Emerging Biopharmaceutical

Emerging Biopharmaceutical Companies

New Technologies and Expanding Pipelines

Rod Raynovich 4/1/06

The 2005 bull market in biotechnology stocks continued to run through the end of February. Biotech stocks tend do well in the November-February time frame, and 2006 has great momentum. Driving this strength are a number of fundamental factors such as M&A, overall market strength in small and mid caps, earnings growth , new product milestones, and increased weighting of biotech in health care portfolios. The institutional factor may be the most pronounced as more money from all types of funds go to work buying biotechnology stocks.

The biotechnology investment model of the past few years remains intact i.e. a” food chain”effect whereby life science R&D creates product pipelines that are licensed or acquired by larger players especially big pharma. Investment in the space is also driven by the need for specialty pharmaceuticals to replace revenues lost to generic drugs since it is estimated that $21 billion of drugs are coming off patent in 2006 alone. Biotech drugs can also address niche markets with products that are difficult to copy and manufacture.
Thus even big pharma is directing more R&D expenditures toward biotechnology products.

YTD performance with ETF’s in the sector as of March 4 are: IBB 85 up 9%, PBE 19 up 8%; BBH was at 195 down 3% as smaller cap issues outperformed large cap stocks such as DNA and AMGN which were both down about 7% YTD. Among the larger biotech funds Fidelity (FBIOX 68.26) is up 8.9% and the more diversified T. Rowe Price Health Sciences (26.9) is up 7.3%.

IBB (85) has exceeded its post 2001 bubble high of 84 but has not approached its all time high of 102. IBB needs to stay above 70 during the usually weak March-April period to confirm a longer term track that could exceed all time highs achieved in late 2000. The larger cap weighted BBH (194) hit an intermediate bottom in March of 2005 of 136 (almost a triple bottom from August ’04 low) of 130, then soared to a high around 210 in November of ’05. All time high was 240 in Sep’00.

Scientific breakthroughs , strategic partnerships and positive clinical results have increased the value of biotech product pipelines boosting demand for small and mid cap stocks. We have selected four companies that have already captured the market interest , are well funded, have strong pipelines and are poised to advance to the next tier of biotech market capitalization assuming positive clinical developments. Each represents broad biotechnology platforms of RNAi, monoclonal antibodies and proteins.

Alnylam (ALNY)

Alnylam Pharmaceuticals is involved in the development and commercialization of therapeutic products utilizing RNA (RNAi) interference technology. RNA interference is a naturally occurring mechanism within cells for selectively targeting and silencing specific genes. Double stranded RNA’s can be chemically synthesized and targeted for specific disease causing genes. The Company has fundamental IP covering structure and function of synthetic RNAi products and is applying its technology to medical needs that it feels cannot be addressed with small molecules or antibodies. In January of 2006 its IP leadership was supported by allowance of the Tuschl II patents. Its lead program is a Phase I product for RSV (respiratory syncytial virus). The so called Direct RNAi platform is being directed toward ocular, CNS and respiratory diseases while the Systemic RNAi technology can be directed to oncology, autoimmune and metabolic diseases. On Feb. 21 Alnylam announced a collaboration with Novartis to advance RNAi toward pandemic flu. An RNAi therapeutic is thought to be capable of incapacitating several genes in the flu virus and the capability of adapting the drug to new strains as they emerge.
Other strategic partners for Alnylam are Merck for ocular diseases and Medtronic for drug/device combinations in neurogenerative diseases such as Parkinson’s and Huntington’s .
Other RNAi players are RNAI and CYTR.

Exelixis (EXEL)

Exelixis is focused on the discovery and development of new drug therapies for cancer and other proliferative diseases. The Company is leveraging its fully integrated gene-to-drug platform to expand a broad pipeline now consisting of 12 compounds of which at least 7 are in clinical trials: XL119 is in a Phase III clinical trial for bile duct tumor, XL874 which will soon enter Phase II for renal disease , XL999 which is in Phase II for variety of solid tumors, and five other anticancer compounds that are in Phase I clinical trials.

XL999 is a Spectrum Selective Kinase Inhibitor (SSKI) is a potent small molecule inhibitor of key receptor tyrosine kinases (RTK’s) implicated in tumor vasculature and proliferation of some tumor cells. Proof of Concept from many of these trials are expected in the 2007-2008 timeframe. Other preclinical compounds in development are for cancer, metabolic and cardiovascular diseases. Partners are committed to about $400 mil. of R&D funding include GSK(12 programs), Genentech, Bristol Myers Squibb, Helsinn and Wyeth. In December the Company signed an agreement with Wyeth for the farnesoid X Receptor (FXR), a nuclear hormone and bile acid receptor involved in a variety of metabolic and liver disease.
Other interesting small molecule player s are ARNA and ARRY.

Tanox (TNOX)

Tanox specializes in the discovery and development of monoclonal antibodies for treatment of immune-mediated diseases, inflammation, infectious disease and cancer. Tanox’s first approved drug, Xolair (omalizumab),is the first antibody approved to treat moderate -to –severe confirmed allergic asthma. Xolair generated annual royalties of $29.5 million in 2005 with annual sales of $300million in 2005 from its partnership with Genentech and Novartis. The Company also has a promising pipeline with three products in the clinic. TNX-355 a humanized anti-CD4 monoclonal antibody, is a novel HIV viral entry inhibito.TNX-355 had positive clinical results in a Phase II trial when given in combination with an optimized background regimen. After review of the data and a meeting with the FDA it is expected to move TNX-355 to a later stage of clinical development. An IND was filed for TNX-650 for treatment of Hodgkin’s lymphoma that is refractory to chemotherapy and radiation. Other programs include TNX-832an anti-tissue factor antibody in Phase I/II for acute lung injury (ALI) and acute respiratory distress syndrome (ARDS). The Company reported net income of $9.8 million for Q4.

Zymogenetics (ZGEN)

Zymogenetics is focused on the development and commercialization of therapeutic proteins for treatment of diabetes, hemostasis, hemophilia and autoimmune disease. Revenues are in the early stage and products sold through its partner Novo Nordisk are NovoLin and NovoRapid for treatment of diabetes, NovoSeven for treatment of hemophilia, and Regranex for treatment of wound healing. The Company also has three products in clinical development : rhThrombin has recently entered Phase III for control of bleeding during surgical procedures; TACI -Ig is a soluble receptor for treatment of autoimmune
diseases and preliminary Phase I data indicated it was well tolerated for multiple myeloma with no dose limiting toxicities. More data for RA, Lupus and multiple myeloma is due later this year. In the pre-clinical stage is IL-21 for treatment of NHL, melanoma, and renal cell carcinoma in combination with retuximab. Interleukin 21 is a cytokine that has potent biological activity for regulating certain types of human cells and plays a key role in the body in surveillance of malignant and infected cells. The Company also has a strategic alliance with Serono S.A. for novel protein and antibody therapeutics. Revenues from licensing and royalties were $43 million in 2005.

Emerging Biopharmaceutical Companies

Company Price 3/4/06 Market Cap(mil) Cash(mil) Technology Focus
Alnylam 17 454 142 RNAi
Exelixis 11.2 932 210 Small Molecule
Tanox 20 890 164 Monoclonal Ab
ZymoGenetics 22 1,400 366 Proteins

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