Research Scientist's Take on the Bio-Pharma Industry

|Includes:AFFX, ARIA, ARNA, BMY, BioTime (BTIM), DNDN, GSK, PFE, VRTX, ZGEN

Below is a guest post by Short Screen member MonkeyPilot, who is a research scientist in the pharmaceutical industry. MonkeyPilot normally shares his views on drug stocks on the Short Screen message boards (e.g., this was his take on AFFX), but this piece was long enough that I decided to include it here as a guest post.

I had asked MonkeyPilot about a stock called BioTime, on behalf of new Short Screen member Market_Sniper, who owns it. MonkeyPilot offered his opinion on BioTime and used it as a jumping-off point for some general thoughts about the state of the bio-pharma industry today.

BioTime

BioTime (BTIM) has a large number (148 in their promotional materials, and more to come) of stem cell lines to sell. All of these are the “multipotent” stem cell lines, not the totipotent embryonic stem cells that are really the holy grail of stem cell research. It sounds like they have a plan to get to those through some kind of genetic manipulation, but they aren’t selling them yet. At any rate, selling the picks & shovels (to carry along the metaphor) is still a long way from getting the gold out of the ground- especially without a map. Sure, Levi & Strauss built a business selling jeans to miners. But the big money is still in the gold. I think a more apt metaphor might be Monsanto. A farmer buys their seed & it makes his life easier. He is the one who has to sweat over the field & harvest a crop- which is ultimately the product. And he can re-plant it (although, is legally bound not to), but he can also buy his seed from someone else or develop his own.

Although I’m sure they probably have contractual obligations in place for anyone working with their lines, the hard work of turning these lines into any kind of therapy is still in the future: figuring out HOW to make them useful, and then proving that to the FDA. I’m sure they have their own line of research into this, but the big payoff is in an actual therapeutic product. And any agency with the know-how to do that will likely be able to to generate their own stem cell lines, as well.

Not to rain on anyone’s parade (I’ll repeat my caveats: I’m no expert in this field, and my information is obviously limited), but this is still a long way from a miracle cure. And not only a long way, but who knows? Maybe stem cells, for all their potential, will turn out to be a dead end too. I can think of at least two other ideas off the top of my head that looked great on paper (gene therapy and antisense DNA technology) but haven’t gone anywhere in my lifetime. And the most promising one (siRNA) was unknown 10 years ago. All that said, maybe BioTime does have a leg up in the stem cell field. They have existing products and revenues. Maybe that will buy them the time to find a real solution.

Thoughts on the drug industry in general

I had a few more thoughts on this & the bio-pharma industry overall. I saw last week that Bristol-Myers (NYSE:BMY) just purchased the last big biotech in Seattle, Zymogenetics (ZGEN) for roughly double the stock price. Oddly enough, this is the 2nd time they’ve been acquired. Although this might be obvious, or late in coming, this is just one more step in the big consolidation that is going on and will be going on for a while, in pharma. Pfizer has been buying up other firms for years, but now even the smaller companies are getting into the act. There are a lot of patent expirations coming in the next couple of years (Lipitor being the big one, of course) and while they’ve still got good cash flow, they’re going to be buying each other up as they see fit. Merck lived by a strategy of going alone- until the Schering deal. Genzyme & Sanofi are making overtures. The list goes on.

Looking for likely acquisition candidates

In fact, I think this is probably the best play in the drug sector short-term: finding the likely acquisition targets and making a buck on the buyout. Two that I’ve seen mentioned as likely targets (disclosure: I hold positions in these) are Vertex (NASDAQ:VRTX) and Human Genome Sciences (HGSI, Craig Venter’s baby). Vertex has a clinical trial update on a Hepatitis C drug (same indication that ZGEN was targeted for and that Merck has in Phase III, among others) sometime in September, so something might happen with them soon. Two more that seem to have some buzz around them are Ariad (NASDAQ:ARIA) and Arena (NASDAQ:ARNA), who has an obesity drug with a clinical report on 9/16 (update: Arena dropped 40% today on unfriendly news from the FDA). Dendreon (NASDAQ:DNDN) had a big hit earlier this year with their prostate cancer therapy, Provenge, and that one is really exciting because it’s an entirely new way of treating disease. Wouldn’t surprise me to see them snapped up by a drug giant, once the froth subsides on their stock price, or their therapy starts showing wider applicability.

The dirty not-so-little secret in pharma has been that in spite of spending on research, the overall number of drugs has not improved. The big firms doubled spending on R&D over the last decade, thinking that by increasing the number of candidates going into the pipeline, an increased number would come out. That didn’t happen. Instead, the increased pipeline led to the SAME number of approved drugs. Some of the speculation about why this happened is that duds were discovered earlier, firms were more stringent with safety, but it’s just as likely that weaker candidates made it into the process. The result is the same: fewer products.

Long-term the big pharmas are going to do okay- there’s a lot of money yet to be made, and we’re only getting older. I doubt any of them are going to rocket upward from sheer size & momentum but they all pay a healthy dividend. More importantly, they’re the only ones with the size & know-how to run a clinical trial & put a big drug on the market. Pharmas had a great reputations as a research firms, and they were. But their real skill was at clinical trials: getting them moving, keeping them on track, and all those pesky reports. Even back in the heyday though, as much as 1/3 of their portfolios was licensed in. Going some will more than double that ratio. At least in part, this is because of the diminishing returns on traditional small-molecule drugs. Everyone is scaling up on biologicals (which includes a broad range of different molecules, and would include stem cells, but is mostly proteins), which are much higher on the risk/reward spectrum, but also much more costly to find & develop. They’re outsourcing much of their discovery R&D and focusing on their strengths: clinical trials.

Back to BioTime

One other thought on BioTime (what an awful name; makes me think of popcorn): attaching someone’s famous name makes no difference to me. “father of regenerative medicine”? It doesn’t matter if he’s the godfather of soul. If a company doesn’t make anything worth buying, what’s the difference? A lot of scientists with big ideas died poor. Craig Venter made himself a lot of cash on the race to the human genome, but he walked away from HGSI & his latest company (featured in the NYT business section last Sunday) is still bleeding VC & partnership money. Beside that is the fact that as I mentioned, there is no such thing as “regenerative medicine”. At least not yet. We can call him the father when the pregnancy is over. Yes, there is enormous potential. Just like nuclear fusion. I’m not holding my breath for either one.




Disclosure: No positions