At the Heart of Investors' Hopes for Scios


By Gene Marcial There is a body of opinion on Wall Street that expects to see shares of Scios (SCIO) pump up with reinvigorated strength as investors recognize that its new drug, Natrecor, will be a major player in the $2 billion market for the treatment of acute congestive heart failure. Shares of Scios, currently trading at $22 a share, have started to recover from their mid-July slump, when they were trading at $16 -- down from $39 in early May. Some analysts think Natrecor's impact could lift the stock to between $35 to $40 in 12 months.

"A hidden epidemic in the form of congestive heart failure is sweeping the elder portion of the population," says Dr. Mark Monane, a medical analyst at the New York research firm, Needham. He notes that about 1 million patients land in hospitals with acute heart failure. According to the National Center for Health Statistics, congestive heart failure is one of the leading causes of hospital admissions in the U.S. It notes that about 5 million individuals suffer from heart failure. Treatment usually entails a program of rest, proper diet, modified daily activities -- and medications. Drug therapy for this disorder costs about $2 billion a year, according to Monane.

Natrecor is a novel medication for the management of heart failure -- the first new drug for treating the disease in a hospital setting. Having received an "approvable status" letter from the Food & Drug Administration in early July, Scios expects to roll out Natrecor -- its first new drug in a decade -- sometime in August. The company anticipates full FDA approval fairly soon, as it expects to complete compliance with the last of two requirements set by the FDA in the near future.

PROFITS AHEAD? "We remain excited by Natrecor's potential," says A. Rachel Leheny, analyst at Lehman Brothers, who expects approval of the drug in the third quarter of 2001. She forecasts sales of $7 million of Natracor in the fourth quarter and $54 million in 2002. Scios is expected to be in the red through next year, but should finally post earnings in 2003.

Monane estimates that Scios will earn 55 cents a share on sales of $152 million in 2003, and $1.88 in 2004 on projected sales of $219 million. Prudential Financial analyst John Sonnier says Scios is holding discussions with three potential European partners. He expects a deal with a major European drugmaker -- which would involve the payment of royalty fees to Scios -- before yearend.

Scios also has a collaboration agreement with Medtronic, a major medical-device maker, for the possible use of Natrecor in Medtronic's implantable hemodynamic monitor, which is being tested in Sweden. This is the first test being conducted to determine the expanded use of Natrecor in other situations involving congestive heart failure. The idea is for the Medtronic device to measure the pressure on the heart. An even more important aspect of the alliance, however, involves a new Medtronic pump device that not only reads the extent of the pressure on the heart but also delivers the Natrecor to the patient.

MERGER TALK. If the Medtronic-Scios collaboration flies, says Monane, "anything is possible" in respect to an expanded deal between the two companies -- including the possibility a merger or acquisition of Scios by Medtronic. Monane says Scios has a robust pipeline of new drugs for the diagnosis and treatment of other diseases, including cardiovascular and noncardiovascular diseases. One of them -- p.38, a kinase inhibitor for rheumatoid arthritis -- addresses another $2 billion market, says Monane. In 1999, Scios partnered with Chiron on Scios's proprietary form of basic "fibroblast growth factor" for development in the management of coronary artery disease and the treatment of skin ulcers.

Chiron has been conducting Phase 2 clinical trials, which are expected to be completed soon. In sum, Scios is still way undervalued, says Monane, who points to the company's integrated cardiovascular programs and partnerships with other biotech and major pharmaceutical companies. Over the next several quarters, he predicts: "The visibility of Scios and its products should further attract substantial investor interest." Marcial is BusinessWeek's Inside Wall Street columnist


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