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Note From Edward Hemmelgarn

Since bottoming in October 2002, the stock market has experienced a normal comeback. Major indexes have delivered double-digit returns.

The market’s performance has been prompted, in part, by a moderate but sustained economic recovery over the last 12 months. Gross Domestic Product grew at a 3.3% rate in the third quarter of this year versus the year ago period. Forecasts for the fourth quarter and into 2004 hover around a healthy 4% growth rate. The most unique characteristics of the growth since the bottom 2 years ago has been that it has not resulted in net new jobs because of the productivity gains. Consequently, corporate earnings are growing faster than normal.

We continue to believe that the better companies in growing industries will continue to grow faster than the average company. Intensive research and astute stock picking will be essential to help differentiate between companies with strong fundamentals and attractive prospects versus companies with inflated valuations and underlying weaknesses.

It’s worth noting that our mutual fund, Shaker Fund, employs the same disciplines as Shaker’s flagship mid- and small-cap growth portfolio. As a result, it has enjoyed competitive performance this year. We believe that the Fund can be an attractive vehicle for individuals – or their children and grandchildren – who seek long-term capital appreciation, and are comfortable with some volatility.

Targeted Medicines May Revolutionize Healthcare
By Lynn Laws, Healthcare Analyst

A better understanding of genomics and basic cell biology has led to the development of a new generation of medicines called targeted medicines. A targeted medicine is a drug that is designed to specifically interfere with the underlying cause of a disease or is able to specifically target and kill diseased cells. Traditionally, drug developers have employed a more random process, screening large numbers of compounds for those that produced the desired effect. Targeted medicines have the potential to work better than traditional drugs, and they should have fewer side effects because they are less likely to affect normal cells.

The preliminary sequencing of the human genome, completed with much fanfare three years ago, and the subsequent knowledge gained by researchers, will lead to the discovery and development of many more of these targeted medicines. Scientists are better able to develop drugs that are effective in treating a disease if they know the link between a genetic defect and the disease. Similarly, doctors are better able to prescribe medicines if they have the tools to determine which patients will benefit from them.

Novartis’s (NYSE: NVS) Gleevec is a good example of a medicine that works by targeting the underlying cause of a disease. Gleevec is approved to treat chronic myeloid leukemia (CML), a type of cancer. CML is caused by a spontaneous genetic mutation called the Philadelphia Chromosome, and cells that have this mutation are cancerous. Gleevec interferes with the mutant protein caused by this abnormality causing the cancer cells to die. Gleevec has been shown to work in over 90% of patients with early stage CML. Because Gleevec works so well in its target population, it was approved in record time by the FDA in May 2001.

Another example of a targeted medicine is Genentech’s (NYSE:DNA) Herceptin, which was developed to treat a subset of breast cancer patients. Prior to treatment, a patient undergoes a test to determine whether or not she has the genetic defect that makes her a candidate for Herceptin. Herceptin works very well in patients that do qualify for treatment, but works poorly in patients that do not have the genetic defect.

In general, targeted medicines will address smaller patient populations than traditional medicines. However, the use of a drug in its target population should be very high, and the drug has the potential to command a premium price because it works better and is safer.

Targeted medicines also have positive economic implications. More effective and safer treatments, coupled with appropriate use in those patients who are most likely to see benefit, should result in improved patient outcomes and lower costs to the healthcare system. So far, our investments have been in suppliers (Invitrogen and Qiagen) to the genomics research area.

This issue of the newsletter features an interview with James A. Bianco, M.D., CEO of Cell Therapeutics [NASDAQ: CTIC], a biopharmaceutical company. Cell Therapeutics is conducting late stage clinical trials with a drug called Xyotax in lung cancer patients. Xyotax was designed to improve upon a common chemotherapy drug, Taxol, which has many toxic side effects. Through an understanding of tumor biology, Cell Therapeutics has employed a technology that allows Xyotax to better target cancer cells. Preclinical and clinical data reported to date indicate that Xyotax has fewer side effects and may work better than Taxol. We believe that Xyotax may be able to capture a significant portion of the large Taxol market if this profile holds up in current clinical trials.

Executive Insights
James A. Bianco, M.D., President & CEO
Cell Therapeutics, Inc. [NASDAQ: CTIC]

Q: What is Cell Therapeutics mission within the biotechnology industry?

A: Cell Therapeutics seeks to develop and market a novel less toxic, more effective treatment for cancer. We are one of the few biotech companies in this sector that already has an FDA approved product in the market and is poised to commercialize other drugs in our pipeline.

Q: What is Cell Therapeutics’ current product focus?

