Medarex (MEDX) - Grundlagen - 500 Beiträge pro Seite

[IWA Japan]

June 7, 2001
RECOMMENDATION: BUY Jeffrey Davis / David Berish

Medarex, Inc. (NASDAQ: MEDX)
Price at Initiation: $2.25 (5/18/99)
(Split-Adjusted)

Reports 4Q00 and FY00 Earnings Results; Large Number of Marquee Partners Validates Technology; Maintaining BUY Recommendation

Market Data

Price of Common Stock (6/6/01)..........$31.50
Shares Outstanding (MM)...................72.7
Market Cap (MM).........................$2,290
Average Daily Volume(MM).................1,345
52-Week High/Low...... ............$75/$11.75

MEDX Corporate Information

Address..............707 State Road, Suite 206
...........................Princeton, NJ 08540
Telephone.......................[phone]
President & CEO.............Donald L. Drakeman
Senior VP & CFO...................Chris Schade


Summary of Recent Events


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Medarex (“MEDX”) continues to execute its plan. The Company has entered into a number of UltiMAb partnership agreements with high-profile companies such as Schering-Plough (NYSE: SGP) and Novo Nordisk (NYSE: NVO) to generate fully human antibody therapeutics for multiple disease targets including cancer. MEDX now has 35 partners, an especially impressive number given the rapidity with which the Company has been able to sign partnership agreements. MEDX announced in February that one of its partners, Centocor, filed an IND for a fully human antibody in the treatment of inflammatory disease. The antibody was developed using MEDX’s HuMAb-Mouse technology. In our view, the number and quality of MEDX’s partners is an important endorsement of its technology and strategy.

MEDX’s 1Q01 financial results were also solid. Total revenues were $15.7 million, of which $6.8 million represented interest income. The Company earned net income of $3.3 million, or $0.04 per share, but has stated publicly that it does not expect to remain consistently profitable for the foreseeable future.

MEDX has seen its stock decline considerably and then rebound this year to the point that the stock is essentially flat YTD, but we do not believe that this is reflective of Company fundamentals. Rather, we interpret the stock’s performance as a result of a “wait and see” attitude on the part of investors towards functional genomics plays, creating a buying opportunity, in our view. We believe that MEDX is the leader in human antibody development. Further, the Company’s strong, broad-based technology platform, its list of marquee partners such as Eli Lilly, Merck and Amgen (to say nothing of the speed with which the Company is entering into partnerships) provide strong validation of the technology and business model. In our view, this should provide assurance to investors that MEDX’s fundamentals are sound, and that the long-term outlook for the stock remains strong. We are maintaining our BUY rating and recommend purchase of stock for those investors tolerant of the risks associated with biotechnology stocks.



Ulti-MAb Partnerships


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MEDX has entered into 35 collaborations so far, and we expect that number to continue to increase rapidly. Most of the UltiMAb collaborations have similar structures that provide MEDX with a near-term revenue stream and the downside protection of a platform company. Generally, collaboration agreements call for graduated payments that can initially be as low as $100,000, but which total $7-10 million over the course of clinical trials, followed by royalty payments of 3-5% once a product is on the market. These payments are tied to the achievement of individual targets, not antibodies, so that a partner that is successful with several targets makes multiple payments to MEDX. Structuring collaborations this way greatly reduces the time and risk assumed by MEDX, while enabling the rapid production of a diverse array of targets.

MEDX’s near-term contract and license revenue also serve as a leading indicator of the development success of the UltiMAb and the royalty streams to come. MEDX’s large number of corporate partners and products in development seems to us to be a clear validation of the Company’s UtliMAb technology platform, and suggests that more products will reach more advanced stages of clinical trials and commercialization than had previously been anticipated.



HuMAb Partnerships


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MEDX’s HuMAb partnerships have a standard structure, as opposed to simple licensing deals. The typical HuMAb deal involves MEDX providing its technology, the partner providing the target and both companies providing $2 million in cash. The two companies split expenses on a 50-50 basis until the completion of Phase IIa testing, after which MEDX assumes ownership of the compound. Management also makes a determination at that point whether to continue testing or not. If the decision is to advance the antibody, then MEDX assumes responsibility for completing the testing, for which it agrees to pay an estimated 3-5% royalty to the partner company.

Some of MEDX’s recent HuMAb partnership announcements include:

MEDX announced in late April that it had entered a collaboration with Neuro Therapeutics, Inc., a privately-held biomedical company, to develop fully human antibody therapeutics for central nervous system (CNS) disorders. Neuro Therapeutics will contribute all of its targets that its management believes are amenable to antibody therapeutics over a period of several years. Preclinical and clinical development costs, as well as revenue from the commercialization of any resulting products, will be shared equally. The agreement may be extended by mutual agreement.


