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Biotech Stock Mailbag: Medarex

A reader makes a persuasive case for Medarex in light of its connection to two Johnson & Johnson drugs.

Welcome back to the Biotech Mailbag. Let's get started with an email from Charles B.

"Adam: What do you think of

Johnson & Johnson's


golimumab for first-pass FDA approval on April 29? Also, Stelara should be approved any day... I believe this may be a game changer for



. These approvals should provide enough royalties to limit the need for additional funding and may spark a take-out by J&J or price war with

Bristol-Myers Squibb


. With updated survival from ipilimumab at ASCO, I believe Bristol will move to buy Medarex this summer. They do not want to wind up in another



Charles is a fervent Medarex bull with a persuasive argument for owning the stock now. I know because he and I had a lengthy email discussion about Medarex earlier this week.

Golimumab, for treating rheumatoid arthritis, and Stelara, for moderate to severe plaque psoriasis, each have the potential to be billion-dollar drugs for J&J. Both drugs were created using Medarex's humanized monoclonal antibody technology, which entitles the company to a low single-digit royalty on sales -- call it 3%.

If one or both of these J&J drugs achieves peak annual sales in the $3 billion to $4 billion range of market leaders Enbrel, sold by



, or

Abbott Lab's


Humira, then the royalty revenue flowing back to Medarex is substantial.

Charles' estimate of Medarex's Stelara royalties alone tops $100 million a year.

His math pencils out OK, but I do worry that he overestimates the peak revenue potential for both Stelara and golimumab. Both seem like strong drugs, but so are Enbrel and Humira. It's not going to be easy to unseat well-entrenched drugs like Enbrel and Humira, especially since both drugs are considered very safe for patients. Stelara and golimumab may be as safe, but they lack the years of data to prove it.

This exact point was made by two rheumatologists speaking last month on a panel at a health care conference sponsored by

Cowen & Co

. Both doctors believed that drugs like golimumab (Stelara didn't come up specifically) would be fighting for second- or third-line treatment. Neither was enthusiastic at all about swapping out a new drug for either Humira or Enbrel any time soon.

Couple this conservatism on the part of doctors with a

recession-fueled pullback

in the use of all expensive biologic drugs to treat auto-immune diseases like rheumatoid arthritis (which I wrote about this week), and you've got plenty of reasons to be cautious about assuming huge royalty revenue flowing into Medarex's coffers.

I don't want to leave the impression that the approval of golimumab and/or Stelara isn't positive for Medarex. Both drugs will bring non-dilutive cash to the company which is definitely a plus in this market environment. Moreover, the approval of either drug will validate Medarex's antibody technology platform, another good thing.

But for Medarex to be truly successful, the company must become more than just the next

PDL Biopharma





. Both of these companies have been disappointments. They collect royalty revenues on other companies' successful drugs but have never been able to develop drugs successfully on their own.

Charles believes that ipilimumab, Medarex's melanoma drug (partnered with Bristol-Myers Squibb) may be that internally developed drug that gets Medarex really moving. I have my serious doubts about that, based on the uninspiring data released so far.

And let's not forget the lameness of Medarex's management team, which seems incapable of doing anything right. Honestly, CEO Howard Pien is like a black hole -- shareholder value goes in, but never comes out.

At around $5.50 a share (a $700 million market cap), Medarex is already getting credit for some of the anticipated royalties from golimumab and Stelara. As one analyst said to me this week, think of that royalty stream as a backstop on Medarex's current valuation and not so much as a future growth driver for the stock price.

That will come if Medarex can successfully develop its internal pipeline of drug candidates. And on that front, I'm definitely in wait-and-see mode.

Dore S. writes, "When does a company have the obligation to report critical data publicly? For example,



has guided that Provenge data is anticipated for the end of April and they have a placeholder at the upcoming

American Urological Association

(AUA) conference at the end of the month.

"However, if the data were to become available let's say mid-April, does Dendreon have the fiduciary responsibility to disclose it at that time? Or would they just release top line-data and full details at AUA?"

I made a pledge to myself not to write anything about Dendreon prior to the release of the Provenge prostate cancer data. After all, what else is left to say about Provenge that hasn't been said over and over again already? I

opined on the Provenge study

last October when the interim results were released, and nothing has changed, or will change, until Dendreon makes public the final data.