A: Cell Therapeutics has four key products. TRISENOX® helps to cure acute promyelocytic leukemia (APL), a fatal cancer of the white blood cells. Today, we market this drug in the U.S. and Europe. The other three products include XYOTAX™, Pixantrone and CT-2106. XYOTAX is currently in the last phase of clinical trials both in the U.S. and Europe and we believe it may be a safer, more effective derivative of Taxol®, one of the world’s best selling cancer drugs. Pixantrone is in final clinical tests for a type of blood related cancer called lymphoma. CT-2106, a derivative of the second largest family of cancer drugs called camptothecins, is entering the second phase of FDA required testing. Like XYOTAX, CT-2106 has the potential ability to deliver more chemotherapy more effectively to tumors without increasing side effects.

Q: What is the market potential for TRISENOX?

A: TRISENOX was originally approved to combat a rare form of severe leukemia, but nearly ninety percent of its sales growth is tied to the treatment of other blood related cancers, which affect nearly one hundred thousand patients each year in the U.S. alone. Sales of TRISENOX increased nearly 100% in 2002 versus 2001, and we are forecasting a similar increase for 2003. For 2004 we have not yet given guidance, but sell-side analysts anticipate TRISENOX sales to grow to approximately $32 to $42 million in 2004. Potential peak revenues are expected to reach $100 to $150 million.

Q: What are the advantages of XYOTAX versus Taxol, the world’s best-selling cancer drug?

A: Every year, Taxol is prescribed to nearly two hundred thousand cancer patients in the U.S. alone. However, Taxol is difficult to administer because it is not water-soluble and therefore must be mixed with castor oil and ethanol, which is extremely irritating to blood vessels and requires surgical placement of a catheter in a large blood vessel for administration. Taxol requires routine pre-medications with steroids and antihistamines to prevent severe allergic reaction and a minimum of three hours of intravenous infusion. The main side effects of this drug include significant reduction in white blood cells, numbness of the hands and feet, grogginess, and severe hair loss. XYOTAX, on the other hand, is water soluble, so it is easier to administer, and requires only a ten-minute infusion with no pre-medication or special surgical catheters.More importantly, it appears to have fewer of the side effects common to Taxol.

Q: Will XYOTAX’s advantages allow it to compete effectively against Taxol?

A: We believe so. By linking Taxol’s active ingredient to a specific protein polymer, XYOTAX has the potential to enhance the effectiveness of chemotherapy on the tumorand reduce the side effects. The fact that it is easier to administer and may be less toxic can potentially make XYOTAX the preferred cancer drug in this class in the market. A number of industry analysts are currently forecasting that XYOTAX, if proven superior to Taxol and Taxotere®, has the potential to be a blockbuster drug that can approach Taxol’s sales, which currently are in the range of $1.2-1.5 billion.

Q: When does Cell Therapeutics expect XYOTAX to reach the market?

A: In June 2003, the FDA gave XYOTAX fast track designation, which implies that this drug will receive approval within six months from the date of filing a complete and successful application. This could allow us to make XYOTAX available to patients as early as the second half 2005.

Q: Does Cell Therapeutics have any direct competitors that focus on the same core
competencies?

A: We believe Cell Therapeutics is the only company developing a protein based polymer drug like XYOTAX, which is in the final stage of clinical trials. This positions us well ahead of potential competitors, which have predominantly focused on traditional methods of finding new ways to develop formulations or solutions that make Taxol easier to administer to patients. CTI has taken a different
approach by developing a technology that targets the chemotherapy to the tumor, increasing its potential effectiveness in addition to improving its side effect profile.

Q: What prompted Cell Therapeutics to acquire Novuspharma earlier this year?

A: The company manufactures a product called Pixantrone, which has the potential to become a best-in-class drug for the treatment of leukemia, lymphomas and breast cancer, and a significant source of operating profits for Cell Therapeutics in the future. Given the potential for product and operating synergies and significant cost savings coupled with a strong combined balance sheet, we felt acquiring Novuspharma made the most prudent business sense.

Q: When do you expect to reach profitability?

A: On an annual operating basis our breakeven target is set for 2005 with profitability in 2006 and thereafter. Initially our profitability forecasts were contingent upon the launch of XYOTAX in the second half of 2005. However, with the success of TRISENOX and the recent acquisition of Pixantrone, we are now well positioned to increase commercial product sales and net income.

Q: What kind of growth are you looking for in the next five years?

A: As a result of our continual and significant investments in research and development, Cell Therapeutics is currently cash flow negative. However, we have provided initial guidance that TRISENOX along with Pixantrone, if Pixantrone is approved, have the potential to generate peak annual sales of $100 to $150 million each, over the next 5 years. If these sales goals are achieved, CTI will be in an enviable position among biotech companies in the U.S. If XYOTAX is as commercially successful as we all hope it could be, the potential combined revenue of the three products could clearly place us among the top few.