This Biotech Has a Strong Pulse

Cell Genesys' cancer treatments are showing promise in testing. Plus, it has deep pockets and may be way undervalued

By Gene Marcial

Biotech stocks are currently in the sick room: The group is down an average of some 35% so far this year. And with the market's prolonged malaise, chances are slim that the sector will be recovering anytime soon. But one stock that could be snapping back is Cell Genesys (CEGE ), which focuses mainly on developing and commercializing cancer treatments.

Shares of Cell Genesys -- down from $23 in late December to around $13 on June 11 -- are showing some signs of life lately. In the past three weeks, when most biotechs were in a slump, Cell Genesys inched up from $12 in early May to $15.10, before easing back down to its current level.

Dr. Mark Monane, a senior biotech analyst at investment firm Needham -- which makes a point of barring its analysts from owning stocks in companies they follow -- thinks Cell Genesys is one of the biotechs that will continue to rebound. He rates the stock a strong buy, with a 12-month price target of 30 to 32.


  "It's successfully transforming itself from a development-stage company to a clinical-products company," says Monane. It has seven treatments in clinical trials, five of them in phase-one and -two testing for treating cancer, and at least one soon to be in phase-three trials later this year, for lung cancer. The majority of the clinical trials center on Cell Genesys' GVAX group of vaccines.

The company has three manufacturing sites to supply GVAX vaccines for the clinical trials and eventual market launch, says Monane. Given the "rich pipeline of drugs" in the making and the vast resources needed to move the products through development and commercialization, "we believe Cell Genesys is well positioned to provide increased shareholder value over the next 12 months," he adds.

The GVAX cancer vaccines -- designed to treat rather than prevent cancer -- stimulate the patient's immune system to mount a response to the disease. The vaccines are made up of tumor cells that are genetically modified to secrete an immune-stimulating protein.


  On June 10, Cell Genesys announced the licensing of its gene-activation technology for certain therapeutic proteins to Transkaryotic Therapies (TKTX ), currently trading at 34 a share. Cell Genesys will get an up-front fee of $26 million -- $11 million in cash and $15 million in stock. In addition, Cell Genesys could also receive additional payments on completiion of certain patent-related milestones.

Something else about Cell Genesys should be attractive to investors: It's one of the few "value plays in biotechs," says Monane. It has solid resources, he says, including cash of $230 million and a 10.5% equity stake in Abgenix (ABGX ), which Monane figures is worth more than $103 million at its current stock price of $11 a share. The $230 million in cash is equivalent to $6.40 a share, and its stake in Abgenix is worth an additional $3 a share, or a total of nearly $10 a share, figures Monane.

Given the current share price, says Monane, "you're paying for Cell Genesys' operations and its products that have great potential for just about $3 a share, vs. its current stock price of $13." He adds: "This is why we think the stock is way undervalued."


  In 2001, Cell Genesys had revenues of $28.3 million but lost $17.7 million, or 85 cents a share. Monane estimates that Cell Genesys will have revenues of $24 million in 2002 (not including the $26 million from Transkaryotic Therapies) and lose $11 million, or $1.04 per share. He forecasts that it'll turn profitable by yearend 2004.

Also high on Cell Genesys is John McCamant, editor of The Medical Technology Stock Letter, in Berkeley, Calif., who rates the stock a buy. "Cancer remains the second-leading cause of death in the U.S. and will result in an estimated half a million lost lives this year," he warns. But, he adds, "there is reason for hope as this year's annual meeting of the American Society of Clinical Oncology showed that progress is being made on multiple fronts," says McCamant (for more of McCamant's comments on biotech stocks, see BW Online, 6/11/02, "Where the Biotech Bets Are").

Cell Genesys reported some of the most impressive data at the ANSCO meeting, he notes. In particular, it disclosed positive long-term survival data from a phase-two trial of its GVAX vaccine for prostate cancer. The data "showed a clear dose-dependent trend toward longer survival in patients with hormone refractory prostate cancer that had metasized to the bone," he says.


  In a 34-patient study, 10 patients received a higher dose of GVAX, and 24 received a lower dose. Seven of the 10 who got the higher dose are still alive -- two and a half years following treatment with the vaccine, with a median survival of more than 30 months, notes McCamant. Of the 24 patients who got the lower dose, nine nine are still alive two and a half years after treatment, with a median survival of 22 months.

"These data are quite exciting, when compared with the reported medial survival of 7 to 11 months for the same patient population that received chemotherapy -- the standard care in this setting," says McCamant.

Based on the positive results, which McCamant says showed that the therapy is also safe and well tolerated, Cell Genesys plans to start a phase-three trial of the GVAX vaccine for prostate cancer in the first half of next year.


  Cell Genesys also reported preliminary data from phase-one and -two trials for a new formulation of its patient-specific GVAX vaccine for lung cancer. The treament, says McCamant, was well tolerated and also showed evidence of producing anti-tumor immunity. Phase-three trials of the lung vaccine is expected to start by yearend.

Cell Genesys is just one example of the huge promise that's coming from the biotech industry, according to Monane and McCamant. So they think investors can ill afford to ignore the biotechs, even though the market seems to be doing so right now.

Marcial is BusinessWeek's Inside Wall Street columnist

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