Companies in a variety of biotech and health-care sectors should see sales and development progress in 2007, analysts say.
Edward A. Tenthoff
Piper Jaffray & Co.
Area of Coverage: Drug Discovery/Biotech
I would say ’06 was a good year for biotech despite the fact that there were a lot of blowups — companies that failed or missed in their trials. Some of the smaller biotech companies did particularly well. I think 2007 should be a good year for biotech given the clinical data/clinical progress, and M&A collaborative opportunities — these are what drive value in this space.
Pharma has a lot of money, and pharma will continue to buy and collaborate for drugs in 2007. We’re going to have to insulate ourselves more diligently from binary events, meaning data points that represent a make or break for the company. Those are tough bets to make. Last year the markets did pretty well across the board. So if biotech does better this year, it may outshine some of the other indices, and that’s important because it will drive generalist money into the space.
Outperforms: Acadia Pharmaceutical (ACAD); Anadys Pharmaceutical (ANDS), Array BioPharmaceutical Inc. (ARRY), Exelixis (EXEL); Human Genome Sciences Inc. (HGSI); Sangamo BioSciences (SGMO); and Zymogenetics (ZGEN).
Top Picks: Array BioPharmaceutical, Exelixis and Zymogenetics
Reasons for Exelixis (EXEL): We currently have three top picks, but I want to focus on Exelisis. They develop cancer drugs — currently have ten drugs in the clinic– a very robust pipeline. The drugs are earlier stage, all in Phase I and Phase II. What really has us excited are Exelixis’ clinical data, clinical progress, and business development opportunities for 2007. We believe this is going to create shareholder value and drive shares higher. Their lead drug, XL999, was halted due to cardiovascular toxin. But we expect to see that drug back into Phase II trials in the second quarter and back on track. In June, Phase II data will be available on XL999, XL647, and XL880. This will be the first data that starts to differentiate these drugs. Exelixis will also have Phase I data on four or five other drugs.
Behind this wave of clinical data and progress will be several corporate development opportunities. Exelixis has a significant partnership with GlaxoSmithKline (GSK). GSK will have a call option on some of these drugs that it could start to exercise. They have an option on two or three of these drugs. This is going to provide some very interesting trading data in the drug. For example, if the first drug they show them data on is XL999, maybe GSK could say, “Well, given the cardiovascular tox, we’re going to pass.” That could obviously hit the stock.
We continuously say that this is going to be a very volatile stock this year, so if you to buy it on weakness that could be another good entry point. I personally believe GSK will exercise on XL880, MET inhibitor VEGF R2. This is a very novel cancer target, first in class. This is the most likely candidate in my opinion. If GSK were to exercise on three drugs, Exelixis would get a total of $270 million. Already $30 million has been paid in a no-strings attached, pre-milestone arrangement. Exelixis now has 10 drugs in clinic and will probably have three or four more by the end of 2007. So they have what I like to call, a lot of “shots on goal.” They also have around $300 million in cash to advance this pipeline. That’s at least two years of runway.
Area of Coverage: Small and Mid-cap Medical Technology
Outlook: There are two distinct groups within our space, diagnostics and vision care. The outlook is relatively positive for vision care. We just published a survey of 331 laboratories in the U.S. to get a sense of what the fundamentals look like for the industry. We are still seeing growth in the mid-single digits, the 6 percent to 7 percent range. About 2 percent of that is pricing, which is a rather positive data point because that had been a troublesome area in the past. What that tells us is that there is not any real discounting from any of the vendors and that the reimbursement environment hasn’t changed or affected the companies negatively.