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Abgenix: The Mouse That Roars?


By Hal Plotkin
CNBC.com Silicon Valley Correspondent

Dec 14, 2000 03:30 PM

52-Week Stock-Performance of Abgenix Inc.
You might call Abgenix Inc.’s {ABGX} transgenic rodent the mouse that roars.

Although volatile, Abgenix’s stock has been one of the biotechnology sector’s most-lucrative performers over the past year moving up, though not always in a straight line, to the mid-60 range this week from its 52-week low of less than 20 a share.

Several analysts recently upped their price targets on the stock, saying that the company’s recent progress should make it a standout performer over both the short and long term. The analysts’ new targets see the stock moving up to the 80 to 100 range over the next 12 months.

“What many people don’t understand yet is that there are fundamental changes going on in the biotech industry,” says Scott Greer, Abgenix’s chairman and chief executive officer. “It’s very different than it was 16 years ago when the first biotech companies got started. What’s really exciting is that new winners are going to emerge, new Amgens {AMGN}, new Biogens {BGEN}, new Genentechs {DNA}, and the next ones are going to be even bigger. We expect to be in that group.”

The analysts who are betting he is right include Needham & Co.’s 15-year biotech veteran Carolyn Pratt, Dain Rauscher Wessels’ analyst Andrew Milne and Pacific Growth Equities’ Tom Dietz. In fact, all the financial analysts who track the stock rate it either “buy” or “strong buy.”

The enthusiasm stems from Abgenix’s broad footprint in the biotech realm. The company’s proprietary rodent-based antibody technology enables it to develop new drug candidates with breathtaking speed in an industry where time is usually measured in decades, not years or months. That ability has attracted numerous drug-development partnerships that analysts say give the company excellent prospects, even if many of its current new drug creation efforts don’t pan out. The experts say it will take just a few major successes, perhaps but one, to give Abgenix the blockbuster breakthroughs needed to substantially increase its already lofty valuation.

“Abgenix is sitting pretty,” says Pratt, who names Abgenix as her favorite biotech stock pick. She initiated coverage of the stock in September 1999 and says she is more optimistic than ever about its prospects.

“Abgenix is in position to create some of the first wave of fruit to be harvested by the human-genome project,” Pratt says.

Unlike prior rodents used in biological experiments, Abgenix’s mice have been genetically engineered to be capable of producing fully human monoclonal antibodies. Monoclonal antibodies are similar to substances produced by the human body to ward off disease. The antibodies augment the human-immune system by attacking specific unwanted invaders while leaving normal human cells untouched.

It is hoped that monoclonal antibodies will be useful in treating a wide variety of disease agents without causing the unwanted side effects common to so many synthetically derived pharmaceuticals. Previous attempts to produce effective monoclonal antibodies didn’t always live up to expectations, in part, because the products produced often contained mouse proteins. Abgenix’s patented mice eliminate that source of potential complication.

What’s more, Abgenix’s mice get the job done so fast that new antibody candidates can often be manufactured and tested within weeks after potential targets have been identified. By contrast, the main competing biotech approach, which involves developing small molecule drugs, often requires years of work before any real testing can begin.

That is why Abgenix is one of the most-talked-about biotech firms on the scene today. The company is partnering with a number of pharmaceutical and human-genomics firms that have signed licensing and royalty deals to use the firm’s technology in conjunction with more than three dozen new pharmaceutical product development efforts now under way, most of which are still in the early stages.

Abgenix typically receives about $8 million to $10 million in up-front licensing and milestone fees for each collaboration, in addition to royalty payments in the 5% to 6% range for any products brought to market.

On Oct. 23, Abgenix reported net income of $1.5 million, or 2 cents a share for the quarter ended Sept. 30, compared with a loss of $1.3 million, or 2 cents during the same period last year. The company’s revenue for the most-recent quarter hit $16.8 million, up from $4.4 million a year earlier.

Just eight monoclonal antibody products currently exist, the most notable of which are Genentech Inc.’s breast-cancer drug, Herceptin, and MedImmune Inc.’s {MEDI} Synagis, which is used to treat a serious respiratory-tract disease in children and infants.

Biotech analysts, however, are betting that Abgenix’s mice will be the progenitor of dozens of new antibody-drug treatments over the next five to 10 years. The experts say they expect there will be more than 100 new monoclonal antibody products introduced over the next decade that will create an overall annual market somewhere in the range of $50 billion.

“We think Abgenix will capture 20% to 50% of the antibody market over that time,” Dietz says. “The company has more products being tested than anyone else. You look for spots to own this stock, and it’s looking very attractive here in the 50s and 60s.” Dietz rates the stock “strong buy.”

Despite general positive feelings, at least some industry watchers warn that Abgenix’s stock has gotten ahead of the company’s position in the actual pharmaceutical marketplace.

“[Abgenix’s] valuation is not based on revenues,” says Alfred Mansour, Ph.D., the founder of BiotechWatch.com, an online firm that tracks the progress of biotech firms. “It’s based on the long-term potential of their Xenomouse technology that produces humanized antibodies.”

Mansour notes there still could be unanticipated complications that emerge during human testing.

Analyst Opinions:
Abgenix
Strong Buy 2
Buy 6
Hold 0
Sell 0
Strong Sell 0
Source: Zach’s
Investment Research

“Most of the clinical risk remains,” Mansour warns. “But to Abgenix’s credit, they have several strong partnerships in place, for example, with Immunex Corp. {IMNX, } and Millennium Pharmaceuticals Inc. {MNLM}. This is a testament to the importance of the technology for antibody development.”

In addition to the partnerships, Abgenix is also developing several of its own proprietary antibodies using the proceeds from its licensing deals and a secondary offering that left the company with about $750 million in cash on hand, according to its most-recent quarterly statement.

Three antibodies created with the firm’s technology are now undergoing clinical testing, with about 150 patients treated so far without any notable incidents, according to the company.

“The drugs are looking incredibly clean,” Greer says. “We expect some failures in the clinic. But at this point, it’s hard to imagine that there is going to be some fundamental flaw. We’ve gone past that point with monoclonal antibodies.”

Greer says that for the immediate future, Abgenix will continue to pursue licensing deals and collaborations with other firms. Looking further down the road, he says most of the company’s revenue will be derived from its own product-development efforts.

“Looking out five or 10 years, I think the majority of the value in the business and a significant portion of the revenue will come in the form of proprietary deals,” Greer says.

In addition to the partners noted above, Abgenix also has significant new drug-development deals with Abbott Laboratories Inc. {ABT}, Pfizer Inc. {PFE} and SmithKline Beecham PL {SBH}, among many others.

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