Crushing disappointment is not an uncommon occurrence in the stock market, but it is practically commonplace in the biotech sector. For every Gilead Sciences (Nasdaq: GILD) or Celgene (Nasdaq: CELG), there are many companies whose compounds fail and whose stocks wither away to mere penny prices.
That said, biotech may also be one of the resilient sectors you can find. So long as you still have a few compounds (or a few ideas) and enough cash, you will get a second chance. And if that second chance works out, you will find the market is more than willing to let bygones be bygones.
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I decided to write this column when I saw news last week that Neurocrine Biosciences (Nasdaq: NBIX) signed a partnership agreement with Abbot Labs for its promising endometriosis drug (Elagolix). This agreement gives Neurocrine $75 million up front, potentially $500 million more in milestones, and royalties on future sales (probably in the teens) that could be in excess of $350 million if the drug also gets approved for fibroids.
Not so long ago, Neurocrine was all but left for dead when its once-promising sleep aid Indiplon reached a dead end. Just last week, though, the company reached two licensing agreements (the Abbott deal and a separate second deal with Boehringer for certain small agonists relating most prominently to diabetes), and it should have the cash to advance a pipeline that is promising, though at quite an early stage.
Isis And D'Nile
Isis Pharmaceuticals (Nasdaq: ISIS) has certainly known the thrill of (presumed) victory and the agony of defeat. One of the pioneers in antisense technology, Isis has been buffeted by years of clinical failures. Though Isis had once-promising drug candidates for two of the Holy Grails in biotech - inflammatory disease and cancer - they largely all flamed out, and only one drug ever made it to market. Worse yet, that one drug (Vitravene) has been inconsequential in the market.
Still, Isis gamely pressed on and continued to develop its technology. Now the company has a promising cholesterol drug (mipomersen) licensed to Genzyme (Nasdaq: GENZ) and a robust pipeline of drugs, including promising medications for inflammatory disease, cardiovascular disease, diabetes and cancer, as well as numerous partnerships. All in all, by virtue of always having cash (or access to cash) and always trying to push the technology forward, Isis has stayed in the game and could still become the pioneer in antisense technology.
Success Without Success
Let us also consider the case of Vivus (Nasdaq: VVUS) and Nektar (Nasdaq: NKTR). Both of these companies had drugs actually reach the market (though Nektar's position was that of licensor), but both were exceptionally disappointing. Vivus's original erectile dysfunction drug (MUSE) was buried by the likes of Viagra and Cialis, no doubt due in part to a cringe-inducing administration method, while Nektar's involvement in inhaled insulin came a cropper when Pfizer quickly abandoned Exubera. (For more, see The UPs And Downs Of Biotechnology.)
Nevertheless, both companies are now enjoying a second bite at the apple. Vivus has a promising drug for obesity (Qnexa) that should hit the market this year and could reap hundreds of millions in sales. Nektar is not so close to market with its own proprietary drugs (the company still has numerous development deals with other pharmaceutical companies), but its cancer drug NKTR-102 has shown promising data in early trials and could become a major player in time.
Never Say Die
None of the companies discussed in this column have really "made it" yet. What I think is important, though, is to appreciate that a company with sufficient cash and promising compounds in the pipeline can rebound from seemingly devastating setbacks. This is why I am adamant about investors searching out those biotech companies with ample cash on the balance sheet and at least two separate drug development programs (that is, two entirely different compounds, not one compound being developed for two different conditions).
It is inevitable that the majority of biotech drug candidates will fail. What is not so inevitable, though, is that the company itself must fail and that shareholders will be left with nothing. If investors can spend the time to seek out those companies with multiple opportunities for success and diversify their holdings to spread the risk, they too can navigate the tricky minefield of biotech without getting blown up. (For related reading, see Using DCF In Biotech Valuation.)
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