FOOL’S CORNER

www.nature.com/naturebiotechnology • SEPTEMBER 2002 • VOLUME 20 • nature biotechnology

The members of the Sitting Pretty InvestmentClub recently returned from their summers inBrighton, Cape Cod, and the back porch,greeting each other at the Bull & Bear withgood-natured fellow suffering: “Oh, theagony!”, and “When will this madness end?”.

The club reviewed the past two issues ofNature Biotechnology, which exhorted them tostay focused on sound personal finance princi-ples while the market endures it malaise.“Malaise?” General (Retd.) Blatzworthy har-rumphed.“I knew Malaise. She was a friend ofmine. And this is far worse than Malaise.”

But he and the other members remainedresolutely optimistic about a brighter future.For months, they had pored over some partic-ularly interesting research on monoclonalantibody (mAb) drugs developed during1980–2002 (Nat. Biotechnol. 19, 819–822,2001; Curr. Opin. Mol. Ther. 4, 110–118, 2002).Interim club president Paisley McTort wouldhave preferred to browse the latest issue ofPunch, but once he started reading these arti-cles he was completely absorbed. So, an entiremeeting would be devoted to it.

Clyde Goforth began the night’s work, apint of lager and lime in hand. “According tothis article in Nature Biotechnology, therewere 77 mAb drugs either in human trials orunder review by the US Food and DrugAdministration (FDA; Rockville, MD) as ofFebruary 2002. Around 22% of the mAbsentering human trials during this periodsecured FDA approval, versus the 10% figurethat is often cited for small-molecule drugs.And FDA review times for mAbs beat thosefor other drugs.”

The assembled knew that these were excel-lent numbers. Hortense Convertible-Bond,secretary–treasurer, offered a rationale for thebetter performance of mAbs. She had consult-ed the website of Abgenix (Fremont, CA), oneof the two companies producing fully humanmAbs. Here she found some answers: “Fasterproduct development, fewer unwanted sideeffects as a result of [mAbs’] high specificityfor the disease target; greater patient compli-ance and higher efficacy as a result of favorablepharmacokinetics; ability to deliver variouspayloads, including drugs, radiation, and tox-ins, to specific disease sites; and ability to elicita desired immune response.”

Convertible-Bond concluded, “All elsebeing equal, this means that a company withmore mAbs in its drug development pipelinehas a more valuable pipeline. Naturally, youhave to adjust for safety and effectiveness of anindividual drug, market size, competition inthat market, and other drugs in development,but the power of mAbs cannot be denied.”

Lower risk optionsGeneral (Retd.) Blatzworthy made the case fora more conservative investment in mAbs. Henoted that the healthcare giant Johnson &Johnson (JNJ; New Brunswick, NJ) forked out$4.9 billion for mAb pioneer Centocor in1999. That proved a smart move whenCentocor’s anti-clotting agent ReoPro and itstherapy for Crohn’s disease, Remicade (nowalso approved for treating rheumatoid arthri-tis), each began to generate more than $500million a year in revenue. Remicade is in phase3 trials for several other indications, and thecompany has other mAbs in phase 1 and 2 tri-als, although no others in phase 3.

JNJ dependably increases its quarterlyrevenue at low double-digit and high single-digit rates. More importantly, it has turnedthose rising revenues into free cash flow at amuch higher rate over the past four years,and pays a not insignificant 1.5% dividend.Even if its growth rate should slow, the com-pany’s enterprise-value to free cash-flow(EV/FCF) ratio (see Nat. Biotechnol. 20, 219,2002, for explanation) of 20 offers room forsteady—not spectacular—value creation forshareholders in the future, along with a mar-gin of safety on the downside. JNJ is there-fore ideal for a dividend reinvestment planor dollar–cost average investing.

Moderate riskThe General admitted that venturing intosomewhat riskier territory put him on edge.He pointed out that Genentech (S. San

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Francisco, CA) dominates the world of mAbstoday. Of the 11 mAbs on the market,Genentech has licensed, developed, and mar-keted three of them, two of which—Herceptinand Rituxan—have provided much of the fuelfor the company’s 27%, 24%, and 22% gains inrevenue over the past three years. And Zevalin,its newest mAb-based product, co-marketedwith IDEC Pharmaceuticals (San Digeo, CA),delivers a radioisotope to non-Hodgkins lym-phoma that is not responsive to Rituxan.

But even with a 36% fall in stock price thisyear, Genentech’s EV/FCF ratio is 58, so farbeyond the company’s current revenue, profit,or free cash-flow growth that investors face aconsiderable downside risk. And that growthhas been further threatened this year: the FDAhas held up the company’s next mAb hopefuls,requiring more data on asthma drug Xolairand addressing manufacturing concerns aboutpsoriasis treatment Xanelim. Genentech maybe a better prospect for investors the closer itgets to $20 a share and under, at or below a $10billion enterprise value.

High risk, high rewardNext, Convertible-Bond examined the riskiestgroup. First, she explained that to date all mAbsapproved are murine, chimeric, or humanized.Of these three, humanized mAbs promise thegreatest effectiveness, and Protein Design Labs’(Fremont, CA) “humanizing” mAb technologyis licensed for all humanized mAbs marketedtoday and a large chunk of those in clinical tri-als (Nat. Biotechnol. 19, 395–396, 2001).Although Protein Design Labs is not yet prof-itable, it has plenty of cash and a relatively lowannual cash-burn rate.

Close on their tails are the fully humanmAbs, which could be safer and more effectivethan “humanized” mAbs. Almost all are pro-duced by, or licensed from, Medarex(Princeton, NJ), Abgenix, and CambridgeAntibody Technology (Melbourne, UK). Allthree companies are unprofitable, andalthough they have a lot of cash they also havesubstantial annual cash-burn rates. Thesecompanies should interest only those investorswilling to take on considerable risk, and eventhen with only a small part of their portfolios.“That is to say,” Convertible-Bond quipped,“these companies come with label warnings.”

The group raised their glasses in praise ofsummer and the glory of mAbs. The literaryMcTort swelled with sudden Shakespeareaninspiration, but the group had already dis-persed when he retorted: “I see Queen Mabhath been with you.”

Tom Jacobs owns shares in Medarex.

Tom Jacobs, of the Internet site

Motley Fool (http://www.fool.

com/), provides his angle on

biotechnology investments.

Read on and become “Foolishly”

informed*. He can be contacted about bio-

technology and investing at TomJ@ Fool.com.

Jacobs cannot give individual investment advice

but welcomes any.

Just mad about mAbs

* Nature Biotechnology does not guarantee theveracity, reliability, or completeness of anyinformation provided on this page; it is notresponsible for any errors or omissions or forany results obtained from the use of suchinformation; it will not be liable for any loss,damage, or investment decision arising from areader’s reliance on the information provided.

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