Offshoring of Biotech Research to China
by Andrew Vaino
Interesting article in yesterday’s San Diego Union Tribune bemoaning the offshoring of biotech research to cheaper labor markets. The article discusses the demise of Discovery Partners (formerly DPII), a San Diego company that focussed on preparing libraries of compounds for other, typically large pharmaceutical, companies. There is some irony here, in that companies like Discovery Partners owed their existence to bigger companies seeking to cut costs by outsourcing. This same outsourcing has been evident in manufacturing for years.
According to a 2005 report by the Pharmaceutical Research and Manufacturers of America (PHRMA), US drug companies spent $11B on drug discovery in 2003. To clarify, drug discovery encompasses activities that lead up to a clinical trial, that is, identification of biologically relevant targets, design and synthesis of molecules to interact with those targets, and evaluation of efficacy and safety. Drug development refers to efforts at getting potential drugs through clincal trials and to market. According to PHRMA, in 2003 US drug companies spent $22B on drug development.
The high value inputs in the drug discovery process are in the design phase. In many ways the intermediate steps in drug discovery (preparation and testing of compounds) are not “high value” labor. Once you’re figured out how to do chemistry and biology it becomes pretty rote: the US has no comparative advantage here. Chinese and Indian scientists are just as smart as American scientists, so moving this work to cheaper labor markets makes economic sense. While pharmaceutical companies enjoy substantial (25-30%) operating margins, they, like all companies, are constantly seeking to cut costs.
I’m not convinced offshoring of biotech labor will go as far as in other industries. I don’t believe that drug development (clinical trials) will move offshore as fast as drug discovery. Intellectual property may limit how much of even drug discovery is done offshore. China has recently taken steps to better protect patent rights, but counterfeiting remains a substantial issue.
In any case, until labor costs in China equilibrate with labor costs in this country—and, given the near-predatory mercantilist policy China is pursing this is unlikely to happen anytime soon—offshoring of biotech research will only increase in scope and scale.
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Tuesday’s Top Biotech and Medical Stocks
Biotechnology
ANIKA THERAPEUTICS [ANIK] +20.24%
CADENCE PHARM. INC. [CADX] +11.21%
MICROISLET INC [MII] +7.56%
HEMOBIOTECH INC [HMBT.OB] +6.67%
BIOMIRA INC [BIOM] +6.47%
Diagnostic Substances
HEALTHCARE TECH LTD [HCTL] +10.43%
MONOGRAM BIOSCIENCES [MGRM] +9.26%
SYNOVICS PHARMACEUTL [SYVC.OB] +5.88%
AVALON PHARMACEUTIC [AVRX] +5.14%
PRESSURE BIOSCIENC [PBIO] +3.60%
Drug Delivery
IOMED INC [IOX] +8.00%
BIOPROGRESS PLC [BPRG] +3.56%
GENEREX BIOTECH CORP [GNBT] +1.93%
COLUMBIA LABS INC [CBRX] +1.90%
K V PHARMA CL A [KV-A] +1.13%
Drug Manufacturers
ACCESS PHARMACEUTICL [ACCP.OB] +15.89%
SINOVAC BIOTECH LTD [SVA] +14.57%
INTERPHARM HLDGS INC [IPA] +13.64%
NEUROCHEM INC [NRMX] +8.60%
CELL THERAPEUTICS [CTIC] +7.22%
Medical Appliances & Equipment
RITA MED SYS INC [RITA] +12.91%
IRIDEX CP [IRIX] +7.32%
MICROTEK MED HLDGS [MTMD] +5.68%
AHPC HOLDINGS INC [GLOV] +3.67%
INTUITIVE SURG INC [ISRG] +3.60%
Medical Instruments & Supplies
OPHTHALMIC IMAGING SYS INC [OISI.OB] +11.55%
NEPHROS INC. [NEP] +8.57%
CYBERKINETICS NEURO [CYKN.OB] +8.00%
MILESTONE SCIENTIFIC [MLSS.OB] +7.69%
UROPLASTY INC [UPI] +4.37%
Medical Laboratories & Research
SPHERIX INC [SPEX] +13.49%
BIO-IMAGING TECH [BITI] +8.17%
GENOMIC HEALTH, INC. [GHDX] +3.37%
ARRAY BIOPHARMA IN [ARRY] +2.95%
MEDTOX SCIENTFIC INC [MTOX] +2.29%
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Angiodynamics Offers $220M To Buy RITA Medical
Shares of RITA Medical Systems (RITA) jumped 3% on higher volume last Friday with no news. This prompted BioHealth Investor to issue a Watch Alert on RITA shares over the weekend.
