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Saturday, 04/05/2008 11:57:18 AM

Saturday, April 05, 2008 11:57:18 AM

Wyeth's New Alzheimer's Drug Could Propel Stock

[This is the cover story in today’s Barron’s; the focus is the investment case for WYE as a solid earnings grower with a “call option” on AAB-001 and the rest of the Alzheimer’s pipeline.]

http://online.barrons.com/article/SB120735036855791183.html

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By RHONDA BRAMMER
5-Apr-2008

It appeared, at first blush, simply a clinical trial gone badly awry. In late 2001, some 300 Alzheimer's patients, age 50 to 85, were injected with an experimental vaccine, code name AN1792, on the supposition they might develop antibodies to help clear their brains of the sticky deposits, or "plaque," so characteristic of Alzheimer's disease. If plaque could be removed, the theory went, mental deterioration might slow. But after most patients had been given just two doses, 18 developed signs of encephalitis, a severe inflammation of the brain. In January 2002, the study was halted.

Which might have been the end of it, had not follow-up work -- done months and, again, years later -- produced startling results. Patients who had developed the hoped-for antibodies after just a couple of doses of AN1792 were found, 4½ years later, to exhibit significantly slower cognitive decline than those who had not. Moreover, autopsies of responding patients who had died of unrelated causes revealed brain tissue surprisingly free of plaque.

Despite the serious side effect, the vaccine seemed to work, both in removing plaque and in slowing the patient's mental slide. The results offered support to a leading theory of what causes Alzheimer's: that a peptide called beta-amyloid is key to the buildup of toxic plaque in the brain and to the disruption of thinking. The apparent efficacy of the vaccine and fresh evidence confirming the cause of the disease raised the possibility that if researchers were to neutralize the adverse reaction, it would be a significant step toward developing a successful therapy for Alzheimer's.

Needless to say, for those afflicted with the disease and their families, such a long-sought but elusive treatment would provide hope where none exists. For New Jersey-based Wyeth (ticker: WYE) and its Irish partner, Elan (ELN), the companies sponsoring the research, it would hold out the prospect of a drug with exceptional promise. And for Wyeth, in particular -- whose shares have languished for a decade and been pummeled of late -- it could ultimately mean investment redemption.

More than five million people suffer from Alzheimer's in this country at an annual cost of nearly $150 billion, reports the Alzheimer's Association. The disease threatens to reach epidemic proportions in an aging population; one of eight people over age 65 has the disease, and nearly one of two over 85.

Drugs currently on the market -- Exelon by Norvartis, Aricept by Pfizer and Eisai, Namenda by Forest Laboratories, Razadyne by Johnson & Johnson -- sometimes ease symptoms. None stops the patient's inexorable decline into dementia and death.

Slowing the disease, and perhaps even reversing it, is precisely what Wyeth scientists have been after. Spurring them on has been compelling evidence they have a drug that seems to do just that, at least in mice. They have succeeded in the lab, both in giving mice Alzheimer's and then, by clearing the plaque in their brains, in taking it away.

Tossed into a tub of water with a small platform out of sight just below the surface, normal mice learned, after only a few dunkings, to quickly find the platform. Mice with Alzheimer's, no matter how many times they were dunked, paddled round and round, unable to remember where the platform was. Unable, that is, until they were dosed with Wyeth's drug and their brains were cleared of plaque. Then they, too, began to find the platform.

"Exciting," is how Menelas Pangalos, Wyeth's vice president of neuroscience research, describes the various early experiments with mice. "The preclinical data was as good as you're going to get."

What works in mice often fails in humans, as the halted trial of AN1792 showed. Undeterred, Wyeth scientists revamped the mode of their attack, using a passive instead of active inoculation. What had gone wrong in the initial trial, they believed, was that by mobilizing the patients' own immune system to produce antibodies, the active vaccine had roiled T cells, triggering the brain inflammation. A passive vaccine, they reasoned, by supplying the plaque-fighting antibodies directly might eliminate the side effects.

