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Inside the Biotech Revolution

TMF: Deals are starting to accelerate and you have almost forty corporate partnerships now. For biotech investors, the key question is "Where are the drugs?" Presumably these companies are out there creating human antibodies for drugs but most haven't reached the clinic yet. But your strategy  creates a virtual drug pipeline that isn't really reflected in your annual reports. With 40 companies out there hunting for drugs, even if only a small percentage makes it to the market, Medarex will have a revenue and royalty stream for the next 10 to 15 years.

Drakeman: I couldn't have said it better. 

TMF: It seems like you have two distinct strategies for partnerships. One looks more like an "upstream" strategy with the big pharma and biotech players to license your technology in return for milestones on any drugs they produce. Even more interesting to me are the "downstream" deals where it appears that you have aggressively identified the companies that are using new technologies like genomics and proteomics to find drug targets, and you are making a big push to get them access to your technology and to make investments to get them up and running on the research and clinical trials. Can you talk a little bit about those strategies and how they appear to be working?

Drakeman:  Sure. The first type of deals, which we call "cash and carry deals," basically let people walk off with our mice and do their own research and pay us milestones and royalties.

We call  the second group of deals "Applied Genomics deals," and the concept there is to create a [drug] pipeline of our own by investing in the product development, and in return we own half the output....The deals are pretty straightforward -- they contribute the target and half the cost of development of the product, and we contribute our antibody technology and the other half of the development costs. The idea is to very efficiently get the product into clinical development, and then to take the ones that look most attractive all the way through to FDA approval. [For more detail, we walk you through the five steps of drug development.]

The goal of Medarex is to file 10 new INDs (that is, filings with the FDA that are needed to begin clinical trials) by the end of 2002. We hope to maintain a pace similar to that each year thereafter.

TMF: That's very aggressive.

Drakeman:    ...[I]f you really want to ensure your success in the biotech and drug industry, the most sensible thing is to adopt a shots on goal approach.... If you take ten shots, out of that perhaps three will be successful. If you only do one or two shots on goal, you had better be lucky. The pharmaceutical industry historically has succeeded because of this shots on goal kind of mentality, whereas the biotech industry has been historically volatile because it has not adopted this shots on goal approach. A company will come along with a successful drug but then not be able to follow it up.

TMF: Is it possible that this has been caused by the biotech industry being under funded? Up until maybe 1998, there hadn't really been much capital market support of biotech dating back to the previous biotech bubble in 1990 and 1991. In the last three years, biotech companies have been able to go public or do secondary offerings at tremendous prices. So today, if you have 100 leads, you can work on 100 leads, whereas perhaps previously the financial resources just weren't there to take more than one or two shots on goal.

Drakeman:  That's really perceptive. Two things have happened over the last two years that have indelibly changed the industry. One has been the genomics revolution I mentioned earlier, but the second is that the investor enthusiasm and excitement surrounding genomics resulted in what was essentially a re-capitalization of the industry. It is certainly true that in the past one of the limitations of product development has been the lack of the money to do more than one or two things. As you point out, that's no longer the limiting factor.

TMF: Let's talk about the wild stock market ride of the last years. As recently as January 1999, you had a company valued at around $200 million. Then all of a sudden, the market goes crazy for biotech stocks, and you wake up one morning in 2000 and your market cap is $3 billion. Besides the positive opportunities that this provided, did the stock price become a negative distraction for the company at any point? 

Drakeman:  I think that every company that went through that probably spent a little too much time standing around the water cooler talking about the stock price. 

TMF: Or maybe saw some talent walking out the door? 

Drakeman:  We haven't had that. We've had talent walking in the door. Having raised a half a billion dollars, and having raised our visibility and market cap, people now come in here with the feeling that Medarex will be here for the long term. Whereas back in 1997 and 1998 many companies, including Medarex, had a small market cap and only a little cash, and new employees that came in would naturally wonder if the company would still be here in a couple of years. Now people see us as a platform that is really going to be making things happen for the long term.

TMF: Let's go over the drugs that you have in development, if that's something you can talk about. 

Drakeman:  MDX 210 is being developed by our partner IDM, or Immuno-Designed Molecules, which is a Paris-based, privately owned biotechnology company. We own about 29% of IDM, and they have a Phase III trial going that combines our MDX-210 product with their activated macrophages, or killer cells, for ovarian cancer.  

Our next most advanced products is MDX-33, which is in Phase II trials and is being developed with our partner Aventis(NYSE: AVE). That's for a disease called Idiopathic Thrombocytopenia Purpura, which everybody just calls ITP for obvious reasons, and is an autoimmune disease.   

After that comes HuMax CD-4, which is being developed by our partner Genmab, a publicly traded Danish company. Genmab is a fully independent company that we own 33% of, and which recently did the largest IPO ever on the Copenhagen stock exchange. HuMax CD-4 is in Phase 2 trials for rheumatoid arthritis and psoriasis. That product is the most advanced of our fully human antibodies. The two prior products I mentioned are partially human antibodies from the days before fully human antibody technology was available.

MDX-101 is a fully human antibody being developed by us for prostate and other cancers in Phase 1/2 clinical trials.  And MDX - 44 is an antibody linked to a toxin, one of the "smart-bomb" products. That's in Phase I clinical trials for atopic dermatitis, which is a skin condition.

And then as you pointed out, Centocor [part of Johnson & Johnson(NYSE: JNJ)] has recently filed an IND. Centocor is a good example of one of our "cash and carry customers" that we shipped mice to a couple of years ago and here there are a couple of years later filing an IND.

TMF: Everything appears to be going gangbusters on the business side, yet at the same time the stock price has gotten very low relative to the increasing value. To what do you attribute that, and what are your thoughts on stock market valuations for biotech right now?

Drakeman: Certainly we are a lot closer to our 52-week lows than our highs, and if you look at the industry as a whole you realize that it is not a Medarex-specific phenomenon. I think that perhaps what happened is that investors got excited with genomics, and many people got a little swept up with too much too fast, and as the market tends to do, it over-reacted in the positive direction only to now overreact in the opposite direction. So I think that we are seeing an overreaction on the negative side now.  In our discussion with analysts and dedicated biotech investors, a lot of them are taking the opportunity to establish positions in biotech now that the value has become a little more compelling. As for Medarex, we just keep knocking the ball out the park, and have been signing an average of one partnership a month or more. 

TMF: And you've been profitable recently, though not on a cash flow basis.

Drakeman: We don't expect to stay consistently profitable in the near term. We have been profitable this year simply because we have started to see some revenues and we have kept our costs down, but going forward we would like to devote a much higher level of investment to product development so that we can really build our pipeline and create the most value in the long term. So we are prepared to sacrifice profitability now to achieve much greater profitability later.

« Back: Part 1

Zeke Ashton (TMF Centaur) edits The Motley Fool Select, TMF's monthly guide to great stock ideas. He owns shares of Medarex, which you can see on his profile. The Motley Fool has a disclosure policy.


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