FOOL ON THE HILL
Corixa Turns Radioactive

Biotech vaccine maker Corixa hopes to bring its vaccine and adjuvant candidates to the market before it runs out of cash. But the FDA dashed its hopes for cancer drug Bexxar, its best near-term possibility. Sometimes risk-tolerant investors might benefit from scooping up a new drugmaker when it's down, but this one is too rich for my blood.

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By Tom Jacobs (TMF Tom9)
March 21, 2002

Corixa Corp. (Nasdaq: CRXA) is the latest to join the parade of drugmakers whose businesses have been affected by bad news from the Food & Drug Administration (FDA). Last week, the FDA asked for more data on Corixa's groundbreaking Bexxar, an anti-cancer monoclonal antibody cum radioactive isotope intended to treat non-Hodgkins Lymphoma. The delay means no near-term approval or revenue from a drug to produce a potential $250 million-plus a year, shared between Corixa and partner GlaxoSmithKline (NYSE: GSK). Corixa stock fell 36% to $6.15, nearing its split-adjusted 1998 first-day close of $4.56. It had leaped as high as $69.75 on Feb. 29, 2000.

The FDA hammer has been falling with increasing frequency, and it is especially painful to newer hopefuls using spiffy new biotechnology to move in on the big pharmas' turf. ImClone Systems (Nasdaq: IMCL) is the talk of the drug town for the FDA's decision not even to accept its application to approve colorectal cancer treatment Erbitux. Board poster boad and others on our Biotechnology discussion board have been cataloguing the crashes, with recent new additions Viropharma (Nasdaq: VPHM), Sepracor (Nasdaq: SEPR)Guilford Pharmaceuticals (Nasdaq: GLFD), and more. Many big pharmas have been disappointed recently, too, but their pipelines usually have more candidates to cushion the blow. 

Opportunity, or are you nuts? 
Every time a newer company takes a hit, risk-tolerant investors interested in the field naturally wonder if there is an opportunity. An example is Scios (Nasdaq: SCIO), who hoped that its Natrecor would be the first new congestive heart failure treatment approved in over a decade. A quick look at its stock chart shows the crash when the FDA failed to approve Natrecor, and a price steady increase while the company was financially able to stick it out and obtain approval a few years later. While high risk, Scios rewarded (with seven- or eight-baggers) those investors who bought after the fall and held on. Is it possible for Corixa?

Corixa went public in August 1998, garnering some cash to develop vaccines and adjuvants (vaccine enhancers). It had a healthy pipeline for a company of its size and lifetime. In 2000, it decided to use some of its highly valued stock and cash to do what any smart company would do -- buy a potential drug revenue stream at favorable prices. Though Corixa focused on vaccines and adjuvants, it purchased Coulter Pharmaceuticals and its revolutionary Bexxar drug candidate for $900 million in stock.

Bexxar was biotech sci-fi: a monoclonal antibody linked to a radioactive isotope. A monoclonal antibody is an engineered protein that joins with and neutralizes a particular virus or bacterium. The idea is to deliver the radioactive bullet via the protein to cancerous cells alone, reducing harm to the rest of the body. Corixa and partner GlaxoSmithKline tested Bexxar on patients with non-Hodgkins Lymphoma at the same time as IDEC Pharmaceuticals (Nasdaq: IDPH) and partner Genentech (NYSE: DNA) and competing Zevalin, but CEO Steve Gillis explained in his interview with TMF why he believed that Bexxar is superior.

Bexxar had the development and regulatory lead for a while, but stumbled. The FDA approved Zevalin in February. Now it appears that Corixa could be required to conduct trials that compare Bexxar directly to Zevalin.

Prospects for Corixa
FDA watchers are seeing a vise-like tightening, where, in order to gain approval, drugs must demonstrate a distinct improvement over those on the market. More and more are failing to satisfy regulators. That's yet another reason why it's extraordinarily risky to invest in developing drugmakers. It's very much about percentages, and why investors -- and probably some traders and other speculators -- will move a company's stock up as FDA news approaches. That's exactly when some contrarians shun a stock already boosted high on expectations of future profitability, and prefer to look when the Street shuns the stock and questions its future, as with Corixa today.

If Corixa intends to pursue Bexxar, it will need to keep the money flowing in. If it does not, investors need to know whether the pipeline can provide enough future profits to justify current risk. They must examine not only the company's cash position to fund further trials or move funds to development elsewhere, but the role of any big pharma partners and what percentage of future revenue streams they claim. Many newer investors are not to blame for failure to read between the lines of company press releases. They often will estimate the market size of a drug, but they will rarely say, "But gee, our company gets only a 10% royalty, while Big Pharma gets the other 90%."

Corixa's cash and pipeline
As of Dec. 31, 2001, Corixa's balance sheet announced $90 million in cash and short-term investments, with a cash burn (net cash from operations minus capital expenditures) for the last four quarters of $18-$23 million a quarter. The company can, subject to some limits, tap a $75 million PIPE (private investment in public equity) from BNY Capital Markets. A PIPE typically allows a company from time to time at its election to issue stock in exchange for cash, diluting current shareholders. It also depresses the share price because those who offer PIPEs are likely to sell the stock quickly, so the PIPE recipient ends up paying the PIPEr.

Corixa must issue shares at a 2% discount, but it can't if its share price is below $5.00. It closed yesterday at $6.45. At current burn rates, which might be lower if the company jettisons Bexxar, the company has about two to two-and-a-half years of cash available. 

Corixa's herpes vaccine, hepatitis B vaccine with adjuvant, and cancer adjuvant are in Phase 3 trials, with a psoriasis drug in Phase 2. Its Melacine melanoma vaccine is approved in Canada and slated for Phase 3 U.S. trials later this year. If any of these succeed in U.S. or other large markets, Corixa will split revenues with partners. Another revenue possibility is a just-announced breast cancer diagnostics development deal with the Ortho-Clinical Diagnostics unit of Johnson & Johnson's (NYSE: JNJ), but financial terms were not disclosed. It's hard, though not impossible, for Corixa to succeed in enough of its development programs to find the revenues in the next two years sufficient to keep it afloat as an independent entity -- but it's another leap to enough revenues to produce free cash flow and substantial appreciation for investors. 

Bottom line: Corixa's finances make it very risky to invest. It could be a Scios, if Bexxar or other drug approvals materialize, but that's too much "if" for me and not enough potential upside to compensate.

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Patty cake, patty cake, Tom Jacobs (TMF Tom9) man. At press time, he owned no shares in companies mentioned in this story. To see his stock holdings, view his profile, and dig The Motley Fool's disclosure policy.