Biotech companies can either win big — or fail. What they return to the investor often depends on the size of the company.

Among the companies global money managers recommend are smaller companies that often team with larger companies to bring products to market. In exchange for financial aid, however, the small companies forfeit future royalties, limiting their upside. Larger companies that can finance much of the clinical testing before they seek out a partner get to keep more of the royalties, making that sort of investment more attractive. And the large companies, they do it all — and keep it all.

In interviews with Investment Executive, money managers recommended two smaller companies and a larger one: Switzerland-based Serono International SA, with revenue of $1.9 billion (all figures are in U.S. dollars, unless otherwise indicated) in the nine months ended Sept. 30; Britain’s Acambis PLC, with revenue of £17 million, or about $30 million; and California-based BioMarin Pharmaceuticals Inc. , with revenue of $16.2 million.

> Serono international sa. Heather Peirce, portfolio manager at AIM Funds Management Inc. in Toronto, likes Serono. Its prospects improved when one of the leading competitors to its Rebif drug —Tysabri, the so-called “leading edge” pharmaceutical for multiple sclerosis, produced by Boston-based Biogen Idec Inc. — was recalled due to side effects. As a result, Serono should be able to grow revenue and earnings “very strongly over the next five years,” says Peirce. Sales of Rebif were $934.4 million, or 53.9% of Serono’s total sales, in the nine months.

Peirce considers Serono’s valuation, at a recent 17 times 2006 projected earnings, very attractive. As well, she says, that price doesn’t factor in growth in Rebif or additional successes in Serono’s pipeline, which she believes will occur. The company’s pipeline includes four Stage 3 and three Stage 2 clinical trials, which should be completed by the end of 2006.

Serono has been the long-time world leader in fertility drugs, according to Peirce. Drugs include Gonal-f, its second-biggest revenue generator at $413.5 million in the nine months ended Sept. 30, or 23.8% of total sales. Serono also focuses on immunology, oncology and neurology, says Peirce.

There is also a possibility the company will be sold. Serono has hired New York-based Goldman Sachs Group Inc. “to explore strategic alternatives,” it says. In a recent report, independent investment research firm Sanford C. Bernstein & Co. LLC called New York-based Pfizer Inc. and Switzerland-based Novartis AG “the most likely buyers, given their strategic interests, fit and financing ability. As a buyer, either company could extract $400 million-$500 million in annual expense savings within three to four years, and both could find the deal accretive.”

Should Serono get taken over, Bernstein expects a price of $23-$25 for an American depository receipt vs $19 in mid-December, and 1,200 to 1,300 Swiss francs for the bearer share, a premium of 20%-30% over the recent trading range.

As of Sept. 30, Serono had 11 million registered shares with a nominal value of 10 Swiss francs, and 10.8 million bearer shares, including 642,000 Treasury shares, with a value of 25 Swiss francs. Each is entitled to one vote. Only the bearer shares trade, including as ADRs, with one ADR equal to one-fortieth of one bearer share. The family of Ernesto Bertarelli, Serono’s CEO, vice chairman and managing director, owns 58.4% of the shares and 75.9% of the votes.

Serono reported a net loss of $249.5 million in the nine months, vs earnings of $395.8 million in the same period a year earlier. The main reason was a $725-million charge taken for the settlement of an investigation in Massachusetts concerning commercial practices related to Serostim, a treatment for AIDS wasting. Sales of Serostim were $35.4 million in the nine months, down 16.8% from a year ago.

Serono makes strong use of collaborative agreements, listing 30 on its Web site. One, signed in May, is with BioMarin. The agreement is to develop further and commercialize two BioMarin products — Phenoptin and Phenylase, which have shown potential for the treatment of phenylketonura, an inherited metabolic disease that can result in serious neurological damage. In addition, preliminary clinical evidence suggests the active ingredient in Phenoptin, which is in Stage 3 clinical trials, may be useful in the treatment of other serious illnesses, including diabetes and cardiovascular diseases.

@page_break@Under the agreement, Serono — which has exclusive selling rights to these products outside of the U.S. and Japan, and shares equally in the costs following successful completion of Stage 2 clinical trials — made an up-front payment of $25 million to BioMarin and will pay milestone payments of up to $232 million in total, as well as undisclosed royalties on the net sales of these products.

A second agreement is with Rigel Pharmaceuticals Inc. , another small California-based firm that is among the companies recommended in this series. (See December 2005 issue of Investment Executive.) The agreement is to develop and commercialize cancer drug candidates from Rigel’s Aurora kinase inhibitor program, including R763, which is about to enter clinical trials. Serono will pay Rigel up to $160 million, with an up-front payment of $10 million in cash, and purchase of $15 million of Rigel stock at a premium.

> Biomarin Pharmaceuticals Inc. Andrew Waight, portfolio manager at Altrinsic Global Advisors LLC in Toronto and manager of CI Global Health Sciences Fund, recommends BioMarin.

