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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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Wow Tinker, thank-you for an excellent post representing some beutiful detective work. I got to get started following your trail!
MStew
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Tinker--

What if somebody makes a pig, or a rat, or a sheep,(or chimp or monkey <LOL>) with human antibody production capability? Costs might even be lower (pigs live longer than mice, e.g., make more antibody per organism, harvesting antibodies might be easier etc.). Would patents protect this "monkeying" of the mouse gorillas-to-be?
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Tinker, thanks for the great report, I'll keep an eye on these companies. Now that you're in the biotech arena I was hoping you could look into a couple of companies and inform the board of your thoughts. Celera (CRA) seems somewhat similar to ABGX and MEDX in that they plan to receive the majority of revenue through licensing fees, could this become a gorilla game. There are several others the I've been following, Caliper (CALP) and Aurora Biosciences (ABSC), could you or anyone else on the board pass on their thoughts. I wrote reports a few months ago on the potential for these two companies (not GG reports):

AURORA BIOSCIENCES:

Aurora Biosciences provides solutions to enhance the drug discovery process. The Company's core technologies include a broad portfolio of proprietary fluorescence assay technologies; its functional genomics GenomeScreen™ program; and its ultra-high throughput screening system (UHTSS™ Platform) and subsystems to miniaturize and automate assays derived from those technologies within a computer-controlled integrated system, capable of searching through expansive libraries of compounds to identify those that might lead to new medicines. These technologies allow its customers to enhance and accelerate their drug discovery process. The rapid increase in compound libraries have created many opportunities for drug companies but unfortunately, has also created bottlenecks in the drug discovery process. Due to its complexity, the screening and identification of compounds as therapeutic targets is becoming increasingly difficult. The objective of Aurora is to address these challenges and develop solutions that enhance and accelerate the customer's effectiveness in discovering novel therapeutics. Companies can either choose to outsource to Aurora or acquire Aurora technology to enhance in-house capabilities.

In late January, the company also announced that its functional genomics initiative had successfully analyzed over half a billion discrete cells derived from 20 million independent GenomeScreen™ clones in one day. This technology acts as a search engine to rapidly scan the genome of living human cells to find genes associated with specified diseases or physiological processes. This allows Aurora to rapidly identify commercially relevant genes, and to directly develop screens for drug discovery, faster and more efficiently than existing methodology.

It's Current customer list reads like a who's who of the drug industry and continues to grow. Customers include American Home Products, Becton Dickinson, Bristol-Myers Squibb Company, Clontech Laboratories, Inc., Cystic Fibrosis Foundation, Cytovia, Inc., Eli Lilly and Company, Exelixis Pharmaceuticals, F.Hoffmann-LaRoche Ltd., Genentech, Inc., Glaxo Wellcome, Merck & Co., Inc., National Cancer Institute, Pfizer, Inc., and Pharmacia & Upjohn, Inc and Warner-Lambert.

As competition in the biotech industry increases so too will Aurora's revenue growth. Also, unlike many companies in the arena, Aurora is profitable, taking in $0.35 per share in the most recent quarter versus estimates of around $0.20. Revenues are almost doubling on a year over year basis to $20 million in the last quarter.



CALIPER TECHNOLOGIES:

In the world of digital information, two technology trends, miniaturization and integration, have enabled the development of huge industries. Because of cumbersome and expensive laboratory methods, chemical and biochemical information is still largely inaccessible on a routine basis. Conventional laboratory space and operations are built to accommodate human beings. Caliper Technologies' (www.calipertech.com) LabChipTM turns this paradigm on its head, automating and integrating procedures, and rescaling experimental and analysis platforms to fit on a chip. The LabChip when used in concert with experimental protocols developed in software, comprise the heart of a nanoscale laboratory. State-of-the-art fabrication processes result in highly uniform chips with superior reproducibility as compared with devices manufactured using conventional technologies. Welcome to the nascent world of microfluidics, where laboratory benches cluttered with chemistry paraphernalia are being replaced by a new breed of devices built around chips and other elements--some small as a fingernail--that are the counterpart of a PC's microprocessor. These labs-on-a-chip contain tiny mazes of channels, valves, and chambers through which minute amounts of liquid chemicals can be pumped and reactions monitored. Using no moving parts and requiring little or no assembly, labs-on-a-chip can measure and dispense volumes as small as one picoliter, an incredible fifty-millionth of a drop of water. That's a spectacular advance, because chemicals used in drug research cost as much as several hundred thousand dollars an ounce. Some DNA samples are just as precious. By handling such tiny quantities, microfluidics makes possible a proliferation of experiments that would have been unaffordable a few years ago.

