A.G. Edwards' Martha Stewart Portfolio
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You can invest like Martha Stewart -- without being accused of insider trading.
Martha is under suspicion because she sold 4,000 shares of biotech firm ImClone just before the Food & Drug Administration announced its rejection of the company's application for Erbitux, a cancer-fighting drug. Since the FDA publicly released its decision on Dec. 28, shares of ImClone have fallen more than 86 percent. But investors still interested in the kind of research that spawned Erbitux have other options besides ImClone, say A.G. Edwards biotech analysts Craig West and Alex Hittle, a pair of All-Star Analysts who appeared on the July 5 broadcast of Wall $treet Week with FORTUNE.
The key is products that block the protein "Epidermal Growth Factor" or EGF, identified as an important part of tumor growth. Erbitux is supposed to stop EGF signals from reaching cancer cells, by binding to their corresponding receptors.
Among the companies that make EGF blockers are two companies followed by West and Hittle, who "puckishly" called it their Martha Stewart Portfolio, in a June 24 memo excerpted below:
"Consider buying Abgenix and Onyx Pharmaceuticals, which have an antibody and a small molecule product respectively that interfere with the same cancer pathway (starting with the EGF receptor at the cell surface) as ImClone’s beleaguered Erbitux. Abgenix has enterprise value about twice that of ImClone’s roughly $200 million, and Onyx is well below at $65 million.
"Managements of Abgenix and Onyx are reportedly still at large."
Dynamic charts for Abgenix and Onyx, with additional commentary from West and Hittle (charts start April 5):
Abgenix
"We see Abgenix, with its XenoMouse Technology, as one of the premier plays among the firms that promise rapid-fire delivery of antibodies to genomically-derived targets. Over the course of the next 12 to 18 months we expect the shares will rise due to a combination of a) progress of existing products through clinical trials and b) new products developed through XenoMouse technology entering the pipeline.
"Discontinuation of IL-8 program (May 14, 2002) and awkward data on ABX-EGF in renal cancer presented at the American Society of Clinical Oncology (ASCO) have hurt the shares. We are more interested in the XenoMouse technology as a platform and continue with our Strong Buy rating. Our price objective is $20."
Onyx Pharmaceuticals
"Delay in manufacturing and trial design issues has changed the thesis on this stock resulting in a March 4, 2002 downgrade. Stock has been performing based on its oral cancer drug 43-9006 data, which showed stable disease in 10 of 82 patients in ASCO presentation. Onyx has experienced management, a large amount of Phase 2 data, and an attractive valuation at approximately two times its $2.59 (March balance sheet) per share in cash.
"It is not without risks, most notably a gene-therapy (read: high-risk) product, manufacturing issues to resolve (i.e. capacity) and a low cash balance. That said, the shift of focus to 43-9006 takes the company somewhat out of the gene therapy orbit and instead makes it a cheap and concentrated play on the blockade of the EGF pathway. Our price objective is $10."
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