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Buyside View XIX: Commercial Risk

Buysiders pin demand for biotech on commercial launches in 2011

BioCentury's 19th Annual Buyside View finds money managers entering 2011 cautiously optimistic about biotech's prospects, particularly as some of the high-profile compounds have already reported some data, lowering risk.

Amidst the optimism is a fair amount of caution, however, as a number of important events involve commercial product launches - an area where the sector has recently failed to meet expectations. Products under the microscope will include Prolia/Xgeva denosumab from Amgen Inc. and Provenge sipuleucel-T from Dendreon Corp.

Key events for 2011 also include PDUFA dates for a pair of homegrown products discovered and developed by mid-cap biotechs that could serve as a reminder about the industry's potential for translating innovative science into medical breakthroughs.

An FDA decision on lupus treatment Benlysta belimumab from Human Genome Sciences Inc. is slated for March 10 and another for Vertex Pharmaceutical Inc.'s telaprevir for HCV is expected around mid-year. If FDA makes positive decisions on time, both could be launched this year.

The race to market between the two lead protease inhibitors, Vertex's telaprevir and boceprevir from Merck & Co. Inc., has now begun in earnest. An FDA decision for boceprevir is likely to follow soon after action on telaprevir.

BB Biotech's Stefan Müller said events like these are what he will be watching.

"It is important that biotechs show they can deliver on the main drivers for 2011, which are going to be showing clinical progress and good sales numbers," he said. "If you show progress, but the stock prices don't react, then the next step is for big pharma to start looking for buying opportunities."

One thing that could benefit smaller biotechs would be for continued signs of recovery from the economy, which should in turn increase investor appetite for risk, according to Otello Stampacchia of Omega Funds. "Biotech is rightly perceived as high risk, so when general beta of the market goes down and the Fed pumps money into system, people feel compelled to make riskier bets, which could be a big driver for people coming back into the sector," he said.

Meanwhile, the established view of top tier biotechs as growth stocks has been tempered by lingering questions about healthcare reform and reimbursement issues. Nonetheless, several buysiders argued that the compression of biotech P/E ratios closer to those of big pharma is undeserved and doesn't take into account that the former is still more innovative. As a result, these see room for the big caps to rise in an overall market upswing.

The P/E ratios "are certainly a lot closer than they were 10 years ago, but I don't think they will totally converge because the growth rates are really quite different between biotech and pharma," noted Müller. "But if biotechs try to reinvent themselves they shouldn't get more pharma-like because the research and new ideas" are the differentiating factor that earn biotech its higher multiples.

Small cap opportunities

Several buysiders expressed confidence that winners can be found among the small cap segment for those willing to take on more risk.

One such investor is Joep Muijrers of Life Science Partners, who told BioCentury that he sees a lot of unrealized value in the small cap space.

Two of Muijrer's best performing companies in 2010 - Algeta ASA and Amarin Corp. plc - began last year with sub-$500 million valuations. Algeta ended 2010 up 99% with a market cap of NOK5.4 billion ($899.4 million). Amarin was up 474%, closing the year with a valuation of $798.8 million.

Algeta, which appeared as a company to watch in last year's Buyside View, is partnered with Bayer AG to develop Alpharadin, a radiopharmaceutical based on the alpha particle emitter radium-223. It is in Phase III testing to treat bone metastases in patients with castration-resistant prostate cancer (CRPC), with data expected in 2012.

Last month, Amarin reported positive Phase III data for AMR101, an ethyl ester of eicosapentaenoic acid (ethyl-EPA), to treat hypertriglyceridemia.

Muijrers is expecting more good things from Amarin. In addition to submitting an NDA for AMR101 to treat hyper-triglyceridemia this year, the company is expected to report top-line results in 2Q11 from a Phase III trial of the compound to treat mixed dyslipidemia.

"This is a product that is demonstrating impressive activity in a massive disease space where it might be of high interest to a pharma that is losing [patent] protection on some of its big drugs," said Muijrers. He thus would not be surprised if Amarin were taken out at some point this year.

Another bullish Amarin investor is Abingworth's Joe Anderson. Abingworth participated in Amarin's $70 million private placement that completed in October 2009. At the time, the company had a market cap of just $44.2 million.

Last week, Amarin raised $87.1 million in a follow-on through the sale of 12 million ADSs at $7.60.

"There are hundreds of these small companies out there in need of cash, but not that many have compelling drug assets with high market potential and a good management team in place," said Anderson.

Domain's Nicole Vitullo declined to name specific picks, but agreed there are numerous potential gems in the micro-cap space.

"There are a lot of companies out there, so it's hard for investors to focus on the handful that might become Cinderella stories," she said. "But over time good companies in that group will find ways to differentiate and get investor interest and break through."

Other small companies that have drawn the attention of buysiders include Pharmasset Inc., Medivir AB, Bavarian Nordic A/S, Aeterna Zentaris Inc., Micromet Inc. and Optimer Pharmaceuticals Inc.

In terms of popular places to play, few are hotter than the HCV space occupied by Pharmasset and Medivir.

According to Sven Borho of OrbiMed Advisors, Pharmasset is developing the best-in-class nucleotide analog polymerase inhibitor. "Everybody believes now that the nucleotide analogs will be a cornerstone of a future" combination regimen, he said.

Other buysiders are already looking beyond "me-first" and have been particularly impressed by interim Phase IIb data reported in November 2010 for Medivir's second-generation protease inhibitor, TMC435 (formerly TMC435350). The company plans to start Phase III testing early this year.

Muijrers said TMC435's potency appears very robust and thinks the compound will benefit from the development expertise and commercialization resources of partner Johnson & Johnson. Medivir granted J&J's Tibotec BVBA subsidiary

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