Five high-value biotech stocks to watch (Page 2)

Rigel Pharmaceuticals (NASDAQ: RIGL, Market Outperform)

We continue to view RIGL shares as undervalued: the company finished 1Q 2010 with ~$210M in cash and with no debt, and at today's market cap of $437M, has an enterprise value of approximately $227M. The company's lead compound R788, a syk inhibitor, is an oral disease modifying anti-rheumatic drug (DMARD), that will enter Phase III testing this year and is partnered with AstraZeneca (NYSE: AZN, Not Rated). We believe that given that R788 is a) a Phase III asset, b) with the potential to address one of the largest and most lucrative therapeutic markets in rheumatoid arthiritis, and c) in development with the resources of a global pharma partner, this asset's value alone is significantly higher than the company's current market cap. We believe that as the market continues to digest and appreciate both the Phase II TASKi 1-3 trial data, and the value of the Astra Zeneca deal, RIGL shares should recover and provide significant upside from current levels.

Many investors have questioned the choice of AstraZeneca as a partner, the implication being that "if there was a lot of real interest in R788, Rigel could have signed on with a company with an established rheumatology franchise, and not one that is now trying to establish a presence in the space." It is very difficult to really know how many interested parties were sitting across from Rigel during the negotiations for R788. However, regardless of the demand, we really like the outcome of this process, and we really like the choice of AZ as a partner for R788. Yes, AstraZeneca does not have a rheumatology tradition. However, they do have the desire to build one (no one can argue with the amount of capital they are investing), and we believe that R788 is better off being the centerpiece of a committed new effort in rheumatology, versus being one of a number of assets in an established rheumatology franchise. We believe that the choice of AZ was a strategic one and we believe that R788 can benefit from the increased attention and resources it will enjoy in the hands of a company looking to break into this space.

In addition, we believe that the terms of this deal compare very favorably to the two most recent deals done in RA. We've compared the terms of the Rigel/AZ deal with the two recently announced deals in the RA space: 1) the Alder (private company)/Bristol Myers Squibb (NYSE: BMY, Not Rated) deal for Alder's injectable IL-6 mAb ALD518 announced November 10, 2009, and 2) the (INCY, Not Rated)/Eli Lilly (NYSE: LLY, Not Rated) deal for Incyte's oral JAK1/JAK2 inhibitor INCB28050 announced December 21, 2009. Briefly, Rigel received $100M upfront and is eligible to receive up to $1.145B in milestones from AstraZeneca, while Incyte received $90M upfront and is eligible for up to $665M in milestones from Eli Lilly, and Alder received $85M upfront and is eligible for up to $964M in milestones. Of note, Rigel is eligible for $345M in pre-commercial milestones. Thus, we believe that the terms Rigel secured compare very favorably to the other two compounds that are now in the hands of US large pharma companies, with higher economics in terms of both upfront and future milestones.

OncoGenex Pharmaceuticals (NASDAQ: OXGI, Market Outperform)

We consider OGXI shares undervalued, since at a current market cap of $77M, and $47M in cash and no debt at the end of 1Q 2010, we believe that the market is heavily discounting the value of lead program OGX-011/TV-011. This second-generation antisense compound, is partnered with Teva (NASDAQ: TEVA, Not Rated), which is paying for three Phase III trials, two in CRPC (castration refractory prostate cancer) and one in NSCLC (non-small cell lung cancer). We like the OGX-011/TV-1011 data in the randomized Phase II trials in CRPC and NSCLC, which provided evidence of a significant survival benefit in two of the largest and among the most difficult oncology settings.

We believe the compound's results are heavily discounted by the Street primarily because OGX-011/TV-1011 is an antisense compound, and this comes with a heavy discount, which we see as understandable, given the novelty of the class, yet too heavily applied in this case. We also like the company's December 2009 deal with Teva, because A) it secures OGX-011/TV-1011's development future with 3 Phase III trials fully funded by Teva, and B) because we like Teva as a partner. The choice of the Israeli generics giant was definitely unorthodox; however, we like Teva's track record in the branded markets, with Copaxone, and we don't see any reason why they could not replicate this success in the oncology space, too.

Infinity Pharmaceuticals (NASDAQ: INFI, Market Perform)

Infinity is an oncology-focused biotech whose lead compound IPI-504, an Hsp90 inhibitor failed in Phase III testing in GIST (Gastrointestinal stromal tumor) in 2009. Since then, the company has been evaluating the efficacy of this lead program in breast and lung cancer, while also advancing the remainder of its pipeline, which includes IPI-926, an oral Hedgehog inhibitor program heading towards Phase II in pancreatic cancer; IPI-493, an oral Hsp90 inhibitor in testing in both solid and liquid tumors; IPI-940, a Phase I oral selective inhibitor of the FAAH enzyme with potential applicability in neuropathic and other inflammatory pain conditions; and INK1197, a PI3K inhibitor licensed from private company Intellikine, and expected to enter the clinic for testing in inflammatory diseases in 2011.

Our current rating for Infinity is Market Perform, but we want to point investors to the fact that the company's current cash position provides a floor to the stock with limited downside risk. With Infinity shares trading around the $6/share range and a market cap of around $155M, with another $150M in committed reimbursed R&D spending from Purdue/Mundipharma in 2010-2011, it is clear that the market is currently not assigning much/any value to the company aside from the cash position of $126M or $5/share. We acknowledge that it may be difficult for investors to assign significant value to the company's pipeline (especially during periods of uncertainty in the market), since despite its promise, it is still in its early stages of development. However, we believe that the company's current cash position and the low burn rate provide downside protection to Infinity investors, and we thus see very limited downside in INFI shares, with the possibility of significant upside with any good news on the Hsp90 (IV or oral) and the hedgehog Phase II trial in pancreatic cancer.

As we mentioned above, we expect Infinity shares to remain range bound, since we believe that investors will remain on the sidelines near- to medium-term on the company, until we have some clarity on what the future holds for IPI-504. However, and despite the setback with the Phase III RING trial, we continue to consider Infinity as a small cap oncology company worth paying close attention to, since we believe it has the potential for significant growth long-term, because it in addition to the possibility of positive data from the ongoing studies with IPI-504, it
combines: a) promising early programs in Hedgehog and the oral Hsp90 with strong biological rationale behind them, b) an all-star R&D team with an enviable record of success, and c) a seasoned senior management team, coupled with 4) financial stability due to strategic decisions in late '08. We will continue to follow the developments on the IPI-504 front closely, and will continue to look for attractive entry points, especially when additional clarity becomes available on the future of the lead program

How'd we do last time? Check out this quick look at our theses from our "On the Radar: Five biotech companies to watch" piece last September. Next page >>