Biotech Values

[DewDiligence]

The current issue of Barron’s has a cover story
on the various players in the Alzheimer’s arena.
Among the companies mentioned are ELN MYGN
NRMX and WYE. This makes a good companion
piece with the 2006 article in BW (#msg-15892303).

http://online.barrons.com/article/SB117529931082755269.html

>>
Alzheimer's Cure

By BILL ALPERT

About a year ago, James Smith's life changed. "At age 46," he says, "something like Alzheimer's disease wasn't even on my radar screen."

Smith was an information-technology director for a big financial firm near Minneapolis, a globetrotting "tech weenie." But he started forgetting things, losing his sense of time. He could no longer multitask. More recently, following the Alzheimer's diagnosis, Smith has noticed his personality changing. Flashes of anger come and go, for no reason. And his awareness is slipping: He'll think he's having a good day, only to find out he's forgotten something really important.

The disease forced him to retire on disability last summer, just after his twin daughters entered Northwestern University. Smith's wife Juanita doesn't have a job with health insurance. His corporate health-insurance coverage will run out in about a year. It's too late for them to get long-term-care insurance, so they'll have to spend down to the poverty level when he finally needs full-time care.

James and Juanita watched her grandmother die of Alzheimer's complications, so they know what's ahead. "Neither of us has any illusions about where this goes," he says. "It's 100% fatal."

But those odds may soon improve for Alzheimer's sufferers like Smith. Large drug companies such as Wyeth have progressed to the point where they're conducting human studies for numerous treatments that stem the underlying biological causes of Alzheimer's disease. Smaller firms like Myriad Genetics and Neurochem are actually in their final phase of testing drugs aimed at Alzheimer's causes. Smith is desperate to participate in one of those clinical studies, but the test designs exclude people under the age of 50.

So Smith is in a race against time -- the most advanced experimental drug candidates are still a couple of years from Food & Drug Administration consideration. But when Alzheimer's drugs arrive, they will do much good for the estimated 440,000 Americans that develop the disease each year. More than 5 million suffer from Alzheimer's in the U.S., according to the latest estimates from the Alzheimer's Association, and perhaps 24 million suffer worldwide. Smith's disease had an unusually early onset, given that Alzheimer's risk increases with age: 1% of those in their early '60s have it, while more than one-third of those older than 85 have it. [I find this stat hard to believe, but I keep seeing it in reputable publications, so presumably it’s true.] With the cohort of 78 million baby boomers that began turning 60 last year, the prediction is that 16 million Americans will have Alzheimer's by mid-century. The worldwide number by then would be 80 million.

Without successful treatments, Alzheimer's will become a crushing economic burden for the country, and not just for families like the Smiths. Patient care already costs Medicare $91 billion a year, plus another $21 billion for Medicaid programs. That makes it the country's third most costly illness, after heart disease and cancer.

"I'll be 60 this year," says Wyeth chief executive Robert Essner. "And there are no really effective treatments out there...This will be a huge health-care problem for my generation."

Essner's company (ticker: WYE) has made a broad investment in Alzheimer's research, bringing 11 drugs into clinical human testing. Its lead compound is a genetically engineered antibody developed with the Irish firm Elan (ADR ticker: ELN) that actually clears away the toxic protein that clots Alzheimer's patients' brains. Other Wyeth compounds inhibit the formation of those Alzheimer's clumps.

Wyeth's experimental drugs certainly could fail, but it wouldn't cost investors much to find out. The Madison, N.J.-based company has one of the cheapest big drug stocks, trading at about 14.5-times this year's consensus earnings estimate, at the recent share price of 50.

Yet its business is improving. Wyeth has gotten its arms around the expensive litigation surrounding its pfen-fen diet drugs, so currently successful products like the anti-arthritic Enbrel and Prevnar, a strep vaccine, should start lifting cash flow and profits. It is also one of only a handful of drug firms that might be attractive merger partners for giants like Novartis (NVS) or Pfizer (PFE). So Wyeth shares could rise into the 60s -- and that's without considering that its Alzheimer's program could yield some of the most important new drugs in our lifetimes.

Other companies with large Alzheimer's bets include Eli Lilly (LLY) and Pfizer, as well as the Salt Lake City-based genetic- testing pioneer Myriad (MYGN) and tiny Neurochem (NRMX) of Laval, Quebec.

Just over 100 years ago, the Bavarian psychiatrist Alois Alzheimer described autopsies of dementia patients' brains, where he found nerves caked with sticky plaque and filled with tangled fibers. In the last 20 years, scientists have gained much understanding of the biology underlying these features of what is known as Alzheimer's disease, the cause of at least half of all dementia. After losing memory and language skills, patients become unable to care for themselves and die bedridden -- sometimes as long as 20 years after diagnosis, but typically after about eight years.

