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Get ready for the imminent 3-year boost:
BioMarin is what the doctor ordered for your biotech portfolio
by Siu-Yee Ng
Over the years I have devoted to exploring the profit potential of IPOs for investors like you and me, I have come across a few secrets... actually, a few very simple rules... that can help you to dramatically increase your returns while minimizing your risk.
There is a consistent pattern that new issues follow during the five years after their debut. Looking at all the new issues between 1970 and 1998, we can identify different entry points that offer potentially high returns. If you compare all the new issues during this period to other companies with the same market cap five years out, the new issues have typically underperformed.
But here’s the good news. There are ways to capitalize on both short- and long-term gains in the first five years. In my service, IPO Trader, I follow the initial six-month period for the short-term returns. But with the shortage of IPO plays in the last six months, I have been evaluating other points of entry.
Looking at the numbers, an IPO going into its fourth year tends to offer a consistent return, right after a characteristic drop-off in the second year. The strategy is to find an entry point in the second year and exit in the third or fourth year. Which, of course, is nothing other than the good old "Buy low, sell high" routine.
Not all companies follow this pattern, since there are other factors affecting the stock’s performance. But this month, let me show what I think will be a perfect example: a new issue that debuted on July 22, 1999.
Making a profit
As scientists continue to unravel the mysteries of disease, they have discovered that the so-called "orphan diseases" are worthy of special attention. Think about it. There are 6,000 rare diseases affecting fewer than 200,000 Americans. Yet, taken together, they strike one American in ten. Collectively this is the most common and most costly health problem of all.
Sure, we like to think humanity will find a cure for those few patients. But it’s not human kindness, it’s the potential profits that put a drug in the pipeline. The Orphan Drug Act of 1983 gave tax credits of 50% for the costs of clinical trials, provided for government grants, and guaranteed seven years of market exclusivity for approved orphan drugs, whether or not they are protected by a patent.
Ten years before this law was passed, only 10 orphan drugs were approved. In the following decade, 87 were approved — a number that has grown to 212, with another 855 currently in trials.
Orphan drugs are not exactly cash cows. Profits are small and frequently may not interest the likes of Merck and Pfizer. But this has attracted a number of smaller companies like BioMarin Pharmaceutical Inc. (BMRN: NASDAQ) to develop enzyme therapies for debilitating, life-threatening, chronic genetic disorders and other diseases.
Think about the market potential. Gaucher’s disease, which causes hideous bone deformities, is one of the most expensive diseases to treat. The medicine alone costs US$130,00 per year for children and US$400,000 per year for adults. Only 2,200 of the 20,000 to 30,000 Gaucher’s patients worldwide receive the therapy. But that’s still half a billion dollars.
Double dose of grapenuts
It’s something we take for granted. A bowl of high-fiber cereal for breakfast has a load of carbohydrates to get you through the morning. These are biological molecules that are critical in maintaining the health and functional integrity of all cells and tissues.
Enzymes are proteins that act as catalysts for many vital biological reactions. Enzymes that act on carbohydrates — called carbohydrate-active enzymes or CEAs — cleave, construct or otherwise modify carbohydrates to regulate their production, maintenance and degradation.
These CEAs are critical to a wide range of functions within the body, including cell proliferation, digestion, blood clotting, immune response, wound healing, conception, and control of infection and inflammation. The body, when functioning normally, produces appropriate quantities of carbohydrate-active enzymes to perform these functions. CEAs have the potential to play an important therapeutic role in certain diseases, either by replacing deficient enzymes or supplementing the enzymes that are naturally present in the body.
Final destination
There are around 70 or more known genetic disorders caused by the deficiency of a single enzyme. In these diseases, the body fails to produce sufficient quantities of certain enzymes. Most of these diseases are rare, affecting only a few hundred to a few thousand people in the United States.
Examples of genetic diseases include Gaucher’s disease, hemophilia, and Mucopolysaccharidosis (MPS) disorders. According to the Frankel Group, there are currently only eight genetic diseases for which there are effective treatments, and five of these eight are treated through enzyme replacement.
Historically, manufacturers were not able to mass-produce the correct forms of enzymes used in enzyme replacement therapies. This is now possible with advancements in recombinant production methods.
Recombinant production applies foreign DNA to cells to make enzymes the cells would not naturally produce. In 1998, the worldwide sales of pharmaceuticals used to treat genetic diseases by enzyme replacement were approximately US$2.7 billion.
Carbohydrate-active enzymes can also treat conditions like burns and infections.
Supplementing the amount of enzymes naturally present in a patient’s body, or adding a new enzyme, can enhance the body’s ability to respond to certain conditions and accelerate the healing process. Using a topical enzymatic formulation to supplement naturally occurring enzymes may speed the healing of burns by removing dead tissue. Adding or increasing the concentration of an enzyme that selectively targets and kills microbes may help the body fight infections.
Orphan status
MPS disorders are a group of seriously debilitating genetic diseases caused by the accumulation of mucopolysaccharides in the body, which are also known as glycosaminoglycans or GAGs. GAGs are complex carbohydrates synthesized by all cells in the body. At least ten enzymes are required for the complete breakdown of GAGs. Normal breakdown of GAGs is blocked if there’s not a sufficient quantity of these enzymes.
