Marcial: Medarex, a Bright Spot in Biotech

The world of biotechs is a tricky place for investors. Ambitious young companies aspiring to become future drug kings require huge financial resources to produce life-changing medicines that take many years to develop. Most firms never make it beyond the development stage. Nonetheless, some biotechs manage to reap enormous rewards once they reach near-commercialization of their products.

That is where Medarex (MEDX), a biopharmaceutical outfit focused on monoclonal-antibody-based therapeutics for cancer and inflammation-related diseases, appears to be headed, according to several investment pros. Medarex believes antibodies have proven to be useful elements in making drugs. Analysts note that as of December 2008, the Food & Drug Administration has approved 24 therapeutic products based on antibodies.

Medarex is one of the few biotechs that has chalked up handsome gains this year. It shot up to 6 a share on May 1, from a 52-week closing low of 3.40 on Mar. 3, 2009. On Aug. 1, 2008, the stock had been much higher, streaking to a 52-week closing high of 10.12. So the bulls are optimistic the stock could bounce up some more, to the 10 to 11 level in 12 months. The Standard & Poor's Biotech Index declined 8.7% year-to-date through Apr. 8, 2009.

The company is close to becoming a major biotech player, says analyst Mark Monane of investment bank Needham, given its late-stage development drugs aimed at major diseases, including metastatic melanoma, prostate and lung cancers, psoriasis, rheumatoid arthritis, and clostridium—a deadly form of diarrhea. (Needham has done banking for Medarex.)

Medarex's state of drug production is the envy of other biotechs. "Medarex has one of the most robust pipelines in the industry, with 40 compounds in development, either internally or through partnerships, including three that are in phase III clinical trials," says analyst Jeffrey Loo of Standard & Poor's, who rates the stock a buy. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

More Than 50 Partnerships

On Apr. 24, the FDA approved one of Medarex's products developed in partnership with Johnson & Johnson (JNJ) called "Simponi," as a once-a-month subcutaneous treatment for moderate-severe rheumatoid arthritis. In December 2008, J&J got approval from Canada to market another Medarex drug called Stelara, for treatment of severe plaque psoriasis in adults. And in January 2009, the European Commission gave its approval for the same drug. Stelara is still under review by the FDA for the U.S. market.

Medarex has been busy teaming up with some of the biggest pharmaceutical companies. Loo notes that as of Dec. 31, 2008, Medarex had more than 50 partnerships with pharmaceutical and biotech companies to jointly develop and commercialize products, including Pfizer (PFE), Amgen (AMGN), Bristol-Myers Squibb (BMY), J&J, Eli Lilly (LLY), Abbott Laboratories (ABT), Human Genome Sciences (HGSI), and Novartis (NVS).

Last Apr. 21, Medarex and Massachusetts Biological Laboratories entered into a licensing agreement with Merck (MRK) to further develop the clostridium drug. Merck made a down payment of $60 million to Medarex and Massachusetts Biological for the partnership. Payments of $165 million are expected down the road as the drug meets further production milestone targets.

"The [Merck] collaboration is positive for Medarex," says Needham's Monane, given the favorable financial terms to complete the drug's phase III development and Merck's commitment to bring its infectious-disease expertise that is needed to develop the product. Bristol-Myers is Medarex's partner on its drug to treat melanoma, now in phase III clinical trials. Data from the trials are expected to be released at the end of the fourth quarter.

Copacetic for Capital

S&P's Loo notes that as of December 2008, 40 antibodies derived from Medarex's proprietary "UltiMab technology" were in human clinical trials, or had regulatory applications submitted for such trials for a wide range of diseases.

The question of money is always paramount with the biotechs. Financially, Medarex appears to be in a sound position. "It is among the best-capitalized small biotech firms," notes S&P's Loo, "with sufficient capital to fund drug development for the next 36 months."

Nonetheless, it has yet to make money. Revenue improvements probably won't offset high operating costs, particularly for research and development, says analyst Adam Rosner of independent research firm Value Line (VALU). But he notes that Medarex's finances remain adequate. It ended 2008 with some $355 million in cash and marketable securities.

He expects the company's top line to rise considerably in 2010. He notes that milestone payments and licensing fees for products in development have accounted for all of Medarex's sales. Such contributions are expected to reach about $85 million in 2010, estimates Rosner.

For investors, biotechs require a lot of patience—and ultimately, faith. The growing perception is that Medarex may be able to justify that faith.

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.

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