The worldwide market for various analytical instruments used in chemistry and biotechnology is about $16 billion a year, and a large portion of it can be miniaturized. Agilent (former subsidiary of HP) has partnered with Caliper and is using LabChip™ inside of its Agilent-2100 Bioanalyzer. The companies say that together they will spend $100 million over the next several years to develop and commercialize lab instruments using microfluidics. About 80 companies worldwide are working in the field, and range from large established firms such as Motorola and PE Corp. to a flock of startups founded in the past few years. Caliper's technology was the first to be released and thus has first mover advantage in the industry. The Company is working in two important areas. To speed the search for new medicines through its LabChips for the high-throughput screening of drug candidates. Using a method called combinatorial synthesis, pharmaceuticals companies are now able to generate "libraries" containing hundreds of thousands of compounds that they want to test against "targets"--biological molecules inside the human body, including gene segments, that they hope to block or activate to effect cures. Before long, each leading drugmaker's library is expected to contain a million or more compounds. Caliper's other work led to its partnership with Agilent Technologies. DNA "sizing" was chosen as the first task for Agilent's HP-2100 Bioanalyzer because it is so widely performed. But the machine, which with peripherals costs $19,500, can run any experiment for which Caliper's designers have created a specialized LabChip. Like kids popping game cartridges into their Nintendo players, scientists will be able to load the appropriate square plastic modules, which encase a disposable glass chip etched with microplumbing tailored to each experiment. Yet another source of revenue for Caliper's technology is with the military. Suspecting that an enemy may be unleashing deadly anthrax, say, or plague or smallpox, a medical corpsman will be able to open a portable device no larger than a suitcase and conduct a test on material gathered by a helicopter-borne-air-sampling device. Within a half-hour the device will notify the medical officers whether an attack has taken place and what the substance was. The battery-powered instrument, which can be carried by hand, gives answers that now would require a mess of equipment cramming the back of a Humvee, as well as a trailer-mounted electric generator.
For the year ended December 31, 1999, the company reported a net loss of $14.4 million, or $0.92 per share. This compares to a net loss of $3.0 million, or $0.21 per share, during 1998. Total revenues were $12.1 million in 1999 compared to $8.2 million in 1998, an increase of 48%. Cash and investments totalled $100.2 million at December 31, 1999. This figure includes net proceeds from the company's initial public offering of $75.9 million. These financial statistics are virtually insignificant since Caliper and Agilent did not even begin shipping their product until late in the year. The true story will be seen as the current year progresses, if the company can live up to the hype it's created, there remains significant upside to the stock.




Hope to hear everybodies imput :)

Krash
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Looks like I opened a can of worms. Gotta love the web. Here I thought I found one of the very few Gorilla Games going on in bio-tech and out of the wood work come more fascinating, emerging market technologies that may be a G&K type of game. This biotech industry certainly has the potential to at least equal if not surpass both the computer and Internet (not including infrastructure). I'm not sure if it'll equal the Internet infrastructure business (this decade anyways).

Krash, thanks for the post. I'll be interested to hear others on this topic. This is truly revolutionary technology. It may do for chemical and biological industries what the PC did for computers back in the 1960s. Many, many people got rich off of that revolution (if they just would have held on).

Tinker

P.S. Anyone know of any newsletter or sources (kind of Gilderish type of stuff) on biotech to help a biotech G&K Gorilla hunter along?
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Have you guys looked at Maxygen? Synthetic evolution of proteins for biotech applications.

Ticker MAXY

Agustin
(no position on this sector after getting out of CRA and HGSI)
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Guys,

I also suggest you take a look at the recent debate we had on Silicon Investor in regards. My enthusiasm for an idea doesn't necessarily make it right. And in fact I bring the issues up to debate the merits. In this case, I'm not so sure I'm that far off (in specific biotech instances) but I don't think that is the general consensus of those who've I've heard from on the topic.

In general, I don't think most biotech companies like Amgen, or even Celera are playing a G&K game. Although a case might be made for Celera and maybe someone will like to make it. But from my cursory analysis I don't think so.

