In the mystifying world of biotechnology, investors need a combination of extraordinary patience, iron insides, and sharp stock-picking skills. You need all of those qualities to be a victor, rather than a victim, in an arcane sector that trips up even some of the most astute investors.
This is the reason activist billionaire investor Randal J. Kirk loves the territory. He is one of the handful of investors who have defied the odds and bagged enormous profits from some wisely chosen biotech gems. How does he do it? An extra skill helps: a keen eye for potential deals. Some of the billions he has made from biotech investing come from picking out little-known companies that subsequently ended up being acquired by Big Pharma outfits because of their attractive drugs or technology.
One of his recent discoveries: Clinical Data (CLDA), which has developed a possible blockbuster antidepressant drug, along with a genetic test to predict its effectiveness in patients. This combination separates it from the rest of the crowd, says Kirk. There are several antidepressants already on the market, such as Pfizer's (PFE) Zoloft and Eli Lilly's (LLY) Prozac. Some 21 million Americans suffer from depression, creating an estimated $9 billion market. But Kirk is confident Clinical Data's antidepressant drug, Vilazodone, would be faster-acting and as effective, if not more, than the competition.
SOME TRACK RECORD
Who is Kirk, and why does he favor Clinical Data? Kirk is CEO of a private equity and venture capital outfit called Third Security, and is currently the largest stakeholder in Clinical Data, controlling some 44% of the company's stock. He has assumed the chairmanship of the company. But the best way to describe him, apart from saying he's an activist investor, is to recall a few of the companies he has invested in, and how they attracted the takeover interest of larger pharmaceutical companies.
In 1996 he founded New River Pharmaceuticals, which developed products aimed at treating drug abuse. It went public in August, 2004, at split-adjusted 4 a share. In 2007, Shire Pharmaceuticals bought the company at 64 a share—a giant win for Kirk. Another winner was King Pharmaceuticals, which Kirk co-founded in 1993, serving as its chairman. The company, a maker of cardiovascular and hypertension drugs, went public in 1998 at around split-adjusted 5 a share, with Kirk owning some 5% of the stock. In 2002, Kirk quit the board and sold part of his stake in the company, which had hit a high of 42. The company went on to list its stock on the New York Stock Exchange and now has a market cap of $2.7 billion, based on a recent price of 11 a share.
In 1999, Kirk purchased a large stake in Scios, a leader in heart-failure treatments, which at the time traded at 4 a share. Kirk, sensing an opportunity, swooped in and became its largest stakeholder on a piece of potentially devastating news: The company's lead product, Natrecor, was rejected by the Food & Drug Administration. That caused its marketing partner, Bayer (BAYRY), to pull out of its agreement with Scios.
BIG PHARMA'S LOVIN' ARMS?
For a while it looked like Scios was in deep trouble. Nonetheless, Kirk joined its board and helped the company do another clinical trial on the drug, which eventually got resubmitted to the FDA for approval. Natrecor subsequently got the FDA's O.K., which led to the successful marketing of the drug. Scios was later purchased by Johnson & Johnson (JNJ) at 45 a share. Another deal involved a company that Kirk co-founded, in 1984, called General Injectibles and Vaccines, which developed flu and hepatitis B vaccines. Sales were an estimated $119 million when Kirk sold the company in 1988 to Henry Schein (HSIC) for $65 million in cash, plus up to $80 million based on performance targets.
What does Kirk see happening at Clinical Data? Because of the company's products and growth prospects, Kirk believes it may very likely go the same route, ending up in the arms of Big Pharma.
That's because Vilazodone is unique, according to Kirk. Indeed, the antidepressant "offers not only the potential to have a more rapid effect but also helps in a patient's management of anxiety," says Chrystyna Bedrij, an analyst at Griffin Securities , which has done business with Clinical Data. The company's genetic test, called Familion, can predict whether a patient is likely to respond to Vilazodone, she notes. "In sum, the two products work together to improve a patient's compliance on the use of the drug, thereby increasing a patient's response rates, which should result in lower costs of care," says Bedrij.
She rates Clinical Data a buy, with a 12-month price target for the stock, currently trading at 17 a share, of 45. She bases her target on Vilazodone's potential as a blockbuster drug, assuming it achieves a peak 25% penetration of the antidepressant market. She also expects Clinical Data to partner with a big drugmaker and receive various milestone payments and retain a 20% annual royalty fee for the drug. In many cases, the big pharmaceutical partner ends up bidding to buy its smaller partner.
The company's Familion portfolio of genetic tests can also be used by patients with cardiac problems, which is a separate business for Clinical Data. Familion provides sample blood tests that help diagnose a heart patient's disease and serve as a guide for treatment options. The tests are already on the market and in the last quarter produced sales of $1.5 million.
Clinical Data also has another unit called Cogenics, which offers genomic services to the health-care and life science industries, including gene sequencing and expression, genotyping, and biomanufacturing support.
Bedrij expects Clinical Data to start making money by 2011, with earnings she estimates at a total of $43.4 million, or $1.71 a share. For 2012, she forecasts net income of $123 million, or $4.79 a share. Significant revenues will start streaming in by 2009. Bedrij estimates that year's total will hit $41.2 million, a figure that will double to $84.6 million in 2010 and jump to $147.3 million in 2011, nearly doubling again, to $267.6 million in 2012.
"Our vision is to create the best 'pharmacogenomics' company, using Clinical Data's drugs and portfolio of genetic biomarkers to advance a personalized way of treating patients for optimum effect," says Kirk. Now in the second of two phase III clinical trials, Vilazodone has achieved its "primary and relevant secondary goals," says Bedrij of Griffin Securities. Results of the phase III trials are expected to be released by early 2009. The company anticipates filing a new drug application with the FDA in late 2009.
Detailed results of the early phase III trials for Vilazodone were presented at the May, 2008, annual meeting of the American Psychiatric Association by Dr. Karl Rickels, professor of psychiatry at the University of Pennsylvania, a clinical investigator who participated in the trials. He reported that Vilazodone offers "the potential for a more rapid antidepressant effect, utility in the management of anxiety, and an improved adverse-event profile characterized by lower risk of sexual dysfunction, than current therapies." Bedrij notes that in assessing efficacy, the trial showed "robust treatment response and statistical significance" in the treatment of a variety of major depressive disorders.
Clinical Data was first highlighted in my Inside Wall Street column, dated Nov. 12, 2007, when the stock was trading at its 52-week high of 28. By July 8, 2008, however, the stock had sunk to a 52-week low of 12, in part because of the broader equity market's massive weakness.
But the company has made more inroads in drug development, making its stock a better buy now, says Bedrij, the only analyst who covers the company, according to Bloomberg. Indeed, the stock itself may elevate your mood since Bedrij remains confident that Clinical Data is on its way to 45.
Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.