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Personalized Medicine Firms Positioned for Long-Term Dividends

Posted on: Monday, 3 October 2005, 15:00 CDT

By KATHLEEN GALLAGHER

Only one-tenth of 1% of each human being is different from everyone else.

That's the tantalizing difference the growing field of personalized medicine is focusing on and one a local money manager says investors may be able to exploit, as well.

"Personalized medicine improves the options for the patient and can help solve escalating drug costs because the doctors will only be treating patients with the drugs that work," said Ann Miletti, a portfolio manager in the Milwaukee office of Wells Capital Management.

The map of the human genome, completed by the Human Genome Project in April 2003, showed that just 0.1% of the 3 billion letters in the human genetic code differs from person to person.

That has blown open a new field that has come to be known as personalized medicine.

Personalized medicine uses information about a patient's genetic makeup to tailor strategies for the detection, treatment or prevention of disease. Thousands of cancer patients already are being treated with targeted drugs, known as "smart drugs," such as Gleevec, Iressa and Tarceva. Unlike chemotherapy, smart drugs target specific receptors on tumors and work very well in people with certain genetic profiles.

The Food and Drug Administration late last year approved Roche's AmpliChip, the first laboratory test designed to use a person's genetic information to help doctors select the most appropriate medications and dosages.

Last week, Genzyme Corp. began offering a test that may help predict which cancer patients will respond to some of the new smart drugs. This and similar tests could help doctors avoid unnecessary treatments by identifying the most effective drugs from the start.

The FDA has been receptive to the idea of personalized medicine, Miletti said.

"There's a lot of fear the FDA will change the way it approves therapies because of worries about safety," Miletti said. "But we don't think that will happen. The trend is toward cancer therapies becoming personalized."

Miletti says she holds three stocks in client accounts with potential to benefit from the revolution in personalized medicine.

Genentech Inc. (DNA, $84.21), a South San Francisco biotechnology company and drug maker, is the bellwether firm with the best management, sales force and science in the industry, Miletti said.

Genentech has two targeted drugs on the market: Avastin, for cancers of the colon and rectum, and Herceptin, for breast cancer. The company also has a 50-50 partnership with OSI Pharmaceuticals Inc. to co-market Tarceva, a smart drug for small-cell lung cancer and pancreatic cancer.

Miletti said she owns some Genentech shares through an exchange- traded fund called Biotech Holdr (BBH, $190.72). She wouldn't buy more Genentech shares now, though, because of their sharp price increase in the last six months.

"We think it's the best company to own long-term, it's just that we think it's fully valued here," she said.

Protein Design Labs Inc. (PDLI, $28), Fremont, Calif., makes human antibodies used to develop smart drugs and receives royalties on all the drugs it helps develop. The company uses those royalties on drugs that other companies have developed in order to develop drugs of its own. One of its drugs, Nuvion, has shown potential in clinical trials used to treat gastrointestinal problems.

OSI Pharmaceuticals Inc. (OSIP, $29.24), Melville, N.Y., had an advantage with Tarceva because it works on a larger percentage of the population with lung cancer than Iressa. Because of that, the FDA limited Iressa sales, helping Tarceva gain market share faster.

OSI's challenge now is to find new applications for Tarceva, Miletti said.

Wall Street has been unhappy with OSI since August, when it announced its intention to buy Eyetech Pharmaceuticals Inc., a biotechnology company focused on developing therapeutics to treat certain eye diseases. One of Eyetech's biggest products in the pipeline, for treating macular degeneration, will compete against one of industry giant Genentech's products.

As a result, OSI's stock is trading well below its 52-week high of $74.95 in December.

Miletti says investors are so focused on the acquisition they're overlooking the strengths of OSI's cancer drug business.

"Although I don't like this acquisition, it's already priced into the stock. You have to go back and look at the fundamentals of Tarceva and look at the potential it has," she said.

OSI and Genentech are doing trials with Tarceva to determine how much potential it has to be effective against other cancers in combination with other drugs, she said.

OSI also has a pipeline of non-cancer drugs under development for diseases like diabetes, Miletti said.

The biggest risk she associates with the stock is the possibility that OSI's management could lose focus.

But management has executed well so far in terms of drug development, finding good partners and marketing drugs, she said.

Miletti has owned OSI in client accounts since April 2002 and has an average cost of $31. She began buying again recently, would buy up to $35 and says these shares could go as high as $60 in the next 12 to 18 months.

ABOUT THIS

The Milwaukee Investment Analysts Society has 487 members, 366 of whom describe themselves as portfolio managers or analysts. The Journal Sentinel focuses on one local money manager or analyst in this weekly feature, looking at a trend that helps investment pros make their decisions.

Copyright 2005, Journal Sentinel Inc. All rights reserved. (Note: This notice does not apply to those news items already copyrighted and received through wire services or other media.)

Source: Milwaukee Journal Sentinel

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