By Randall Osborne

Editor

Last week, at the end of the American Society of Clinical Oncology (ASCO) annual meeting in New Orleans after a parade of biotech firms boasted positive new data on their cancer drugs, many of them late stage the mood among researchers and company officials was high.

Stock prices, however, were not.

In fact, many biotech numbers fell. And their slide could hardly be blamed on the overall trading slump, said Robert Toth, Prudential Securities' Vector Healthcare Group's senior biotechnology analyst.

It was as if, at the conclusion of that four-day bayou conference easily the most important scientific assembly of the year in cancer research, and the last major meeting until autumn the already unnerving disconnect between biotech's progress and the industry's market valuation was telescoped into a parody of itself, within that niche of research.

"The [biotech cancer] stocks got whacked pretty good, more than the general market," said Toth, who regularly follows nine cancer companies, "probably more than anybody on Wall Street."

Companies such as Celgene Corp. and ImClone Systems Inc., after boasting solid, late-stage research into cancer drugs at ASCO, fell 10 percent and 20 percent, respectively, Toth noted. Matrix Pharmaceutical Inc. met a similar fate, losing 13 percent of its value after making known the good news, he said.

Even the mighty Genentech Inc. "lost at least a third of its value," Toth said, despite the fact that Genentech also disclosed positive preliminary Phase II results for the monoclonal antibody Herceptin (trastuzumab) as a front-line, single-agent therapy in women with previously untreated HER2-positive metastatic breast cancer, and signed a deal for a test kit with Vysis Inc.

At ASCO, Genentech also presented positive Phase II data for its recombinant humanized monoclonal antibody to vascular endothelial cell growth factor (rhuMAb-VEGF) against advanced metastatic colorectal cancer.

What happened?

Toth, who hosted a conference call last Tuesday, acknowledged biotech's volatility over the past month or so. "These stocks have tried to find a bottom," he said.

But to explain the tumble taken by cancer companies' shares after ASCO requires a closer look, he told BioWorld Financial Watch and the answer could mean opportunity for investors with fortitude.

"There's opportunity now to own some bigger names," Toth said. "The reigning thought [in the sector] is more of a short-term trading thought, and there's a lot more fast-money activity in the space, so it's harder to put money to work longer term, but I'm still maintaining my one-year outlooks."

At the start of summer, valuations "have been much higher, despite the pullback since February," he said. "Rather than try to figure it out, a lot of investors are standing on the sidelines, waiting to see how things settle in."

But smart money will not stay away, he said.

"I was inclined to upgrade [ImClone's] stock on the pullback," Toth said, adding that IMC-C225 has potential not reflected in stock movement before ASCO, and certainly not since.

At the meeting, ImClone reported follow-up data from a Phase Ib/IIa study of IMC-C225, a monoclonal antibody against epidermal growth factor, and radiation in patients with locally advanced squamous cell head and neck carcinoma. Of 15 evaluable patients, 13 showed a complete response (100 percent tumor regression) and two experienced a partial response (greater than 50 percent regression).

"Celgene was another one," Toth said. "I came out feeling much more optimistic about Thalomid's growth potential."

The company reported data regarding Thalomid (thalidomide) from clinical studies in a variety of cancers, including multiple myeloma, Waldenstrom's macroglobulinemia (a disease related to myeloma) and renal cell carcinomas. Celgene held an investigators' meeting at ASCO to discuss further clinical development strategies for Thalomid, which won FDA approval in July 1998 for cutaneous manifestations of leprosy known as erythema nodosum leprosum.

Matrix's IntraDose Injectable Gel, for recurrent or refractory head and neck cancer, proved effective in Phase III data disclosed at ASCO, and will be the subject of a new drug application to be filed this year. IntraDose is a collagen-based gel that incorporates cisplatin and epinephrine. But the market failed to respond happily.

Genentech's story is not as bad as stock prices would suggest, either, Toth said. Although the company's antibody to vascular cancer, an anti-angiogenesis drug, is having problems causing lung bleeding in some patients, and working less than optimally with chemotherapy the product shows promise in that indication and in colorectal cancer, he said. And Genentech has other products in the works.

For now, investors "just aren't willing to make bets," Toth said. "There are no buyers," although reliable gambles are to be found.

When last year's ASCO meeting began, he said, larger-cap biotech firms were trading much lower than this year, which found them selling at a level nearer that of pharmaceutical stocks. Does this mean biotech shares are valued so high that they must come down more positive data or not?

"Well, that's the question investors are battling with," Toth said. "I would argue this should be the bottom for biotech stocks. Over time, [biotech] has a more attractive and sustainable business model than pharma, which has major drugs coming off patent."

In the next three to four years, pharma will feel intense pressure to launch new drugs, whereas biotech will undergo no such stress, Toth said. Investors hardly need to see big pharma linked with biotech anymore, because biotech is doing well enough on its own, he added.

Which means, among other things: Don't wait three or four years. Buy now, buy smart, and sweat out the hot season.

"If you're not willing to assume the risk that summer doldrums [bring], maybe you shouldn't be playing," Toth said. On the other hand, if you are willing and you buy stocks such as ImClone the gains can be significant, he said.

Other late-stage development stocks to watch, he said, are Idec Pharmaceuticals Corp., MedImmune Inc. and Immunex Corp., which markets Novantrone (mitoxantrone), a drug combined with Genta Inc.'s Genasense (G3139) against advanced prostate cancer to show positive results in Phase I studies disclosed at ASCO.

Toth said he also likes Allos Therapeutics Inc., which at ASCO reported significant survival improvement in a Phase II trial of RSR13, a small molecule that boosts oxygen release from hemoglobin as a means of heightening radiation sensitivity. The trial combined the drug with cranial radiation therapy in patients with Class II brain metastases.

The radiation enhancer "was presented in a discussion session as one of the more promising," he said. "Doctors were very encouraged. It was one of the more exciting presentations."

In general, genomics firms although favored lately "are ahead of themselves in valuation. What does that leave you with? Late-stage development companies that can see strong improvements in their stories, and seem heavily risk-adjusted."

Careful selection and prompt action may be the keys, Toth said.

"I wouldn't say you should own a basket of stocks in a space and hope to get one or two winners," he said, but "an awful lot of money knows [cancer biotech] is a good space to be in."

Pick through the oncology heap wisely, Toth said, and "you'll be pretty happy with your returns a year from now." *