By Zeke Ashton (TMF Centaur)
June 15, 2000

Article Synopsis: In the first part of this series, we introduced the Foolish biotech checklist to help you identify biotechnology companies worthy of investment. Part 2 of the series walks you through the first three criteria on the list and introduces several useful information sources.

Welcome, Fool, to the second installment of the biotech investing checklist! For those of you who didn't catch the first article, you can link to it right here. The next step is to go through the checklist in some detail, using Biogen (NASDAQ: BGEN) as our example. I've included links in the text where you can find the information I'll be using, and I encourage you to keep track of the links you find helpful for use in your future research.

Criterion # 1: Successful products on the market
Let's start with Biogen's currently marketed products. The company's flagship product is Avonex, which is now the best-selling drug for multiple sclerosis worldwide. In its latest earnings report, Biogen reported first quarter Avonex sales of $174.5 million, a 33% increase over the previous year's sales. With annual sales potential of over a billion dollars, Avonex definitely qualifies as a successful product.

In addition to Avonex, Biogen also had first quarter royalty income of $42.2 million from drugs that are sold through marketing partners. One of those is Intron-A, marketed by Rule Maker Portfolio holding Schering-Plough (NYSE: SGP). Intron-A is the current gold standard of treatment for Hepatitis C and achieved worldwide sales of $1.1 billion in 1999. Biogen also receives royalty income for its Hepatitis B vaccines and diagnostic products, which are marketed by partners SmithKline Beecham (NYSE: SBH), Merck (NYSE: MRK), and Abbott Labs (NYSE: ABT).

Biogen's total revenues from product sales and royalties amounted to $216 million in the first quarter of 2000, up 26.3% from the first quarter of 1999. With annual revenues likely to be well over $750 million, Biogen is definitely in the top tier of biotech companies.

# 2 A deep product pipeline with late-stage candidates
Time to check Biogen's pipeline of potential new drugs, which are in various stages of FDA clinical testing. (If you would like more information about the FDA clinical trial process, click here). First, though, let's define what we are looking for.

Each drug in a company's pipeline is a lottery ticket of sorts. The more tickets a company has, the better its chances of getting one of them to market for a payoff -- and the less reliant the company is on any one product. Since the chances of each drug eventually achieving FDA approval improve the closer it gets to market, a drug in Phase 3 of testing is much more likely to be valuable than one in Phase 1. The payoff of a drug in Phase 3 is also expected as much as five to seven years sooner than a compound in Phase 1.

Ideally, we'd like to see at least one or two products in Phase 3 trials or already submitted as a New Drug Application to the FDA. A number of products in early stage trials (Phase 1 and 2) is another a good sign. Remember that the depth of the pipeline is relative to the market capitalization of the company: Don't expect a company with a $100 million market cap to have 9 products in clinical development. On the other hand, one would expect a company like Biogen, with a market cap of over $8 billion, to have multiple candidates in clinical development, and at least a couple in Phase 2 or Phase 3 trials.

For those of you interested in a very simple but elegant way to get a numerical rating for a given company's pipeline, I'd highly recommend using the Clinical Index. The CI, developed by Fool community member and all-around font of biotechnology knowledge, Greg Carlin, is one of the concepts introduced in the research report Biotech Pipeline Evaluation: Harvesting the Human Genome.

OK, now that we understand what we're doing, let's take a look at Biogen's pipeline. (Click here and go to R&D and Product Center.) At first glance the list of products looks long and impressive, but most of the clinical trials in progress are for additional applications of Avonex. While clinical testing for additional therapeutic uses for an existing product is a great strategy, we'd like to see some other drug candidates to bolster the company's chances for future revenue streams. Beyond Avonex, Biogen has only one other drug in late stage clinical trials -- Amevive, which treats the skin disorder psoriasis. The company does have several other irons in the fire, but none of them has advanced so far as human testing yet. This means that they are at least a decade away from the market. In terms of depth, Biogen's pipeline is pretty bare for a top tier biotech firm with a market cap of $8 billion.

# 3 Drugs and candidates that target large or underserved markets
Just as important as the number of products in the pipeline is whether those products are likely to generate large sales once they reach the market. A single billion-dollar drug is obviously worth more than five drugs that generate $100 million each. Avonex is piling up sales, which would indicate that there is both a large and underserved market for the drug. But what about Amevive, Biogen's lone bullet in the pipeline? Will it add to the bottom line? There are three factors that we will consider to answer this question: the number of potential patients, the number of potential competing products, and the relative effectiveness and safety profile of the drug.

Let's start with the patient size. I start by going to Google.com and typing in the word "psoriasis." The first link I get is to the National Psoriasis Foundation. Good enough. As it turns out, this site has loads of statistics for psoriasis. According to NPF, the disorder affects more than 7 million Americans, with between 150 and 260 thousand new cases each year. Annual outpatient costs for treatment are estimated at between $1.6 and $3.2 billion annually. So it's a big market.

How well served is the market? Based on the excellent description of available treatments on the NPF website, there are only three available internal drug treatments for severe psoriasis, and each has side effects that limits its attractiveness. The market therefore appears to be both large and somewhat underserved.

Since it is rather unlikely that Biogen is the only company targeting a large, underserved market, let's see if we can find out what other companies are researching psoriasis treatments. The best site I know for this kind of information is Recap.com. Click on "clinicals" at left and type in "psoriasis" in the text search.

This gives us a great overview of the potential competition. Lots of different drugs for psoriasis are in clinical trials, but it looks like only a few candidates are as far along as Amevive: two drugs in Phase III from Genentech (NYSE: DNA) and Xoma (Nasdaq: XOMA), and another from Bio-technology General (Nasdaq: BTGC) and Johnson & Johnson (NYSE: JNJ).

To determine the third factor, the drug's effectiveness and safety profile, we must rely on the company's reports and the information presented at medical association conferences. Therefore, this factor is something of a judgement call, but based on recent press releases, the company looks to be encouraged by Amevive's clinical test results.

To summarize, it appears that Biogen's one candidate in late-stage trials appears to target a large market and may offer an improvement in efficacy and safety compared to the drugs already on the market.

It looks like I'm out of space, and we're not even halfway through the checklist! Looks like a third installment is called for, so I'll be back on Tuesday to run Biogen through the remaining items on our Foolish biotech checklist. Hope to see you then!

Next: Biogen and the Biotech Investing Checklist »

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