Morphosys – A Biotech Rule Breaker

Morphosys (MOR.DE) is one of the most unusual biotech companies, as it breaks three basic rules that apply to drug development companies:

Rule No. 1: Development-stage companies burn cash and therefore must constantly raise capital and dilute existing shareholders.

Rule No. 2: Development-stage companies are risky and volatile because they rely on a limited number of binary events.

Rule No. 3: Investing in cutting edge, growing segments of the pharmaceutical industry is associated with a high level of risk.

Morphosys is the only company I am familiar with that systematically breaks each and every one of these rules. It does not have any drugs on the market and is not expected to have any in the foreseeable future, yet it is profitable. It is involved in drug discovery which is associated with a high attrition rate, yet statistically, there is a very high chance that it will have commercial revenues at some point in the future. It is involved in one the fastest growing segments in the industry, but can be regarded as a conservative holding since it will never be dependent on a limited number of binary events. And finally, it has no need to raise cash in the coming decade in order to support its activities, as its costs are covered by other companies.

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Good News For Roche, Excellent News For Immunogen

Earlier today, Roche announced positive results from a phase III study evaluating its breast cancer blockbuster, Herceptin, in gastric cancer. According to Roche, the addition of Herceptin to standard chemotherapy “significantly prolonged” overall survival of gastric cancer patients. From a medical perspective, this trial is a great achievement considering the severe shortage of effective treatments for gastric cancer. This is also the first success Herceptin has outside of breast cancer, where it quickly became a cornerstone treatment.

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Spicing Up The Biotech Portfolio – Curagen and Curis


The past six months have not been kind to microcap biotech stocks, as it is hard to find a lot of love in today’s market for tiny, high risk, cash burning biotech companies. Honestly, who can blame investors for throwing stocks that offer a distant dream with minimal success rates and heavy spending? Surprisingly (or not), the negative sentiment also presents unprecedented opportunities in the microcap arena, as some microcaps are making tremendous progress, which is not yet reflected in their stock prices.


There are quite a few companies with market cap under $100M active in the fields of oncology and inflammatory diseases, the two fastest growing segments in the pharmaceutical industry. Hypothetically, these companies represent huge upside potential in the form of imaginary returns over a period of several years. The issue with these companies is that they usually have only one or two drugs in very early stages, the vast majority of which are doomed to eventually fail. While identifying the right drugs based on concrete clinical data is complicated but possible, evaluating drugs based on earlier results is even more challenging. The idea is therefore to identify companies who have already reached proof of concept in humans, thus facilitating better visibility to investors. Since investors today focus primarily on risk mitigation, they typically ignore potential reward and shrug off any positive developments. This, in turn, may result in an “arbitrage-like” situation, where companies with a potential success rate of 25% are traded as if they had a potential success rate of 10%, simply because the progress they have made is not factored into stock price.

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Immunogen and Exelixis Defy the Myth of Recession


In a time when so many biotech companies do not know how they will survive the nuclear winter of 2009, two companies we hold in the biotech portfolio, stand out in the crowd. Immunogen (IMGN) and Exelixis (EXEL) are poised for an exciting year, with plenty of events in the coming twelve months. The two companies have a lot in common: Both are developing innovative  drugs for cancer that rely on remarkable basic science, both can generate an unlimited number of novel agents, that in turn can be licensed to large partners, and perhaps more importantly these days, both can remain independent of the capital markets for at least two years. Above all, the two companies exemplify how good products and good technologies can still generate tremendous value for investors, even during these economic turbulent times. 

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Biotech Portfolio Updates – Buying More Genentech and Exelixis


Only two and a half weeks have passed since the launch of the model portfolio, so it is still too early to assess its performance, nevertheless, even after a sharp decline in two stocks, the portfolio seems more robust than the general market. Since inception, the biotech portfolio, co-managed by Ran Nussbaum and myself is down “only” 3.6%, compared to the Nasdaq and S&P which are down 8.5% and 6.7%, respectively for the same period.    


Based on recent market action and the unprecedented level of anxiety, it seems that the bottom is getting closer and hopefully, the markets will stabilize towards the end of 2008. Therefore, the coming weeks may be a good opportunity for increasing exposure to the stock market, which is why we intend to end 2008 with 90-95% of the portfolio in stocks.

