Watch Out for These 3 Biotech Companies

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The growth of the biotechnology industry is greatly influenced by research and development expenditure.

This year, the North American players in the biotechnology industry are expected to spend $15 billion. This spending will be in the form of mergers and acquisitions as well as research and development. The North American market is an oligopolistic market where the majority of the revenue is made by a few dominating companies. With such intense competition, it becomes necessary for companies to spend more on research and development.

A company exploring different biological cancer treatments

Biocad, a Russian biotechnology company, is thinking of being bought out. If the market sources are to be believed, Amgen (NASDAQ: AMGN) is one of the potential bidders for Biocad. Based on current market values, Biocad is worth $1 billion.

Last year, Amgen had $26 billion in cash and cash equivalents on its balance sheet. It is highly probable that the purchase consideration will be met out of this enormous cash balance. Therefore, the arrangement of funds won’t be a problem for Amgen. Additionally, as far as synergy from the acquisition is concerned, Amgen will benefit from Biocad’s development of different versions of biological cancer treatments. Currently, Biocad is working on biosimilar versions of rituxan, herceptin and avastin. Currently, these three are among the top selling cancer drugs. Amgen will benefit from this move as the world market for biological drugs is expected to reach to $178.4 billion by 2017.

Recently, Amgen presented the results of the Phase III trial for its T-Vec drug, which will treat melanoma. Melanoma, a type of skin cancer, is rapidly increasing among U.S. and U.K. citizens. It is estimated that 77,000 new melanoma cases will be documented in the U.S., and every 20 out of 100,000 people will be affected by melanoma this year in the United Kingdom. This indicates a huge platform for this drug. The final survival data about the drug is expected out in late 2013; after which, it can be expected the drug will gain approval in the first half of 2014. Analysts expect T-Vec toan be a $350 million-$500 million drug for Amgen.

Expansion of a company’s product base

On June 28, Celgene (NASDAQ: CELG) entered into a licensing agreement with MorphoSys for strengthening its product base in the field of multiple myeloma, or MM. Under this agreement, Celgene will have a worldwide right to sell MorphoSys' MOR202. Currently, this drug is in the phase I/2a trial stage. The agreement dictates equal profit sharing. Currently, Celgene sells Thalomid, Revlimid and Pomalyst as MM drugs. The addition of MOR202 will diversify Celgene’s portfolio. Moreover, it is estimated that around 100,000 new MM cases are diagnosed annually worldwide. 

Prior to this, Celgene has experienced a strong cannibalization on its product sales whenever a substitute product is launched. Since MOR202 is in the early stages of tests, it is expected that it will nullify the declining revenues from Celgene’s existing products. Therefore, this agreement provides a natural hedge to Celgene’s revenue. Thus, the company will generate revenues of $4.73 billion, $5.4 billion, and $6.6 billion in 2013, 2014, and 2015 respectively from the sale of these products.

At the European League Against Rheumatism (EULAR) meetings in June, Celgene presented the results for its Apremalist drug, which will be used for curing psoriatic arthritis patients. Psoriatic arthritis is a type of inflammatory disease that develops in those who have chronic skin psoriasis. The results showed the improved potential of the drug. The company expects approval for this drug in the U.S. in first half of 2014 and in Europe in the first half of 2015. Analysts estimate Celgene to receive revenue of $130 million in 2014 and $482 million in 2015 from this drug.

A company launching different drugs

Biogen’s (NASDAQ: BIIB) oral multiple sclerosis drug, Tecfidera, witnessed a strong launch in the U.S. market. Analysts expect Tecfidera to generate $422 million in fiscal 2013 for Biogen. However, there remains a concern regarding its regulatory data protection (RDP) in Europe. It is highly probable that the European Medicines Agency (EMA) will not provide a RDP designation to this drug once it is approved in Europe. This means Tecfidera will face generic challenges, which can jeopardize its long-term profitability. Currently, it is estimated that the European market will contribute approximately 36% of the total estimated sale of Tecfidera. Therefore, investors should remain cautious as to how the EMA will react to Tecfidera.

Additionally, analysts believe Biogen’s Eloctate and Alprolix drugs will receive FDA approval by first half of 2014. These drugs will be used in the treatment of Hemophilia A and Hemophilia B respectively. Hemophilia is an inherited disease that affects blood clotting. In the U.S., it is estimated that one out of every 5000 new born babies are affected by Hemophilia A and Hemophilia B is one out of every 25,000. These drugs will open up a new revenue generating opportunity for Biogen. As such, Biogen is expected to generate combined revenue of $199 million in 2014 and $375 million in 2015 from both these drugs.

Conclusion

The new licensing agreement with MorphoSys, and the positive outcome results of Apremalist, will certainly strengthen Celgene’s product portfolio. This will drive its future revenue upwards. Also, Amgen’s possible acquisition of Biocad and the launch of t-vec will help it to increase its top line. Therefore, both these stocks are recommended as a buy.

The launch of Eloctate and Alprolix will create a new revenue generating opportunity for Biogen, but the uncertain stance of EMA on Tecfidera requires a recommendation for a hold on this stock.


Madhu Dube has no position in any stocks mentioned. The Motley Fool recommends Celgene. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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