There isn't a painkiller strong enough to numb the spirits of biotech investors so far this year. The American Stock Exchange Biotech Index is down more than 12%, as the
debacle, a sector rotation out of biotech into technology and Enronitis all take their toll.
spoke recently with Jim Fiore, a fund manager with Greenwich, Conn.-based
Life Sciences Group
, seeking some balm for biotech investors' wounds.
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TSC: Jim, what the heck is going on?
What we're seeing is a shift. There were a lot of investors buying biotech over the last couple of years who didn't understand what they were buying, especially growth mutual funds. In the last 60 to 90 days, a lot of these funds have sold off their positions after they realized that biotech stocks go down as well as up.
TSC: So, where do we go from here?
Moving forward, biotechs are in stronger hands and at better valuations. I think 2002 will be the year of the lone wolf -- where companies that are not widely followed or that have products that are not considered hot will be in favor. It will be a stock picker's market.
TSC: Biotech stocks are in a deep hole so far this year, but you believe the sector will see sunshine again soon?
Very much so, especially off a bottom such as this. We now have a void in terms of positive news, plus the fact that selective bad news, post-ImClone, has already hit the market. But we're coming into a very strong season with medical meetings like the dermatology conference and the ASCO
American Society of Clinical Oncology meeting. There should be a plethora of good news coming for investors, if you make the right picks.
TSC: Give us some of your top picks.
In the cancer arena, I like
-- a very interesting company that's conducting a Phase 3 trial for a renal cell cancer vaccine. The early data look phenomenal.
TSC: Aren't cancer vaccines controversial? Didn't Dendreon (DNDN) just have a big problem with their cancer vaccine for prostate cancer?
I wasn't short Dendreon, but I was always negative because I never believed that prostate cancer, especially hormone-refractory prostate cancer, was a good target. Antigenics, on the other hand, is testing its vaccine in early-stage renal cell cancer that's been surgically resected. The vaccine is used to try and stop the recurrence of the disease -- a better setup for vaccines.
TSC: Other picks?
( CRGN). It is an excellent relative valuation play in the genomics subsector of biotech. The numbers tell the story. CuraGen has a
market cap of about $744 million, $508 million in cash and about $150 million in debt. That gives the company a technology value of $386 million.
But look at what the company is doing. It has a $1.4 billion deal with
, and has already delivered 100 drug targets to
. Its overall body of drug targets includes 120 proteins and 191 monoclonal antibodies, among others.
Now if you look at ImClone, it created more than $4 billion in market value by taking one good monoclonal antibody and putting it through the clinic. So that means that out of CuraGen's 191 monoclonal antibodies, all it takes is just one to be a potential ImClone in the next four years. CuraGen has a technology value right now of about $386 million -- that's a pretty good risk return.
TSC: Investing in genomics companies has been particularly hellish for investors over the past year, hasn't it?
Absolutely. I've said to avoid them, but now the market is going too far in the other direction. CuraGen is a great example of one company that is underfollowed, I think.
TSC: Any other picks?
For a short-term gain, I like
, especially at its current price of around $7. If Medi-507 lives up to the promise of early trials, the stock could pop to $10 on the news.
TSC: Medi-507 is an experimental drug for psoriasis, right? And doesn't BioTransplant license the drug to MedImmune( MEDI)?
Yes, that's correct. Medi-507 is showing promise as a psoriasis drug. BioTransplant will receive royalty payments on sales in the high-teens
percentage from MedImmune, which is excellent considering the early-stage prospect for the drug.
TSC: We couldn't talk biotechs without chatting about ImClone. No use rehashing old news now, but is ImClone, at these depressed levels, a buy?
A lot of people ask me if I think Erbitux gets approved, and I say yes. But is this a smart investment for most people who are reading this? No.
TSC: Are there lessons investors should take away from this mess?
Definitely. We were short ImClone, but not because we had an excellent consultant who told us that the Erbitux application wasn't going to be accepted. We were short ImClone because it had a $4 billion valuation for the drug, and we thought that would go down either way.
The lesson for investors is not to get too enamored with any one product, and instead, to invest in companies that have a development engine. Don't play a single product because you never know if it will get approved or not.
TSC: So, which company has the best drug pipeline in the biotech sector right now?
, when you look at the company's market cap vs. its pipeline. Investors should always weigh market cap into this equation.
Vertex has a technology value of about $700 million and 11 products in clinical trials. Remember that ImClone had a market value of more than $4 billion for one product. Vertex has an excellent drug development engine that lets it bring small molecules from targets to the clinic in 18 months -- half the time it takes for big pharma to do the same thing. That's why these guys have deals with
and others in excess of $1.5 billion.