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Biotech Portfolio Updates- Buying More Immunogen

Investing, particularly in biotech, comes with plenty of risks and uncertainties. These uncertainties are usually results of clinical trials, which are very unpredictable and unfortunately do not end up well in most cases.  Once in a while, a company and its stock price diverge in a way that substantially decreases the risk in a particular company without increasing the stock price. We believe what happened yesterday with Immunogen (IMGN) is a classic case of this phenomenon.

Immunogen, similarly to all its peers in the field of drug development for cancer is a high risk investment, and  will surely have more bad news than good news to tell its investors over  the years, simply because in drug development, successes are substantially outnumbered by failures. Yesterday should have been one of the happiest days for Immunogen’s shareholders, as a great uncertainty that has been hovering over the company was resolved, and turned into a great achievement. Genentech’s (DNA) T-DM1 is by far the most important drug for Immunogen currently, for reasons explained here, here and here. Two days ago, Genentech publically stated that by early 2009, T-DM1 will be in two registration trials for indications with blockbuster potential. Of course, there is no way of knowing the final outcomes of either study, but it is important to realize that Genentech based its decision based on much more than the data that was published  from several T-DM1 trials. Consequently, Genentech statement turned Immunogen into a company with a more attractive risk/reward ratio, simply because the risk component is substantially lower today than prior to the announcement.Regardless of the recent news, Immunogen is expected to have additional good news on several fronts in the coming 6-9 months.

 In the coming 9 months, we expect the company to announce whether IMGN242 managed to demonstrate an objective response in a phase II trial in gastric cancer patients. This announcement seems like a classic win/win   situation. Investors have already given up on this agent, which showed disappointing results in the current as well as in its earlier version. The company already stated it would discontinue development of IMGN242 if no responses are shown among the first cohort of 23 patients. This would free up resources and enable the company to focus on other in-house products, so ironically, even a negative announcement would be perceived as a good things by investors, who want to leave that story behind them. We are not expecting great things from this trial, but we do note that a fairly impressive response in one of the first six patients enrolled to the study was reported (bottom right of the poster) at ASCO. Thus, there is still a chance for an objective response.

Also in the coming 9 months, we expect Immunogen to announce several licensing deals with new and present partners. First and foremost, based on management remarks and market trends, we expect the company to announce one broad technology licensing collaboration with a pharmaceutical company. The deal could be either very general such as the 5 year collaboration with Sanofi-Aventis. It can also be more specific, similarly to the collaboration with Genentech which includes specific targets. 

Speaking of Sanofi and Genentech, we expect additional candidates from these collaborations to enter the clinic in the coming 9 months. In a recent investor conference, Immunogen’s CEO revealed that  they had recently met with Genentech and that Genentech is “making progress” with antibody-drug conjugates (ADC) against three additional targets. It will be safe to expect that one of these agents will enter the clinic in the foreseeable future. Sanofi will most likely advance two additional products into the clinic, SAR566658 and SAR650984. SAR566658 is an ADC that targets DS6, a target that can be found on a plethora of solid tumors. SAR650984 is a naked antibody that will be evaluated for the treatment of blood cancers.  

With respect to actual data publication, Immunogen will publish new data on IMGN901, which is currently in a phase I trial in multiple myeloma. Antibodies for the treatment of multiple myeloma are currently one of the hottest topics in hematology, as can be echoed by the very high activity in the field that attracted Genentech, Bristol-Myers Squibb and Biogen-IDEC, just to name a few.  Data from this study will be published at the ASH annual meeting this December. We still remain cautious about the activity of IMGN901 as a single agent, after last year’s disappointing results, nevertheless, Immunogen’s CEO alluded to this data by stating that “…the data look good, we continue to see patients derive clinical benefit…“, so there could be a positive surprise there.

