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Friday, April 17, 1998
Alteon Inc.
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Phone: 201-934-5000
Price (4/16/98): $4 11/16
HOW DID IT FIND TROUBLE?
In working to bring its diabetes drug pimagedine to market, Alteon has seen plenty of sugar rushes -- and crashes. The latest came this past December, when Alteon stock spiked to a double after Genentech (NYE: GNE) agreed to infuse some major cash into the company. But that double soon turned to trouble after Alteon had to halt crucial clinical trials.
On March 18, Alteon reported that a safety monitoring committee gave the green light to its phase III trial testing pimagedine in Type I ("early-onset") diabetes patients with overt kidney disease. But the committee told the firm to stop its phase III trial on similar patients with Type II ("adult-onset") diabetes. The side effects were just too severe. In earlier trials, the drug had caused flu-like systems, gastrointestinal troubles, and signs of liver toxicity.
Type II sufferers represent the bulk of the diabetes market. This bad news immediately cut Alteon's stock from $9 13/16 to $4 15/16. After reviewing data with the FDA and Genentech, Alteon agree on March 23 to scrap the Type II trials due to "an insufficient risk/benefit ratio based upon data currently available." A few days later it reported FY97 results -- a loss of $25.4 million.
BUSINESS DESCRIPTION
Alteon is a development stage biotech working mainly on treatments for diabetes.
As blood glucose reacts with proteins, Advanced Glycosylation End-products (AGEs) are formed. Excess AGEs are believed to be a cause of complications seen in diabetes, such as kidney disease and nerve damage. Alteon's approach with pimagedine is to inhibit or break AGEs or their chemical cross links.
There is some evidence that pimagedine also can be used topically to treat skin inflammation such as eczema as well as to reduce the tissue death seen in some stroke patients. Alteon is also working on glucose-lowering compounds and on using its AGE-inhibition technology to monitor therapy for diabetes patients.
Alteon has strategic alliances with Genentech, Yamanouchi Pharmaceutical, Corange International, Gamida for Life, and IDEXX.
FINANCIAL FACTS
Income Statement
12-month sales: $1.5 million*
12-month income: ($25.4 million)
12-month EPS: ($1.60)
Profit Margin: N/A
Market Cap: $92.8 million**
(*Investment income; the company has no sales)
(**Includes possible dilution from preferred shares)
Balance Sheet
Cash: $29 million
Current Assets: $29.4 million
Current Liabilities: $7.1 million
Long-term Debt: None
Ratios
Price-to-earnings: N/A
Price-to-sales: N/A
HOW COULD YOU HAVE SEEN IT COMING?
Alteon was dumped into penny stockdom following the June 1996 decision by Hoechst Marion Roussel to end a partnership with Alteon after that company acquired Marion Merrell Dow, which had struck the deal. Yet that seemed purely a financial decision.
The latest news had been quite excellent. Genentech had infused $15 million in exchange for common and preferred shares. Plus, Genentech agreed to fund continued development of pimagedine and possibly support additional clinical trials for new indications by purchasing up to $48 million of preferred stock. It will also fund some development costs for the second-generation AGE-inhibitors.
Genentech does get broad rights to pimagedine and to new AGE drugs. But Alteon will also receive $50 million when it meets certain milestones on pimagedine and another $50 million for milestones on newer AGE drugs. Alteon also gets royalties on these drugs.
Genentech can terminate the deal in whole or in part on six-months notice. Still, this positive development seemed unlikely to produce a Trouble just four months later.
WHERE TO FROM HERE?
There are 16 million Americans with diabetes, about one million of whom suffer from Type I or insulin-dependent diabetes. Of these, 35-40% develop significant kidney disease by age 50. Plus, perhaps 100,000 diabetes patients have end-stage renal disease, with 50,000 new patients facing this fate each year. Pimagedine is still being tested on both groups.
The phase III trials on 690 Type I patients with progressive kidney disease will be completed by August, with data released by the fourth quarter. A phase III trial on patients with end-stage renal disease revealed a positive trend in its mortality data last July. An independent committee recommended it for continuation on March 12, but Alteon hasn't indicated when this trial will end.
In other words, it should be October, at least, before significant clinical trials news hits the wires. Meanwhile, the company has ample cash, especially now that Genentech has signed on to keep the research running. So the bad news may be out for now.
Of course, Genentech could decide to revise or back out of its December agreement. A similar thing happened recently with Amylin <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMLN)") else Response.Write("(Nasdaq: AMLN)") end if %>, another biotech at work on a diabetes drug. After Johnson & Johnson <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: JNJ)") else Response.Write("(NYSE: JNJ)") end if %> handed that company its six-month notice, Amylin's shares were shaved in half.
To measure risk/reward among biotechs, analyst Michael Murphy uses what he calls the M score: market capitalization divided by the past five year's research and development spending. In Alteon's case the M score is 1.4 ($99 million/$69 million in R&D). A score under 3 means you could be looking at a homerun -- if the science ends up working.
A big "if." Fools looking for a biotech speculation might want to investigate the science behind AGE-inhibitors more closely while giving the folks at Genentech some time to change their minds (or not).
-- Louis Corrigan
([email protected])
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