But in some instances, Caliper for one, a G&K game may exist. In fact I'm absolutely positive that Caliper's market is a G&K market. It involves the proprietary production of chips. It really isn't much different from the semiconductor market. I haven't got the chance to look closer at ABSC yet.

But in most instances, such as AMGEN and Millenium, or HGSI, or INCY type companies, there just isn't a GG game or even Royalty game afoot.

Tinker
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I just want to clarify. This does not mean that Caliper is a Gorilla or a King. Just that the structure of its market is very similar, if not nearly identical to the SiC semiconductor market. It is not identical to the computer processor market where technology must necessarily conform to a standard.

Thus, if CREE can be a Gorilla (and maybe or maybe or not it can, this is debatable) then Caliper is in a market that can produce a CREE like entity given the IP required to create the micro-fluidic chips. None has yet sprung. And none may ever spring, although at this time there seems to be only 3 candidates in the market (one of which is private).

Tinker
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Here's a Caliper report..

http://boards.fool.com/Message.asp?id=1030064000632000&sort=id


Not sure how detailed it is, but better than nuttin.


I know AFFX is a chip company making chips for Biotech companies, although i'm not sure if their a competitor to Caliper?
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In regards to the ABGX MEDX discovery recently announced by TinkerShaw, I must say he is on to something. I have been following four companies in that area for a little while now, and have accumulated some pretty cool info.

First of all, there is one other company that has fully humanized monoclonal antibodies. Cambridge Antibody technologies, located in England (CMBHF), also has a method for mAB's (monoclonal antibodies). Protein Design Labs, whom some of you perhaps heard about recently (they lost a patent, took a plunge), has a drug out that uses monoclonal antibodies, but they are not fully humanized. They contain a small amount of mouse antibody, which can lead to a negative response. I see the potential for humanized antibodies in treatment applications as huge. Bacterial infections could be killed with non-antibiotics, which is a big step towards a positioning against some of the newer superbacteria that are resistant to previous types of antibiotic treatments.

A few snippets on the companies tinkershaw has found. ABGX is in a partnership with Millenium Pharmaceutical (MLNM). Their agreement has ABGX contributing their Xenomouse technology and receiving royalties from any drug developed that employs it. Also, they have a research partnership with Corixa to develop theraputical mAB's and test them against Corixa's antigens.
MEDX also aligned itself with a big pharmaceutical, Regeneron (REGN). Under their agreement, both companies will participate in preclinical research and testing, and any drugs produced will be jointly marketed. And in a move parallel to abgx, MEDX just today inked an agreement with Raven Biotechnologies (cool name)(private i think) to test MEDX's HuMAb-Mouse technology against raven's antigens.

It seems both those companies are pretty much mirroring each other's approach. But the company I really like the mAB area of things is Cambridge Antibody in england (as was previously mentioned)(CMBHF still). These guys have agreements with such powerhouses as Pfizer, Genentech, Eli Lily, and Human Genome Sciences to name a few. They also have a couple drugs that are set to enter phase III of clinical trials. Which means a probable release is not that far down the road, assuming phase III is successful. Their 1999 annual report can be found below:

http://www.cambridgeantibody.com/investor/catannualreport1999.pdf

whew, that was somewhat longer than expected, but I hope it's helpful nonetheless.

phil.
for more info, head over to ElricSeven's board, some great bio discussions reside.
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ABGX makes a mouse which is used by a drug company to look for a response to a compound already developed or under development. The company gets fees and if the compound becomes a viable drug ABGX gets royalties in perpetuity. CRA gets fees for access to a database which the drug companies have to use to develope a drug and if that becomes a viable drug then CRA gets royalties. I believe ABGX has better prospects.
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Hi Fools,

I`ve been lurking for a while and thought I`d post some European news. I have to translate the details from German into English so it´s a bit tough. Please bear with me.

The crux is the mouse thing right? Morphosys are able to do the same thing but "synthetically" with HuCal.

Any comments on this shooting EU star would be welcome.
I`d certainly like to know if its a Gorilla with real DNA.

Rob
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Y2Krash,

In regards to CALP, they have a competitor named ACLA that IPOed last week.

I believe they may be in litigation with each other over some patents.

Sorry if you already knew about them.

Aridian
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TinkerShaw,

I passed along your original post over to Elric7's Research Corner, a mssg board here at TMF.