Shortly afterwards, at the  Annual San Antonio Breast Cancer Symposium, Genentech is expected to give an update on an ongoing phase II trial of T-DM1 in 2nd and 3rd line metastatic breast cancer, which should be positive given Genentech’s recent decision.  Early next year, Genentech is expected to dose the first patient in the phase III pivotal trial, which will trigger a potentially double digit milestone payment, will announce the receipt of a substantial milestone payment to Immunogen.It is important to note that despite all these positive catalysts down the road, there are likely to be disappointing news as well, as is always the case with drug development. However, at this point of time, with two potentially registration studies underway, Immunogen seems to be cheaper than ever, which is why we decided to increase our holding in the company.

We also added a new company, Santarus (SNTS), on which we hope to elaborate in the future.


Immunogen – Lost In Translation

It finally happened. Yesterday, Genentech announced that they made a “go” decision to advance T-DM1 into a phase III trial. Although no official announcement is out as of yet, Genentech’s President of Product Development, Sue Hellmann, left no doubt in her prepared remarks:

“Additionally, we recently made a Phase III go decision for T-DM1 in the second line setting and plan to initiate a study comparing TDM1 to a Capecitabine plus lapatinib combination in the first half of 2009.”

Evidently, this kind of decision has tremendous implications on Immunogen from a financial stand point, as it is now closer than ever to receiving sales royalties on sales of a product that can be in the market as early as 2010. This kind of move should also trigger a substantial milestone payment. The company has not disclosed the exact size of the payment, but based on the $5 million Immunogen received after T-DM1 entered phase II and remarks made by Immuogen’s CEO, this milestone payment should be in the $8-10 million range. There are also plenty of additional implications on Immunogen’s ability to attract more partners and  sign more licensing deals, which is equally important because it will increase the number of Immunogen’s  shots on goal and provide a non-dilutive source of funding.

Amazingly, Genentech’s announcement is still not translated into an upward move in Immunogen’s stock, but it seems inevitable given Genentech’s position in the biotech field, T-DM1’s huge addressable market and the great validation of Immunogen’s technology. Genentech’s decision is also a good sign with respect to the ongoing phase II trial to be presented at the San Antonio Breast Cancer conference this December, since Genentech has access to up to date unpublished efficacy data.  

Small biotechs such as Immunogen are highly risky in the short run, and normally trying to predict  short-term movement of these stocks  would be futile. Nevertheless, I believe that the imminent official press release Immunogen has to publish (since it is a material event) creates a window of opportunity for  risk-tolerant investors, as the way I see it, a near term jump is inevitable.  Regardless of market conditions, Genentech’s  decision to promote a drug based on Immunogen’s technology into a registration trial is one of the most meaningful events a development stage biotech can have, and meaningful fundamental events eventually translate into meaningful moves in the stock price.

Author is long IMGN & DNA

When There Is Blood In The Streets – Buy Biotech

History has shown again and again that times like these represent a huge long term buying opportunity. This may be particularly true for the biotech segment that, despite weathering the storm better than other segments, has had its share of price declines. During the past several weeks, great biotech stocks, from small early stage companies to fully commercialized companies have been thrown out of portfolios like bad auction rate securities, but the truth is that the value proposition of most of these biotechs did not change at all, and is not likely to change as a result of market conditions. This is why current prices create the best opportunity to get into the biotech segment since 2002.

In the past, the pharmaceutical segment served as a safe haven at times like these, based on the notion that drug sales, especially those for the treatment of serious illnesses, remain unaffected by recession. Unfortunately, most pharmaceutical companies are in the midst of an innovation crisis, where their traditional blockbusters are gradually being cannibalized by generic competition, so the next couple of years will be very challenging for them, recession or no recession. Consequently, investors may want to look for growth in the relatively new entrants to the field – biotech companies. 


Biotech companies can be divided into two groups, each has its own merits and pitfalls.

The first group includes fully commercialized companies with a healthy balance sheet and cash generating products. These include all the big biotech companies such as Genentech (DNA), Amgen (AMGN) and Gilead (GILD). Because these companies can be found in every typical portfolio, they all got hit pretty badly from the recent sell-off due to indiscriminate panic selling. Nevertheless, the impact of an anticipated recession will have on these companies, who are selling drugs that address diseases such as cancer and AIDS, will be marginal.


The second group consists of smaller, development stage companies, with no commercially available drugs and several cash consuming development programs. The good news is that fundamentally, these companies have nothing to do with the global economy because they are not selling anything. The bad news is that they have to constantly find resources to finance the costly development of their drug candidates. Thus, the most important implication a market crisis has on this kind of companies is that it makes cash-raising almost impossible.