Yet Dore's question deserves an answer because it's not really about Dendreon as much as it is about how all biotech and drug companies must balance timely disclosure of material information with the demands of the scientific community which generally frowns upon data presentation by press release.

I'm not a corporate lawyer but here is how I think about this issue: Any clinical trial that will have a material bearing on a company's stock price and/or valuation must be disclosed publicly as soon as the data/results are known to management.

Clearly, Provenge is absolutely crucial to Dendreon's future, so results from the phase III prostate cancer study must be released publicly as soon as they become available. That means Dendreon will not wait for the AUA meeting at the end of the month, but will issue a press release with some level of detail about the Provenge results.

I'd argue that any phase III study for any drug company, regardless if it's Dendreon or



, is probably a material event requiring speedy disclosure.

This is not necessarily true for earlier-stage trials. Pfizer, for instance, may not consider a phase I or phase II study to be a material event, and justifiably so, because one drug candidate out of dozens in its pipeline may not be significant enough to make much of a difference.

But for a small biotech company like

Amicus Therapeutics


(just to use it as an example) that has no approved drugs, no meaningful revenue, no profits and just a few drugs in its pipeline, each and every clinical trial -- phase I, phase II or phase III -- carries much greater weight overall.

This is why biotech companies tend to be press release happy. They have many more material events to report.

The other tangle that drug and biotech companies must deal with is how much to say in a clinical trial press release. Disclose too much and the medical societies that run the big scientific meetings won't let you present the data. But investors, naturally, want to know everything right away.

This is why you often see companies release "top-line" data in a press release -- essentially a broad summary of the results -- while leaving the nitty-gritty details for later presentation at a scientific meeting.

Reputable companies don't use this arbitrage situation to highlight the good data today and hide the bad data for later. But we all know that there are a lot of disreputable drug companies out there, which makes this setup less than ideal for everyone.

Steve has words for me on



"I hope you are working on something regarding Celgene. You have been bullish on the stock for years as has been Jim Cramer. I, like many others, followed your advice and bought at much higher levels. Will you now maintain your bullish stance and defend your convictions or will you do a mea culpa and tell us to sell?"

I sold my Celgene position in the Biotech Select model portfolio on April 2 at a significant loss, soon after the company warned of a first-quarter earnings shortfall.

As Steve points out, I had been bullish on Celgene for a long time and continued to be bullish as the stock sank from the 60s, into the 50s and sadly, into the 40s.

Maybe Celgene found a bottom with its first-quarter earnings warning and now is a good time to be buying the stock for its above-average growth prospects. That's what Jim Cramer's been doing for his Actions Alert portfolio.

But as you can see above, I'm not the guy to be recommending Celgene anymore.

A related email from Cary L.:

"I own a good number of biotechs,and was struck by yesterday's

April 2 relative poor performance of the group. Do you agree about the poor performance? If so, what caused it? Was it concern that Celgene's report suggested broader weakness?"

Even in this lousy market overall, it's been nice to see the biotech sector outperform the broader indices. Unfortunately, that's no longer the case. The Nasdaq-fueled stock market rally of the past month has left biotechs on the sidelines.

Cary is right in that the Celgene warning spooked a lot of investors because it brought home the hard truth that drug sales may not be so recession proof. Add to that the uncertainties around health care reform and generic copies of biotech drugs and you've got more than enough to spook investors.

Expectations for first-quarter earnings from the big-cap biotech group are fairly low. Top-line estimates have come down in recent weeks, which means that in-line results could be enough to ignite a "relief rally." At the very least, I'm hopeful that the biotech sector starts behaving better in relation to the broader market if we can get through earnings season without any more Celgene-like blowups.

Finally, because hate mail is fun to read, I'll close the Mailbag with a note from Quint S., who didn't like my column on

Arena Pharmaceuticals'


lorcaserin results


"In my opinion you are either just another moran

sic who opened his mouth too soon and now is not man enough to admit he was wrong or you and friends had a load of shorts on Arena. It's quite obvious that you have been trying to sabatage

sic this stock from the start."

Adam Feuerstein writes regularly for In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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