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No. of Recommendations: 55
Of mice and goats.

An actual, honest to God biotech Gorilla Game.

Delirious with RMBS profits I've been scouring the globe for investment opportunities. Sure, sure, I put much of it into Gorillas and or Gorilla Candidates but I cast my glance to the horizon as well. The next big thing: biotech. For the life of me I couldn't make heads or tails of this biotech world. As I looked further I found biotech companies ( like HGSI) which clearly have developed discontinuous processes for drug creation and development which revolutionize the efficient production of drugs. But no Gorilla Games.

Then I stumbled across it. It is mainly a story of mice and goats. But mainly mice. The two companies of interest are Abgenic (ABGX) and Medarex (MEDX). Now before you get too skeptical I will explain:

PROPRIETARY OPEN ARCHITECTURE

Yes. Both companies have developed bio-engineered mice. HuMAb mouse technology for MEDX and XenoMouse technology for ABGX.

What these mice offer is human immune systems. The immune systems of these mice have been altered to be completely human. The benefit is that these mice then secrete completely human antibodies. A remarkable achievement in the development of new bio-drugs.

These mice are protected by strong patents. Said patents have never come under question. These mice are also licensed to the drug industry.

Both MEDX and ABGX have licensed their mice out to the whose whose of the pharmaceutical industry. From Amgen to Schering-Plough. Everyone is stepping up to the plate to license these mice. And these deals do not come cheaply. The deals generally call for multi-million $ fees up front (ranging from $10 million to over $100 million), milestone fees for certain accomplishments (again in the 7 to 9 figures range) and then royalties upon product developments and sales.

Currently it is estimated that 20-25% of all biotech drugs in clinical or pre-clinical stages are making use of antibody therapy technology. This number is expected to increase perhaps up to 1/2 or more of all biotech drugs this decade.

A pharmaceutical developing such drugs has no choice but to go to either ABGX or MEDX for the drugs development both as to time to market advantages and as to developing drugs that actually work. As mouse cross-over antibodies tend to be rejected when injected into humans and sometimes cause severe allergic reaction. You need real human antibodies or nothing at all.

Thus, the technology is open and proprietary. It is of such nature as to be the focal point for the development of antibody treatment drugs. A nice, non-niche, place of the drug development world to be a focal point.

IS IT A DISCONTINUOUS INNOVATION?

Yes. Prior to this mouse technology development, mouse cross-over antibodies were used. And as stated above this solution was neither perfect, or at times, practical at all. And often times dangerous.

Further the time to market is dramatically increased as is the speed that target genes and illnesses can be tried as the mice will produce the proper human antibodies in a matter of several months.

CONTINUOUS TO THE USER?

Yes. Medical researchers love this stuff. It is like the engineer who can now plug numbers into a computer and get their answers over many scenarios.

With the antibody mouse technology you can now target your disease and have developed the appropriate antibodies for study in a matter of a few months.

HIGH SWITCHING COSTS?

The switching costs are of the GMST variety. (1) strong patents. (2) Even if somebody were to get around the patents, and survive the battle in court, both MEDX and ABGX have procured long-term licensing agreements (for example 10 years with Amgen) with the crem-la-crem of the drug research world form Millenium and Human Genome Systems to Amgen, to Schering-Plough, etc. The patents are strong, the technology very sound, the benefits and value of the technology enormous, and the long-term agreements and commitments are outstanding. These two companies are quickly locking up the entire industry. The Gorilla Game is already underway.

ACROSS THE CHASM AND IN THE BOWLING ALLEY?

As far as drug development methodology goes this technology is across the chasm and through the bowling alley. Everyone is using and demanding it (that is the players who can afford it).

As for product development: I'd say pre-chasm. Several blockbuster type drugs using antibody therapy have successfully hit the market. But this is less than 5 that I'm aware of.

.

TORNADO WATCH

The business model of these companies are two fold.

