Of Billionaires and Biotechs

Feb. 01, 2011 3:05 PM ET
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Contributor Since 2011

Chimera Research Group provides completely independent and actionable investment and trading ideas backed by comprehensive fundamental research and analysis for listed companies in the biotech and pharmaceutical sectors. Our coverage primarily focuses on early stage companies with impending FDA and/or clinical trial catalysts. Our coverage may also include mid-to-large cap biopharma companies where there exists specific catalysts. Where appropriate, our recommended trade and investment ideas incorporate the use of simple to more complex option strategies. Our coverage universe is continuously updated and includes research and trade/investment ideas for the Top 10 up-and-coming catalysts that represent the best opportunities for traders and investors. The biopharmaceutical sector offers significant opportunities to generate big returns yet can be risky and difficult to navigate.
The biotech industry does not crank out billionaires. The long timelines to an improbable success combined with inevitable dilution of the founder's stake makes it all but impossible. Consider that the collective market cap of all biotech companies is only about $360 billion, compared to about $320 billion for Apple alone. But a few men have found a way.
One particularly impressive biotech success story is that of maverick scientist and businessman, Dr. Patrick Soon-Shiong, now estimated to have of net worth close to $6 billion. A controvertial figure, he grew up in apartheid-era South Africa to parents who had fled China during World War II. Dr. Soon-Shiong did his internship at Johannesburg’s General Hospital, but completed his surgical training at UCLA.
He left the hospital in 1991 to found VivoRx, a diabetes company. The company was later sold and he started American Pharmaceuticals Partners in 1997. This highly successful generics company was split in two in 2007; APP Pharmaceuticals would house the injectable drugs business and Abraxis Bioscience held the oncology and research businesses. The principle product of Abraxis Bioscience was Abraxane, albumin-bound paclitaxel, approved in 2005 for the treatment of breast cancer.
The stock had been struggling prior to the split and critics had argued Soon-Shiong overly hyped his drug's data. With the purchase of APP Pharmaceuticals by the German health care company Fresenius for an initial payment of $3.7 billion in 2008 and the acquisition of Abraxis Bioscience by Celgene for $2.9 billion in 2010, there is nothing left to criticize.
Abraxane, once thought to simply lessen the side-effects of paclitaxel treatment, has now successfully completed a Phase III trial in non-small cell lung cancer. It may also be effective in pancreatic cancer and melanoma. It is thought that albumin bound paclitaxel is able to penetrate deeper into a tumor, resulting in increased efficacy. Sales of Abraxane were only a little over $300 million in 2009, but with the lung cancer indication and international expansion, Celgene estimates sales can grow to $1 billion by 2015. This will become a major driver of Celgene’s near term growth.
More recently, there has been some concern regarding Abraxane in the NSCLC indication due to it inability to extend progression free survival, although Celgene still believes approval is possible. It is seeing increasing acceptance of the drug for breast cancer in Europe, making that indication more important than originally thought.
Two men making news in biotech circles recently are billionaires Randal Kirk and Alfred Mann. Neither of the two came from scientific backgrounds, but both are highly successful serial entrepreneurs.
Kirk currently owns majority shares in privately held Intrexon, a synthetic biology company that has developed systems to control genetically engineered cells for the production of human therapeutics and proteins. Intrexon announced that it was taking a 12.5% stake in Ziopharm Oncology early this January. This collaboration appeared somewhat surprising as the two companies did not appear to have much in common- Ziopharm is working on improving chemotherapeutics while Intrexon is developing next generation gene therapies. Kirk admits as much when he suggests success of a new DNA drug from Intrexon would make Ziopharm’s current lead compound a “rounding error” in its future valuation.
The only way this partnership makes sense is as a financial tool, akin to spinning off Intrexon’s drug development technology into a public company while holding the rest private. Ziopharm could be a nice play on Kirk’s DNA technology- essentially a controlled form of gene therapy.
The companies plan to develop a cancer drug based on Intrexon’s DNA technology, with profits split evenly between the two. If the therapy reaches Phase II, Intrexon goes on to gain an additional 7.5% interest in Ziopharm for a total of close to 20%. Ziopharm’s stock is up over 20% since the deal was announced.
Randal Kirk, a lawyer by training, found early success as co-founder of a business providing medical supplies to doctors- General Injectables and Vaccines (GIV). He also co-founded King Pharmaceuticals when it was spun out of GIV. Eventually, both GIV and King Pharmaceuticals were sold. GIV went for $65 million in 1998 and King Pharmaceuticals for $3.6 billion in 2010.
What Kirk is best known for is the founding of New River Pharmaceuticals, a company that developed a new drug for ADHD. He cashed out when New River was sold to its then partner, Shire, in 2007 for $2.6 billion. At that time, he owned half the company.
With this level of success, it is no surprise his new company's investment in Ziopharm has created such a stir. Ziopharm does have its own lineup of clinical candidates, but its stock has been unchanged for over five years. Intrexon offers an injection of technology it would otherwise be unable to acquire on its own.
Alfred Mann has seen success in industries ranging from aerospace to medical devices. Early accomplishments were in the electronics field, where he founded and sold aerospace, semiconductor, and solar cell companies.
Mann's interests turned to the medical field when he founded Pacesetter Systems, maker of cardiac pacemakers. He never looked back. From there, he went on to create MiniMed and Advanced Bionics, makers of insulin pumps and neuroprosthetics, respectively. All three were sold to large medical device companies.
The company perhaps most associated with Alfred Mann today is Mannkind Corp, a biotech developing Alfrezza, a fast acting inhalable insulin. The idea is great although the execution appears more difficult. Pfizer had made an earlier attempt at inhaled insulin, but failed badly with the launch of a poorly designed product. Mannkind has learned from Pfizer’s mistake but is running into problems with the FDA.
It has filed for marketing approval, but has just received its second complete response letter, this time more onerous than the first, asking for two new clinical trials. The new trials, which will add up to an additional two years to Alfrezza’s development, took many analysts and investors by surprise. There does not appear to be any issues with the drug itself; the FDA was concerned with a next-generation inhaler Mannkind had switched to. In addition to the clinical data, the FDA's letter also requested more information on usage, handling, shipment and storage of the inhaler, plus updated safety information for Afrezza.
So far, Mann has lost hundreds of millions on his investment in Mannkind. With this new setback, analysts are expecting the “Bank of Mann” to open up his vault once again for the biotech.
Investing alongside successful entrepreneurs may well be a good strategy. It will be interesting to see if that holds true in the case of Mannkind Corp. Nearly all other competitors have left the inhaled insulin field after Pfizer’s failure.
Mann had believed Alfezza would be his greatest success by far. The survival of his company may rest on his faith continuing to hold out. But should Alfrezza reach approval, it looks to have the market cornered.

Disclosure: I am long CELG.

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