So we waited, and waited, and waited. And then, just when we thought it would never happen, boom! It exploded, hotter than we ever expected. I am, of course, referring to the biotech mini-boom of 2003 (what else?).
After reaching an all-time high of 754 in March 2000, the Dow Jones Biotechnology Index declined dramatically for the better part of three years. But since the beginning of March, it's been a different story altogether: The index has been on fire, gaining some 39%, vs.18% for the S&P 500. Has biotech finally arrived, or are we being treated to Irrational Exuberance II: Son of Exuberance?
If you're skeptical of the rally, you may be encouraged to hear that the latest interest in biotechnology was spearheaded primarily by legitimate, positive developments, particularly in the oncology pipelines of ImClone Systems (NASDAQ:IMCL), Millennium Pharmaceuticals (NASDAQ:MLNM), and Genentech (NYSE:DNA).
Imclone's Erbitux and Millennium's Velcade could be the drugs that put both companies firmly on the path to profitability. Genentech, which is already the number two biotech, hopes that Avastin will cement its position as a leader in cancer treatment for years to come. Are these expectations realistic, or are they just another bunch of biotech pipeline dreams? Let's take look.
ImClone Systems returns to life
Even though it has no products on the market and has never turned a profit, ImClone has received more publicity than any other biotech over the past six months. Unfortunately, the attention stemmed less from the science of Erbitux than from an insider trading scandal involving the company's former chief executive and, of all people, Martha Stewart.
Both were accused of insider trading in December 2001, just days before the Food and Drug Administration refused to review ImClone's new drug application for lead drug candidate, Erbitux, citing problems with ImClone's study design. Ironically, even as Waksal was tried and sentenced, ImClone repeated the clinical trials and verified the efficacy of the drug in treating patients with colon cancer. In addition, ImClone published promising data suggesting a use for Erbitux in lung cancer patients.
Let's talk some science. Erbitux is designed to bind to the Epidermal Growth Factor Receptor (EGFR). Ordinarily, growth factors bind to EGFR and activate the receptor. The activated receptor then creates signals that promote the spread, growth and repair of tumors. Erbitux, by contrast, binds to the EGFR receptor without activating it, thus blocking the effect of other growth factors. You can find a fantastic animation of the drug's mechanism here.
Quick approval is expected for Erbitux, and initial estimates peg the drug's potential at anywhere from $300 million to $1 billion in annual sales. The major challenge for Erbitux will be competition from AstraZeneca's (NYSE:AZN) Iressa, an EGFR blocker that can be taken orally. In addition, Genentech's forthcoming Tarceva also blocks EGFR, making for a very crowded marketplace.
Millennium's first in class
In contrast, Millennium's Velcade is the first drug that targets a structure within cells known as the proteasome. Proteasomes, which exist in both cancerous and normal cells, are cellular "shredders" that chop up and dispose of cellular proteins that are damaged, no longer needed, or are related to Enron.
Imagine proteasomes as musical conductors, directing the activity of the cell. Velcade inhibits the action of the proteasome, removing the maestro and forcing the cellular melodies to play out on their own. The results depend on the type of cell that is affected. Normal cells are temporarily affected, but usually recover. In contrast, the inhibition sends cancer cells toward programmed cell death, a process known as apoptosis.
Millennium began clinical trials of Velcade in patients with multiple myeloma, a cancer of the blood. The initial results were so promising that in December 2002, Millennium decided to take a chance and file for approval prior to the conclusion of its clinical trials.
This move was met with a great deal of skepticism (except on the Fool), but it paid off on May 13, when the FDA approved the drug for patients with myeloma who had failed two other rounds of chemotherapy. The four-month review was the fastest of any drug in history. Millennium shipped the drug six days later, providing patients with the first new treatment for myeloma in over a decade.
The initial market for Velcade is estimated at approximately $300 million. As part of the FDA approval process, Millennium is obligated to complete a series of clinical trials on patients with myeloma, including patients who have not been treated with other drugs. Millennium is also testing Velcade in a number of other hematological and solid cancers, including prostate, colorectal, and lung cancer.
Although myeloma is a small market, the potential for success in treating other cancers makes Velcade a potential blockbuster (over $1 billion in sales). That's big news for any company, but it could be a potential lifesaver for Millennium, which has never turned a profit and continues to burn cash.
Genentech's vast improvement
Genentech's Avastin is the first drug based on the principle of anti-angiogenesis. Cancerous tumors are composed of cells that are rapidly proliferating. Just like everything that grows quickly (including hungry teenagers), these cells need more nutrients and oxygen than do normal cells. When oxygen levels become low, tumor cells release a protein called Vascular Endothelial Growth Factor (VEGF). VEGF binds to nearby blood vessels and triggers them to form new branches to feed the tumor, a process known as angiogenesis. Angiogenesis provides the tumor with a new source of blood that contains the nutrients required for further rapid growth and spreading.
Avastin is designed to bind to and deactivate VEGF before angiogenesis can occur. Laboratory research has shown that tumors not fed by additional blood vessels cannot grow larger than a small pea. Since small tumors are easier to treat, Avastin was widely anticipated as a potential blockbuster. However, a phase III study published in September 2003 showed that Avastin was ineffective for patients with relapsed breast cancer, and investors wrote off the drug, and for that matter, and the entire anti-angiogenesis approach.
Genentech's May 19 announcement of Avastin's success in patients with colon cancer shocked both the medical and investment worlds, and resulted in a one-day stock gain of 45%. The trial demonstrated that a combination of Avastin and chemotherapy extended the lives of patients with metastatic colon cancer by five months. On June 26, the FDA granted Avastin "fast-track" status, which assures a quick review process for the drug.
Based on this news, analysts are predicting that Avastin will reach $100 million in sales by 2004. After that, it's anybody's guess. If Avastin is approved for colon cancer, the market potential is between $800 million to $1 billion annually. However, analysts have been all over the map in projecting sales, with estimates ranging from $500 million to $10 billion (yes, $10 billion!).
The wide range of estimates is due to the breadth of potential indications for the drug. Genentech is taking the same approach as Millennium by running clinical trials testing Avastin in non-small cell lung cancer, renal cell carcinoma (cancer of the kidneys), and metastatic breast cancer. Even though the first trial in breast cancer failed, Genentech feels that patients that have not yet relapsed may benefit from the drug. It is widely believed that Genentech will also run clinical trials for Avastin in patients with early-stage cancers.
Where does this leave us?
ImClone's Erbitux, Millennium's Velcade, and Genentech's Avastin are clear winners. Unfortunately, they've all three been hyped enough to make LeBron James blush. Over the past three months, ImClone, Millennium, and Genentech have all doubled in value, meaning that much of the potential upside for these drugs is likely factored into the stock prices.
And be warned: The slightest development hiccup can lead to a massive sell-off, which makes these companies especially risky for investors. Does this mean that the stocks will invariably trade lower? Not necessarily -- additional positive news from any of the three, either relating to the drugs mentioned here or other promising compounds, could boost these stocks yet higher.
Either way, the more you know about how these drugs work -- and how the industry works -- the better equipped you'll be to analyze the news flow that's sure to come. Informed investors should keep a close eye on these companies as potential additions to the high-risk, high-reward portion of their portfolios.
Arash Mostaghimi, a guest writer for The Motley Fool, is a student at Harvard Medical School. He holds undergraduate degrees in biomedical engineering and the history of science. He also runs a tutoring company in Boston, www.RagingKnowledge.org. Last month, Arash wrote about the booming stent market. He enjoys receiving feedback via email.