For those of you not familiar with Elric, he seems to be regarded very highly among the biotech posters at TMF.

There is also a biotechnology board at TMF as well.

I think you could find a great deal of useless info or resources from the posters on these boards.

I am glad to see some interest in Biotech, because I do believe a company like CRA, that deals in information, can be considered a technology play.

They are not looking to profit from drugs that they themselves create, but through the information they can deliver to companies about the human genome.

On the CRA board, there is a link on the upper-left for Elric7's unofficial Celera FAQ...it may be worth a look.

Aridian
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I meant to say "USEFUL" information from these posters!

Aridian
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Tinker,

Great post and as an aside I am a great fan of your investing philosophy. However, having a bit of knowledge in this subject as well as working for a company that is developing a humanized antibody, I felt like I needed to chime in here. While fundementally I agree that the field of antibody humanization is an ideal place to look for potential investment (note I did not use the "G" word), I urge caution. I believe that the true "tornado" type growth will come from the information elucidated by the genomics effort...or as is the current in vogue term "functional genomics." However, as those of us that do drug discovery will attest, creating antibodies one mouse at a time is not what I would describe as high-throughput. I concurr with one of the earlier posts that the place to look is at CAT (FTSE) or Morphosys (Neuer markt). These two companies do screening for humanized antibodies by using phage display (a very powerful technique designed for highthroughput screening of 10s to 100s of millions of possible antibody combinations at a time). What is even more exciting about this technology is that is allows for the creation of antibody that might not otherwise be create in an animal...let me explain.

Suppose you have a drug target that is very similar between man and mouse (not a big assumption). Moreover, this drug target is important in the every day functioning of the animal (also not a big assumption). By immunizing the animal with the drug target in order to get the animal to produce antibodies against the drug target, you will probably not get very good antibodies against the target. This is because the animals immune system will not create a response to "self." However, by removing the animal and using a bacteriophage (viruses that attack bacteria) system, antibodies to any protein can be easily made. This is not to say that there are not problems associated with the phage techniques (antibody maturation etc.) however, in general this a very powerful technique and the only one IMO that will be able to be incorporated in the functional genomics revolution.

What makes this even more interesting is that these two companies are currently locked to a very ugly patent battle (a la QCOM vs ERICY).

Yo.
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Yo,

A bit of clarity there, thanks. I still haven`t worked out the "Vorsprung", the NM firm you mentioned, has over CAD. But with Bayer and Millenium agreements concluded (March 20th) they are obviously in the picture. The results obtained with HuCAL are superior offering a library of more genes. Also competitive edge with greater amount of potential material, manufactured synthetically. Another candidate is MWG Biotech but perhaps not a challenger at this stage.

Rob
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A few days old but there you go

Das in privatem Bestitz befindliche Unternehmen Raven Biotechnologie und Medarex haben heute die Zusammenarbeit zur Identifizierung therapeutischer Antikörper bekanntgegeben.

Die Suche bezieht sich schwerpunktmäßig auf Krebsantikörper, aber auch auf weitere Krankheiten. Im Rahmen der Kooperation wird Medarexs HuMAb-Mouse™ Technologie zur Entwicklung menschlicher Antikörper gegen von Raven neu entdeckte Antigene einsetzten werden.
Raven hat das Recht zur Nutzung dieser Technologie gegen eine Reihe von Zielen. Medarex erhält Forschungszahlungen, Lizenzgebühren und Meilensteinzahlung, sowie Gewinnanteile von Produkten, die aus der Zusammenarbeit hervorgehen.

And now get yer diKschunnurries out. Have fun!

Foolin

Rob


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Hey guys,

Thanks for all your input. This really is a rapidly developing and explosive industry where discontinuous innovation can pop up at any time. I still think the use of G&K tenets can be helpful in picking biotech candidate companies. But I just want to make clear to everyone, so there is no mistake, you don't replace your core Gorillas with biotech Gorilla Candidate type companies. We don't know how well the framework will hold up with biotechs and the technology is changing fast. These markets are just not mature enough. What I do think G&K provides in biotech is a tool to help you make better selections in this emerging area, if you so choose to do some dabbling in the area.

But aside from that I'll check our Elric's board and look into FTSE and Morphosys and continue my education.

Thanks all.