Also in late April, MEDX announced the formation of a partnership with Northwest Biotherapeutics, which is also privately held. MEDX expects to generate fully human antibody therapeutics for multiple cancers. The two companies have previously worked together to generate fully human monoclonal antibodies to on of the alliance’s initial targets, an antigen associated with prostate cancer. Northwest Biotherapeutics will initially contribute four of its existing cancer-related targets, and an additional four undetermined cancer target’s. Preclinical and clinical development costs will again be equally shared, and the two companies will have the right to jointly commercialize any resulting products. MEDX also purchased $4 million of Northwest Biotherapeutics’ preferred stock, and will purchase an additional $3.5 million of its common stock if it goes public during the next year and satisfies certain other undisclosed conditions.


In early January, MEDX formed an alliance with Eli Lilly (NYSE: LLY) and Biosite Diagnostics Incorporated (NASDAQ: BSTE), under which BSTE and MEDX will utilize Trans-Phage Technology, a high-throughput method for generating high-affinity, fully human antibodies to genomics-derived targets that LLY will provide. LLY intends to use these antibodies to identify novel disease targets. The agreement calls for LLY to provide targets to BSTE every year for three years. BSTE is to receive access, development, annual target maintenance and milestone fees and sales royalties. MEDX is to receive license fees and milestone payments, as well as royalty payments from LLY on product sales.


MEDX entered into a strategic alliance with privately-held Immusol to develop fully human antibody therapeutic products. MEDX will use its UltiMAb Human Antibody Development System to develop high affinity, fully human antibodies to therapeutic products discovered by Immusol’s Inverse Genomics platform. Immnusol’s Inverse Genomics technology identifies drug targets from the opposite direction of standard discovery programs. Inverse Genomics enables researchers to work backward from a biological feature with therapeutic potential. This process identifies only those genes with potentially viable therapeutic targets. MEDX and Immusol will share pre-clinical and clinical development costs, as well as profits. MEDX has also committed to making a $5 million investment in Immusol.
MEDX has entered into a strategic alliance with Seattle Genetics (NASDAQ: SGEN) through which MEDX’s UltiMAb Human Antibody Development System to develop and commercialize monoclonal antibody-based therapeutic products against specific cancer targets. Pre-clinical and clinical development costs will be shared, and any developed products will be jointly commercialized. MEDX also made a direct purchase of $2 million worth of SGEN common stock.


MEDX announced a collaboration with privately-held Glaucus Proteomics, B.V. The purpose of the collaboration is the development of new antibody therapeutic products to novel disease targets discovered by Glaucus.


MEDX licensee Centocor, a wholly owned subsidiary of Johnson & Johnson (NYSE: JNJ), has filed an IND for a fully human antibody product used to treat inflammatory disease. This is the third HuMAb-developed product to enter human clinical trials, and represents further validation of the Company’s technology platform and business strategy.
These deals represent additional endorsement and validation of MEDX’s strong fundamentals and technology platform. MEDX is entering into deals that will enable it to capitalize on both genomics and its partners’ proprietary target information.

Management has stated that its goal is to file between 10 and 12 INDs with the FDA by the end of FY02. We believe that it is these INDs, a percentage of which will likely be approved, that will ultimately be the true value drivers for MEDX stock. Beginning in 2003, management expects to file 3-4 INDs annually. Conservatively assuming a 30% success rate for the INDs, MEDX could have 9 products approved by 2007. Further assuming a total revenue stream of $300 million per approved product (which we believe is also a conservative estimate), MEDX could potentially generate $2.7 billion worth of total revenue from its HuMAb partnerships alone.

What gives us reassurance that this is more than hopes and dreams is the quality of the Company’s development partners and the speed with which deals are being done. MEDX currently has 10 HuMAb partnerships with emerging biotech companies including Eos, Regeneron, Oxford Glyco Sciences and Corixa. Give the pace of deals so far this year, we would be quite surprised if MEDX did not announce any more deals during the year.

From an investment standpoint, MEDX’s HuMAb partnerships provide the Company with the significant upside potential of an emerging biotech company



FY00 and 1Q01 Results
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MEDX’s FY00 results were better than we were expecting. For the year ended December 31, 2000, MEDX earned $22.4 million in product and contract revenue. Net loss for the year from ongoing operations was $14.7 million, or $0.21 per share. Its 33% ownership stake in Genmab A/S, which went public in October 2000, resulted in a one-time tax gain of $21 million of interest and dividend income. This one-time gain resulted in FY00 net income of $3.3 million, or $0.03 per share. MEDX ended the year with cash and equivalents of $344 million.