This is why investors should invest only in development-stage biotechs which have found a way around this problem. Some companies can generate cash from licensing their technology or intellectual property, some, like Array (ARRY) and Poniard (PARD) arranged a line of credit, some, like Seattle Genetics (SGEN), were smart enough to do a secondary offering under good market conditions, some, like Exelixis (EXEL) and Immunogen (IMGN), licensed some of their products and have someone else paying for the development. 

Bearing in mind that in the foreseeable future, licensing of technology and products will be the preferred way of getting cash, it would particularly be wise to pay attention to companies with unpartnered assets that are generating robust data in clinical trials as well as to platform companies that can license their technology on a non-exclusive basis. Evidently, when small companies have one way of raising cash blocked, it might reduce their leverage position in the alternative route of partnering. However, thanks to the pressure traditional pharmaceutical companies are currently under, they are starved for new promising candidates, which means that a good drug candidate still has tremendous value in the eyes of big pharmas. A good example for such a promising candidate is Rigel (RIGL) Pharmaceutical’s R788 that showed impressive results in treating rheumatoid arthritis, a disease with a market size exceeding $ 10 billion. Another good example for that may be Arqule’s (ARQL) ARQ-197, which already demonstrated its potential in a wide array of cancers and has a blockbuster potential.      


In order to put this approach to the test, I asked Pontifax’s Ran Nussbaum his help in building a virtual portfolio of promising biotech stocks. This portfolio is not intended for short term trading, but for long term investment of at least several years. Although we do not expect active trading in this portfolio, from time to time there may be changes as additional stocks will be added and existing holdings may be sold. Any future changes can be made only when markets are closed. On a more cautionary note, regardless of the attractiveness of all of these companies, all the inherent risks associated with biotech remain, including long time to market and statistically low success rates.

                                        Biotech Portfolio as of October 9th 2008



Genentech’s Shiny New Platform


On June 18th, Seattle Genetics (SGEN) announced it had received a milestone payment from Genentech (DNA) after the latter filed an IND (Investigational New Drug) application for an antibody-drug conjugate (ADC) powered by Seattle Genetics’ technology.  Intriguingly, there was no additional data about the new agent, nor was there any official announcement from Genentech. An article that will be published in this month’s issue of Nature Biotechnology may shed some light on the identity of the new ADC and the technology it utilizes. Based on this article, the new agent will not be based solely on the familiar Seattle Genetics’ ADC technology, but will also utilize a next generation platform with potentially disruptive implications.

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Immunogen at ASCO 2008

Many terms can be used to describe Immunogen’s (IMGN) recent stock behavior, but it seems the word “schizophrenic” is the most suitable one. Immunogen gained almost 50%  in the three weeks prior to the ASCO annual meeting, just to give it all back in the 8 trading sessions following the conference, thus it is clear that the rollercoaster in the company’s share price had a lot to do with what was (or was not) presented at the conference. Immunogen is involved in multiple clinical programs, but for the past year the vast majority of the attention it has received was directed at T-DM1, which is being developed by Genentech (DNA) based on Immunogen’s technology. T-DM1 is garnering more attention than all the rest of Immoungen’s programs combined because it has all the necessary ingredients for the ultimate biotech story: Huge addressable market, a strong partner, impressive (yet preliminary) clinical activity and an opportunity to validate a disruptive technology. Accordingly, it is only reasonable to expect Immunogen to be traded in tandem with T-DM1’s development.


Wild swings in biotech stocks are commonly an outcome of clinical results publication, and indeed, the presented data at ASCO could be partially blamed for the violent market reaction. Nevertheless, in this particular case, Immunogen was affected from a lack of positive news rather than the release of negative news. Genentech had previously stated it would decide whether to advance T-DM1 into a registration trial during 2008, based on an ongoing phase II trial. This led many to believe that Genentech would use the ASCO platform to announce its intention to commence a phase III trial already this year. In the last day of the conference, when the market realized Genentech was not going to give the dramatic announcement nor was it going to release data from the ongoing phase II trial during the conference, the reaction was brutal.

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