And, indeed, the re-engineered drug -- a plaque-fighting monoclonal antibody dubbed bapineuzumab, or AAB-001 -- was generally well-tolerated after patients received a single dose in one of three strengths. While designed to demonstrate safety, the tiny Phase I study produced a surprising finding: Patients given a moderate dose of the drug evinced signs of mental improvement.

Thus encouraged, Wyeth and its partner began a Phase II trial with 180 patients in 2005, later expanded to 240. They received "fast track" status from the Food and Drug Administration in February 2006, and in October 2006, Bob Ruffolo, Wyeth's head of research, disclosed plans for an "interim" peek at the study. After which, he said, Wyeth might finish up the trial as planned, or, if research merited, even before the study was done, might launch a Phase III trial. For this to happen, he cautioned, "results would have to be spectacular."

Results, obviously, were compelling enough that last May bapineuzumab advanced directly into Phase III trials. Preliminary findings of Phase II are to be disclosed in June.

The new trial is huge, the largest Phase III Alzheimer's study ever done, involving 4,100 people on several continents, and it's very expensive. As for safety, an FDA spokesman explained, speaking generally, regulators need a high degree of confidence in the safety of a drug to allow a company to launch a Phase III trial concurrent with a Phase II. As for efficacy, unless the drug showed intriguing signs of working, it's unlikely that Wyeth and its partner would be footing the bill for a global Phase III study estimated to cost on the order of $300 million.

Without disputing the sad truth that drugs designed to treat Alzheimer's have had notoriously high rates of failure, Wyeth execs are clearly upbeat about bapineuzumab's potential. Joe Camardo, senior vice president of global medical affairs, told a JPMorgan health-care conference early this year that bapineuzumab "could be the breakthrough the world needs for Alzheimer's," and he stressed: "It's not going to be an incremental symptomatic improvement. If it works, it's going to be a huge leap."

Scientists, too, are watching bapineuzumab with keen interest. John Hardy, professor of neuroscience at University College London and a researcher known for his work in developing the amyloid hypothesis (who has no financial ties to any drug company), finds bapineuzumab research "very interesting." Mouse data have been "extraordinarily strong," he feels, and while citing key differences in the brains of mice and men, he reckons bapineuzumab is no "long shot," but rather has "a good chance of working," and he puts the odds at even money.

One savvy health-care investor, Larry Feinberg, has been quietly making a sizable bet on the drug. President of Greenwich-based Oracle Investment Management, Feinberg, whose flagship health-care hedge fund was up 34% last year (and, on average, 21% annually over the past 18 years), believes bapineuzumab could be the first treatment to modify the course of the disease. If he's right, he figures it could easily surpass the $13 billion in sales of Pfizer's cholesterol drug, Lipitor, to "become the biggest drug of all time." The effect on Wyeth's stock, he ventures, would likely be huge, boosting it 50% in the next year or so.

That would be a welcome contrast to the stock's lackluster performance over the past year -- and the past decade. At $42, the shares are down sharply from a yearly high of $62 and sell at a modest 12 times the estimate for this year's earnings, which management forecasts at $3.35 to $3.49 a share (a tad lower than last year's $3.52).

An investor who bought shares exactly 10 years ago, moreover, when Wyeth was known as American Home Products, and held them through thick and thin, would today be down some 12%.

That sorry long-term performance can be largely blamed on Wyeth's two ill-fated diet drugs, Redux and Pondimin, which were part of the "fen-phen" craze of the late 1990s. Pulled from the market in 1997, they were implicated in serious heart-valve damage and primary pulmonary hypertension. The ensuing litigation dragged on for a decade and has cost Wyeth an astonishing $21 billion.