Drugs to combat Alzheimer's have been slow to arrive, with many failed efforts. The five medications approved since 1993 only treat the symptom of weak memory -- offering a moderate boost that lasts for less than two years. Pfizer's Aricept and Novartis' Exelon prevent the breakdown of the neurotransmitter acetylcholine that's part of the mechanism of memory (as does Cognex, which Pfizer no longer actively markets). Johnson & Johnson's Razadyne works similarly, but also makes the so-called nicotinic receptors produce more acetylcholine. Namenda, from Forest Labs (FRX), prevents another neurotransmitter called glutamate from overexciting memory receptors of nerve cells.

Smith has taken Aricept for a year, and is adding Namenda. Aricept helped him regain a lot of his mental clarity. "It's like the difference between driving during the day...and driving at night," he says. "Within the space of my mental headlight, with Aricept, I can do pretty well."

But none of these approved drugs has been shown to actually change the downward course of Alzheimer's. The search for drugs that can slow the disease has focused largely on the source of the plaque first reported by Alois Alzheimer. The plaque consists of a misfolded variant of a common cellular substance known as amyloid. This rogue version is called amyloid-beta42 -- or A-beta42 -- and it tends to clump together inside nerve cells, interfering with nerve function and eventually killing brain cells.

Researchers have been able to reproduce features of human Alzheimer's in the laboratory cell cultures and mouse experiments that precede clinical studies in humans. "There has been a lot of preclinical evidence that amyloid deposition is upstream of the other effects of the disease," said Harvard Medical School neurologist Dennis Selkoe, in a recent conference call with clients of CIBC World Markets.

The farthest along of the anti-amyloid experimental drugs are Myriad's Flurizan and Neurochem's Alzhemed, both of which are in the Phase 3 trials that come just prior to seeking FDA approval. Myriad already has a genetic cancer-testing business that ran up $132 million in sales in calendar 2006 -- and a stock-market valuation of more than 10-times that amount, at a recent share price of 34, despite its lack of profits. The company's been plowing research dollars into developing drugs like Flurizan, an anti-inflammatory designed to inhibit formation of the amyloid-beta42 that's prone to clumping.

Flurizan seemed to work in mice, but it failed to show a statistically-significant benefit during a 12-month Phase 2 study involving 207 patients. The endpoint combined tests of patients' cognitive performance and caregiver ratings of the patients' ability to carry out daily activities.

After the study, however, researchers followed some of the Phase 2 patients who had the mildest Alzheimer's and who continued taking Flurizan for two years. Those on the highest dose of Flurizan stabilized their mental test scores. This post-hoc analysis of a subset of patients doesn't prove much, but it encouraged Robert C. Green, a Boston University neurology professor. "If you can preserve function up to two years in some people," he says, "that suggests to me that the drug's doing something."

Green is lead investigator in one of Myriad's two Phase 3 studies of Flurizan, each of which is following 1,600 patients over 18 months. Myriad recently cancelled plans for an interim analysis after 12 months, so Green won't have his results until 2008.

The future of Canada's Neurochem basically rides on Alzhemed, an experimental drug that's like an anti-coagulant that binds to single copies of A-beta42 and reduces their tendency to clump together. Like Myriad's drug, it seemed to work in mice and is safe in humans. But in a Phase 2 trial in 58 patients, Alzhemed yielded no measurable benefit in memory tests -- although the study period was an admittedly short three months.

It did reduce levels of an A-beta biomarker in patients' cerebrospinal fluid, however. That impressed Paul Aisen, a professor of neurology at Georgetown University Medical Center who is leading the large 18-month Phase 3 study of Alzhemed in North America. But cerebrospinal biomarkers have been hard to interpret in Alzheimer's. "We really have no idea how much a reduction in [cerebrospinal] peptide over 12 weeks will translate into clinical and cognitive gains over 18 months," he told listeners on CIBC's recent conference call. "It could be anything from zero to a major difference."

In more than 1,000 patients, the Phase 3 trial will look for a difference in standard measures of mental and everyday functioning. Over half the patients have also gotten MRI scans to check for the shrinkage in brain volume that's characteristic of Alzheimer's. The study's done, but its results have not yet been revealed.

Neurochem could announce top-line results within the next few weeks. Georgetown's Aisen should report the detailed Phase 3 data at a couple of neurology conferences in early June. "This is a tremendously exciting stage in Alzheimer's disease research," Aisen told CIBC's clients. "We are quite close to disease-modifying drugs."

If Alzhemed succeeds in its pivotal North American trial, Neurochem is unlikely to seek FDA approval until it has the results from a European trial in late 2008. Even so, Neurochem Chief Executive Francesco Bellini has made big bets on its success. Last year he took out millions of dollars in margin loans, secured by his shareholdings, to buy Neurochem shares and squeeze the skeptics who had sold the stock short. The share price climbed from less than $10 to more than $25, before settling at a recent $15.42. CIBC analyst Brian Lian (whose firm is a Neurochem investment banker) thinks the company merits a speculative bet.

