Protein Design's Transplant Drug Test Success Boosting Stock

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By Andrew Morse
Staff Reporter

There are a lot of reasons to like

Protein Design Labs

(PDLI) - Get Report

, a Mountain View, Calif.-based maker of transplant rejection treatments. The strong test results of its lead product or the better-than-expected first-quarter results spring to mind.

But most eyes will be drawn to the company's stock performance. It's up a jaw-dropping 31% over the last three weeks alone, rising from 25 1/8 to 31 3/8. And while there's no sure bet -- as a floor, its leading drug has yet to receive

Food and Drug Administration

approval -- a lot of biotech watchers say the company is going to continue to defy gravity.

Even the less enthusiastic find it hard to pick nits, arguing that the company could double in value over the next couple of years.

"It's probably a $60 stock," says Michael Murphy, who manages the

Murphy New World Biotechnology

fund. The fund is down 1.9% this year -- a return that places it 15th of 31 biotech/health-care funds tracked by

Lipper Analytical Services

. And while Murphy doesn't hold PDLI in his fund -- he says the 100% return he expects isn't enough for him -- he concedes the company has "made some significant progress and deserved to see their stock go up."

PDLI has even attracted mutual fund luminaries like Karen Firestone, who has collected enough of the company for it to appear among the top-10 holdings of the $552 million

Fidelity Select Biotechnology

fund

(FBIOX) - Get Report

. The fund is down 1.2% in the year-to-date period.

To be certain, the company faces some challenges. For instance, while it does collect revenue through licensing arrangements, PDLI has yet to taste a profit. Moreover, while its drug may prove popular, chemotherapy continues to dominate transplant rejection therapies, according to industry experts. Dislodging giants that support that treatment, such as

Bristol-Myers Squibb

(BMY) - Get Report

, will not be an overnight task. Indeed, PDLI's treatment is intended as a complement to chemotherapy that ultimately would diminish chemo's prevalent use.

Still, PDLI's prospects are considered robust. The feisty spike in its stock price dovetails with a sudden renaissance in biotech shares in general. The sector, which had been hammered down along with many small-cap indices, is up a buoyant 11% since the beginning of the month, according to an index of biotech shares compiled by

Baseline

, a market data provider.

It also follows Protein Design's successful Phase III testing of

Zenapax

, a drug that prevents the body from recognizing transplanted organs as foreign tissue. The drug was so effective it pushed rejection rates down to 12% in transplant patients. By comparison, conventional treatments average a rejection rate of around 20%. The tests also showed the drug was effective in combination with other treatments.

Analysts expect Zenapax to be on the market later this year, though the drug has not yet formally been submitted for FDA approval. They also expect the drug, to be marketed by

Hoffmann-La Roche

, to be popular with doctors seeking to diminish the reliance on chemotherapy alone. Unlike other antirejection therapies, Zenapax has few of the side effects associated with chemo and other traditional treatments. Those include fever, swelling and damage of the transplanted organs.

"Zenapax is the first efficacious immunosuppressive drug in history without side effects," writes Matt Geller, a biotech analyst at

Oppenheimer

, in a recent report that says the stock "represents an unusual value." Oppenheimer has an investment banking relationship with PDLI.

The market for rejection therapies is large and expected to grow. More than 19,400 transplant surgeries were performed in 1996 and an estimated 52,600 Americans are waiting, according to the

United Network of Organ Sharing

.

"The data was very, very good, " says Michael Yellen, who manages the $544 million

GT Global Health Care

fund

(GGHCX) - Get Report

, of the test results. "This has the potential to be a $500 million drug in four or five years."

Yellen has plenty of reason to be happy: PDLI is his fund's second-largest holding. His fund is down 4.4% this year and ranks 29th of 31 funds in his peer group, according to Lipper. Last year he ranked second of 21.

The company, which has three other drugs in clinical testing and a whopping 16 in development, also posted better-than-expected first-quarter results. The 200-employee company posted a loss of 26 cents per share. That was narrower than the 29-cent loss forecast by

First Call

, which compiles analysts' estimates.