The competition to treat macular degeneration offers biotech investors an exciting story and great investing tips. Where everyone looks, company valuations are usually too rich to allow enough potential return for the risk. But where others avert their eyes, unpopularity may offer the opposite.
Huge unmet need Age-related macular degeneration (AMD) is the prime cause of blindness in those over 50, affecting 13−15 million people in the United States alone. Of the two forms, 'wet' and 'dry,' the former comprises only 10−15% of AMD cases, but progresses faster to cause 90% of AMD-related blindness. About 500,000 new wet AMD cases are diagnosed worldwide each year, with about 200,000 in the United States, and the over-50 population is rising.
This math doesn't include the numbers for diabetics suffering from ocular diseases, which wet AMD candidate drugs may treat as well. Some put the US market alone for AMD and diabetic retinopathy therapies at $7.5 billion by 2010.
So this is big business, destined to increase. The only currently approved treatment for wet AMD, Visudyne, is estimated to bring QLT (Vancouver, BC, Canada; Nasdaq:QLTI) and its marketing partner Novartis (Basel, Switzerland; NYSE:NVS) $430−455 million in sales this year. This may expand, because whereas the US Food and Drug Administration (FDA) approved Visudyne only for one subtype of wet AMD in the United States, Medicare now reimburses for Visudyne treatment for all three subtypes—predominantly classic (25% of cases, fastest vision loss); minimally classic (35%, slower loss); and occult (40%, slowest loss) (for more information, see ref. 1).
Crowded field of vision There are at least 13 publicly traded companies and one private company with wet AMD drug candidates in development from preclinical to phase 3 and as new drug applications (NDAs). Supplementary Table 1 shows the range, from the familiar and cash-rich giants to development-stage companies.
Eyetech Pharmaceuticals' (New York; Nasdaq:EYET) Macugen, which may gain approval for all three subtypes of wet AMD, is considered the most serious near-term threat to Visudyne. Experts agree that both drugs slow, but do not halt or reverse, vision loss, and it's possible that others in development may do better. For now, though, Macugen is the comer.
A few investors had been selling QLT shares since May, but they really woke up en masse only on August 27, when it was announced that an FDA advisory committee was meeting to discuss Macugen clinical data. For two days, sellers drove down QLT shares 17% and chopped off $210 million in market capitalization. How fickle the market is. Under $10 in spring 2003, QLT shares rocketed to $30.70 just this past May on Visudyne hopes, only to sink to $14.69 the Monday after the advisory committee meeting. This spurred QLT management to hold a conference call with the they-doth-protest-too-much purpose "to reiterate confidence in Visudyne's potential."
A sweetheart deal Eyetech has been the market's darling. Macugen's promise brought enough venture capital and a $745 million alliance with Pfizer (New York; NYSE:PFE) to advance the drug even before Eyetech's IPO this year raised a net $142 million. But market sweethearts come with a price. Eyetech's only revenues to date are from the Pfizer deal, so its $1.4 billion market capitalization is based solely on high expectations for Macugen. That market cap is $350 million more than QLT's, which is based on $164 million in sales over the past 12 months. What kind of return can investors anticipate from Eyetech's lofty level today?
Borrowing some analysts' wide-eyed projections, let's grant Macugen approval and future blockbuster status at $1 billion a year in worldwide sales. Assign 70%, or $700 million, of that to the United States. That gives Eyetech $350 million for its 50% share, plus a ballpark $50 million for royalties. Give Eyetech an Amgen-like (Thousand Oaks, CA, USA; Nasdaq:AMGN) price-to-sales ratio of 7 to that $400 million and you might arrive at a market capitalization merely double that of today. 'Merely,' because a possible 100% gain over several years hardly seems adequate compensation for all the ifs. Consider that if Macugen sold 'only' $500 million a year, the stock would arguably be overvalued today and could bring investor pain.
QLT has stable finances and prospects for broad pipeline growth through its proposed merger with Atrix Laboratories (Fort Collins, CO, USA; Nasdaq:ATRX). The stock sells for under ten times its past year's free cash flow, which is unheard of for a profitable biotech drugmaker. It's a rare opportunity, but only if you believe that competition will not soon destroy Visudyne revenues before Atrix drugs can make up the difference.
Seeing clearly I'll let the experts debate which drug better slows vision loss, whether laser-activated Visudyne offers less infection risk than more frequently and eye-injected Macugen, and whether wider labeling means more sales even if Medicare reimburses for Visudyne for all wet AMD subtypes. But an investor should see the risks and rewards dispassionately. The popular Eyetech at today's prices expects great success and offers more possibility of disappointments, whereas the unpopular QLT, assuming that the Atrix merger is consummated and Visudyne is not crushed, presents the reverse.