Less risky bets on Alzheimer's drugs are Elan and Wyeth. In 1996, Elan acquired a pioneering Alzheimer's research firm called Athena Neurosciences. It has since collaborated with Wyeth on developing a number of treatments. The companies' first human trial vaccinated patients with a synthetic version of amyloid-beta to get their immune systems to attack A-beta42 accumulations. In rodents, vaccination cleared A-beta from brain cells, improved performance in maze tests and extended life spans. But the human study was halted after just two doses in 2002, when 6% of the 300 patients suffered brain inflammation from their hopped-up immune response. Researchers still followed the test patients, however, and some showed stable or improved memory tests. Autopsies of patients who died of other causes revealed that amyloid plaque had shrunk.

"What we know is that the immunotherapeutic approach to Alzheimer's works," declared Elan Chief Executive Kelly Martin at a recent SG Cowen health-care conference. Wyeth and Elan have returned to human trials with a reformulated vaccine code-named ACC-001. It uses a shorter, more specific fragment of A-beta and a carrier protein from Wyeth's vaccine business that shouldn't overexcite patients' immune systems.

Further along is the companies' Phase 2 trial of a so-called passive immunotherapy. About 240 patients are enrolled in the test of bapineuzumab, a genetically engineered antibody. It's designed to tag amyloid for clearance by patients' immune systems. In mice, these antibody infusions cleared amyloid as effectively as did vaccination.

Patients in the study have experienced no adverse events so far, says Menelas Pangalos, who heads up Wyeth's neuroscience research. Results should come out this year. If they're good, Pangalos says a Phase 3 trial could start within 6-18 months. A successful Phase 3 study could support an application for FDA approval as early as 2010.

Outside of its Wyeth collaboration, Elan has other Alzheimer's projects. Those include a potential anti-amyloid pill called AZD103, developed with Toronto Stock Exchange-listed Transition Therapeutics (TTH.TO), which has reduced amyloid levels and improved learning performance in rats.

Wyeth, too, has separate Alzheimer's projects. It's running Phase 1 trials of GSI-953 and PAZ-417, two oral drugs. The first interferes with the enzymes that help form A-beta42, while the second prevents clumping. Enzyme-inhibition strategies have proven effective in stemming diseases like AIDS. In Alzheimer's the approach would attack the disease process farther "upstream" than other treatments, by preventing harmful amyloids from even forming.

Wyeth is testing drugs for Alzheimer's symptoms, as well. It has a Phase 2 trial of a compound called Lecozotan that boosts multiple neurotransmitters. Three other cognitive boosters are in Phase 1 studies. "The disease is ultimately going to be treated by multiple drugs," says Wyeth researcher Pangalos, who foresees Alzheimer's patients getting immunotherapy infusions, pills for enzyme inhibition and several symptomatic drugs...hopefully, from Wyeth.

Despite its achievements in neuroscience, Elan has steadily lost money over its history. So Wyeth is by far the safest bet on Alzheimer's drugs. Its best-selling products like the antidepressant Effexor (which faces generic competition in the next few years), the strep vaccine Prevnar and the arthritis treatment Enbrel (partnered with Amgen) helped Wyeth grow sales 9% last year to $20.4 billion. Earnings per share grew 14% in 2006, to $3.08.

Wyeth could generate 4 bucks a share in 2008, says Bear Stearns analyst John Boris, while continuing to buy back billions of dollars worth of shares and paying a dividend of $1.18 (for a yield of 2.5% on the current share price). Yet Wyeth shares trade at a price-earnings ratio that's 15% cheaper than its peers.

Wyeth's chief exec, Essner, attributes his company's valuation discount to investors who worry that the company hasn't resolved the legal problems over its discontinued phen-fen diet drugs. But after a nationwide settlement program and $21 billion in charges, Essner believes Wyeth is nearing the end of its diet-drug costs. The company is also defending against the claims of some 5,200 women who blame their cancer, stroke or heart disease on Wyeth's hormone-replacement drugs. The company's liability won't be easy to demonstrate, however, because its labels warn of the cancer risk and both products remain FDA-approved. So Wyeth's billions in annual cash consumption for litigation could subside next year.

Wyeth stands to grow its earnings at about a 15% annual rate, whether or not its Alzheimer's drugs pay off. But if it succeeds with only a few of its dozen Alzheimer's drugs in development, the payoff will be big. If a large percentage of America's 5 million Alzheimer's patients spend a few thousand bucks a year for disease-modifying treatments, Alzheimer's will easily become a multi-billion-dollar market. Needless to say, an effective drug would also be a wonderful thing for people like James Smith.
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