Burgeoning bellwethers

26th annual Buyside View sees biotech investors eyeing small- and mid-caps in 2018

The miserable performance of large cap biotechs last quarter is likely to be a boon for small- and mid-cap players this year, in more ways than one.

Buysiders spent most of 2017 focusing to a large degree on the big caps, which had been riding clinical data and commercial launches to new heights. Biotechs valued at $10 billion and up had a median gain in value of 16.1% through 3Q17, adding $248.4 billion in market cap in the first nine months of the year.

But sentiment soured in 4Q after Celgene Corp.’s mongersen failed in Phase III and several bellwethers served up soft 3Q17 earnings and weak guidance. The median big cap gain was just 1.3% in the quarter, and overall $56.5 billion in market cap was lost from Sept. 29 to Dec. 29.

With few large cap catalysts in the coming year, buysiders are planning to put more funds to work in smaller names that could become the next generation of big biotechs.

“Nobody is out there saying 2018 is going to be the year for biotech large caps.”

Otello Stampacchia, Omega Funds

“Nobody is out there saying 2018 is going to be the year for biotech large caps. The stocks look relatively cheap versus the S&P 500, but in my opinion, the discount is justified by the fundamentals,” said Omega Funds’ Otello Stampacchia (see “Watch and Wait”).

Many of the 18 buysiders who spoke to BioCentury are watching companies in the $1 billion to $10 billion market cap space that are close to market. A handful of others are watching players in the $10 billion to $40 billion range that could break the $50 billion market cap threshold on the back of clinical data and strong launches.

ClearBridge Investments’ Marshall Gordon’s sentiment was typical: “I’m definitely more in small- and mid-caps than large caps. There’s more opportunity there, and even more so on a relative basis compared to past years.”

Buysiders also think the biggest biotechs may turn to M&A to seed long-term growth. As a result, they’ll be tracking take-out targets in the $1 billion-$20 billion market cap range.

Maturing combinations

Oncology and Orphan diseases remain favorites in the small- and mid-cap space, along with companies working on new modalities with curative potential. In cancer, investors continue to look for winners among immuno-oncology combinations.

“We want to see winners emerge,” said Loncar Fund’s Brad Loncar. “So far that hasn’t happened and that’s mostly because it’s just been too early.”

Incyte Corp. remains in the spotlight as it prepares to report the first Phase III data for its indoleamine 2,3-dioxygenase 1 (IDO1) inhibitor, epacadostat.

Initial data are expected in 1H18 from the ECHO-301 study of epacadostat in combination with Merck & Co. Inc.’s PD-1 inhibitor, Keytruda pembrolizumab, as first-line treatment for advanced melanoma. The combo is also in Phase III testing to treat non-small cell lung cancer (NSCLC), renal cell carcinoma (RCC), urothelial carcinoma and squamous cell carcinoma of the head and neck (SCCHN).

The melanoma data will “show a lot about IDO’s potential utility in the combination approach, and cancer in general,” said Loncar.

“We want to see winners emerge.”

Brad Loncar, Loncar Funds

LSP’s Joep Muijrers said a negative readout could drag the sector down. “There’s so much riding on what could be the best combo partner for checkpoint inhibitors,” he said.

Carl Harald Janson of International Biotechnology Trust plc (IBT) thinks Incyte has long-term growth potential, but Loncar and apo Asset Management’s Kai Brüning believe the company could be acquired following its melanoma readout.

Loncar and Gordon also are following Bristol-Myers Squibb Co.’s Phase III CheckMate -227 trial of PD-1 inhibitor Opdivo nivolumab plus CTLA-4 inhibitor Yervoy ipilimumab as first-line therapy for NSCLC. Data are expected in 1H18.

The stakes are high, as Opdivo monotherapy already failed in one Phase III study in first-line NSCLC, and a PD-L1/CTLA-4 inhibitor combination from AstraZeneca plc also missed its endpoint in a first-line NSCLC Phase III trial.

Loncar called CheckMate -227 “the most important trial of the year because it affects such a big company and is in such an important space.”

IBT’s Ailsa Craig and WBB Securities’ John Nolan like Nektar Therapeutics, and look forward to Phase Ib/II data evaluating NKTR-214 plus Opdivo in solid tumors.

Nektar reported positive interim response data from the Phase Ib portion of the study in November, and plans to report additional data at the American Society of Clinical Oncology (ASCO) meeting in June.

NKTR-214 is an immunostimulatory cytokine engineered to selectively activate IL-2 receptors on cytotoxic T cells.

Table: 2018 milestones

Selected products with clinical or regulatory milestones expected in 2018. (A) Mallinckrodt plc (NYSE:MNK) is acquiring Sucampo Pharmaceuticals Inc. (NASDAQ:SCMP). Source: BCIQ: BioCentury Online Intelligence

AB Science S.A. (Euronext:AB)Masiviera masitinibPrimary progressive multiple sclerosis (PPMS) or relapse-free secondary progressive MSInterim Ph III AB07002 data1H18
AbbVie Inc. (NYSE:ABBV) / Boehringer Ingelheim GmbHRisankizumabPlaque psoriasis Submit reg apps2018
Ablynx N.V. (Euronext:ABLX; NASDAQ:ABLX)CaplacizumabAcquired

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