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Four Stocks That Stand Out in Biotech's Bargain Bin

It's time to go hunting in the biotech bargain bin.

While the broad Amex Biotechnology Index can't seem to put any real distance from its year lows set in April, there are some decent buys to be found if you look closely. Fair-weather biotech investors have been scared off, leaving some fundamentally sound stocks bruised but not beaten. Call them biotech bargains because fund managers are finding the low prices irresistible.

Here are four such biotech bargains, all on the buy list of various fund managers, especially at current market prices -- Praecis Pharmaceuticals (PRCS), Inhale Therapeutic (INHL), Bio-Technology General (BTGC), Interneuron (IPIC).

Now, before you call your broker, a healthy dose of caution is in order. All of these companies have some hair on them -- they wouldn't be oversold if they were gems. Nor will they ever be mistaken for the next Amgen (AMGN). And in some cases, the expected upside is still a ways down the road. But again, fund managers are nibbling on these companies because the low prices outweigh the risks right now.

Praecis Pharmaceuticals: If these stocks are hairy, then Praecis is Chewbacca . Last week, shares in the company tumbled more than 35% after Amgen pulled the plug on a partnership to develop a new prostate cancer drug called Plenaxis. In June, the Food and Drug Administration deemed Plenaxis' marketing application "inadequate for approval."

But at Monday's closing price of $3.81 a share, Praecis is trading well below cash, pegged at $5.53 a share as of June 30. And Plenaxis, for all its recent hiccups, looks like an effective prostrate cancer drug. Praecis is expected to use some of its $282 million cash reserve to answer the remaining regulatory questions. The company also may seek a new partner. Plenaxis is not expected to be a huge seller, but if Praecis can get it approved, the company's shares will rebound.

Inhale Therapeutic: Investors left the company gasping in July after its highly anticipated inhaled insulin drug, Exubera, was delayed. Inhale's partner Pfizer (PFE) is driving Exubera's development, but the pharmaceutical giant hasn't said much about what's holding the drug up. An approval filing was expected by the end of the year, but Pfizer is now saying that additional tests might be needed.

But Inhale is not just about developing technology for the delivery of inhaled drugs, and it's not completely dependent on Exubera for its survival. In May, Inhale acquired Shearwater, expanding its repertoire into technology to improve the effectiveness of injectable drugs. Through Shearwater, Inhale now stands to earn royalties on the sale of 14 drugs, including PEG-Intron, a recently approved Hepatitis C treatment marketed by Schering-Plough (SGP). Inhale also will earn royalties when Amgen gets approval to sell Neupogen SD/01 -- an improved version of its blockbuster drug Neupogen -- sometime next year.

It's true that Inhale is still judged largely by the outcome of Exubera, and the risks are plentiful. Pfizer is expected to shed some light on Exubera's future at its December analyst meeting, and few biotech observers have given up hope that the drug will be a big seller. But despite this uncertainty, Inhale has diversified with the Shearwater acquisition, and at its current price of about $12 a share, the company's stock looks oversold.

Bio-Technology General: An overlooked (profitable) biotech company. Bio-Technology General's biggest seller is Oxandrin, a drug developed five years ago to reverse dangerous weight loss in AIDS patients. The benefit from so-called AIDS drug "cocktails" put a crimp in this market, so the company inked a partnership with Abbott Laboratories (ABT) in May 2000 to sell the drug to nursing homes and other long-term care facilities.

Elderly patients, it seems, gain weight and strength when given Oxandrin. Pushed by the Abbott sales reps, Oxandrin sales rose 200% to more than $34 million in the first half of this year, compared with the first six months of 2000. And Abbott is motivated to sell the drug because it seems to boost the effectiveness -- and sales -- of its own nutritional supplements. While no one expects the explosive growth rates of Oxandrin to last, it seems as if the drug has found a profitable and growing niche.

Bio-Technology General also sells three other, smaller drugs, all of which are expected to contribute to earnings of 40 cents a share this year and 50 cents a share in 2002. At its Monday close of $6.76 a share, the company is trading at 13.5 times 2002 earnings. Cheap.

Interneuron: Talk about a company left for dead. Remember the fen-phen diet drug debacle of the late 1990s? Well, Interneuron developed the "fen" portion of the dangerous combination, which was sold through a license to American Home Products (AHP). Both companies were buried under billions of dollars in consumer lawsuits, and Interneuron, being a small biotech, was thrown on the sector's trash heap.

But in May, the dark cloud lifted. Interneuron was able to force AHP into a settlement that protected the company from any further legal liability. In essence, the fen-phen disaster was deemed to be an AHP problem, allowing Interneuron to focus attention on its drug development pipeline.

And one experimental drug in particular is drawing a lot of interest. The company has inked a partnership with Pfizer to develop Pagaclone as a new type of drug to treat patients suffering from panic attacks and general anxiety disorders.

Pagaclone could be a big drug because it may treat patients effectively without the bad side effects of existing drugs. Valium, for instance, is addictive and causes drowsiness, while drugs like Xanex can cause sexual dysfunction and insomnia.

Now, Pfizer is developing Pagaclone in the Big Pharma way -- that means large, time-consuming trials involving lots of patients, and not much public disclosure into how things are going. But Pfizer is expected to talk about Pagaclone's development during its December analyst meeting, and if all goes well, the drug may reach the FDA in 2003 or 2004.

In the weeks after Interneuron inked its fen-phen settlement with AHP, the company's stock soared to $10 a share, after trading as low as $1.15 a share. Today, Interneuron trades at about $4 a share, which makes it an attractive, low-risk investment for many institutional investors.

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