Then early Tuesday AngioDynamics, Inc (ANGO) made an offer to buyout RITA for $220 million, including the assumption of $3 million of debt.
RITA, a medical device developer and marketer of ablation and other surgical instruments, should complement ANGO’s peripheral vascular device business very well.
Both companies have had tremendous sales growth over the last three years, but RITA has had problems reducing its yearly net loss. AngioDynamics has seen an increasing bottom line and cash flow on a yearly basis.
With $89 million in cash and only about $3 million in debt AngioDynamics should have no problem affording the price tag since this deal is a cash and stock offer. Company executives believe that the acquisition should be neutral by mid 2007, and to add about $0.05 to its bottom line by 2008.
This deal makes sense. RITA is rescued from its debt and lack of profit growth, and AngioDynamics grabs hold of exciting surgical ablation and other surgical devices. AngioDynamics also adds RITA’s 30 strong sales force to its 50 sales persons, thereby increasing its sales potential by 60%. Both companies’ products do not overlap each other as well.
RITA made BHI’s Watch List last Friday.
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Colorado Bioscience Discovery Grant Over $2 Million
The State of Colorado Bioscience Discovery Grant Program provides matching funds for proof-of-concept projects. The University Colorado Tech Transfer Office selected 13 finalists from a large pool of applicants. The proposals totaled $2,129,000, and have been sent to the state for final review. Though funds are earmarked for technology that has not yet been obligated to an entity it will be exciting to watch the data that pours in and see if any start-ups emerge downstream as a direct correlation of this grant program.
Finalists included:
Stephen Hunsucker, School of Medicine, Department of Pediatrics, UCDHSC. “Protein Biomarkers to Differentially Diagnose Follicular Thyroid Carcinoma and Follicular Thyroid Adenoma.”
Leland Shapiro, School of Medicine, Division of Infectious Diseases, UCDHSC. “Infusion of Alpha-1-Antitrypsin (AAT) to Suppress Human Immunodeficiency Virus Type 1 (HIV) Replication in Patients.”
Steven Anderson, School of Medicine, Department of Pathology, UCDHSC. “Suppression of Irradiation-Induced Salivary Gland Dysfunction by IGF-1.”
Jeffrey Holt, School of Medicine, Department of Pathology, UCDHSC. “Biomarker Enabled Development of PARP Inhibitors for Cancer Therapy.”
Gary Brodsky, School of Medicine, Division of Medical Oncology, UCDHSC. “In-vivo Analysis of a Cardiac and Skeletal Muscle Stem Cell Activator.”
Edward Dempsey, School of Medicine, Cardiovascular Pulmonary Research Laboratory, UCDHSC. “Moving Bryostatin-1 from the Lab to the Clinic for the Treatment of Pulmonary Hypertension.”
Robert Hodges, School of Medicine, Department of Biochemistry and Molecular Genetics, UCDHSC. “Applicability of SARS Coronavirus Antibody Technology to Influenza Virus.”
Karen Stevens, School of Medicine, Department of Psychiatry, UCDHSC. “A New Treatment for Ineffectively Treated Schizophrenia Patients: Pre-clinical Validation for Centrally Administered Clozapine.”
Douglas Graham, School of Medicine, Department of Pediatrics, Center for Cancer and Blood Disorders, UCDHSC. “A Novel Biologically Targeted Agent for the Treatment of Non-Small Cell Lung Cancer.”
David Ross, School of Pharmacy, Department of Pharmaceutical Sciences, UCDHSC. “Hydroquinone Ansamycin Pro-drugs as Novel Anticancer Hsp90 Inhibitors.”
Tad Koch, Chemistry and Biochemistry, CU-Boulder. “New Targeted Drug for the Treatment of Lung Cancer.”
Christopher Bowman, Chemical and Biochemical Engineering, CU-Boulder. “Redox-Initiated Radical Chain Polymerization for the Detection and Amplification of Biological Recognition Events.”
Michael Larson, Mechanical Engineering, UCCS. “A Device for Laser Fusion of Septal Tissue.”
