I'm adding Protalix Biotherapeutics Inc. (AMEX:PLX) to my portfolio at the expense of half my holding in Fundtech (Nasdaq: FNDT; TASE: FNDT), although I continue to believe in Fundtech as a special niche company in financial software. I'm getting into biotechnology again, which, as is well known, is a risky field but one with dreams of big profits that sometimes come true. My first experience with biotech in my portfolio, with Pharmos Corp. (Nasdaq: PARSD), ended, as will be recalled, with an almost complete write-off after failure in the decisive trial for a new drug. The second, with Omrix, ended with a highly profitable exit when the company was sold to Johnson & Johnson (JNJ) for 2.5 times the IPO valuation.
Protalix is on the final straight, about two months before publication of Phase III trials of its Gaucher disease treatment. Genzyme's (GENZ) treatment for Gaucher's disease has annual sales of $1.2 billion. Protalix's platform is revolutionary in that it produces its drug from plants: from carrots in the case of the Gaucher's disease treatment under trial, and from tobacco leaves in the cases of other drugs at various stages of pre-clinical trial development. Extraction from plants not only has great advantages for production costs; it also means low vulnerability to contamination. This is as opposed to production from animal cells, which is Genzyme's method. Genzyme's production lines became severely contaminated recently, causing its market cap to plummet.
In contrast to Pharmos's blind trial, Protalix has conducted an open trial on 31 Gaucher's disease patients around the world. None has left the trial since it began two years ago. This indicates efficacy, because otherwise those patients would have reverted to using Genzyme's product. On the other hand, only when the final results are released will we know whether the Protalix drug succeeds in causing a 20% reduction in the size of inner organs, such as the spleen, the success threshold set by the US Food and Drugs Administration in the trial protocol. In Gaucher patients, organs such as the spleen and liver become enlarged due to the lack of the enzyme needed to break down fats.
With all the risks associated with this investment, I still don't see an apocalyptic scenario such as we saw at Pharmos, whose drug was trashed as soon as the failure was announced. The worst I can see happening with Protalix is a situation in which the FDA will require further data, an additional trial, or improvement to efficacy through further development of the drug. These are certainly possible outcomes, and if they happen, the share price will crash, but an opening will be left for it to recover in the future. This often happens with biotech companies large and small that receive approval for a drug, but not before they have traversed the FDA's obstacle course.
Anyone who like me heard Protalix CEO Dr. David Aviezer's presentation last Thursday at the Canaccord Adams investors' conference in Boston will feel in no doubt that the FDA approval is just around the corner, and will give the negative scenarios I have described no chance of materializing. "The doctors are happy with what they have seen so far in the trial," Aviezer said, and the analysts who cover Protalix, Genzyme, or UK company Shire, which has its own Gaucher's disease treatment in the clinical trials stage, also cast no doubt on Protalix's chances of obtaining FDA approval.
Moreover, the FDA has now asked Protalix to expand the trial and add dozens of patients who will be otherwise be left without treatment because of the interruption to production at Genzyme, and the authorities in other countries are expected to follow suit.
If things are so good at Protalix, why did its share price fall from a peak of nearly $8 at the end of July to $5.77, its level before yesterday's move by the FDA? In my view, the answer lies with Dr. Philip Frost, one of the largest investors in Protalix, who now has no role in the company. As reported in "Globes" on Sunday, since the end of July, Frost has sold more than 700,000 of the 9.8 million shares he owned. This is a small proportion of his stake, but enough to alarm investors. What's more, he holds such a large number of shares that, were he to sell on good news from the FDA, he would be liable to kill the upside expected from the announcement.
Published by Globes [online], Israel business news - www.globes.co.il - on August 18, 2009
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