Protein Design Labs has built a solid business as a drug-technology
company, but can it successfully transform itself into a more profitable
drug developer?
A partial answer is coming Friday. PDL will take the wraps off results
from a late-stage test of Zamyl, a drug being developed to treat acute
myeloid leukemia. Monday, the company also will release preliminary results
from a midstage test of Remitogen, another cancer drug being tested in
non-Hodgkin's lymphoma patients.
The results will be unveiled at the annual meeting of the American
Society of Hematology, Dec. 7-11 in Orlando, Fla.
The fates of Zamyl and Remitogen are important to PDL because they
represent the company's plans for increasing profits in the future. After
years of licensing its technology to other drug firms, PDL is now in the
business of developing drugs on its own.
The "old" PDL has been a pretty good performer. The company's
technology takes monoclonal antibodies developed in mice and makes them
mostly human. Humanized antibodies work better in people because there is
less chance that the drugs will be rejected by a patient's immune system.
Drugs such as
Genentech's Herceptin, and
MedImmune's Synagis have
been "humanized" by PDL, which receives a continuing stream of royalty
revenue based on the drugs' sales. Last year, that royalty revenue was
enough to push the company into the black, with earnings of 1 cent per
share. This year, PDL is expected to earn 3 cents per share, according to
Thomson Financial/First Call.
But PDL will generate far greater revenue and profits if it can use its
technology to develop and sell its own drugs. PDL faces increasing
competition for its core technology from companies such as
Abgenix and
Medarex, so building its own roster of drugs also offers
the opportunity to set itself apart from its closest rivals.
Zamyl is PDL's most advanced drug prospect, while Remitogen and five
other drugs candidates are in early or midstage testing. One of these other
drugs, Zanapax, is already approved for transplant surgery and is sold by
Roche. PDL is developing the drug further to treat diseases such as
psoriasis and asthma.
"PDL's shares have performed better than Abgenix and Medarex because
its internal drug pipeline is more advanced," says SG Cowen analyst Bill
Tanner. "It's important for companies to develop their own drugs -- that's
what the market wants." Tanner rates PDL a strong buy and his firm has done
underwriting for the company.
Friday morning, PDL will announce the results of a phase 3 test of
Zamyl involving just more than 200 patients who have failed conventional
chemotherapy treatments. Patients in the test received either Zamyl and
chemotherapy, or chemotherapy alone. The company is shooting for a complete
response rate of about 22.5% from the Zamyl arm of the study -- compared with
a historical chemotherapy success rate of about 15%.
Investors might want to keep their Zamyl expectations fairly low. Early
indications -- or at least Wall Street rumors -- don't give the drug much
chance of success.
"When we last talked to PDL management, Zamyl was the one drug which
didn't give us the greatest level of confidence," says Tanner. "The body
language we're getting from management suggests that the data may not look
encouraging and the company may not go ahead with the drug's development."
Salomon Smith Barney analyst Elise Wang concurred in a recent research
note. "There is a high level of risk associated with this program," she
said, adding that previous tests of Zamyl alone have yielded only limited
responses. Wang rates PDL a buy and her firm hasn't done underwriting for
the company.
But PDL gets another chance at positive spin during the American
Society of Hematology conference Monday, when it releases partial results
for a phase 2 test of Remitogen in patients suffering from non-Hodgkin's
lymphoma. Earlier studies of the drug have shown promise, so PDL is hoping
to build on that with more signs that the drug is safe and effective.
There is a billion dollar-plus market opportunity for
biotechnology-derived drugs to treat non-Hodgkin's lymphoma. The king of
these drugs is Rituxan, marketed by Genentech and
Idec
Pharmaceuticals. Even if it is successful, however, Remitogen is not likely
to become another Rituxan because it works on a smaller subset of NHL
patients.
Maybe the trickiest thing to figure about PDL is its valuation, and how
that will be affected by the goings-on at the hematology confab. At its
Dec. 3 closing price of $36.70 per share, PDL is worth $3.2 billion. In
other words, the company trades at a huge 600 times 2002 expected
earnings of 6 cents per share.
But as a drug-technology company that is only beginning to creep into
the drug-development game, a price-to-earnings ratio doesn't really do much
to fairly measure PDL. In reality, the company has more in common with
relatively unproven genomics firms such as
Millennium Pharmaceuticals
(MLNM - Cramer's Take - Stockpickr)and
Human Genome Sciences, both of which sport large valuations based more
on future promises than current performance.
Like Millennium and Human Genome, PDL is also comfortably cash-rich.
The company finished the third quarter with cash and short-term securities
valued at $648 million.
"If I had to choose right now between PDL, Millennium and Human Genome,
I would choose PDL for two reasons," says one hedge fund manager who
doesn't own any of the stocks. "First, PDL has more monoclonal antibodies
in development than any biotech firm other than Genentech. And second, the
licensing revenue it gets for its technology is based on a solid business
model that will grow over time."
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