From: Ramez Naam (mez@apexnano.com)
Date: Wed Jun 11 2003 - 10:24:15 MDT
As long as we're talking about investments, I thought I'd point out
one of my favorite stocks at the moment.
Many extropians will remember Alteon. Their drug ALT-711 is an
AGE-breaker. AGEs (Advanced Glycation End products) are a kind of
extracellular garbage that build up in many tissues of the body as
partially burned sugars bond with proteins and make a non-functional
glue.
AGEs are implicated in the loss of elasticity in many tissues as we
age. In small human and animal studies, ALT-711 has been shown to
restore some of this lost flexibility. In particular its been shown
to restore lost arterial flexibility and thus reduce blood pressure.
Alteon is currently seeking FDA approval for ALT-711 as a blood
pressure drug. They're just wrapping up Phase IIb studies. Phase I
studies determined basic safety with a small number of patients.
Phase II studies determine effectiveness at various doses with a few
hundred patients, and of course also determine safety with this wider
population. Phase III studies, the last needed before a drug is
approved, are even larger safety studies involving thousands of
patients.
Historically Phase II is the hardest phase to get through. Only about
30% of drugs that enter Phase II trials come out of them successfully.
On the other hand, drugs that make it to Phase III trials have a 70%
chance of succeeding in them.
Alteon is set to release data from the Phase II trials in July or
August of this year. The indications are that they'll clear this
hurdle. Here's the evidence I base that on:
1) In smaller studies on both dogs and humans the drug has already
been shown to reduce blood pressure significantly more than the
minimum needed for approval.
2) The drug reduces blood pressure in an entirely new way, so it
doesn't have to outperform any existing drug on the market to get
approval.
3) Between Phase I and Phase II studies, Alteon doubled the maximum
dosage of the drug, indicating that they feel pretty good about
safety.
4) Patients in the Phase II trials have the option to stay on the drug
after the trial ends. Alteon is reporting that a large number of
patients are opting to stay on, which also says good things about
safety and side-effects.
5) Alteon's external safety board has not brought any safety issues to
their attention.
So all told, I believe that in July or August, Alteon will announce
positive results from their Phase II trials. At that time I think the
stock will rise substantially.
As a company, Alteon has enough money to complete Phase II trials and
operate for a while after that, but not enough to complete expensive
Phase III trials. Alteon is currently in talks with major
pharmaceutical companies to partner on the Phase III trials and
marketing of the drug. If they make it through Phase II trials it's
highly likely that they'll get such a deal.
The potential market for ALT-711 is multiple billions of dollars per
year. Alteon's current market cap is around $180 million. If we
assume a price / sales ratio of 4 (low for the pharmaceutical /
biotech industry), and assume that Alteon could be keeping $1 billion
/ year in sales of ALT-711 after partnership agreements, we get a
potential $4 billion dollar market cap for the stock 3 years from now,
IFF the drug clears both Phase II and Phase III trials.
$4 billion is about 22 times $180 million, suggesting that the stock
has a lot of potential for positive movement.
Let's try to calculate the fair market cap of the stock right after an
announcement of success in Phase II trials (which of course hasn't
happened yet, but which I believe is likely in the next 60 days).
To figure this out we'll discount the eventual market cap of $4
billion by the likelihood of clearing Phase III trials (70%) and by
20% per year between now and the drug being on the market (estimate 3
years). That gives us $4 billion x 0.7 x 0.8 x 08 x 0.8 = $1.4
billion, or more than 7 times current market cap. Even if we
discount by another 50% to reflect uncertainty over a pharma company
partnership, potential market for the drug, and so on, we end up with
a fair market cap 3 or 4 times over the current price of the company.
Now, I don't actually think the stock will go up by a factor of 7 upon
successful completion. I do think it will take a healthy jump,
though. And I expect that later in the summer or fall Alteon will
announce a partnership with a major pharmaceutical company, which
would assure Alteon's survival and will give the stock another jump.
So, that's my long winded way of saying that there's a good short to
medium term investment opportunity in this stock for those that are
tolerant of risk.
To be clear, there *is* a very real risk with the Phase II studies.
They are not complete. When the data is unblinded in July or August,
it could be surprisingly bad. The larger studies could fail to find a
statistically significant effect on blood pressure. There could be
unexpected safety issues. The company leadership could all be thrown
in jail for insider trading or accounting scandals.
At the same time, just about every indication it's possible to get in
advance of the completion of Phase II studies is positive. They all
point to success in Phase II. And success in Phase II will almost
certainly result in a substantial rise in stock price.
cheers,
mez
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