Buyside View XXII: 'Grown up' means growth

2014 Buyside View: Focus on biotech HCV and MS launches, immunotherapy, Orphans

An increase in regulatory approvals and new breakthrough therapies has money managers buying into the concept that biotech has entered a new product cycle that provides a strong fundamental basis for growth. They are looking for a slew of clinical, regulatory and commercial milestones to continue to drive the industry in 2014.

Investors who participated in BioCentury's 22nd annual Buyside View survey broadly agree the biotech bull run of 2013 - unlike that of 2000 - wasn't driven by hype, but by fundamentals.

"The sector has finally grown up," BB Biotech's Daniel Koller told BioCentury.

Commercial execution thus will be key for maintaining the sector's steam, especially for Gilead Sciences Inc. in HCV and Biogen Idec Inc. in multiple sclerosis (MS).

For Gilead, some money managers think the wide spread in forecast revenues for Sovaldi sofosbuvir means there is potential upside, while others think the stock is priced for perfection. Investors were mixed on whether there is room in HCV for smaller players.

Biogen's Tecfidera dimethyl fumarate is expected to continue to grow its share of the MS market. Some investors are tracking next-generation oral S1P inhibitors that could build a solid position behind Tecfidera as second-line therapy for relapsing-remitting MS (RRMS).

Drug candidates that could create new treatment paradigms - especially in cancer and infectious diseases - were the most-discussed therapeutic areas.

First and foremost was cancer immunotherapy, where optimism is reminiscent of the early days of the all-oral combinations for HCV. While pharma dominates the most advanced programs like PD-1, specialist investors expect to play the space through biotechs developing compounds that could be combined with immunotherapy.

As in 2013, hematological malignancies are hot. Technologies like chimeric antigen receptor therapies and breakthrough small molecule approaches against Bruton's tyrosine kinase (Btk) and CD38 are driving excitement.

Orphan diseases remain a perennial favorite, although investors have started to worry about how long Orphan pricing can remain protected.

Cystic fibrosis (CF) also will be closely watched, as Vertex Pharmaceuticals Inc. has a make-or-break Phase III readout of its combination of Kalydeco ivacaftor and VX-809 in patients with the delta F508 mutation, the most common among CF patients.

Fundamental strength

Following a fantastic 2013 for biotech equities, optimism among buysiders remains high based on the idea that biotech has grown up, with valuations based on products and revenues.

"It is no longer just a banker-led market like in 2000 where genome sequencing became a big theme but there were no immediate revenues," OrbiMed's Sven Borho told BioCentury. "This time around the new theme is product launches, which is different than the past biotech bull markets" (see "New Products to Watch," A10).

Joep Muijrers of LSP-Life Sciences Partners agreed: "When we saw the market go way up in previous bull markets, underneath that rise there wasn't that much. It was all expectations, whereas today a lot of it is more concrete."

"It does seem we are in a new product cycle in many therapeutic areas, all coming from biotech," AXA-Framlington's Gemma Game said. "That is really broadly encouraging and speaks to biotech as being an area of innovation."

Ivo Staijen of HBM Partners noted that Millennium Pharmaceuticals Inc. raised almost $1.2 billion in two financings in 2000 with a postmoney valuation of $13.5 billion, but the company had no marketed products and no revenues. "The biotech sector has grown up and has real products now, real profitability," he said (see "Top Biotech Products," A9).

Millennium is now part of Takeda Pharmaceutical Co. Ltd.

Medical Strategy's Harald Schwarz noted the new product cycle is being built on shifts in treatment paradigms where new therapeutic approaches are replacing old modalities. Examples include interferon (IFN) being replaced by oral therapies in HCV and MS. In cancer, chemotherapy, the long-time backbone on which other treatments were added, could be pushed aside for combinations of targeted therapies or immunotherapies.

Investors cited a more amenable and collaborative FDAas playing a major part in driving biotech's new product cycle.

In the 2013 calendar year, FDA approved 27 new molecular entities (NMEs). While lower than the 39 in 2012 - which was the highest since 1997 - 2013 was in line with the agency's 10-year average of 26.

First-action approval rates for NMEs have also been up. Through Nov. 30, 2013, 71% of applications were approved in the first cycle, similar to the 72% rate in 2012 and 70% in 2011.

Over 2002-10, the first-action approval rates were much lower at 42-56%.

Investors also noted new initiatives by FDA to expedite the delivery of drugs to patients. The agency has granted breakthrough therapy designation to 37 products since the pathway was enacted as part of the FDA Safety and Innovation Act (FDASIA) in July 2012.

As of Dec. 25, FDA had also granted 35 Qualified Infectious Disease Product (QIDP) designations under the Generating Antibiotic Incentives Now (GAIN) Act, which also was part of FDASIA. The designation makes a product eligible for an additional five years of market exclusivity if approved, among other benefits.

Product launchpad

Buysiders said high-profile launches will be a key determinant of whether biotech remains attractive to investors in 2014.

First and foremost is Gilead's Sovaldi. In December, FDA approved the nucleotide analog HCV NS5B polymerase inhibitor in combination with ribavirin to treat HCV genotypes 2 and 3 infections, marking the first approval of an all-oral, interferon-free combination therapy.

Sovaldi also was approved for use in combination with ribavirin and IFN to treat HCV genotypes 1 and 4.

Most investors agreed it is the most anticipated product launch in quite some time.

"Gilead's HCV launch is the benchmark for 2014," said ClearBridge Investments' Marshall Gordon.

However, with Gilead's market cap near $115 billion, some investors suggested the stock has little room for upside. "Gilead is priced for perfection these days, so that launch has to go really well," Muijrers said.

Other buysiders see some room for the shares to go up. Game noted there is a wide range of revenue estimates for Sovaldi in 2014.

"You can still make the argument there is upside in the numbers," she said. But she added: "Make no mistake: there will be a myopic focus on the weekly prescription data for Sovaldi."

Investor confidence has been buoyed by Phase III data for Gilead's fixed-dose combination of Sovaldi and ledipasvir (GS-5885), an HCV NS5A protein inhibitor. In December, the company announced data from three Phase III trials of the combination with and without ribavirin that showed SVR12 rates in the range of 93-99% across treatment-naïve and -experienced patients with genotype 1 infection.

Investors differed on whether any company could challenge Gilead for majority share of the HCV market.

"From an investor point of view HCV seems to be largely done," with Gilead first to market and expected to take a large share, said Staijen.

On the other hand, RA Capital's Peter Kolchinsky argued that with pharmacy benefit managers pushing back on prices, follow-on all-oral combinations - like AbbVie Inc.'s combination or others from Bristol-Myers Squibb Co. and Merck & Co. Inc. - could take share if they are prepared to offer substantial discounts.

AbbVie is Gilead's nearest competition. In 2Q14, the pharma expects to submit regulatory applications for its all-oral combination of ABT-450, ABT-267, ABT-333 and ritonavir. ABT-450 is an HCV NS3/4A protease inhibitor; ABT-267 is an NS5A protein inhibitor; and ABT-333 is a non-nucleoside HCV NS5B polymerase inhibitor.

BMS has an all-oral combination in Phase III testing, while Merck's all-oral combination is in Phase II.

The other major launch for investors is Biogen's Tecfidera for MS. The oral dimethyl fumarate that activates nuclear factor (erythroid-derived 2)-like 2 (NFE2L2; NRF2) had a tremendous start, with $478.5 million in sales for the six months following its U.S.

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