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4 cancer-drug companies with room to grow
Cancer drugs are likely to get favorable treatment from the FDA as boomers age and demand grows. Here are four biotech companies positioned to deliver for investors.
By Michael Brush
When Biogen (BIIB, news, msgs) and Elan (ELN, news, msgs) pulled their multiple-sclerosis drug Tysabri from the market a month ago because of evidence of fatal side effects, investors in those companies promptly lost 40% to 75%.
Biogen's blowup may yet cause more damage to biotech stocks by helping to force the Food and Drug Administration -- already under fire for approving Merck's (MRK, news, msgs) painkiller Vioxx -- to overhaul and tighten its drug-approval process.
But there is one area shielded from such worries in the biotech area: cancer drugs. Because these treatments save lives, they are expected to get plenty of leeway from the FDA, despite any negative side effects. With the aging of the population driving up the need for such drugs, the investment case for companies making cancer treatments is compelling.
Shares of Genentech (DNA, news, msgs), for example, popped 25% in one day last week after the company revealed its leading cancer drug can tackle more than one form of the disease. The company announced that its colorectal cancer treatment Avastin also helps treat the most common form of lung cancer.
With all the gloom and doom in the biotech area, it was a breath of fresh air, says Jordon Schreiber, who manages the Merrill Lynch Health Care fund (MDHCX).
For investors hoping to reap profits from cancer therapies, Id suggest two large companies: Genentech, when its price dips, and ImClone Systems (IMCL, news, msgs), which makes Erbitux, as a value play. And since the biggest gains in biotech often come from the smallest names, Id recommend NeoPharm (NEOL, news, msgs) and Pharmacyclics (PCYC, news, msgs), two promising small-cap companies developing treatments for brain cancer.
Before we get to the details of these companies, there are two things to keep in mind when investing in the biotech sector. First, diversification is a must. To get the biggest winners, smaller companies are the way to go. But you have to own several so that you get one or two big winners to offset all the losers.
Second, you have to be patient. Four out of the five companies I wrote about in my last column on cancer therapies are down since the column ran last May. But that doesnt make the column a failure, says Jay Markowitz a biotech analyst with fund company T. Rowe Price Group. The reason: All of those companies are still working on the research that could eventually lead to the breakthroughs I highlighted.
When biotechs work, the results can be astounding. Ron Garren, a practicing physician and researcher who follows the sector in his Biotech Insight newsletter, says he has seen his picks jump 782% since he started publishing in 1999.
These stocks can move even before drug studies are completed. Genentech's jump last week came on news of preliminary results. That means investors will be keeping close watch on the annual American Society of Clinical Oncology conference in May, an event at which cancer companies often release market-moving news.
Heres a closer look at four promising cancer companies.
Genentech: Paying up for proven results
Decades ago, a pioneer in cancer research named Judah Folkman at Harvard University hypothesized that doctors would one day kill cancer tumors by finding ways to cut off their blood supplies.
Known as anti-angiogenesis, the process was greeted with skepticism. But the Avastin breakthrough announced by Genentech last week confirms that the process will eventually be used against many kinds of cancer.
Genentechs Avastin works by attaching itself to a protein that helps generate the blood vessels that feed tumors. More tests are under way to see how well Avastin works against other cancers -- such as breast, kidney and ovarian cancers. And Genentech is testing many other compounds, often in partnership with major pharma companies.
With two cancers already clearly in the crosshairs of Avastin, doctors will begin using it off label to treat other kinds of cancer even before the FDA approves it for these uses.
Thats good news for anyone whose family has a history of the disease -- and for Genetech investors. The Avastin news drove Genentech shares into the low $50 range from below $45. At these levels, many investors have doubts about the companys valuation.
By any rational arithmetic formula, it is way overvalued, says Merrill's Schreiber. But I dont think it matters, because they have enough going that further developments will justify the valuation. They have a fairly decent pipeline.
The risk for Genentech shareholders is that other drug companies like Schering-Plough (SGP, news, msgs) are also developing similar treatments, says Markowitz.
Imclone: A cheap cancer play
Doctors also treat cancers using drugs that block the signals in malignant cells that order them to grow out of control. That's the trick behind Imclones Erbitux. The treatment inhibits a receptor for a protein called epidermal growth factor, which many tumors use to grow.
Erbitux sales skyrocketed when the drug first came out. But by the second half of last year, sales began to slow and investors fled Imclone's stock. It fell to below $40 recently from north of $80 last summer.
Down here, it looks like a good value play. The stock trades at 24 times 2005 earnings and its price-earnings ratio is equal to its projected growth rate. In contrast, biotech stocks trade for 37 times 2005 earnings and have a PE of 1.7 times their projected growth as a group, says Fulcrum Global Partners analyst Patrick Flanigan.
What might make Imclone move up closer to the group average? It may soon show that Erbitux works against head and neck cancer. Look for data supporting this at the ASCO meeting in May.
NeoPharm: Poisoning cheeseburgers
As many as 10,000 people a year get the most common -- and typically fatal -- form of brain cancer called glioblastoma multiforme. Doctors can often remove the tumors with surgery. But the cancer comes back in about six months because surgeons cant get rid of the malignant cells that spread through brain tissue.
NeoPharm hopes to change that with a compound called IL13-PE38. Doctors squirt this compound into the brain, after removing a tumor, so it can bind to remaining cancer cells and kill them. Initial tests have yielded good results. NeoPharm hopes to start getting data from more definitive Phase III trials by the end of 2006.
But the companys main product in the works is a drug-delivery system. It is based on liposomes, which are small pieces of fat that travel in the blood. To cancer cells -- which have a big appetite because they grow eight to 10 times faster than normal cells -- liposomes look like cheeseburgers, says Lawrence Kenyon, Neopharm's chief financial officer. NeoPharm hopes to prove that loading liposomes up with toxins -- like Taxol -- is a good way to deliver poisons to malignant cells feeding on liposomes.
Like Imclone, NeoPharm seems like a value play. The stock has fallen to under $9 from above $22 last May. Its down because of two management reshuffles and an ongoing investigation by the Securities and Exchange Commission into the timing of the release of some news.
But the science that got investors excited a year ago hasnt changed. Its only advanced, and investors can buy it cheaper now. Insiders sure seem to think the company is a bargain. They purchased nearly $600,000 worth of stock for $8 to $8.28 on March 11, a positive sign for the stock.
Pharmacyclics: Combating brain cancer
Pharmacyclics wants to use a compound called Xcytrin to combat several forms of cancer. But the most promising near-term use may be against brain cancer, says Pacific Growth Equities analyst Gregory Wade. Wade holds shares of Pharmacyclics, and Pacific Growth has done investment banking for the company.
Pharmacyclics will soon start Phase III testing of the compound in people who have brain cancer that has spread to their lungs. The goal is to show that the compound slows neurological decline. If it is true, doctors cant afford not to use it, says Schreiber.
Wade says Phase III testing could be done by the first half of 2006, with final approval coming around the end of that year. But based on projected Xcytrin sales of $60 million to $223 million a year from 2007 to 2009 in the United States, Wade thinks the stock would trade into the low $30s on positive results alone. The stock recently traded for around $8. We think it is an excellent stock for this year, says Wade.
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