A Cure For Ailing Portfolios?

In the world of biotech, the typical business model involves reaching into deep pockets filled with tens of millions of dollars and funding many years of painstaking research before realizing a payoff. While high-profile industry giants like Amgen Inc. (Nasdaq: AMGN), Genentech Inc. (NYSE: DNA) and Novartis AG (NYSE: NVS) grab most of the headlines, one little-known upstart is giving the household names a run for their money.
 
It may be a long way from the southeastern coast of Australia to New York City. But ChemGenex Pharmaceuticals Ltd. (Nasdaq: CXSP) , a small Australian biotech company focused on developing treatments cancer, diabetes, obesity, depression and anxiety, is prompting whispers being heard all the way in the hallowed halls of Wall Street.

Headquartered in Geelong, Australia with a cutting-edge R&D lab in Menlo Park, Calif., ChemGenex's topflight scientific talent has produced a promising pipeline of drugs. Though not yet operating in the black, the competition has a lot to worry about. ChemGenex could be several years ahead of the pack in advancing a new treatment for chronic myelogenous leukemia (CML), a slow-progressing disease in which a genetic flaw triggers the overproduction of white blood cells that affects approximately 22,000 Americans and some 100,000 people worldwide. ChemGenex's lead drug candidate, Omacetaxine, derived from the Chinese yew tree, is in Phase II and III clinical trials randomized studies that provide some patients with drugs while others receive a placebo and has received Food and Drug Administration fast-track status for treating CML patients who responded to Novartis drug, Gleevec.
 
The company has another potential cancer-fighting molecule drug in Phase II human trials in the United States: Quinamed, which is being developed as a treatment for prostate cancer, a leading cause of death which afflicts 186,000 American men every year. It also has a third new cancer drug candidate, CXS299, for the treatment of solid tumors resistant to chemotherapy, in late stages of pre-clinical development.
 
On June 10, ChemGenex announced that it bought all European intellectual property rights to Omacetaxine from its Swiss partner, Stragen Pharma, in exchange for a 17% stake in the company. And on July 1 the company submitted to the FDA the first of a three-part rolling submission for a new drug application (NDA), clearing the way for completion of the NDA submission by mid-2009. This means scrappy little ChemGenex will probably beat Merck & Co. (NYSE: MRK) and its partner Vertex Pharmaceuticals (Nasdaq: VRTX) to the CML treatment market (the firms stopped recruiting new test subjects to trials last November because of side effects caused by their own would-be leukemia drug).
 
Last year, ChemGenex posted revenues of AUS$1.4 million ($1.36 million), derived primarily from partnership agreements, and an AUS$11.7 million ($11.4 million) net loss. At the start of fiscal 2008 ChemGenex had about AUS$25 million ($24.4 million) in cash in the bank and estimated quarterly expenses in the neighborhood of AUS$3.5 million ($3.4 million).
 
Keeping tabs on ChemGenex's finances can be challenging since the company is not required to file quarterly updates with the SEC and it is not tracked by any industry watchers on this side of the pond. However, analysts at Sydney-based ABN-AMRO Morgans maintain a "buy" rating on the stock and call ChemGenex their "top pick in the life science sector."
 
Shares, which closed at $13.73 on August 4, have traded between $8.58 and $26.99 over the last 52 weeks. 
 
ChemGenex has already proven that its current investors have made a wise choice given its share price has risen about 80% since January. And that could only be the tip of the iceberg. With its highly anticipated experimental medicine showing great promise, the firm appears to be on the brink of a groundbreaking discovery in the treatment of drug-resistant leukemia. FDA approval would position ChemGenex as a key participant in the lucrative CML treatment market (the U.S. market is worth $2.5 billion while the global market is estimated at $4 billion and is growing at a clip of about 18% annually). 
 
While the volatile biotech industry may not seem as safe as Big Pharma, (it is, after all, inherently high-risk), its potential can not be ignored. But caveat emptor is the watch word. Considering less than 25% of all anti-cancer agents reach the market and few of those that do turn be the silver bullet drugs oncologists and the Street had hoped for. That said, while ChemGenex's successes so far have early buyers riding wave and though savvy investors should always be on the lookout for opportunities, it may well pay to be a bit wary of the steep ascent of the any biotech stock linked to "breakthrough" cancer treatments. In the long term, the hype could well overshadow the drug's ultimate results. But, then again, investing is all about balancing risk and reward.
 
Burgeoning ChemGenex could turn out to be a very healthy shot in the arm for your portfolio.

Our recommendation: Buy shares of ChemGenex Pharmaceuticals Ltd. (Nasdaq: CXSP) at or near $13.73.

By Shannon Roxborough
Analyst, Medtech Millionaire