FOOL ON THE HILL
Snake-Bitten Biotech

Buying good companies when they are down on their luck is often better than chasing today's market darlings. While it requires patience and the willingness to go against the crowd, buying stocks when expectations are low will often lead to attractive prices. Bio-Technology General is a profitable, cash-rich biotech company that has seen its share of bad luck. With low expectations producing an interesting price, it may be an undervalued stock.

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By Zeke Ashton
June 19, 2002

I'm sure you know the old saying that it's better to be lucky than to be good. Well, I can tell you that luck and serendipity play a big role in business. Some companies manage to stumble into being at the right place at the right time with the right product, and that gets them a big lead over the competition. Other companies seem to do everything right yet never get that lucky break that will put them over the top.

For whatever reason, I've always been attracted to good little companies that are down on their luck. I figure that bad luck can't last forever, and I want to buy good companies when the stocks are cheap.

I've had some measure of success with this approach, though patience is usually required. As an example, one of my long-time favorite stocks was an unheralded Canadian biotech company called BioChem Pharma. Despite its small size and low profile, the company discovered and developed 3TC, which went on to become the best-selling HIV drug in the world for a while. The stock became a huge winner in the heady days following 3TC's successful launch in 1995. Unfortunately, high expectations often bring disappointment, and BioChem Pharma's stock price hit a high in 1996 that only perfection could sustain.

Not surprisingly, the stock never advanced any higher, and began to sink when the company suffered a couple of nasty setbacks. First a promising drug candidate failed in clinical development, and then Zeffix, BioChem's follow-on product for Hepatitis B, suffered from a slow launch. The stock sagged. I bought BioChem Pharma in 1999 and added to my position in early 2000. The stock went nowhere for what seemed like a very long time during a huge rally for biotech stocks. Finally, in late 2000, my investment had a happy ending when BioChem Pharma was bought out at a healthy premium by the British firm Shire Pharmaceuticals (Nasdaq: SHPGY).

I remember the key ingredients that made my decision to invest in BioChem Pharma the right one: The company had a lot of cash, it was very profitable, and it had suffered just enough bad luck to become a very unpopular stock. All the momentum junkies and short-term traders had long since moved on to the Millennium Pharmaceuticals (Nasdaq: MLNM) and Human Genome Sciences (Nasdaq: HGSI) of the world, leaving an exceptionally profitable and growing company trading at a very reasonable price for those willing to overlook the recent bad luck and lack of an immediate catalyst.

As it so happens, I'm a sucker for these kinds of companies, as evidenced by one of my newer favorites, a similar company with an eerily similar name -- Bio-Technology General (Nasdaq: BTGC). Bio-Technology General, which has its headquarters in New Jersey and has manufacturing and R&D facilities in Israel, was founded in 1980. Now going on 22 years old, it suffers badly when compared to its first-generation biotech peers Amgen (Nasdaq: AMGN), which boasts a market cap of $44 billion, and Genentech (NYSE: DNA), which is valued at over $18 billion.

While Bio-Technology General's $270 million market cap looks puny by comparison, it's certainly no small accomplishment to have survived the 20-year journey from startup to profitability in an industry littered with failed companies. Bio-Technology General broke $100 million in total revenues in 2001, and also has more than $100 million in cash in the bank. In an industry in which many biotech companies with much higher market caps are still looking for their first commercial drug, it has managed to get nine drugs to the market. Unfortunately for Bio-Technology General, none has been a big winner.

You have to have a certain mindset to be willing to buy a stock like Bio-Technology General. I happen to be a Texas Rangers baseball fan. The Texas Rangers have never won anything. They've never even been good enough to lose in the World Series. Every time it looks like they have the talent to put together a championship run, something horrible happens and they end up with a disappointing year.

Being a Texas Rangers fan has prepared me well for being a Bio-Technology General stockholder. It seems like every time it looks like it is about to break through, some supply issue, inventory overhang, sales disappointment, patent litigation, or some such pops up and bites the stock. Most recently, the problem was an unexpected slowdown in the company's most important product, Oxandrin, and lower-than-expected sales of human growth hormone due to pricing pressures in Japan. This unhappy turn of events caused the company's stock to drop from the low $8 range down to its current price of about $5.

Bio-Technology General is, in short, the unluckiest biotech company I've ever come across. And for those of you who don't really follow biotechnology, luck can play a huge role in a game where the first one to market with an approved drug generally gets the feast, and the second mover gets whatever scraps might be left. To demonstrate, Bio-Technology General was a little late to the market with its recombinant human growth hormone, which was approved by the Food and Drug Administration way back in 1995. Unfortunately, biotech pioneer Genentech got there first. And because the drug was awarded Orphan Drug designation by the FDA, it also got seven years of U.S. market exclusivity.

Growth hormone accounts for about a quarter of a billion dollars in revenue for Genentech annually, while Bio-Technology General has to be content to market their product in Israel and Japan. (It managed only $24 million in revenue in 2001.) Bio-Technology General's most recently approved product, Arthrease, is an injectable lubricant for arthritic knees that will be marketed by a subsidiary of Johnson & Johnson (NYSE: JNJ) in the U.S. and Europe. But here again, Bio-Technology General is late to the party. Arthrease will have to compete with an entrenched competitor in Genzyme's Synvisc, marketed by Wyeth (NYSE: WYE), which is close to a $100 million product.

I think it's fair to say that the market isn't too excited about Bio-Technology General's prospects. I suppose that's why the stock appeals to me. There's a lot here to like -- a biotech company with nine products on the market, $100 million in cash, and a market cap of less than $300 million just sounds very cheap to me. The company has been profitable and cash flow positive for the last five years, so it isn't going away anytime soon.

In the meantime, any number of good things could happen. Bio-Technology General has an intriguing joint venture with Israeli generic drug giant Teva Pharmaceuticals (Nasdaq: TEVA) to produce generic biotech drugs. It has an interesting pipeline, with three drug candidates that, if approved, could become large sellers. The most advanced of these is only in Phase 2 testing, and is, therefore, at least a couple of years away, but positive Phase 2 results would certainly be a welcome development. Bio-Technology General is also investing in its sales force to help revive sagging sales of Oxandrin, which accounts for about half the company's product revenues. Any improvement there likely would do wonders for the stock.

In my final reckoning on Bio-Technology General, there is just too much good stuff here for the price to be ignored, though I have no idea how long it might take for its luck to finally turn for the better. I have learned that when you buy unpopular stocks, you sometimes have to be patient. Maybe 2003 will be the year that Bio-Technology General finally breaks through and the stock takes off. And maybe the Texas Rangers will finally win a World Series -- now, that'd really be something!

At time of publishing, Zeke Ashton owned shares of Bio-Technology General. Zeke apologizes for the completely inappropriate reference to baseball in an article about biotech investing, but pleads temporary insanity due to the inhumane torture of watching John Rocker give up a home run to lose yet another game for the Texas Rangers in the ninth inning. The Motley Fool's disclosure policy is a winner, though.