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WILL MICROCIDE'S 'TARGETED GENOMICS' PAY OFF FOR PATIENTS--AND INVESTORS?For every problem, there's a solution. At least, that's what Microcide Pharmaceuticals (MCDE) in Mountain View, Calif., is betting as it tries to develop cures for new strains of infectious diseases that are proving dangerously resistant to traditional antibiotics. Of course, no one ever said solutions should be easy. Microcide knows a little about that, too. The would-be producer of new, more potent antibiotics noted the need for such medicines well ahead of most drug companies, opened for business in 1992, and went public in May, 1996. But it still doesn't yet have any drugs in clinical trials, and as a consequence, its stock price has languished between 10 and 12 for most of the past two years. In February, its shares dipped below 10 as some of its early venture capital partners distributed stock to investors, who then sold. On Mar. 26, Microcide closed at 8 13/16. That's a buying opportunity, argue several analysts who follow the biotech startup -- especially since several catalysts could give the stock a lift this year. "It is one of the few pure plays" in the effort to find new infection-fighters, says Richard van den Broek, an analyst with Hambrecht & Quist. He recommends the stock based on the strength of its technology, the muscle of its corporate partners, and its focus on filling a critical need in a huge potential market. Matthew Murray, an analyst with Lehman Brothers, has set a 12-month price target of 18 for Microcide, based largely on the value of future royalty payments he expects it to receive for drugs in development. Microcide is looking for cures on two fronts. Its targeted antibiotics program focuses on prolonging the usefulness of currently available antibiotics that fight hospital-based infections, such as staph. Its scientists have found ways to block the mechanisms that allow such bacteria to develop resistance to these drugs, and the company has two such products in the works, one partly funded by Daiichi Pharmaceuticals and the other by Johnson & Johnson. Microcide missed its 1997 target for starting clinical trials on one of these products. But it expects to start trials later this year for the one its working on with Johnson & Johnson. These drugs could each have the potential for $200 million to $500 million a year in sales, according to estimates by Cowen & Co. Microcide's best chance for a blockbuster, though, lies in its efforts to develop an entirely new class of antibiotics. The company's "targeted genomics" approach uses genetic engineering to isolate the genes that are essential for bacteria to grow and survive. If a way can be found to block those genes, the bacteria will die. "It's kind of like looking for which parts of a car you'd have to disable so that the car wouldn't run," says James E. Rurka, Microcide's CEO. Such a new class of antibiotics is years away, but these drugs could have $1 billion in annual sales potential for the company that develops them first, analysts predict. This year, Microcide hopes to pick development candidates out of the hundreds of compounds it has identified with the support of its partner on the project, Pfizer. Even as it does that haystack search, the company is trying to expand its gene-blocking efforts to fungal infections, which attack patients with suppressed immune systems. The stock should get a boost when Microcide lands a corporate backer for this venture, an announcement Merrill Lynch analysts expect in the first half of 1998, according to a Feb. 19 report from the brokerage. Meantime, Microcide is also in the early stages of developing antiviral medicines. In January, it spun out an incubation-phase subsidiary, Iconix Pharmaceuticals, which was capitalized by such prestigious venture capital firms as Abingworth Management, Institutional Venture Partners, and Kleiner Perkins Caufield & Byers. The two techniques for developing new antibiotics, plus Microcide's excursions into antifungals and antivirals, give the company a measure of diversification than many of its competitors lack -- assuming, of course, that it doesn't spread itself too thin. Microcide still loses money each quarter -- normal for an early-stage biotech company. But analysts note that it burns cash at a relatively modest rate. It reported fourth-quarter and 1997 losses that were slightly lower than Wall Street expected: Its net loss for the year was $4.6 million, or 43 cents a share, on $15 million in revenues, reflecting payments from its partners. The company had $40 million in cash at the end of 1997, which, at its current rate of spending, is enough to cover eight more years of research. Buying Microcide at this juncture means betting on several things: Its discovery of an effective antibiotic, which sails quickly through clinical trials (as Cowen & Co. analysts say antibiotics tend to do), plus the company's ability to hold onto its corporate partners, whose departure would be read as bad news. But if you think Microcide's approach to combating exotic new strains of bacteria has potential, buying now could be a gamble worth making.
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Updated Mar. 26, 1998 by bwwebmaster
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