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Sweet Music for Myogen

Gilead makes a huge bet on two drugs under development.



has managed to hit a home run without introducing a single knockout drug to the market.


Gilead Sciences

(GILD) - Get Gilead Sciences, Inc. Report

-- a heavy hitter in the biotech world -- has pushed Myogen into the major leagues with a $2.5 billion offer for the company. Gilead will pay $52.50 a share for Myogen, representing a 50% premium to the company's latest closing price, under the terms of that transaction.

Gilead, a big player in the HIV space that's looking to diversify, hopes to score big with two pulmonary drugs in late-stage development by Myogen. The first, ambrisentan, could win approval for the treatment of pulmonary arterial hypertension sometime next year. The second, darusentan, could emerge as a new treatment for resistant hypertension a couple of years later.

Together, analysts estimate, the two drugs could ultimately generate as much as $1 billion in annual sales.

In the meantime, however, Myogen has mustered little sales -- and no profits -- on its own. Last year, for example, the company posted revenue of just $7 million and a net loss of $63 million, or $1.68 a share. Analysts have assumed that the company will continue to operate in the red both this year and next. Looking ahead, however, they believe that the company could then secure approval of two "best-in-class" drugs and emerge as a big-time winner.

But skeptics note that Myogen has yet to win any drug approvals so far. They, therefore, question whether the company is worth as much as some -- including Gilead -- seem to believe.

"Myogen has been able to stay afloat by selling stock to investors," notes Peter Cohan, a Massachusetts investment strategist with no position in biotech stocks at all. "It issued $119 million in 2005's fourth quarter (alone). The deal with Gilead looks like the ultimate stock sale. Too bad Myogen has not been as good at generating profits from operations."

Shares of Myogen surged 47% to a record high of $51.46 on Monday. They have now surpassed most price targets established by the company's many fans on Wall Street.

Perfect Timing

In a well-timed move, WR Hambrecht analyst Patrick Flanigan initiated coverage of Myogen with a buy rating and a $50 price target less than three weeks ago.

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Flanigan assumed that Myogen could actually take care of itself. He predicted that the company would win approval of ambrisentan in 2007 and see the drug quickly emerge as a favored treatment for PAH, with annual sales topping $300 million a few years down the road.

For darusentan, Flanigan expressed higher hopes still. Specifically, he forecasted that the drug -- designed to treat a much wider population than the company's other drug -- will ultimately hit peak sales of $750 million a year.

That said, Flanigan cited risks involved with both of Myogen's drugs.

First, he pointed out that competitor



recently fielded an "approvable letter" -- rather than outright approval -- for its own PAH drug. He suggested that Encysive's drug could suffer from classwide problems that might affect ambrisentan as well. Second, he questioned whether darusentan's lack of liver toxicity could persist in later -- and much larger -- drug trials.

Flanigan's firm makes a market in Myogen and Encysive alike.

'Different Rules'

Meanwhile, Leerink Swann analyst Joseph Schwartz has offered some hints that Encysive's regulatory setbacks could prove drug-specific in nature.

Schwartz recently reviewed the European label for Thelin, Encysive's own PAH drug, and emerged with some important observations. Notably, he says, the label does not promise the same level of liver tolerance that some people had expected. Moreover, he says, it warns about stronger bleeding risks -- at least when combined with other treatments -- than some had anticipated as well.

"This could limit uptake in an era of increasing combination use, we believe," wrote Schwartz, whose firm makes a market in both Encysive and Myogen. Indeed, "label analysis supports our belief that Thelin may play a more limited role as an alternative (PAH treatment) than Myogen's ambrisentan, which appears to offer a more potent efficacy and better liver/bleeding safety profile."

Schwartz has a market-perform rating on Encysive's stock, which he values at between $4 and $5 a share. Encysive's stock, which fetched nearly $10 before its regulatory setbacks, inched up 4 cents to $4.34 on Monday.

Cohan, for one, sees no reason to buy -- or even short -- stocks in this volatile sector. He says that most biotech companies, like Myogen, have no commercial products or profits to speak of. Rather, he says, the companies seem to sell promises instead.

"I feel like there's a 'reality-distortion' force field around biotech stocks," he says. "I would be scared to short one of these companies. It seems like they're able to keep going based upon some unknown promise in their research portfolio.

"And if they can't survive as a standalone company, they have an alternative exit strategy: They can be acquired by somebody larger. ... Investors definitely approach this class of stocks with a different mindset. It's a different game with a different set of rules."