Tinker
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About Maxygen: I took a serious look after reading at:

http://moneycentral.msn.com/articles/invest/models/5248.asp

Sample:

Maxygen's work has wide scope
Here's why I like Maxygen, which was first suggested by a reader in December: Unlike most companies in the biotech sphere, this company doesn't target a single interesting market -- like osteoporosis, cancer or sexual dysfunction. Instead, it applies next-generation genetics-engineering techniques to solve problems in a wide range of multibillion-dollar markets, from the improvement of the enzyme that helps laundry detergent make your whites whiter to better farm-animal vaccines and enhanced soybean seeds.

The strength of this business plan is its diversity and potential for speed -- and there is no underestimating the latter. While genetically engineered proteins intended for human ingestion can wend through the federal regulatory maze for many costly years and still never emerge, zippy new molecules intended for bovines or bathwater are very often approved with a hand wave. If they work in the lab, they can move quickly to industry or the field and start making money. Better yet, Maxygen retains royalty rights to the compounds that it creates under contract from industrial titans like DuPont (DD, news, msgs) and Novo Nordisk (NVO, news, msgs), creating the potential for annuity-like streams of dollars that flow for decades.

Founder of string of biotech successes
Zaffaroni learned the lesson of focusing on biotechnology platforms -- or sets of tools -- rather than specific drugs midway through his career. His earliest success came in 1951 with Syntex -- the Mexican pharmaceutical manufacturer that developed the Pill for contraception. He went on to found the eponymous ALZA in 1968, as the pioneering developer of drug-delivery systems, such as skin patches and time-release capsules. Then came DNAX in 1980, which specialized in combining genetic engineering with immunobiology. Affymax came next, in 1988, to pioneer work in the new field of combinatorial chemistry. It was followed by Symyx in 1993, to focus on combinatorial materials; Affymetrix (AFFX, news, msgs) in 1993 to develop a tool called the GeneChip that revolutionized genomics research; and lastly, Maxygen in 1997 to hurry evolution with a set of DNA-shuffling techniques called "molecular breeding."

The scorecard for investors: DNAX was sold to Schering-Plough (SGP, news, msgs) in 1982 and Affymax went to Glaxo Wellcome (GLX, news, msgs) for $533 million in 1994. Of the currently independent firms, Affymetrix today fetches a market capitalization of $6 billion, Maxygen is worth $5.2 billion and Symyx is the baby of the family at $1.3 billion.

Gene-shuffling has wide application
But enough of the past. What makes Maxygen, in particular, a candidate for a really big market capitalization someday is that, in addition to generating immediate revenue by licensing its high-speed gene-shuffling technology to industrial or pharmaceutical concerns, it retains the potential for high-margin, product-development revenues of its own.

Maxygen already has more than 40 products in the pipeline, which is a lot. In case you're just catching up with investments in biotech, take note that these companies need just a couple of hits to become wildly successful. Amgen (AMGN, news, msgs), for instance, has grown to a $60 billion market cap largely on the strength of just two drugs: Epogen and Neupogen. Meanwhile, Immunex (IMNX, news, msgs) has a $31 billion market cap on the strength largely of three: Enbrel, Leukine and Novantrone.

So what's the big deal with gene shuffling? Think of evolution as if it were a game of poker in which players are dealt genes instead of cards. To develop a better human being or stalk of corn over the past few million years, Mother Nature keeps shuffling her deck of chromosomes, via the process of procreation, until she gets a winning combination -- a genetic royal flush. This takes a long, long time. Eons, in fact. Classical breeding techniques developed by Gregor Johann Mendel in the 19th century sped up the process a great deal, but principles and equipment developed in the past decade by first-generation genomics companies like PE Biosystems (PEB, news, msgs), Affymetrix and Gene Logic (GLGC, news, msgs) vastly accelerated the pace. Now, Maxygen's techniques take the process up by an order of magnitude -- allowing scientists to shuffle genes at an astonishing rate. What once took generations now takes weeks. In the past 25 years, the biotech industry has created fewer than 50 therapeutics for the treatment of disease. Maxygen's techniques provide a faster, more efficient way to create the next 500 products.

