Sector Watch: Biotech stocks

Lisa Springer | Jul 16, 2008 6:20am EDT | 2 Comments

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Biotechnology investments often offer big risks, but huge potential rewards. New drugs, such as ones in development by Emergent BioSolutions (NYSE:EBS) and ChemGenex (Nasdaq:CXSP), can provide multi-billion dollar payoffs once sales commence.

Emergent BioSolutions is a profitable biopharmaceutical company developing immunobiotics for use against infectious diseases. Its lead product, BioThrax, is the only FDA-approved vaccine for preventing anthrax, a potential bioterrorism weapon spread by airborne bacteria. BioThrax sales were $169.8 million in 2007, and Emergent has already supplied over 16 million doses of BioThrax to U.S. government agencies. Last year the company entered into a three-year $448 million deal with the U.S. government to supply an additional 18.75 million doses. About 12 million remain to be delivered on this contract. The cash flow from BioThrax sales is being used to fund the development of new vaccines. Emergent has vaccine candidates for typhoid and hepatitis B in late-stage development, and is working on a post-exposure anthrax therapeutic, along with early stage development vaccine candidates for botulinum, group B streptococcus and Chlamydia.

Emergent’s typhoid vaccine candidate entered Phase II clinical trials this July. Study results are expected by year-end and Phase III trials are likely to commence in 2009. Typhoid poses a major health threat in many developing countries with an estimated 22 million cases occurring each year. Typhoid vaccines exist but require multiple doses to be effective. Emergent has the only single-dose preventative. The company’s hepatitis B vaccine candidate is also in Phase II trials. Hepatitis B infections are a serious global health problem with an estimated 350 million chronically infected cases worldwide. In addition, animal studies are underway of an anthrax immune globulin therapeutic designed for post-exposure use, and human clinical trials are scheduled for 2009.

In addition to its in-house research, Emergent fills out its product pipeline with late-stage compounds acquired from others. It recently acquired an anthrax post-exposure therapeutic from AVANIR and an anthrax vaccine candidate from VaxGen that has already completed Phase II studies. In addition, Emergent is acquiring FluBlok, a recombinant flu vaccine candidate in Phase III trials and other product candidates from Protein Sciences. FluBlok is the industry’s first recombinant influenza cell culture vaccine and has been given fast-track status by the FDA. FluBlok’s potential market is huge: more than 1 billion flu cases occur each year, resulting in 250,000 to 500,000 deaths worldwide. This acquisition has not been progressing on schedule, however, and Emergent filed a lawsuit against Protein Sciences in July alleging breach of contract and seeking damages.

Emergent recorded 62% year-over-year revenue growth in the first quarter of 2008, primarily due to BioThrax sales. First-quarter revenues rose to $42.7 million from $26.4 million last year while first-quarter net income improved year over year to $7 million, or $0.24 per share, from a loss of $2.7 million, or $0.10 per share. The company targets full-year 2008 revenues in a $180 million to 195 million range and net income exceeding $20 million as compared with 2007 revenues and net income of $183 million and $23 million, respectively. Analysts look for this company to produce 25% growth next year. My $15 price target for Emergent is 24% above Tuesday’s closing price of $12.12. Shares have ranged between $4.40 and $12.67 over the last 52 weeks. For more information on Emergent, read our spotlight on the company.

While not yet profitable like Emergent, ChemGenex Pharmaceuticals may be years ahead of the competition in advancing a new treatment for chronic myelogenous leukemia (CML), a condition that affects about 100,000 individuals worldwide. The company’s lead drug candidate, Omacetaxine, is in Phase II and III clinical trials and has been granted fast-track status by the FDA for treating CML patients who haven’t responded to alternative therapies and have a commonly occurring gene mutation known as T3151. On July 1, 2008 ChemGenex submitted the first part of a three-part rolling submission for a new drug application (NDA). The second part is due in early 2009 and the company anticipates filing the final portion of the NDA submission in mid-2009.

Omacetaxine, derived from the Chinese yew tree, has shown promise as a treatment for CML patients who haven’t responded to Novartis’ drug, Gleevec. Approximately 3% to 4% of CML patients are resistant to Gleevec, with many of these linked to the T3151 mutation. Gleevec costs about $30,000 per year and addresses a $2.5 billion U.S. market. The global CML treatment market is estimated at $4 billion and is growing about 18% annually; The Leukemia and Lymphoma Society estimates that 22,000 Americans have CML. According to the American Cancer Society, more than 4,800 new cases will be diagnosed in the United States in 2008.

In addition to Omacetaxine, ChemGenex is also developing Quinamed for the treatment of prostate cancer with fewer side effects. Approximately 186,000 prostate cancers are diagnosed in the United States each year, is the most common type of cancer in men and is a leading cause of cancer death. Quinamed has entered Phase II clinical trials. A third new drug candidate, CXS-299, is in late pre-clinical development for the treatment of solid tumors refractory to chemotherapy.

ChemGenex is headquartered in Australia but has a California research center. Last year the company recorded revenues of AUS$1.4 million, consisting mainly of partnering income, and an AUS$11.7 million net loss. ChemGenex began its fiscal 2008 with approximately AUS$25 million in cash and estimates its quarterly cash burn rate at around AUS$3.5 million. At the time of this release, June 30, 2007, the USD to AUS$ was about 1:1.15.

ChemGenex is not required to file quarterly updates with the SEC, so monitoring the company’s financial progress is difficult. In addition, the company is not widely followed on Wall Street although two Australian analysts have rated its shares a “buy.” Reflecting positive Omacetaxine news, ChemGenex’s Nasdaq- traded shares have risen nearly 70% in 2008, trading as high as $27 in recent weeks. My $25 price target for ChemGenex is a 31% premium to Tuesday’s closing price of $19.10. Over the last 52 weeks, shares have ranged between $8.58 and $26.99. For more information on the company, read our spotlight “ChemGenex Pharmaceuticals: Years ahead of competition.”

About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience. Read More