OSI's Plunge May Disguise Its Promise


By Amy Tsao As biotech stocks continue to tumble from their lofty prices of last spring, opportunities are beginning to appear for investors to pick up stocks with real promise. The question now: Is OSI Pharmaceutical (OSIP) one of them? It was the biggest percent gainer on the Nasdaq last year, when its stock rose a huge 909%. Lately, however, it has slid from its 52-week high of $86 to around the mid-$30 range. The price could fall further because it's still trading at a significant premium to other biotechs in a similar stage of growth.

For a number of reasons, however, OSI stock could be a bargain over the longer haul. First of all, the product it's developing comes from arguably the hottest field in cancer research. OSI is trying to block a receptor to a key growth factor that causes tumors to grow. Endothelial growth factor receptor (EGFR), located on the surface of cancer cells, is found in abnormally high quantities in lung, head and neck, and ovarian cancers, among others.

CUTTING TIES. Much like Genentech's Herceptin antibody for breast cancer, OSI's drug, OSI-774, aims to stop cancer-cell proliferation at its roots -- a strategy that has fewer side effects than trying to wipe out cancer cells en masse with chemotherapy. The most common side effect with EGFR blockers has been skin rash. "The reason OSI is so compelling is that [its lead drug] is probably in the most exciting area in cancer research right now," says Carol Werther, an analyst with Adams, Harkness & Hill.

Last summer, OSI got a lucky break. Antitrust regulators were scrutinizing the megamerger between Pfizer and Warner-Lambert, and they ordered the companies to cut their ties with OSI, one of Pfizer's biotech partners, on a key project. As a result, OSI walked away with full rights to one of the most promising cancer drugs on the horizon and improved its financial position substantially. In January, it landed a lucrative agreement with Genentech (DNA) and Roche to develop the drug.

Once Pfizer/Warner-Lambert quit their partnership with OSI, the company became a hot property overnight. OSI, which specializes in developing early-stage potential drugs, was able to pull off a hugely successful secondary offering last fall, raising $437 million. That has left it with a stash worth some $580 million in cash and short-term investments if you include payments from its collaborators, according to a spokesman.

OSI, which was founded in 1983 by a group of scientists from the National Cancer Institute, says it may spend some of the money for acquisitions. Otherwise, the company's plan is to boost its research and development programs and possibly license drugs from other companies. (It now has 45 collaborations with other drug companies.) OSI expects to usher internally developed drugs into the later stages of development on its own. And it has already diversified its pipeline beyond cancer drugs into drugs for diabetes and cosmeceuticals for such problems as hair loss, wrinkling, and skin discoloration.

ENCOURAGING RESULTS. OSI lost $16.3 million on revenues of $28.7 million in the fiscal year that ended Sept. 30. Analysts expect it to pile up losses through at least 2003. With any luck, that's when revenues from the company's big-gun drug will kick in, assuming it passes muster with the U.S. Food & Drug Administration. So far, OSI and its partners have shown OSI-774 to be safe and found evidence of "encouraging anticancer activity." The drug is being tested in a variety of cancers, alone and with other drugs. The company aims to start late-stage trials some time this year.

The downside: Because the potential market for such drugs is huge, the competition from other companies that make cancer fighters could be fierce. OSI's entry is likely to be the third one to get approval. Imclone's (IMCL) monoclonal antibody and Iressa, AstraZeneca's (AZ) rival drug, are both expected to be available some time next year. Nicholas Bacopoulos, OSI's head of R&D, concedes that all of the drugs in clinical development are "very good representatives of the class."

Still, there's a compelling argument for investing in OSI: Its deal with Genentech and Roche. Rival AstraZeneca, which sells a battery of cancer drugs, obviously can put considerable marketing clout behind Iressa. But Imclone, whose IMC-225 is expected to be its first FDA-approved product, has decided to go it alone. OSI gets paid by Roche and Genentech to reach certain goals during the development process and in return will gain considerable marketing power when the drug is approved.

"Genentech is not only well-equipped to execute the clinical and regulatory plan, but it's also an exceptional marketer," says Joel Sendek of Lazard Freres & Co. He rates the stock a buy and has a price target of $101, about triple today's price.

EASY TO TAKE. Though comparison trials have yet to be conducted, the way OSI's drug is taken could also give it an edge, analysts argue. OSI's drug, like AstraZeneca's, is an oral, once-a-day pill, but an antibody like Imclone's would have to be taken intravenously. And while an antibody is better at honing in on the receptor, a small molecule like OSI-774 could theoretically penetrate the cell and block the receptor's activity within the cancer cell as well. "An oral compound obviously has benefits on two fronts: It's more easily administered, and it's likely to be less expensive to make," Sendek says.

Dr. John Mendelsohn, president of the M.D. Anderson Cancer Center at the University of Texas at Houston, first introduced the theory of blocking EGFR in the early 1980s. And now that drug researchers are finally close to bringing actual drugs to the marketplace, "many of us feel these drugs will have relevance to many types of cancers," he says. But Mendelsohn notes that such drugs will not be a magic bullet since they only halt one of several processes involved in directing cancer cells to grow.

So, EGFR inhibitors will most likely be used as part of a drug cocktail. But given how many of those cocktails may be served up, it could be a lucrative drug indeed. In the meantime, biotech stocks, including OSI, are probably in a very bumpy ride. But if you're a long haul buyer, OSI looks mighty promising. Tsao covers biotechnology for Business Week Online


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