Randal J. Kirk is beside himself right now. The legendary
biotech investor, who is now worth more than $2 billion, made a
rare misstep by plunking down $14 million (at $10.61 a share) on
Halozyme Therapeutics (Nasdaq:
in February, only to see that investment lose a quarter of its
value on Monday, April 16.
His nearly 8% stake in the company is now worth roughly $70
million, down from nearly $100 million before Monday's plunge.
That's when the Food & Drug Administration (FDA) told Halozyme
-- along with key partner
-- that further clinical testing for a key drug would be required.
This put an abrupt end to a solid upward move in the stock, which
only recently saw the company's value move past the $1 billion
mark. But Kirk figures to still
handsomely, as Halozyme's biotechnology platform should still reap
solid rewards in the years to come.
Halozyme has been garnering a steadily rising buzz in biotech
circles, thanks to the impressive action of its key product,
hyalurodinase. The drug mimics hyoluric acid, which is naturally
produced by the body as a gel-like substance. Halozyme's
hyalurodinase has proven quite effective at helping drugs to be
absorbed into the bloodstream. Baxter and
Roche Holdings (Pink Sheets : RHBBY)
have poured money into Halozyme in exchange for the rights to
several drugs that are currently before the FDA. In both instances,
those two Big Pharma players want to use hyalurodinase to convert
existing intravenous (IV) drugs into subcutaneous (injectable)
Roche, for example, has paired up Halozyme's drug with its own
Herceptin and Rituxan drugs, both of which are seen as key parts of
Roche's future sales growth. Analysts at Brean Murray have
repeatedly suggested that Roche might look to buy Halozyme (at
around $13 a share) if the FDA issues a full set of green lights
for the drug combinations. (
had been surging in recent months on news that clinical trials
pairing hyaluronidase with other drugs were going very well.)
Biotech investors first began chatting about Halozyme in late 2010
when the company brought in a new business development team that
subsequently initiated several new key partnerships. In June 2011,
Halozyme signed a development deal with privately-held Intrexon to
develop a subcutaneous version of A1AT, a protease inhibitor used
to stop inflammation in respiratory conditions such as cystic
fibrosis and emphysema.
was also launched, and clinical tests are now underway for pairing
hyalurodinase and Viropharma's Cinryze, which treats a fairly
obscure genetic blood disease.
These partnerships are being pursued in tandem with Halozyme's own
proprietary drug-development efforts. For example, the company
recently announced solid Phase I testing data for HTI-501, which
treats extreme cellulite. The opportunity in the cosmetic market
possibly holds even higher potential than Halozyme's multiple
partnerships. Lastly, Halozyme is also developing PEGPH20 to treat
pancreatic cancer, and
Eli Lilly (NYSE:
is looking at using it in tandem with its gemcitabine drug, which
is used in chemotherapy.
Parsing the FDA's response
So does the FDA's move to ask Baxter and Halozyme to submit more
long-term data render hyalurodinase much less worthwhile? Not at
all. To be sure, a possible 2012 product launch is now unlikely to
happen, and conservative investors may wish to assume that that the
Baxter/Halozyme drug, known as HyQ, won't get approved at all.
Analysts at Goldman Sachs still think HyQ will get approved, though
that may come as late as 2014 if a new clinical trial is required.
Here's the key takeaway: The FDA has not cast doubt on HyQ, but
says the companies should be providing more long-term
clinical-testing data. So shares were dumped on Monday because
Halozyme's expected revenue ramp will be pushed out by at least
several quarters. And as is the case with many biotech stocks, this
quickly leads to concerns about financial strength while the move
to profitability is delayed.
Halozyme was fortunate to raise roughly $80 million in February
(which is when Randal Kirk bought his shares). The company now has
an estimated $120 million in the bank, which is likely sufficient
to fund operations for another 12-18 months. In the interim, the
company may also receive royalty payments from other partners as
key drugs advance in the clinical testing process.
Taking account of the FDA setback, analysts at Brean Murray lowered
their target price from $13 to $11, although some biotech
investors, including Randal Kirk, presumably believe Halozyme's
biotechnology platform could be worth much more than that.
Risks to Consider:
Halozyme is expected to report a range of other
clinical-testing information in the coming 12 months and will need
to show continued positive results before shares can rebound.
Action to Take-->
This is all about risk and reward. Monday's setback has removed
much of the near-term risk from the stock. Shares may simply tread
water in the absence of near-term catalysts. But shares would
quickly spike well north of $10 again if the cellulite drug
opportunity starts to heat up, or if Roche's marketing efforts
start to pay off and Halozyme starts to report an impressive sales
As is the case with any biotech stock, investors should only accord
a smaller portion of funds to this speculative type ofbusiness
model . But Monday's sell-off looks like a great opportunity to
step in as other investors step away.
If you haven't heard about this unique opportunity, then I want to
tell you about it now. StreetAuthority has staked me with
$100,000 of real money
to invest in my absolute best ideas. For a limited time, you'll be
able to follow along with me completely free.
Go here to learn more
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of LLY in one or more if its "real money" portfolios.