Many biotech companies are banking on new ideas and technologies to create cures and treatments for significant, long-standing diseases. That is not to say they don’t face significant challenges, but the opportunities are also abundant.

In interviews with Investment Executive, global money managers recommended four such firms. One is California-based Genentech Inc., the world’s second-largest biotech company, with 2005 revenue of $6.6 billion (all figures are in U.S. dollars). But the managers prefer to hold Genentech through Swiss pharmaceutical company Roche Holdings AG, which owned 55.5% as of Sept. 30.

The others are Massachusetts-based Sepracor Inc., which had nine-month revenue of $509.8 million; Imclone Systems Inc. of New York at $284.7 million in the same period; and California-based PDL BioPharma Inc., which changed its name from Protein Design Labs Inc. earlier this year, with revenue of $193.3 million in the nine months.

> Genentech Inc. “The company launched a number of successful products recently, which have proven more effective than existing products or did not have the horrible side effects,” says Charles Burbeck, head of global equities at HSBC Halbis Partners in London.

Cancer is Genentech’s main franchise, an area in which there is huge potential, given the need for more powerful and more effective drugs. The company’s three top sellers are cancer-treating medications: Rituxan, which had 2005 sales of $1.8 billion; Avastin, which had 2005 sales of $1.1 billion; and Herceptin, which had sales of $747.3 million. Its sixth top seller, Tarceva, with sales of $274.9 million, also treats cancer.

These four drugs combined account for almost $4 billion in sales, or 73% of the $5.5 billion in total product sales. All the company’s sales are in the U.S.; Roche has the right to sell Genentech’s products globally. Royalties on products amounted to $935.1 million, with contract revenue of $210.2 million.

Genentech’s pipeline is also heavily weighted toward cancer treatment, which accounts for one of two products in Phase I testing, four of nine in Phase II testing, and four of six in Phase III testing. Three in the pipeline are preparing to file with the U.S. Food and Drug Administration, and three of four are awaiting FDA approval.

Both Burbeck and Heather Peirce, a portfolio manager at Aim Funds Management Inc. in Toronto, recommend exposure to Genentech through Roche.

Investors can also get some exposure to Genentech through another Swiss pharmaceutical company, Novartis AG, which Peirce likes. Novartis owns 33.3% of Roche subsidiary Roche Holding Ltd., through which Novartis is deemed to have an indirect beneficial ownership of more than 10% of Genentech.

Genentech, which started in 1976, had net income of $1.3 billion in 2005 vs $784.8 million a year earlier. It spent $1.3 billion on research and development, or 19% of revenue. As of Dec. 31, 2005, revenue was up 44% year-over-year; long-term debt was around $2 billion.

Its stock, which trades on the New York Stock Exchange, closed at $93.34 a share on Jan. 10; it has been trading in the $80-$100 range since June. As of Dec. 31, there were 1.1 million shares outstanding — it is widely held.

> Sepracor Inc. This company is touted for developing Lunesta, the first insomnia drug to work long-term, says Robert Beckwitt, portfolio manager at Trilogy Advisors LLC in New York. Beckwitt, manager of a number of CI Investments Inc. funds, adds that all other remedies are short-term. About 70 million people in the U.S. suffer from insomnia. Beckwitt expects Lunesta sales could top $1 billion in a few years.

Sepracor has two other products in the market: Xopenex and Xopenex HFA, both for asthma and chronic obstructive pulmonary disease.

The company sells three products through partners: Allegra, Clarinex and Xyzal/Xusal, all antihistamines. Allegra went off patent in the U.S. in September, but is still under patent in other countries.

Sepracor has another medication for chronic obstructive pulmonary disease — Arformoterol — under FDA review. Hypertension medication Amiodipine is in Phase II testing and two depression medications are either in Phase I testing or close to testing. There are two more products in the pre-clinical stage, one for Parkinson’s disease and one for psychosis.

In January 2005, Sepracor signed a three-year licence, option and collaboration agreement with California-based ACADIA Pharmaceuticals Inc. to develop new drugs for central nervous system disorders.

@page_break@Sepracor has exclusive global rights to develop compounds resulting from the collaboration in any field except prevention or treatment of ocular disease. It also has an option to select one of ACADIA’s pre-clinical programs to use in combination with Lunesta.

Sepracor will give ACADIA $2 million in annual research funding, plus milestone payments for products developed in the collaboration. Sepracor will also pay royalties on sales. It paid $10 million, a 40% premium, for 1.1 million ACADIA shares.

Launched in 1984, Sepracor lost $32.2 million in the nine months ended Sept. 30 — a significant improvement from the $261.9 million it lost in the same period a year earlier. The company spent $104.1 million, or 20.4% of revenue (which more than doubled) on R&D. Its convertible, subordinated debt was $1.2 billion.

Its share price was $51.78 on Nasdaq on Jan. 10, well below the $65 of early March 2005. Like most biotechs, its shares sank when the biotech bubble burst in 2002. It had 105,599 shares outstanding as of Sept. 30.

> Imclone Systems Inc. This firm has one product on the market, Erbitux. The monoclonal antibody is a genetically engineered version of a mouse antibody containing both mouse and human components. It was approved for treating colorectal cancer in February 2004 and is in Phase III testing for other cancers.

Erbitux is distributed and marketed by Imclone’s partners, including New Jersey-based Bristol-Myers Squibb Co. in the U.S. and Merck KGaA of Germany elsewhere.

Imclone specializes in cancer research. It has two other products in Phase II testing and four in Phase I testing. The company is also working on a cancer vaccine.

Andrew Waight, portfolio manager at Altrinsic Global Advisors LLC in Toronto and manager of CI Global Health Sciences Fund, calls Imclone a “good opportunity” as its shares are trading at a discount.

Imclone made $85.8 million in the three quarters to Sept. 30, down from $126.8 million in the same period the previous year. Revenue growth stalled with license, milestone and manufacturing inflows falling sharply, almost offsetting the rise in royalty and collaborative payments; expenses rose to $213.1 million from $135.6 million. Long-term debt was $600 million.

The stock, which trades on Nasdaq, closed at $35.29 a share on Jan. 10, down from more than $80 in mid-2004. There were 83.9 million shares outstanding.

> PDL Biopharma Inc. This is another Beckwitt pick, which he describes as “one of the most compelling biotech stories in the U.S.” because of an “amazing set of technologies to develop new drugs.” PDL also licenses other firms to use its platform, which has resulted in several products on the market.

PDL has Cardene IV for treating hypertension, Retavase to prevent heart attacks and IV Busulfex for treating leukemia on the market.

PDL has six products in the pipeline: one in Phase III testing, one in Phase II/III testing and four in Phase II testing. They are aimed at treating cancer, heart failure, immune-mediated diseases such as multiple sclerosis, asthma, transplant maintenance, liver cirrhosis, inflammatory bowel disease and rheumatoid arthritis.

Beckwitt believes the firm’s success will continue, and says this makes it a potential takeover target.

Last March, PDL bought New Jersey-based ESP Pharma Holding Co. Inc. Revenue rose 164% but the firm lost $126.7 million in the nine months to Sept. 30— a much bigger loss than the $38.7-million shortfall in the same period a year earlier. Total R&D was $125.1 million, or 64.7% of revenue, and long-term debt was $7.4 million.

The share price was $31.48 on Nasdaq on Jan. 10. There were 112.6 million shares outstanding as of Sept. 30, and Boston-based Fidelity Management & Research held 12.3% of them. IE