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AMS May Be Seeing A Turnaround
American Shares Hospital Services (AMS) is a tiny company with a market cap of only 31M. The stock is thinly traded and jumps around quite a bit for a security with a low beta of .46. It is too
small for me, but someone may be interested.
AMS has performed poorly in relation to the S&P 500, but a turnaround may be in progress, judging by the last three months price action. Recent earnings have been good and the stock looks cheap. There is a 3.07% dividend yield and the company has definite growth potential. In addition, there has been insider buying activity in the last three months.
AMS and its subsidiaries provide Gamma Knife stereotactic radiosurgery services to medical centers in the United States. The Gamma Knife is a noninvasive treatment for brain tumors, vascular malformations, and trigeminal neuralgia. The company provides the Gamma Knife equipment, as well as planning, installation, reimbursement, and marketing support services to 21 medical centers in 18 states.
AMS also offers “The Operating Room for the 21st Century”, state-of-the-art surgical suites, at major medical centers on a fee-for-use or other shared basis. These operating rooms incorporate diagnostic imaging equipment to guide surgical procedures, with computer-controlled navigation systems an integral component. Robotic technology is included to provide assistance to the surgeon. The suite includes a computer-controlled, motorized combination operating room table and ICU bed with on-board sensors and dispensers for oxygen, anesthetic gases and intravenous fluids.
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Targeted Genetics Jumps 52% with No News!
Shares of Targeted Genetics (TGEN) jumped more than 52% on Monday, ending the trading day at $5.87 a share. Over 7 million shares traded hands, which is 6900% over the 3-month daily average.
What makes this price action so interesting is that there were no news releases or other signficant events that could be detected. In fact, in a bizjournals.com article it was noted that company insiders did not know why the shares jumped, or why there was so much interest in the stock.
Could it be that Biogen Idec has finally made an offer for TGEN?
Certainly something is going on, and some news was leaked. It will be very interesting to watch TGEN shares on Tuesday.
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Monday’s Top Biotech and Medical Stocks
Biotechnology
TARGETED GENETICS CP [TGEN] +52.86%
INHIBITEX, INC. [INHX] +16.22%
TRUBION PHARMACEUTIC [TRBN] +6.63%
IDM PHARMA INC [IDMI] +6.57%
BIODELIVERY SCI INTL [BDSI] +6.15%
Diagnostic Substances
GENELABS TECH INC [GNLB] +9.52%
HEALTHCARE TECH LTD [HCTL] +4.55%
AVALON PHARMACEUTIC [AVRX] +2.80%
VALERA PHARMACEUTICA [VLRX] +1.71%
INFINITY PHARMACEUTI [INFI] +0.88%
Drug Delivery
NOVADEL PHARMA INC [NVD] +2.76%
NOVEN PHARMACEUTIC [NOVN] +2.76%
BIOVAIL CORP [BVF] +1.10%
QUIGLEY CORP THE [QGLY] +1.03%
Drug Manufacturers
PLANET TECHS INC [PLNT.OB] +12.50%
ACCESS PHARMACEUTICL [ACCP.OB] +11.85%
INTERPHARM HLDGS INC [IPA] +10.00%
CARRINGTON LABS IN [CARN] +3.51%
MINRAD INTL INC [BUF] +2.78%
Medical Appliances & Equipment
SPECTRASCIENCE NEW [SCIE.OB] +14.29%
TRIMEDYNE INC [TMED.OB] +8.22%
LANGER INC [GAIT] +4.44%
ATS MEDICAL INC [ATSI] +3.79%
CAMBRIDGE HEART INC [CAMH.OB] +2.68%
Medical Instruments & Supplies
ELECTRO-OPTICAL SCIE [MELA] +6.95%
QUANTRX BIOMEDICAL [QTXB.OB] +6.92%
OPHTHALMIC IMAGING SYS INC [OISI.OB] +6.54%
ATRICURE, INC. [ATRC] +6.40%
MILESTONE SCIENTIFIC [MLSS.OB] +4.00%
Medical Laboratories & Research
SPHERIX INC [SPEX] +20.11%
PACIFIC BIOMETRICS N [PBME.OB] +0.88%
LABORATORY CORP NEW [LH] +0.59%
AETERNA ZENTARIS [AEZS] +0.38%
NATL DENTEX CP [NADX] +0.28%
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Watch Alert: RITA Medical Systems Rising on Higher Volume
Shares of RITA Medical Systems(RITA) rose almost 3% on Friday as volume spiked 140% above the 3-month daily average.