An industry with dramatic growth potential
The company is currently in a quiet period as it prepares to sell an additional 1.5 million shares to raise money for general corporate purposes, so its executives were not available for interviews. However, a biotech analyst, who also declined to be quoted by name due to the quiet period, said that applications for Maxygen in the chemical industry alone could potentially be totaled in the tens of billions of dollars. In an interview conducted in early February, he said: "Right now the genomics industry is in a time frame that's equivalent to when the Internet consisted of America Online and Prodigy, circa 1992. There's been a lot of wealth created since then in the Internet, and I think the value in names like Maxygen could ultimately be much more significant."

In summary, it appears that Maxygen can play a key role anywhere that DNA can encode something worth money -- from vaccines, anti-cancer drugs and new-age nutraceuticals to enzymes that turn cellulose into cheap fuel. Indeed, it's hard to imagine an industry where, in 10 years, you couldn't see the life sciences finding new and improved applications. One recent deal with mining giant Rio Tinto (RTP, news, msgs), for example, calls upon Maxygen to develop ways to reduce carbon-dioxide emissions from industrial processes.

Combine those ambitions with a gold-plated management team and board, cash and equivalents of $136 million, virtually no debt and a research-and-development effort that's a profit center rather than a drain, and you could potentially have one of the great success stories of the decade.


Gorilla, chimp, boa or fat cat...does not matter in this case. Success by this company means muchissima cashola for its investors.


Francois
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Diversa (DVSA) is a problem for MAXY, though...they're in the same bowling alley...

http://www.diversa.com/corpinfo/corpover.asp
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ThinkerShaw wrote:

Caliper is in a market that can produce a CREE like entity given the IP required to create the micro-fluidic chips. None has yet sprung. And none may ever spring, although at this time there seems to be only 3 candidates in the market (one of which is private).

Correct me id I'm wrong but you mentionned Aurora, Caliper and one private Cie in this market right? There is also Nanogen (NGEN) who is developing a Lab-on-a-Chip. Stock price took quite a drubing lately but their field tests have been very promising so far.

My 2 n'gwees
Francois
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Tinker what is to stop others from making a better/just as good human mouse and taking market share away or changing the royalties portion of their fee structure of Abgenix or MEDX. What would make them gorillas? Why should anyone rally to form a value chain around their mouse instead of someone elses?

Although I haven't done my DD on these Co.'s yet it was something that was bothering me in your characterization of them as gorillas. Aren't there numerous ways you can make these mouse/rat/pig models with human immune systems that can't be protected by patents? If the market is as large as you believe and drug Co's have to sign away a % of profits to use these mice there would seem to be a huge incentive for the drug Co's to find another alternative?

If it was easy to patent protect why are there 2 Co's already doing the same thing? ie: How didn't the patents from the first one stop the other?

In any case I'd keep a real close eye out for the emergence of another mouse/pig etc. That little mouse could turn into a huge problem.

Drag

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Tinker

Great post!!!

Phist
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I have a great deal of respect for TinkerShaw and do not intend to carp. Sometimes my pedantic gene is expressed. There is a sloppy article in Technology Investor this month that mentions both ABGX and MEDX But as usual they they are not so good on details.

A few years back a mouse was created at Stamford that in fact did have a human immune system. As I recall they formed a company. But I dont think we are discussing that creature.

The human antibody genes have the genetic information of a free living microorganism. Say about 2000-5000 genes. Mas grande! This represents a small portion of genes involved in the human immune system. I dont think ABGX is there.

The focus is on monoclonal antibodys that are probably IgG. Just a guess for now. So what? Part, not all of the human antibody genes have been introduced into mice. I dont believe that IgM IgE, IgD and IgA can be made. I dont know if the normal somatic mutations that make IgG such a force in the secondary response occur.
These mice are a part of a great system for antibody development. But I dont really know how unique these mice are. I will bet there are better critters out there. In any event be careful.

Is the "human antibody" that much better than the "humanized antibody"? Dont lose sight of PDLI. Dont be dismissive of their technology. 1) It is based in part on protein structure as revealed by the software 2) Mouse monoclonals are used. 3) The antibody as antigen is not the problem it once was 4) more importantly progress in construction of the variable regions often leads to enhanced affinity for antigens.
It is a very important point. If very high binding affinity can be built into the programs PDLI will prosper.

Are there other systems for making monoclonal antibodies. I think so but the real battle is ABGX vs PDLI. I am just urging caution. Binturong
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As a newbie, I wish to thank you all for a great thread. I've gotten tons of great research ideas from this conversation.

Zemyna9
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