PGL is a cancer-drug development company and a contract manufacturer of biopharmaceuticals products. The development of its lead candidate drug PI-88 is at a very interesting stage with several phase II trials in progress. Should the trials be successful management expects the compound to be in the market by 2006/07. That is relatively soon in the world of biotechnology.
The drug is an anti-angiogenic compound. Angiogenesis is the biological process of blood supply formation that is an integral part of tumour growth. Not only does PI-88 retard existing tumour growth it also inhibits metastasis (cancer spread). The profile of the anti-angiogenic approach to cancer treatment recently received a very strong boost from the success of the US biotech, Genentech's anti-angiogenic drug Avastin. PI-88 could prove to be a more effective compound than Avastin due to the fact that it has multiple mechanisms of action making evasion by the cancer more difficult. Avastin also needs to be used in conjunction with traditional chemotherapy drugs for it to be significantly efficacious whereas PI-88 appears efficacious when used as a monotherapy. The likelihood though is that it will also be used in combination with other drugs.
Market commentators suggest that the success of the Avastin trials has led to a US$10 billion increase in the market cap of Genentech. This market reaction is no doubt excessive. This analyst using a very back-of-the-laptop type calculation believes the increment should not be more than $2.5 billion. What the reaction demonstrates is how enthused investors become when there are strong signs that a new cancer treatment is close to market. This in turn reflects the lack of progress that has been made in the fight against cancer. Before readers begin comparing the value of Avastin to Genentech with PGL's market value they should appreciate that Genentech has the ability to develop, manufacture and distribute its drugs itself. This means that it will earn very rich margins, 80%+, from a successful drug whereas a small research company such as PGL is more likely to earn a royalty of perhaps 10% on sales that are generated by a large pharmaceutical company that distributes the research company's drug.
A Phase II trial in multiple myeloma has been completed while a further three Phase II trials should be underway by the end of this month. One, in advanced melanoma, has already commenced. The other two trials will address post-surgery liver cancer and advanced lung cancer. Several patients treated in the Phase I and in the completed Phase II trials have experienced long-term disease stabilisation. There is a range of melanoma and multiple myeloma patients whose disease continues to be stabilised by PI-88 after many months. The longest period of stabilisation so far is 29 months. Given the aggressiveness of these cancer types and the fact that patients on trial are very close to dying these results are impressive.
We have been impressed by PGL's management who strike us as being very competent, conservative and highly credible in their claims. These attributes are one of the chief reasons we are attracted to the stock.
Majors are circling
Management appear confident that there are several major players who are genuinely interested in partnering the drug. Initial meetings commenced around six months ago. On average partnering deals take 17 months to be concluded so should PGL be successful in this regard such success is likely to take many more months.
Assuming further success in Phase II trials we would value the potential cash flows that PI-88 could generate for PGL at around A$100m in a year's time. PGL's manufacturing facility again very roughly could be worth around $12m while the rest of the drug development portfolio we would fairly arbitrarily value at another $10m. This takes us to a value of $122m or a little over $3.00 per share. Further successful development of PI-88 could treble this value over the next two to three years.
Conclusion
As at 2nd December PGL had $16m in cash, enough to fund at least 18 months of operation. As a speculative stock PGL is attractive at current prices. The evidence to date is very promising both in terms of the drug's safety profile and in terms of efficacy. The quality of management is another strong plus.
cheers
Mitch
PGL Price at posting:
0.0¢ Sentiment: None Disclosure: Held
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