| SmallCap Digest Weekend
Edition: Short Term Trading Alert on Pharmacyclics (PCYC)
 Investing
in biotech companies often times require patience. The Federal
Drug Administration (FDA) is considered the platinum standard throughout
the world. One of the benefits is that the public should have a lower
likelihood of using drugs and medical treatments that are harmful.
However, the FDA is not perfect and there have been instances where the
agency was a bit premature in green lighting new drugs. This scrutiny
placed on new drug applications in the United States is both a blessing
and a barrier to health.
There are drugs in the pipeline that can save lives
or may life more bearable for the terminally ill. Obtaining FDA approval
is a long drawn out process that takes time and money. Unfortunately
time is just not something readily available for those seeking the use
of the drugs in waiting.
From an investment standpoint a biotech company's
future is dependent on obtaining FDA approval. An outright rejection
or even delay will send a company's stock tumbling. People begin
to give up and decide to cut their losses. One such company is Pharmacyclics
(PCYC)
started
by Richard Miller, M.D. who also co-founded IDEC Pharmaceuticals
(IDPH)
now
a $9 billion dollar drug company. Pharmacyclics has found a way to
get molecules that accumulate in cancer cells to carry metals that make
the cancer cells more vulnerable to radiation and possibly chemotherapy.
The metals also make the cells more visible when magnetic resonance imaging
tests are conducted.
What once was hailed as the next great biotech
has really fallen on some hard times. Less than two years ago the
company was trading in the $70 range and sporting a valuation upwards
of $1.2 billion dollars. As of Friday's close at $7.12
per share Pharmacyclics is trading at less then the
$120 million
the company has in the bank. However, things may finally be starting
to turnaround.
The future of Pharmacyclics is heavily dependent
on the Phase III trial of its lead product Xcytrin, a cancer
fighting drug. In December 2001 some less than positive data on Xcytrin
dropped the stock from the mid $20's down to single digits. For many
investors this was the final straw and the stock was punished mercilessly.
Initially things looked bleak but upon closer examination
the lung cancer patient subset within the trial did experience significant
benefits. The company is expected to present promising data from its clinical
trials in primary brain cancer and subset analysis of data from its failed
Phase III in patients with brain metastases showing that Xcytrin improved
the time to neurologic progression in patients whose primary cancer was
non-small-cell lung cancer. The next steps for Pharmacyclics include a
full evaluation of the Phase III data and a meeting with the FDA
regarding potential paths to approval. The FDA meeting is expected to
occur in the early part of April.
There is still considerable hope for the drug's
commercial development. Xcytrin may have produced better results had patients
been pre-treated with the drug prior to entering radiation therapy.
Xcytrin demonstrates a dose-progression effect as viewed by MRI enhancement
that may indicate the drug may need to be pre-loaded, which was not done
in the failed Phase III trial.
 The
potential blockbuster revenues from Xcytrin may be of interest to some
larger drug makers out there. Original revenue estimates for the
drug before the failed Phase III test was $170 million in FY03,
$330
million in FY04, and $400 million in FY05. It is possible that
Xcytrin can be positioned as a complement to other radiation enhancing
agents already in development. Companies such as OSI Pharmaceuticals
(OSIP),
AstraZeneca
(AZN),
and Amgen (AMGN)
each have drugs in various stages of clinical development that could act
synergistically with Xcytrin. The idea of a buyout for Pharmacyclics
is not a foreign concept. Famed investor Joseph L. Harrosh,
recently filed a 13G with the SEC declaring his ownership of the company
exceeds 5%. Mr. Harrosh has had an uncanny history of making investments
right before a takeover.
Pharmacyclics has a drug pipeline that may be an
added bonus for any potential suitor. Four of the company's investigational
product candidates are currently being evaluated in clinical trials by
either Pharmacyclics or the National Cancer Institute under the company's
Cooperative Research and Development Agreement with the National Institutes
of Health for over 15 different potential therapeutic uses.
This coming week Pharmacyclics will be presenting
at the 93rd Annual Meeting of the American Association for Cancer Research
April 6-10 in San Francisco. There is potential for some very interesting
developments to come from Pharmacyclics at this meeting.
Shares of Pharmacyclics are extremely undervalued
and at $7.12 per share the company is trading at less than cash
the company has in the bank. The potential for Xcytrin is certainly
worth something not to mention the other drugs the company has in the FDA
approval process. In the next few weeks a positive meeting with the
FDA could push shares of Pharmacyclics to the $10 level. The
total number of shares outstanding for the company is 16.1 million shares
with approximately 94% of the shares owned by insiders and institutions.
The short interest in the stock is 1.67 million shares. All of these
elements make for an explosive move to the upside on any sort of positive
news.
In the event of a buyout it would probably take
an offer of $15-$20 per share to make the deal happen. The
downside for the stock is around the $6.50 level. Success
of any kind is not priced into Pharmacyclics' stock price which is a mistake.
With about $120 million in the bank and a burn rate of $9-$10 million per
quarter the company should have enough cash to see Xcytrin through the
approval process.
The first sign of Pharmacyclics going down the
right path will be some good news from the company at the Meeting of
the American Association for Cancer Research. After a painful
two years where investors in this once darling biotech have all but given
up, it may be time to believe.
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