The Daily Interview: I Want A New Drug

The biotech sector has turned choppy this summer after a strong spring. The leaderless Food and Drug Administration is a big concern these days, as the agency has been rejecting or delaying a growing list of new drugs.

John McCamant Editor, Medical Technology Stock Letter

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Today's Daily Interview checks in with John McCamant of the Medical Technology Stock Letter to get his views on the FDA and stocks to watch in the always-volatile biotech sector.

The Medical Technology Stock Letter, run by McCamant and his father Jim, is an investment advisory newsletter that has been researching and recommending biotech stocks since 1983. The newsletter's model portfolio is down 4.3% for the year through July 12, after posting an 86.4% gain in 2000. The "aggressive" portfolio is down 18.6% this year, after returning 52.9% in 2000.

McCamant is keeping a close eye on the troubles at the FDA, but believes there is a way for investors to hedge their bets from more bad news. He's a long-term biotech bull who believes investors must search out investment opportunities beyond the usual big-cap suspects. Read on to learn more.

TSC: How big of a hurdle is the FDA these days? The agency seems to be rejecting or delaying drugs at an unusual rate, and a lot of people put the blame on the lack of a commissioner. Do you agree with that?

McCamant: I think short-term, the lack of an FDA commissioner is a difficulty, but the FDA has run without commissioners in the past relatively smoothly. But it hasn't done that with the backdrop of a major controversy.

For instance, the FDA has received a lot of negative publicity about Rezulin, a diabetes drug that killed many people after it was approved by the agency. The Los Angeles Times did an expose on this last year that really put its feet to the fire. So, when you don't have a commissioner, and you're getting real pressure, you're going to be much more cautious and ask for a lot more information [from drug applicants].

TSC: Is there a way for investors to play the current reality? Biotech is a very event-driven sector. Should people be much more cautious about expecting FDA approvals?

McCamant: Yes. Rather than look at biotech companies as short-term ways to make money, look at them as long-term investments. Look for companies that can survive a rejection by the FDA or a delay in a drug's development. Diversity is also important. Invest in a nice mix of biotech companies -- some that are profitable, others that are at earlier stages.

Also, look for companies that are diversified internally -- that could be a company that has a platform with multiple product opportunities, or maybe a single product that has a chance to work in a couple of different disease areas.

TSC: A lot of investors gravitate toward the big-cap biotech names -- the Genentechs(DNA) and Amgens(AMGN). Should they also be looking at smaller, less well-known companies?

McCamant: If we're really talking about investors, absolutely. If you look at [smaller biotechs] as long-term investments, we think there is more upside. Of course, there is also more risk. When it comes to midtier or third-tier biotechs, look for companies with cash, diverse pipelines and those that haven't been recognized by Wall Street.

TSC: Do you have some recommendations from your portfolios?

McCamant: Onyx (ONXX) is a very controversial company that is using cutting-edge gene therapy and viruses to treat cancer. Now, a lot of people think the company's technology has no value, but it has a decent cash position, a market cap of just $200 million and is in Phase III trials with partner Pfizer(PFE). In addition, Onyx has retained a significant portion of its product rights with Pfizer -- I like companies that own their product rights instead of just getting a royalty check if the product works.

There is risk in Onyx, but the upside, if the drugs work, could push the company stock up five times in the next two years. When I look at an Amgen or a Genentech, I don't see that kind of potential upside going forward.

TSC: Cancer is obviously a hot area of biotech research. Any other biotechs focused on cancer research that you like?

McCamant: Well, I'd mention ImClone Systems (IMCL) because I think it ties in well with our discussion about the FDA. It's going to be a real bellwether to watch. ImClone has filed a rolling application with the FDA, and if these guys deliver with their data and really provide the FDA with all the information they need, it will be an opportunity for the FDA to prove itself.

ImClone has developed a monoclonal antibody used to treat colon cancer patients who have failed all other current treatments. This is the kind of drug that the FDA had in mind when it started granting expedited reviews. If ImClone runs into significant delays and it appears that it's not the company's fault, then I would really start to grow leery of the FDA.

TSC: ImClone is one of several companies creating new classes of cancer drugs. Are there any other companies you like?

McCamant: Another interesting company is ImmunoGen(IMGN). It has a technology that essentially attaches a killer payload to a monoclonal antibody, which is the targeting vehicle. The drug only targets a specific type of cancer cell, so it doesn't release its killer payload until it has been internalized within the cancer cell. That way you don't get any rogue poisons spreading through your body; it's only targeted to the cancer cells. One of its highest profile partnerships is with Genentech, and they've done numerous other deals since then.

TSC: Outside of those that make cancer drugs, are there any companies that are getting your attention these days?

McCamant: Yeah, we have two recommendations in the diabetes area. Amylin Pharmaceuticals (AMLN) has the higher profile because it goes in front of an FDA advisory panel on July 26 for its lead drug, Symlin. The drug has, we believe, an efficacious effect on smoothing out glucose levels, especially over the long term.

Excess glucose levels are a hallmark of diabetes and lead to long-term complications. We don't expect Symlin to be a blockbuster drug, but it has very interesting prospects. Amylin also has a second diabetes drug right behind called Exendin that has shown some very interesting Phase II data.

Our second recommendation is Insmed(INSM). Its lead drug is called INS1, a naturally occurring molecule that is being developed for Type 2 diabetes as well as for something called polycystic ovary syndrome, which is one of the leading causes of infertility among women.

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