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Follow the leader
Beware the Johnny-Come-Latelies in the biotech bull market
by Brian Hicks
It doesn't seem very long ago that I recommended my first medical technology stock in Taipan: a little-known company in the Research Triangle called Closure Medical (CLSR:NASDAQ).
Taipan recommended buying stock in this company, a maker of a wound glue called Dermabond, at US$5.75 a share in October 1996. Less than a year later, we sold the stock for over US$32 a share.
We're back in it again, but that's not the point.
When I started researching the biotech sector in 1996, do you know how many pure biotech mutual funds existed?
Zero. Not one.
Recommending a biotech stock at a cocktail party those days you were all but guaranteed a punch in the face.
Believe it or not, that's the best sign for a market contrarian (not that I consider myself one).
But nobody would listen to me then.
Today it's a different story.
Gold-bug market gurus who used to short the high-tech economy are now forming a conga-line into the biotech sector.
This sends my contrarian instincts into overdrive.
But I'm not ready to sell the farm just yet.
Why? Because I am confident that Taipan is positioned in three of biotechnology's top stocks: Millennium Pharmaceuticals, (MLNM:NASDAQ), MedImmune (MEDI:NASDAQ) and Aviron (AVIR:NASDAQ).
I am convinced that all three of these stocks will reap massive gains over the next 3 to 5 years — I'm talking 300% from today's prices. Want an indication of the current biotech sector? Take a look at the AMEX Biotech Index. On a year-to-date measurement, the index is up a staggering 92%. Yes, you read that correctly, 92%!
No matter how you look at it, biotechnology stocks are devastating the rest of the market. Just compare the BTK to any of the major indices. While the Dow, NASDAQ and S&P 500 are all flat for the year (at least as of this writing), biotechs are approaching triple-digit gains. I am as bullish as ever on the outlook for biotechnology... and these three biotech stocks (all of them core holdings in The Cutting Edge) are going to lead the change.
But first, some sells
Before I get into the reasons why I like MLNM, AVIR, and MEDI, I first want to sell some positions — starting with a huge winner for the Taipan portfolio, Agritope (AGTO:NASDAQ).
To refresh your memory, Agritope was a speculative play on agricultural biotechnology. When it comes to genetic modification, one group has been doing it longer than anyone else. But with all the hoopla surrounding the genome project, the "original" biotechnologists — farmers — were getting overlooked. We initiated a trade on AGTO for around US$5 a share.
On September 8th, Agritope announced that it was being acquired by Exelixis (EXEL:NASDAQ). This caused AGTO to jump 60% in one day. To date, we are up over 100% on Agritope, and I want to take some profits. Sell Agritope at the market.
Also sell AVI Biopharma (AVII:NASDAQ). We originally bought AVII in Taipan for under US$3.50 a share. Today it trades for about US$8 a share — giving Taipan a nice gain of 128%. Sell AVII at the market.
This time it's different: The best of the rest
I predict Millennium will become one of the best biotech stocks in the market within 10 years. Why?
Well, for starters, Millennium is a combination of a drug discovery company (traditional biotechnology and big pharma) and a genomics company.
The scope of this company's platform is awesome.
Millennium is involved in three major areas: cancer, metabolic diseases (including obesity) and inflammatory illnesses. The company also has significant programs for infectious diseases, cardiovascular diseases, and diseases of the central nervous system.
All in all, Millennium has 9 products in the clinic.
Massive.
And the company's list of partners reads like a "who's who" in the biotech and pharmaceutical industries.
Take a look: Abgenix, Genentech, Schering AG, Becton Dickinson, Genzyme, Warner-Lambert, Roche, Medarex, Hoechst, Bristol-Myers Squibb, Incyte, Lexicon Genetics, Astra AB, Eli Lilly, Wyeth-Ayerst, and Pfizer.
Like I've said a hundred times before, if the likes of Pfizer and Genentech are eager to strike deals with Millennium, there's something there...and it's big.
So, from this brief analysis alone, it's clear that this company is involved in some massive markets.
This may account for the company's cash position (R&D budget) of over US$644 million.
Currently, the stock is trading at a market cap of around US$14 billion. This should swell in the years to come. And I wouldn't be surprised if it becomes a US$100 billion company by 2010.
I hate chasing stocks — especially when my original entry price was US$38 a share. This stock recently tipped the scales at US$153 a share, a gain of roughly 400%.
MedImmune (MEDI:NASDAQ)
Following in the footsteps of Amgen, MedImmune produces two FDA approved drugs, Synagis and CytoGam. Of the two, Synagis is the cash cow, accounting for 80% of the US$228 million in sales over the last 6 months.
Synagis treats RSV, or respiratory syncytial virus, a lower respiratory tract disease. You might not have heard of it before, but RSV is the leading cause of respiratory illness and pneumonia in infants. At some point in their lives, nearly all children will be exposed to RSV, so it's a huge market. Since Synagis is the only drug to treat RSV, MedImmune has a monopoly.
MedImmune recently got downgraded, causing the stock to give back 20 points in one trading day. I see this as an outstanding opportunity to open a position in one of the top biotech companies in the world.
With RSV season approaching, I think shares of MedImmune could reach US$100 by early next year.
Forget the flu
I've been following Aviron since 1996. It's a stock that I simply love. But they've disappointed investors in the past. That's why we implemented a hedging strategy in The Cutting Edge to safeguard against a bloodbath. The bloodbath never came. In fact, just the opposite happened. Aviron went on to post an impressive rally.
Aviron's lead product is FluMist, an influenza vaccine administered through a nasal spray. This delivery method is the reason Taipan initiated a buy recommendation.
Traditionally, flu vaccines have been delivered by injection. But the pain associated with needles caused resistance to further market expansion. Using a nasal spray is not painful at all.
Now, FluMist is entirely different from other recent approvals such as Relenza and Tamiflu. Instead of just treating the virus, FluMist actually prevents you from getting the flu.
In a Phase III trial in children, FluMist demonstrated a 1% incidence of flu in treated patients, versus 18% for placebo. These stunning results prompted big pharma Wyeth Lederle to strike a marketing partnership with Aviron. Assuming Aviron meets its milestones, the deal could be worth in excess of US$140 million.
FluMist has the potential to be a blockbuster — with estimated initial sales of the product reaching US$500 million. Once the ramp-up in FluMist is complete, Aviron's top line should grow at a robust clip — climbing from US$106 million in 2001 to over US$347 million in 2004.
Currently Aviron trades at a market cap of about US$900 million. If our valuation model is correct — and assuming FluMist gains FDA approval — AVIR could handle a market cap in the US$7 to US$10 billion range.
So I see a lot of upside from current levels.
We last bought Aviron at around US$22 a share. As I write this, the stock is approaching US$60 a share for a gain of 172%. Hold Aviron for more gains.
Brian Hicks is the editor of Cutting Edge, a monthly newsletter that focuses on opportunities in the microcap, high-tech, and biotech sectors.
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