Most of the Company’s milestone revenues to date have come from its UltiMAb “mouse” deals that are structured so that MEDX receives payments as product development progresses. In our view, MEDX’s financial results were quite encouraging, especially as we believe that the higher than expected revenues resulted from the Company’s partners’ progression of more products through early-phase testing than we had anticipated. We expect this to naturally lead to more products advancing into clinical development and commercialization. Indeed, during its conference call, management stated an expectation that 10-12 INDs would be filed by the end of calendar 2002, which we estimate will result in $15-24 million in milestone revenue to MEDX.

Looking forward, we expect the pace of revenue growth from partnerships to accelerate for the next couple of years. We believe that management will be able to reach its goal of filing 10-12 IND applications by the end of FY02. We estimate that this would result in MEDX receiving $15-24 million in milestone revenue. We are projecting profitability in 2005, by which time MEDX could very well have a drug pipeline that rivals much larger pharmaceutical firms in size and scope.



Summary


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In summary, we believe that MEDX offers investors a very compelling investment opportunity, especially at current price levels. The Company has very strong fundamentals and has a broad antibody library. The Company is, we believe, the antibody partner of choice. Its UltiMAb licensing deals provide near-term revenue with minimal work on the part of MEDX or downside risk. Its T-12 process, which enables the Company to go from identifying a target to the initiation of clinical trials in 12 months, is a strong competitive advantage. Its HuMAb partnership deals enable the Company to use partners to defray development costs while providing the potentially huge upside potential enjoyed by biotech companies producing proprietary products.

We further believe that MEDX compares very favorably to its main competitor, Abgenix (NASDAQ:ABGX), both in terms of company fundamentals and from a valuation standpoint. On a fundamental basis, we believe that MEDX’s UltiMAb mouse, its T-12 process (which is designed to bring a product from initial targeting to clinical trials in 12 months) and Trans-Phage technology give the Company a very meaningful competitive advantage. From a valuation standpoint, backing out MEDX’s $483 million in cash, equivalents (including its Genmab stake) and equity holdings, we arrive at a technology value of approximately $1.843 billion. Backing out ABGX’s $696 million in cash, equivalents and equity holdings yields a technology value of $3.103 billion, providing a potential upside to MEDX investors of $1.26 billion to simply reach the point of parity.

We believe that MEDX’s most attractive qualities are:

Its broad-based technology platform – The UltiMAb platform’s versatility provides a hedge against the risk of failure of a single product, one of the biggest risks of biotech investing. It further enables the Company to take advantage of a wide variety of market opportunities.


Large number of strong corporate partners – MEDX’s partnership list includes some of the largest and most well-capitalized companies in the pharmaceutical industry. This provides important validation of MEDX’s technology platform and business model. The ability to rapidly get a large number of deals done with partners of this caliber speaks very well of management’s ability to execute. Deals are also structured favorably; risk to MEDX is minimized while the Company is positioned to benefit from the success of its partners.


Strong financial position – MEDX has approximately $334 million in cash and equivalents. We are projecting an additional $15 to $24 million in licensing and milestone revenue of by the end of FY02.


Attractive valuation – MEDX’s main competitor, Abgenix, has a market cap roughly 62% higher than MEDX, once cash and equivalents are backed out. We believe that MEDX’s UltiMAb mouse, its T-12 process and Trans-Phage technology places MEDX ahead of its competition, creating a more attractive opportunity for investors.


Risk Considerations


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This section of the document is provided to remind potential investors to undertake a prudent level of due diligence prior to making an investment in the securities of MEDX. For a complete description of risks and uncertainties to MEDX’s business, see the “Risk Factors” section in MEDX’s SEC filings, which can be accessed directly from the SEC Edgar filings at www.SEC.gov on the Internet. Other potential risks include:

Market risk: Investors should consider technical risks common to many small-cap or micro-cap stock investments, including liquidity levels, small float, risk of dilution, dependence upon key personnel, dependence upon single products or technologies, and the strength of competitors that may be larger, better capitalized and hold dominant market positions.


Business risk: MEDX has limited experience in the manufacturing, marketing, and the distribution of pharmaceutical products. Many of its products are in the early stages of development. Additionally, MEDX intends to license rights to its products to other companies. There can be no assurance that these licensing agreements will be completed, or that the market will accept any products under development.


Regulatory risk: There is no guarantee that MEDX’s products will be approved by the US FDA or international regulatory bodies for marketing in the US or abroad.


Competitive risk: The pharmaceutical industry and the market for antibodies are extremely competitive, in particular because of its large market potential. Many companies are developing products for markets that are targeted by MEDX. MEDX’s main competitor, Abgenix, is a particularly strong competitor.

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Vergleich Medarex/Abgenix