May 16th 2004: The last few days have been brutal for the smaller cap biotechs. This is a typical flight to safety, which occurs as investors get scared—a very political event. There are good values out there at these prices but one needs both the guts and the cash to step in. I am holding the current positions in the model and nothing new has happened to change the fundamental values in these companies. Prior alerts have talked about the risks and rewards in companies represented by the Model Portfolio.

A few readers have written worried about the drop in ConjuChem and Genaera. I don’t have any news other than a skittish market to explain these drops and they are not that far out of line with other small cap losses. I have not done any trading in my personal account in the last few days expect to buy two companies Nastech (NSTK) and Aeterna (AELA). I bought them both at slightly higher prices than Friday’s close. I am still doing some research on both these companies and may add them to the Model after I fully evaluate the risk. At first glance the risk for NSTK seems a lot higher than for AELA.

Nastech is an interesting story in the weight loss field. Their most important compound is PYY3-36, a small peptide produced in the gut, which signals a sense of satiety to the brain. The ying and yang of this system consists of ghrelin produced in stomach, which signals a sense of hunger and the intestinal peptide PYY that signals fullness. They both work in the brain at the level of the accurate nucleus (the PYY receptor is NPY2). The signals are integrated through the MCR4 (melanocortin receptor 4) pathway. Nastech has a nasal delivery system that apparently gets good distribution to the brain. I am not sure I believe their specific nasal delivery excipients can really alter the nasal mucosa junctions and thus modulate systemic and brain delivery in the manner they so neatly describe but it may not matter. I am doing more research especially regarding the patent situation—Amylin (AMLN) has IP in this area some of which they licensed from Curis (CRIS). They filed an IND to start studies using an injection route (not too smart but not a lot of alternatives for a peptide). Emisphere is also in the game with an oral delivery system but if past performance is any predictor they will self-destruct.  What is particularly interesting is that published work shows obese humans have a relative deficiency of PYY secretion (unlike the leptin story) and that they respond to an IV injection with a decrease in hunger (NEJM 349:10 Sept. 4 2003)). Early Phase I studies by Nastech using nasal delivery also showed a decrease in appetite and produced plasma levels similar to normal post-prandial levels. I also like that the drug is identical to a peptide fragment from the natural product and therefore wouldn’t be expected to be toxic or have major side-effect issues. Toxicity problems have killed most drugs in the weight loss field. A later stage multiple dose Phase I trial is ongoing and results will be available soon. This should show us whether appetite suppression continues with multi-dosing and whether any side-effects show up. It won’t tell us anything of significance about weight loss. In a phenotype like weight there are many interacting pathways and so one might expect that altering just one signal might not do the trick but on the other hand this looks like an important signal. Other companies also have an interest in PYY and Amylin is looking at a subcutaneous injection as their preferred route. NSTH is selling at $12.25/share with a market cap of $160 million. I decided to take a small position in my personal account before the Phase IC results are in. My reasons include the large market potential and my expectation that toxicity will not be an issue. It still remains to be seen if PYY will cause weight loss and how the IP situation plays out. If Phase Ic trials are successful and I think they will be I may put NSTK in the Model Portfolio.

The other company I am looking at is Aeterna (AELA). The stock is at $7.34/share with a market cap of $324 million. This is a Canadian company trading on NASDAQ that until recently got no respect. There prior claim to fame is a proprietary shark cartilage product in an ongoing cancer trial---most investors including myself have little confidence in that product. What changed is that recently AELA bought a German company called Zentaris (formerly part of Degussa) which has a host of products in oncology, endocrinology and infectious disease and AELA’s majority owned (61.8%) cosmoceutical firm, Atrium, is spinning off increasing revenue.  In 2003 AELA’s revenue was 166 million Ca, $120 million came from Atrium and $46 million came from the Zentaris deal (of that $20 million will be recurring for the next 9 years). As of the last quarterly they had $53 million Ca. cash. The real excitement is from the list of drugs that Zentaris contributed. One of the more important is Perifosine, an oral AKT inhibitor, which is a first in-class compound. Keryx (KERX) owns the North American rights to Perifosine and has multiple Phase II trials ongoing in the US. It is not clear to me at this point whether AELA gets royalties or any milestones in N.A from Keryx. AELA will have data from a Phase I/II trial in combination with radiation at ASCO next month. There are a number of other Zentaris products in the clinic including a technology platform for LHRH partial antagonists for endometriosis, fibroids, BPH as well as an oral leishmaniasis drug partnered with Roche. They will be hosting an investor conference in NYC tomorrow. I just bought some Aeterna for my personal account last week at a higher value than Friday’s close. I am adding 5000 shares of AELA at $7.34 to the Model Portfolio.

As a matter of disclosure I want all readers to know that I own many of the stocks I write about in my personal account and always maintain a long position. I am not a stock broker or a registered investment adviser.  I also write about some of these stocks in alerts for BioPortfolio, which can be found at www.bioportfolio.com . Biotech Insight is a  web-based newsletter published and archived at www.biotechinsight.com. Alerts and newsletters are sent electronically to subscribers.  The following is further disclosure: Dr. Garren is an advisor to two funds investing in biotechnology. I recommend many of these same stocks to the investment funds mentioned above. It should be noted that certain funds go both long and short. The information in this column under no circumstances serves as a recommendation to buy or sell stocks. Please also see the disclosure about Biotech Insight archived on BioPortfolio.

Ron Garren MD
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Ronald Garren, the editor of Biotech Insight is a member of Biotech Insight Management, LLC, a California registered investment adviser and the general partner of a hedge fund that invests in biotechnology companies, including some of the companies discussed in this newsletter. Garren also consults for both a second large hedge fund focused on the healthcare industry with a heavy emphasis on biotech and InvestBio an investment and information devision of  Diversified  Biotech Group Investments of NYC. Many of the stocks discussed in the newsletter and alerts are also included in the hedge funds, recommended for investment to InvestBio (Diversified Biotech Group Inc. a subsidiary of InvestPrivate Inc.)and owned personally by Ronald Garren.