There is Tornadic like (or at least approaching) activity in regard to licensing and on-going drug development. Each new partner signed up is another large cash payment up-front, and milestone payments in the future. This drug development, enabling tool part of the process is very nearly in, if not already in the very start of the Tornado.

The enormous potential royalty streams down the road are still pre-chasm. They may never materialize. It all depends on how successfully these drug companies are at developing drugs.
Many drugs are being investigated, and are in the pipeline. Activity is rampant and growing rapidly, but may take many years to reach fruition (if ever).

What will push this second part (and possibly most lucrative part) of the business model across the chasm is further successful drug development.

IS THIS IMPEDIMENT LIKELY TO BE REMOVED?

Yes. Drug development efficiency is becoming more and more efficient and biotech drug development is leading that curve. Several blockbuster antibody therapy drugs have been brought to market. This decade (probably within the next 2-5 years) I believe many, many more of these drugs will hit the market en masse. Most, if not all of these drugs will have used one of the enabling technology mice in their development and creation. Creating a tremendous explosion or royalty income to these two companies which comprise the focal point/the enabling technology, for this industry.

Yes, the technology and money is there today (unlike it was ten years ago) to push drugs developed using antibody mouse technology from lab to market.

However, nevertheless, like high-temperature superconductors (which AMSC is now bringing to commercial market – another company I, and Gilder apparently is quite high on – but definitely pre-chasm) the development of new technology like this is speculative. It may take longer than we think, or it might take off 6 months from now.

Thus the impediment of getting drugs to market is likely to be removed. The technology and knowledge that wasn't in place ten years ago is in place today. Antibody treatment drugs have made it successfully to market in blockbuster style. It seems just a matter of time until many more (going through mouse enabling technology) do the same.

OTHER NON-GORILLA ASPECTS.

Both companies also have very good internally developed drug pipelines to go along with the mousey Gorilla game the two are in. A nice bit of icing on the cake.

CONCLUSION

This is a Gorilla Game. Might end up being two Chimps without a Gorilla. But these two chimps, maybe 1 Gorilla someday, will end up being the toll takers for a good portion of all drugs developed over the next decade or two.

How did I respond to my discovery of this Gorilla Game? I bought the basket of ABGX and MEDX using 17% of my portfolio. About time I got to buy something in the biotech world (except for one other small purchase I bought for my mother). And I feel like buying some more. Although, in prudent, conservatively aggressive Gorilla ways, 17% exposure to this part-of-the-way-across the-chasm (drug development aspect) and part-of-the-way-not-across-the-chasm technology (royalties from commercial products) is probably plenty of exposure for now.

But given what I described above, the GAP and the CAP for these two stocks seems enormous (although still largely visionary at this time). As Mike Buckley and I discussed regarding risk, I do not find these two stocks overly risky given MY perception of their GAP and CAP with their toll booth positioning within the biotechnology world. Royalties will amount to 3-5% of drug revenues. It is my understanding (but not confirmation) that ABGX's royalty rates are generally 5% or so; I think (but again haven't confirmed) but MEDX's are a mixture along the 3-5% level. But, again, this lucrative royalty aspect is not across the chasm. Treat it accordingly.

Of the mice ABGX's mice are generally considered superior. But MEDX's mice are no slouches, and they have resolved many of the perceived weaknesses of their product with a joint agreement with an Asian mouse. But a long-tail indeed.;-) Both companies enjoy enormous and as impressive as you can get value chains within the drug development world. ABGX's value chain is slightly better, but their internally developed drug pipeline is slightly inferior to MEDX's drug pipeline (again, the non-Gorilla aspect of the business).

Oh, about the goat. A goat with a human immune system has also been developed (apparently). The goat's use will be more to produce these antibodies in commercial quantities for distribution. The goat is inferior in regards to drug development. The vast majority of toll-taking will be done by the mice. The goat will just express large quantities of antibodies through milk once the mice have done all the hard work.

Tinker.
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