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5 biotechs on the edge of cancer breakthroughs
Shares of OSI Pharmaceuticals soared recently on word of a promising lung cancer drug. Who will be next in this risky but potentially profitable field?
By Michael Brush
When the tiny biotech OSI Pharmaceuticals (OSIP, news, msgs) unveiled promising test results for an experimental lung cancer drug last week, its shares turned into a one-day wonder, advancing more than 150% before the markets closed.
The stock has lost a quarter of its value since, but the awesome move left many investors -- including myself -- asking the following question: Where might lightning strike again in the cancer research field?
Theres certainly no shortage of candidates. Thanks to advances in cancer research, scores of tiny biotech companies have potentially promising cures. The trick is to find the ones whose potential treatments arent yet priced in to the stock.
For help with this daunting task, we turned to some top experts in this field. First, we checked in with Ron Garren, author of a hot investing newsletter who also happens to be a practicing physician of 30 years and a molecular biologist with a Ph.D. from Stanford University. Hes got great insight because he knows the theory. And he has a good sense of what will work in the marketplace. His record speaks for itself. Garrens Biotech Insight newsletter carries a model portfolio that is up more than 1,000% since June 1999.
We also consulted Fredric Cohen, president of Crownstone Group, an investment research firm that specializes in biotechnology. A physician, Cohen is a former research strategist at Johnson & Johnson (JNJ, news, msgs).
Two money managers shared ideas as well: Jay Markowitz of T. Rowe Price and Brian Hathaway of Hathaway Partners Investments.
Rules for a risky road
Before we get to their top five picks, lets discuss some cancer-drug-investing rules.- Dont expect giant, one-day gains very often; theyre rare. OSI jumped so high last week because it was the first time that a drug in its class had been found to extend the life of cancer patients.
- Get familiar with just a few scientific concepts. Moving beyond traditional radiation and chemotherapy for cancer, scientists are essentially developing three other ways to stifle this terrifying killer.
First, theyre inventing therapies that cut off the supply of blood and nutrients to cancerous cells by blocking angiogenesis, or the development of blood vessels. Second, scientists are finding ways to block the orders that travel through cells to make them divide in a manner thats wildly out of control. Another approach may someday use vaccines to trick the bodys immune system into killing cancer cells.
- Never take too big a position in any single biotech stock; theyre just too unpredictable. Basic money-management rules dictate that single positions should be no larger than 2% to 5% of your stock portfolio.
- Be patient. It may take months for a biotech stock to gain the catalyst it needs for a strong surge.
A few things to look for
Here are some of the catalysts to look for when seeking out promising biotech investments:- Solid data. You dont need successful completion of the so-called Phase II or Phase III trials for a biotech stock to get a good lift. Often -- as with OSI Pharmaceuticals last week -- a company will simply release data showing that the drug is progressing as hoped, even before it finishes a testing phase.
- Fast-track approval: Drugs that treat life-threatening diseases with no available cure can get this form of early approval from the Food and Drug Administration (FDA). This can light a fire under a stock, especially if it is a small company.
- Oncology conference surprises: In early June, many biotech companies, including several of the five we mention below, will release data from crucial clinical trials at the American Society of Clinical Oncology (ASCO) meeting in New Orleans. Expect stocks to bounce around on this news.
- Partnerships: The big pharmaceutical companies badly need products for their pipelines. This puts biotech companies in the drivers seat. Development-stage biotech companies that once settled for 15% royalties on sales in the United States are now getting 50% of profits, notes Morgan Stanley biotech analyst Steven Harr. Partnership announcements can boost the stocks of small biotech companies.
With all this in mind, here are five biotech companies that may move up nicely over the next year or so.
5 on the leading edge
Onyx Pharmaceuticals (ONXX, news, msgs)
This companys experimental cancer drug, known as BAY 43-9006, has shown promise in the treatment of advanced kidney cancer. The downside for investors: The drug has already received fast-track approval for this use, meaning some of this potential is priced into the stock.
But Onyx, which has a partnership with Bayer (BAY, news, msgs), also is testing whether this drug can work against other kinds of kidney cancer, as well as melanoma, lung cancer and cancers of the liver and pancreas. It is certainly not undiscovered, but this could be a real interesting cancer drug, says Markowitz, of T. Rowe Price. The drug works both by blocking angiogenesis and disrupting signals that spark excessive cell division.
Onyx has a claim on half the worldwide profits from the drug, and peak sales could top $2 billion, says Jim Reddoch, of Friedman, Billings, Ramsey. Onyx likely will announce breakthroughs at the June ASCO meeting.
Medarex (MEDX, news, msgs)
Compared with Onyx, Medarex has a lot of potential that isnt yet priced in to the stock, believes Biotech Insights Garren. The companys claim to fame is that it developed genetically altered mice used to produce human antibodies -- meaning these antibodies dont spark allergic reactions in people.
One of these antibodies, known as MDX-010, shows promise in treating melanoma and prostate cancer. It works by stimulating the immune system, so that anti-cancer vaccines used at the same time can work better. Thats good news, because so far cancer vaccines have been a failure. But this is one of the things that could make the vaccine space happen, says Garren.
The company has several other antibodies that are being tested in the treatment of different cancers, and the potential to develop many more. Medarex enjoys partnerships with lots of pharmaceutical companies. And it has $364 million in cash, which helps protect against downside, says Brian Hathaway, of Hathaway Partners. Expect breakthroughs to be announced at the June ASCO meeting.
Genitope (GTOP, news, msgs)
Genitope makes exactly the type of cancer vaccine that would get a helping hand from Medarexs immune-system booster. Genitope is also a favorite choice of Crownstone Groups Fredric Cohen, in part because there are already so many test results supporting Genitopes MyVax vaccine. (Cohens pick in my April 21 column on stocks that Wall Street analysts ignore, Aeterna Laboratories (AELA, news, msgs), is already up 14% on news of successful trials for its cancer drugs.)
Genitopes vaccine is in Phase 3 testing to see how well it fights a form of lymph-system cancer known as non-Hodgkins lymphoma. The company is way ahead of potential competitors -- another reason Cohen likes it. He also likes Genitope because its management has experience bringing drugs to market.
Though Genitope might not get approval for a year, Cohen thinks it makes sense to buy the stock now. I think investors should get this stock while it is cheap, before it goes up two or three times in anticipation of the data. Cohen also believes MyVax is a good candidate for fast-track approval.
Sonus Pharmaceuticals (SNUS, news, msgs)
The most widely used drug for chemotherapy is a compound sold by Bristol-Myers Squibb (BMY, news, msgs) known as Taxol. Like two other smaller drug companies, Sonus Pharmaceuticals is working on a way to bring a variation of Taxol to the market. But while the two competitors changed the compound slightly, Sonus changed only the delivery mechanism. This is key, says Garren.
Why? Because this means Sonus can piggyback on all the FDA approvals Bristol-Myers has already received. That will help speed the time to market for this companys version of Taxol, known as TOCOSOL-Paclitaxel. The compound is used to treat common breast and lung cancers, among others. Potential catalysts: Sonus is likely to announce a partnership soon. And it will present data at ASCO.
Ligand Pharmaceuticals (LGND, news, msgs)
Ligand Pharmaceuticals markets the painkiller Avinza, plus the anti-cancer drugs Ontak and Targretin. But decent potential upside may lie elsewhere. Ligand is currently testing how well Targretin helps combat lung cancer when used along with other anti-cancer drugs in chemotherapy. I have a hunch it will work out, says Garren. Look for news at the ASCO meeting in June, he says.
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