On the Radar: Five high-value biotech stocks

Our new On the Radar report returns with fresh insights from Simos Simeonidis, PhD, Rodman & Renshaw's senior biotech analyst, who highlights biotech stocks which he believes will be good value plays in the months ahead. One reason Simeonidis is focusing on value, he explains, is that there are fewer catalyst-driven stories looming in his universe, "while I find myself speaking to investors more about value, especially given the uncertainty of the markets." In the mood for some market risk analysis? Then check out these five companies. - John Carroll


Array BioPharma (NASDAQ: ARRY) (Market Outperform)

We believe that current price levels do not represent the value in the company's pipeline of four fully-owned clinical programs and numerous compounds partnered with several big pharma and biotech companies, and we see them as offering the opportunity for significant appreciation, both short- and long-term. We believe that the reason to own Array, buy it at these levels and hold long-term, has never been any single one of the compounds in the pipeline, but a) Array's basket of promising pipeline compounds, b) the company's ability to generate new candidates at a consistent pace, and c) the ability of these and the already partnered compounds to generate significant future revenue from big pharma/biotech partners.

As an example of the value Array has been able to built through its internal discovery and R&D efforts, this past April, Array announced a worldwide partnership with Novartis (NYSE: NVS, Not Rated) for its small molecule MEK inhibitor program, which includes ARRY-162 (currently in Phase I trials in oncology), its backup ARRY-300 and other earlier compounds. Array received $45M upfront (includes a milestone), and is eligible to receive up to another $422M in development and commercial milestones, double-digit royalties on sales, while Array will co-develop ARRY-162 in one or more indications and fund a portion of its development, and co-detail in the US. We believe this was a great deal for ARRY shareholders for the following three reasons: a) great terms, especially for a Phase I program, b) Array gets the option to co-market in the US, giving it the opportunity to eventually build a commercial organization, and c) Array is able to continue to execute on its business plan and continue to monetize its home-grown pipeline. This is the second high-profile partnership with a blue-chip partner the company has announced in past 4 months for a Phase I program, since in mid-December, Array signed a deal with Amgen (NASDAQ: AMGN, Not Rated) for ARRY-403, its glucokinase activator for T2D, and receiving very favorable terms, including $60M upfront.

Alnylam Pharmaceuticals (NASDAQ: ALNY, Market Outperform)

We see current Alnylam valuation (~240M EV) presents a great entry point to what, in our view, we could be the grade school/junior high years of the Genentech of RNAi, and we see the opportunity for 25 to 30 percent returns in next few months. Alnylam shares closed at $15.81 today, which is below where the stock traded before the validating and transformative Roche deal in July 2007. Obviously, the market is completely different than where it was then, and investors can disagree on the value of specific technologies and companies. However, we simply want to alert investors to the fact that Alnylam is currently receiving little credit for their technology and we see this pullback as directly connected to current market conditions and unrelated to any changes in the fundamentals of the Alnylam story, which we view as strong as ever. We also remind investors that Alnylam ended 1Q10 with $419M in cash, or ~$10/share, giving the company's shares an EV of just ~$240M, or ~$5.8/share for their IP, technology and programs. We believe that given Alnylam's long-terms potential, its current valuation represents a very attractive entry point for investors with a long-term horizon. In addition, we believe that even investors with a shorter horizon can benefit, since we believe that current levels can provide significant returns even in the short term (6-9 months), since we believe that a) partnership news will reignite the interest in the name and b) continued improvement in the market will allow more generalist healthcare money to flow in to small cap biotech We believe that Alnylam will benefit, given its limited downside risk, due to its very strong balance sheet and the potential for significant returns long term. We believe that these two factors will lead to significant appreciation in ALNY shares this year, and we believe that even short-term investors can realize a 25 to 30 percent return within the next few months.

We believe that longer-term, RNAi can become the third major category of drugs, after small molecules and monoclonal antibodies, and if that happens, Alnylam is poised to become for the RNAi field, what Genentech was for the field of monoclonal antibodies. It is, of course, impossible to know with certainty when (and even if) the current revolutionary work conducted at Alnylam will result in a drug. Our personal belief is that RNAi has the potential to revolutionize drug development and provide solutions for diseases with "undruggable" targets. We also believe that given the progress Alnylam has made thus far, and the leading position that has resulted from the head-start it has in terms of collective knowledge and expertise as a group of individuals, both within the company and the network of contacts and collaborations in academia and other biopharmas, place Alnylam in the position to benefit, should the RNAi space ends up fulfilling its promise and becomes the third leg of drug development. And if the field's promise is indeed fulfilled, we believe that Alnylam is poised to become what Genentech represents for the field of monoclonal antibodies, i.e. the leading company, both in terms of innovation, excellence and commercial success.

On the Radar: Five high-value biotech stocks

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