There were no significant news releases or other significant events that could be detected.
RITA Medical engages in the development, manufacture, and marketing of products that use radiofrequency energy to treat patients with cancerous or benign tumors.
The company carries more debt ($9 million) than it holds in cash ($6 million).
Sales have been increasing substantially over the last three years, but net loss has not improved.
Shares of RITA Medical closed at $4, almost 14% away from the 52-week high of $4.65
RITA Medical Systems has made BHI’s Watch List.
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A Closer Look at Five Biotech ETFs
For those investors not keen on spending countless hours pouring over financial statements and company profiles, not to mention the confusing scientific and technical jargon that biotech companies harbor in their annual reports, Exchange Traded Funds (ETFs) may be the better choice for investing in the biotechnology industry.
There are currently five popular biotech ETFs, each differing by the number of stocks held and the indices mirrored.
The five are SPDR Biotech ETF (XBI), PowerShares Dynamic Biotech & Genome (PBE), IShares NASDAQ Biotechnology (IBB), First Trust AMEX Biotechnology (FBT), and finally the Biotech HOLDRs (BBH).
BBH holds the least number of stocks, currently at 18 as last reported by Yahoo!Finance. This is inadequate for an investor seeking a generalized representation of the biotech industry. 38% of the total holdings is taken up by Genentech (DNA) while another 25% is held in Amgen (AMGN). That is more than 60% held in only two stocks! While biotechs held by BBH tend to be the largest in market cap of all the biotechs, there still remains much room for lowering the risk. Imagine if Genentech or Amgen suddenly drop in price, no matter the reason, BBH will take a much larger hit than the rest of the biotech ETFs.
While FBT also holds a small number of stocks, currently at 20 to mirror the AMEX Biotechnology Index, its assets are more evenly distributed. No more than 6% is held in any one stock. In fact the top 10 held stocks differ within a range of 1%. However, FBT carries riskier stocks in its top 10, such as Human Genome Sciences (HGSI) and Millennium Pharmaceuticals (MLNM) who both historically have not lived up to their potential.
IBB holds 176 total stocks, by far the most number of stocks of any biotech ETF. It follows the NASDAQ Biotechnology Index. Amgen takes up more than 15%, and is the top holding. The second top holding however is less than half with 6% held in Gilead Sciences (GILD). Even though this ETF holds some of the riskiest little biotech stocks on the market it is generally the safest investment as the risk is diluted substantially. IBB also accurately mirrors the entire publicly traded biotech industry as the NASDAQ holds almost the entire field of stocks. Investors however lose out on the father of biotech stocks, Genentech, as it currently does not trade on the NASDAQ. Investors could easily invest in Genentech stock separately if desired.
PBE is intriguing and is relatively new. It is intriguing because its top 10 holdings are mixed, with larger capped big biotechs and smaller riskier ones. The top holdings include biotech stars such as Gilead Sciences, Amgen, and Genentech, while also carrying the smaller Human Genome Sciences and Bruker Biosciences (BRKR). PBE holds over 30 stocks in total and is an interesting way to invest in a moderately risky sample of the biotech industry.
Finally, there is XBI, which currently holds over 30 stocks and follows the S&P Biotechnology Industry Select Index. This ETF by far carries some of the best performing companies. Its top 10 holdings include such top performers as Cephalon (CEPH), Gilead Sciences, Celgene (CELG), and OSI Pharmaceuticals (OSIP). These are in addition to the biotech giants Genentech and Amgen. XBI makes a great biotech ETF for its quality holdings, and its risk distribution as the top holding is only 0.3% larger than the 10th holding.