But there have been more recent setbacks. The widely anticipated approval of Pristiq to treat hot flashes and other menopausal symptoms was delayed by over a year when, in July, the FDA required more studies. A month later, the agency nixed approval of Wyeth's anti-psychotic drug, Bifeprunox. In early September, a court denied Wyeth's motion for a preliminary injunction against Teva Pharmaceuticals to prevent an "at risk" launch of a generic version of the Wyeth's $1.9 billion heartburn drug, Protonix.

These reversals have caused investors to ignore Wyeth's considerable attributes. With $22 billion in sales and a market cap of $56 billion, the company enjoys a strong balance sheet (cash outweighs debt), robust cash flow and lush profit margins. Last year, gross margins topped 72%, while on every dollar of sales, Wyeth earned a cool 20 cents, after taxes.

Its impressive stable of drugs, moreover, includes the top-selling antidepressant, Effexor ($3.8 billion); the leading vaccine, Prevnar ($2.4 billion), used in 86 countries to prevent pneumococcal disease in infants and children; and the world's No. 1 biotech drug, Enbrel ($5.3 billion), prescribed for rheumatoid arthritis and psoriasis. [WYE owns only a portion of the economics on Enbrel as it is shared with AMGN.] Wyeth lays claims to a niche animal-health business and a $3 billion consumer-health franchise featuring stalwarts like Centrum, Advil, Preparation H, Robitussin and ChapStick.

Wyeth also has 10 other Alzheimer's drugs in development. Those in Phase I or II trials aimed at changing the course of the disease include ACC-001, an active vaccine made from the original peptide used AN1792; GSI-953, a gamma secretase inhibitor that seeks to halt production of beta amyloid, and PAZ-417, a plasminogen activator inhibitor that tries to enhance clearance of beta amyloid.

Wall Street may be skeptical of Wyeth's growth prospects, but even an analyst who finds its drug pipeline "unattractive" forecasts relatively stable earnings per share, not for a year or two, but for the next half decade: $3.42, $3.59, $3.64, $3.49 and $3.81. (Consensus estimates for this year are $3.41, and $3.68, next.) In the face of what may prove a rather trying recession, such stability could begin to shine.

Little noted, too, is that Wyeth is quickly transforming itself from stodgy big pharma into biotech. Biotech revenues currently chip in nearly a third of sales, up a robust 24% last year. And the company now ranks as the world's fourth-largest biotech firm [behind AMGN, JNJ, and DNA].

In 2007, an estimated 50% of profits came from rapidly growing biologics and vaccines like Enbrel, with '07 sales up 36%, and Prevnar, whose revenues climbed 24%. Biologics tend to be high-margin pharmaceuticals with long commercial lives that do not as yet face generic competition. By 2012, an estimated 50% of Wyeth's sales and 75% of its profits are expected to come from such offerings, compared with a mere 10%-15% for the drug industry as a whole.

Also shrugged off by Street skeptics: The company's asset value approximates or exceeds its current stock price. Morgan Stanley's Jami Rubin figures that Wyeth's biologics and vaccines alone are worth $32 a share. Adding conservative estimates for the rest of the company, she comes up with an overall value of $41 a share -- valuing the drug pipeline at zippo. Feinberg does the exercise a bit differently and calculates a value in the neighborhood of $48 a share -- again, sans any contribution from drugs in development.

By either calculation, investors get Wyeth's drug pipeline, including 11 compounds targeting Alzheimer's, for nothing.

It's rare, indeed, even in today's stressed market, that the shares of a major drug company that's fast becoming such a formidable presence in biotech can be had for less than break-up value. A company, moreover, with a strong balance sheet, high margins and a stock that sells at only 12 times earnings. A company that has long been rumored a likely takeover target for a pharma giant like Pfizer (PFE) or Novartis (NVS). A company with a promising therapy for Alzheimer's that, essentially, you get free. And a company with a dividend yield of 2.7%, paying more than a five-year Treasury note while you await the final verdict on bapineuzumab, potentially "the biggest drug of all time."
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