This pharmaceutical company focuses on what Waight calls “orphan diseases” that have very small markets but for which drug developers can charge very high prices.

BioMarin has had three drugs approved: Naglazyme and Aldurazyme, which are both for carbohydrate-storage disorders, and Orapred, used primarily for the treatment of asthma in children. In October, the U.S. Food and Drug Administration approved BioMarin’s filing for Orapred OPT for the treatment of inflammatory conditions. The FDA will act on the filing by mid-2006. BioMarin added Orapred when it acquired the Ascent Pediatrics business from Arizona-based Medicis Pharmaceutical Corp. in 2004.

Aldurazyme is being developed and commercialized through a 50/50 joint venture with Boston-based Genzyme Corp.

In May, BioMarin paid $3.3 million for an exclusive worldwide licence — except in Japan — for Tokyo-based Daiichi Suntory Pharma Co. ’s Tetrahydrobiopterm. Tetrahydrobiopterm is the active ingredient in Phenoptin, one of the two products covered by BioMarin’s collaborative agreement with Serono.

BioMarin reported a net loss of $59.3 million in the nine months ended Sept. 30, down from the $105-million net loss reported for the same period a year earlier. Revenue was up 241.4%, to $16.2 million. Operating cash flow after net change in non-cash working balances was negative $44 million, similar to the negative $43.2 million the year before.

Long-term debt and acquisition obligations at the nine-month mark were $196.4 million, only slightly less than the $233 million in total assets. Shareholders’ equity is negative — to the tune of $65.4 million.

There were 73.9 million BioMarin shares outstanding as of Sept. 30. Boston-based Fidelity Management & Research Corp. held 11% of the shares as of Sept. 30. The shares were trading around $10 a share in mid-December, up from less than $5 earlier in 2005.

> Acambis Plc. Robert Beckwitt, a portfolio manager at Trilogy Advisors LLC in New York, which manages a number of funds for Toronto-based CI Investments Inc. , likes Acambis’s prospects.

Acambis specializes in research and development of anti-viral and anti-bacterial vaccines, putting it front and centre in the war against bioterrorism. It’s a prime candidate for money from the U.S. government’s Bio Shield program, which provides funding for vaccine development. It is presently working on smallpox, West Nile virus (with Toronto-based Cangene Corp. ), and a “universal” flu vaccine that would be effective against both A and B flus (most vaccines work only on one type or the other). Beckwitt adds that Acambis may have a development that could help with avian flu. It’s at an early stage, but Acambis “has the science,” he says.

In a recent report, Credit Swiss First Boston Corp. gives Acambis a “neutral” weighting because the majority of products in its pipeline are in early stages, leaving the stock “with few clear triggers in the near term.”

Acambis reported a net loss of £23 million (or $44.4 million) in the nine months, vs earnings of £22.6 million in the same period a year ago. Revenue shrank to £17 million from £62.4 million, the result of lower sales of its smallpox vaccine to governments, both because it has almost completed its contract to supply the U.S. Centers for Disease Control and Prevention and because of the current focus on the threat of a pandemic influenza.

Acambis had assets of £131.9 million as of Sept. 30, including £59.5 million in cash, and would be interested in acquiring products through licensing or partnership agreements. Long-term financial obligations were only £5 million.

There were 107.2 million Acambis ordinary shares outstanding as of May 27. Major shareholders included INVESCO Perpetual U.K. Investment Series (with 18%) and F&C Asset Management (with 9.9%). The shares can be bought as ADRs on Nasdaq, with one ADR equal to two common shares. The share price has been on a downward trend since early 2005, with the ADRs trading around $7.50 in mid-December.

Acambis started in 1992 as Peptide Therapeutics Ltd. and was renamed in 2000, after its 1999 acquisition of U.S.-based vaccine research firm OraVax Inc. Most of its operations, including R&D manufacturing, sales and marketing, and finishing is done in the U.S. The company has only one product on the market, Vivotif, the world’s only licensed oral typhoid vaccine, for which it has the North American sales and distribution rights, acquired in 2003 with its purchase of Florida-based Berna Products Corp.

As well, Acambis has what it calls a “unique arrangement” with the FDA, which allows it to sell two unlicensed smallpox-related products to the U.S. and other governments as stockpiles in case of a bioterrorist attack involving smallpox. These are its own ACAM2000 and Cangene’s Vaccinia Immune Globin. Acambis is Cangene’s agent outside North America and Israel.

Acambis is also developing another smallpox vaccine, Modified Vaccinia Ankara (MVA), under contracts with the U.S. government. Distribution of these products outside the U.S. and Britain is through Chicago-based Baxter Healthcare Corp., which is part of Baxter International Inc. Baxter is also involved in manufacturing MVA. IE