Seattle's Zymogenetics Inc. has a promising pipeline but spends like Barkley

From The Stock Masters

Last Thursday ZymoGenetics, Inc. (NASDAQ:ZGEN) announced that the Biologics License application for its bleeding control during surgery drug, rhThrombin has been accepted for review by the U.S. Food and Drug Administration (FDA). ZymoGenetics is developing rhThrombin as a general aid to achieving hemostasis (halting bleeding) during surgery. However, the additional news they reported about their Q4 loss of $37.1M, which compares to their $15.1M loss a year earlier wasn’t as exciting. For fiscal 2006, ZGEN reported a loss of $130M and the year before that was loss of $78M.

Charles Barkley couldn’t lose that much money if he tried and that guy’s a champ at throwing his money away. In an ESPN interview in May 2006, Barkley estimated that he’d lost about $10M gambling over the years. Sir Charles said two weeks ago on the air that he lost $2.5M million "in a six-hour period" one night last year. Lucky for us there isn’t a Sir Charles Barkley Index Fund, but ZGEN comes close when you look at the returns.

So what’s ZymoGenetics smoking and if it’s any good can I have some?

Fellow Masters, ZGEN’s rhThrombin has the potential of billions in revenue. If and when their blood stopping drug is approved, they will be part of the growing market of recombinant coagulation factors which posted 2006 sales of more than $4.6B (this according to Business Intelligence firm La Merie S.L.). But ZGEN’s not the only company out there to make a run for all that money, it’s a competitive field pioneered by Bayer Schering Pharma (SHRGY), Wyeth (WYE) (with a clinical Phase I project) and Novo Nordisk (NVO).

Last Thursday during the Charles Barkley-like-conference call, Bruce L.A. Carter the CEO of ZymoGenetics said:
"We’re extremely pleased that the FDA accepted our Biologics License Application for rhThrombin for review. In the past, recombinant products have quickly replaced animal and human plasma products, so we’re excited about the potential opportunity to compete in the thrombin market. We believe based on our market research that we can attain a substantial share of the existing bovine thrombin market and that there is significant potential to grow the use of thrombin in surgical procedures through increased awareness."

Besides rhThrombin, ZGEN has a few things in the pipeline including a cancer drug (Interleukin 21 – IL-21), autoimmune diseases drug (Atacicept – TACI-Ig) and hepatitis C drug (PEG-interferon lambda IL-29). ZymoGenetics has been around for over 25 years and it’s landmark building is a fixture seen by Seattle commuters daily along I-5 located on Lake Union. ZymoGenetics IPO’d in 2002 and the stock really hasn’t done much, but why would it, all they do is spend money? The stock has been floating in the $15 to $16 range, they have a Price to Earnings ratio of -10, and their annual revenue reads like average points scored by Barkely per game (take out the million factor) – 2003 was $25M, 2004 was $35M, and 2005 was $42M.

Don’t you think that shares should be trading around $3 with 67.4 million ZGEN shares outstanding? However the Stockmasters believe like Barkley, this stock will be a superb rebound candidate once their drugs go to market. I know, waiting for a pharmaceutical stock to finally take off can be painful, like listening to Barkley’s commentary on TNT, but when that ship comes in you can believe it’s going to sail. ZymoGenetics has been around a long time when comparing it to other pharma companies, and they have been working on their drugs since Barkely went Pro. In January A.G. Edwards and Sons initiated coverage of the company with a "Buy" rating citing good potential for growth. Analyst Albert Rauch also set a price target of $20 per share for ZGEN and predicted that they will be profitable in 5 to 6 years.

This is a sit and wait story – the Stockmasters are not recommending putting your life savings into ZGEN. We are just making you aware of the company and their up and coming pipeline. ZGEN expects to post a bigger losses in 2007 due to costs related to the planned launch of rhThrombin. But what makes us write about this stock is the fact that their shares still remain trading at a respectable price range, the company’s history, and the potential for hundreds of millions in revenue. The success story is a way off, but you can bet if things go well with the FDA and we get some positive press releases, ZGEN is going to the All-Star game in a hurry.

Article written by: Eric Cheshier
Article posted on: February 20th, 2007

Disclaimer: The Author does not own any shares or hold any short/long positions in ZGEN.

http://thestockmasters.com/index.asp