Here is a quick look at the top 10 holdings in each:
SPDR Biotech ETF (XBI)
CEPHALON INC (CEPH) 3.83%
ALKERMES INC (ALKS) 3.69%
GILEAD SCIENCES (GILD) 3.66%
CELGENE CP (CELG) 3.63%
GENENTECH INC (DNA) 3.62%
AMGEN (AMGN) 3.55%
OSI PHARMACEUTIC (OSIP) 3.54%
ICOS CP (ICOS) 3.53%
BIOGEN IDEC INC (BIIB) 3.52%
VERTEX PHARMACEUT (VRTX) 3.50%
PowerShares Dynamic Biotech & Genome (PBE)
GILEAD SCIENCES (GILD) 5.25%
APPLERA CORP-APPLIED (ABI) 5.2%
WATERS CP (WAT) 5.17%
AMGEN (AMGN) 5.12%
SIGMA ALDRICH CP (SIAL) 5.08%
GENZYME CORPORATION (GENZ) 5%
GENENTECH INC (DNA) 4.99%
BIOGEN IDEC INC (BIIB) 4.87%
HUMAN GENOME SCI (HGSI) 2.95%
BRUKER BIOSCIENCES (BRKR) 2.94%
IShares NASDAQ Biotechnology (IBB)
AMGEN (AMGN) 15.36%
GILEAD SCIENCES (GILD) 6.04%
CELGENE CP (CELG) 4.51%
TEVA PHARM INDS AD (TEVA) 3.91%
BIOGEN IDEC INC (BIIB) 3.51%
GENZYME CORPORATION (GENZ) 3.42%
VERTEX PHARMACEUT (VRTX) 2.66%
MEDIMMUNE INC (MEDI) 1.64%
SEPRACOR INC (SEPR) 1.53%
SHIRE PLC ADS (SHPGY) 1.49%
First Trust AMEX Biotechnology (FBT)
Myogen, Inc. 6.13%
HUMAN GENOME SCI (HGSI) 5.78%
ICOS CP (ICOS) 5.55%
PDL BIOPHARMA INC (PDLI) 5.52%
GILEAD SCIENCES (GILD) 5.46%
MEDIMMUNE INC (MEDI) 5.45%
GENENTECH INC (DNA) 5.03%
AMGEN (AMGN) 4.97%
BIOGEN IDEC INC (BIIB) 4.96%
GENZYME CORPORATION (GENZ) 4.93%
Biotech HOLDRs (BBH)
GENENTECH INC (DNA) 38.29%
AMGEN (AMGN) 25.38%
GILEAD SCIENCES (GILD) 11.52%
BIOGEN IDEC INC (BIIB) 6.71%
GENZYME CORPORATION (GENZ) 4.94%
APPLERA CORP-APPLIED (ABI) 3.51%
MEDIMMUNE INC (MEDI) 2.51%
SHIRE PLC ADS (SHPGY) 2.01%
SEPRACOR INC (SEPR) 1.62%
MILLENNIUM PHARM (MLNM) 0.73%
NPS Pharmaceuticals Seems Like A Bargain
by Andrew Vaino
NPS Pharmaceuticals (NPSP), which was trading as high as $15 earlier this year, has taken two major hits recently. In March the stock dropped a third when they announced a delay in getting their Preos osteoporosis drug on the market. The stock then dropped by almost a half, to $5, in May when they announced that the FDA had recommended a new clinical trial. They have submitted to the FDA a clinical protocol for a 12 month NDA enabling study to meet this requirement.
Now, a new clinical trial is a major setback, but I don’t think it’s anywhere near a death knell. The company’s net current assets will see it through a couple of years. It is worth noting that Preos was approved for sale in Europe in April. With an aging population, demand for osteoporosis drugs is only going to increase.
In addition to Preos, NPS licensed Cinacelcet HCl from Amgen. This drug is marketed in Europe and the US for hyperparathyroidism in patients requiring dialysis, and for patients with parathyroid carcinoma. While revenue from Cinacelet isn’t great, it does demonstrate they know how to sell drugs.
NPS also has a Phase 3 study underway on Teduglutide, a treatment for patients with short bowel syndrome (the drug acts to make absorption through the smaller length of intestine more effective). Results of this study could be available early next year. This drug has also shown potential in Crohn’s disease, and a Phase 2a study in support of this has been completed. If NPS is able to gain marketing approval for Teduglutide there will be nothing to prevent physicians from prescribing it to patients with Crohn’s disease. While this “off-label” prescribing is not encouraged (and companies can’t market the drug for off-label use) it does occur frequently.
NPS has been dealt a couple of setbacks. There will always be uncertainty in any clinical trial. My take is a stock trading in the $5 range, with two late stage clinical candidates and an enterprise value $200M more than its market cap seems like a pretty good deal.
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