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COMMENT

A Tempting Biotech Bet

By Ed Bowsher (TMFArkle)
June 7, 2006

It's been a good month for biotech fans. Shares in Cambridge Antibody Technology (LSE: CAT) soared 65% last month after AstraZeneca (LSE: AZN) said it was buying the company.

Then Neutec Pharma (LSE: NTC), the superbug specialist, did even better. Its share price has more than doubled on news that Swiss drugs giant Novartis wants to buy the firm.

So I think it's a good time to look at one of the UK's better biotech companies -- Protherics (LSE: PTI). I'm not saying that Protherics is an inevitable bid target, but I do think it looks undervalued.

The most exciting product in the company's portfolio is a drug for severe sepsis called Cytofab. Sepsis is a nasty illness which results from uncontrolled infections. It affects around 3 million people each year worldwide and approximately a third of those sufferers die.

Protherics reckons that Cytofab should significantly improve sepsis treatment. Results from a clinical trial suggest that patients who have taken Cytofab leave the hospital ward five days earlier, and the drug may reduce the number of deaths by a third.

What's more, AstraZeneca shares Protherics' enthusiasm and in-licensed Cytofab last year. Astra is obliged to pay £16.3m to Protherics and the milestones could eventually hit £195m. On top of that, Protherics will receive a 20% royalty on wholesale revenues.

Analysts at Piper Jaffray have estimated that peak sales could be $1.5bn (£800m), so wholesale revenue might be $1.2bn.

Not bad for a company with a £220m market cap!

A final stage Phase III trial should commence next year and Cytofab could be launched in 2010/11. Of course, there's no guarantee that Cytofab will receive regulatory approval; a typical drug at this stage has a 50 to 60% chance of success.

Yes, a Cytofab failure would be a big blow, but Protherics is not a one-drug business. The company already has two products on the market -- Digifab and Crofab -- the latter treats snake bites. As a result, Protherics reported revenue of £17.7m in this morning's 2006 results. The operating loss was £9.5m.

Admittedly, 2006 revenue was slightly down due to a reduction in inventory by Protherics' US sales partner. I'm not too worried by that fall and I see potential for higher sales and a significantly higher profit margin as Protherics simplifies the manufacturing process.

Valuation

It's never easy to value a biotech, but I think you can make a strong case that Protherics is cheap.

Profits from Crofab and Digifab should rise from here and analysts are forecasting earnings of 1.8p a share in 2007. Clearly those earnings don't justify the current 85p share price on their own, but they should provide some kind of floor for the price. And those profits also reduce the need for any future share issue by the company.

I reckon that Protherics could receive royalties of $200m a year from Cytofab, and that revenue stream could start in four years time. What's more, there are three other promising products in the pipeline which I don't have space to discuss.

Protherics is certainly a high-risk bet, but it's a tempting one too.

More: Year Of The Biotechs | Looking For Biotech Bargains Pt II | My Favourite Biotech

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