MPS-I is a genetic disorder caused by the deficiency of the enzyme alpha-L-iduronidase. About 3,400 patients in developed countries have MPS-I, including about 1,000 in the United States and Canada. If untreated, almost all children diagnosed with the more severe forms of MPS-I will die before reaching adulthood.
Currently, the only available treatment for MPS-I is a bone marrow transplant. But a matching donor is as rare as the disease itself. And many of those who do find a donor decide not to receive the therapy because of the serious side effects.
BioMarin is developing a specific form of alpha-L-iduronidase, designated BM101, for the treatment of MPS-I. BM101 treats MPS-I by making up for the deficiency in alpha-L-iduronidase. In September 1998, BioMarin established a joint venture with Genzyme for the worldwide development and commercialization of BM101. The drug is in Phase III clinical trials.
BioMarin received orphan drug designation for BM101 from the FDA. If it receives FDA approval of BM101 before any other company receives approval of alpha-L- iduronidase to treat MPS-I, this gives BioMarin exclusive rights to market a product using alpha-L- iduronidase to treat MPS-I in the United States for seven years.
The company also received fast-track designation from the FDA for its Biologics License Application (BLA) for BM101 for the treatment of Hurler and Hurler-Scheie syndromes, which are the two most severe MPS-I disorders and account for approximately 60% of MPS-I patients.
In the pipeline
BioMarin is also developing treatments for other rare disorders. MPS-VI, also known as Maroteaux-Lamy syndrome, is a genetic disorder caused by a deficiency of the enzyme N-acetylgalactosamine 4-sulfatase, which is designated BM102.
There are approximately 1,100 patients suffering from MPS-VI in the developed world, with 340 in the United States and Canada.
Patients with MPS-VI have symptoms similar to those of MPS-I. But MPS-VI patients do not suffer mental retardation.
If untreated, the average life span of MPS-VI patients is estimated to be between ten years in the severe form to 30 years in the mild form.
MPS-VI has been treated by bone marrow transplants. But like MPS-1 patients, a matching donor is hard to find and the side effects are severe. BioMarin is developing BM102 for the treatment of MPS-VI. BM102 treats MPS-VI by making up for the deficiency in the enzyme N-acetylgalactosamine 4-sulfatase. The drug is currently in Phase I/II trials.
Giving up skin
BioMarin intends to develop additional enzyme replacement therapies for other medical problems, such as burns and infections.
In 1997, approximately 65,000 patients in the United States alone were admitted to hospitals with burns.
Approximately 20% of these patients had very severe burns that destroyed all layers of the skin, referred to as full-thickness or third-degree burns. Full-thickness burns require major skin grafts, and the admittance to one of approximately 150 major burn centers in the United States.
Unhealthy and dead tissue is removed, a process called debridement, to prevent infection and to prepare the burned site for skin grafting or other therapy. Currently, loss of blood, loss of healthy tissue, continued trauma, pain, and scarring complicate these treatments.
Surgery is delayed in many severely burned patients. Also, certain parts of the body, such as the hands and face, are difficult to treat by this method.
A limited number of topical debridement products are available as an alternative to surgery. But they have not been widely accepted by physicians because these products are ineffective and often cause the patient pain and bleeding.
If you think about it, a large portion of the human skin is made up of carbohydrates and proteins. There’s an opportunity for more selective enzyme debridement products that specifically digest carbohydrates or proteins in dead tissue.
Earlier this year, BioMarin acquired an exclusive worldwide license to intellectual property covering Vibriolysin, an enzyme that has demonstrated promising preclinical efficacy in debridement and wound healing. BioMarin currently has two products under preclinical development for the treatment of full-thickness burns.
BioMarin is also developing two naturally occurring enzymes to combat infection by Aspergillus spp. Aspergillus is one of the most common fungi in the environment. Although aspergillus is not usually harmful to people with healthy immune systems, it can pose a life-threatening risk to those whose immune systems are compromised, such as cancer patients undergoing chemotherapy, organ and bone marrow transplant recipients, and people with late-stage AIDS.
Aspergillosis, a fungal infection caused by aspergillus, begins as an upper airway infection and can become a systemic fungal infection in immuno-compromised patients.
It is difficult to diagnose and often proves fatal, and currently there’s no adequate treatment.
BioMarin is also researching CAEs for use in treating certain inflammatory conditions. It is developing a CAE to treat psoriasis, a common inflammatory skin condition. It’s currently in preclinical studies.
The time to buy
BioMarin priced at US$13 in July 1999 and opened at US$15.00 on its first day. The company had a good six-month run, reaching its high of US$41.25 before pulling back with the market last year.
But the stock is trending upward. It experienced a huge volume spike last month. With its promising drug to treat MPS-I in phase III trials, BioMarin will gain additional market attention. I rate BioMarin Pharmaceutical, Inc. (BMRN: NASDAQ) a buy under US$11.00.
For more information contact BioMarin Pharmaceutical, 371 Bel Marin Keys Boulevard, Suite 210, Novato, CA 94949, tel. 415-884-6700, fax 415-382-7427.
Siu-Yee Ng is the editor of IPO Trader, an IPO alert service that helps readers profit on IPOs and, more importantly, the IPO Aftermarket. Click here to find out how you can put Siu-Yee's expertise and extensive contacts to work for your portfolio.
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