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Jan 10, 2011
 |  BioCentury  |  Finance

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 ex-Nordic rights in 2004.

Borho also included Medivir as one of his picks for 2011, noting the company is "a broad HCV play." In addition to TMC435, Medivir expects to move into Phase I testing this year with HCV Pol, a nucleoside NS5B inhibitor that also is partnered with J&J.

"The HCV space will be interesting to watch, not only for the approval and adoption of the first generation protease inhibitors," according to Muijrers. "After talking to physicians, it will be interesting to see how much warehousing of patients will go on" as they hold off on prescribing a direct antiviral to patients until the more potent next generation agents become available.

Bavarian Nordic is another popular pick among buysiders and, like Medivir, is following in the wake of a high profile first-mover. In this case the breakthrough was Dendreon's Provenge, the autologous cellular immunotherapy approved to treat asymptomatic or minimally symptomatic metastatic hormone-refractory prostate cancer (HRPC).

BB Biotech's Müller suggested that because Bavarian Nordic's ProstVac is an allogeneic therapy, it may avoid many of the costly and time-consuming issues inherent with an autologous product like Provenge.

ProstVac is a vaccine targeting PSA that also contains the Tricom triad of costimulatory molecules (LFA-3, ICAM-1, B7.1). It improved overall survival in a Phase II trial and has an SPA from FDA for a Phase III trial to treat metastatic CRPC. That study is slated to begin by 3Q11.

Borho also likes Bavarian Nordic and believes it is well positioned to attract a partner for ProstVac.

Allianz RCM's Paul Wagner suggested Aeterna Zentaris is an intriguing micro-cap company that is "significantly undervalued relative to its pipeline and cash balance," particularly given the cash crunch that has been hanging over its peer group.

Aeterna had $39.9 million in cash at Sept. 30, 2010 and a nine-month operating loss of $21 million.

Partner Keryx Biopharmaceuticals Inc. is conducting a pair of Phase III trials of perifosine (KRX-0401) to treat multiple myeloma (MM) and refractory advanced colorectal cancer. Keryx has North American rights to the alkylphosphocholine modulator of phosphoinositide 3-kinase (PI3K)/protein kinase B (PKB; Akt) and other signal transduction pathways.

Wagner noted that Keryx is paying for both studies, while Aeterna is in line for royalties on North American sales and should be able to use the Phase III data to support marketing submissions in Europe.

In addition to a pipeline of earlier-stage programs, Aeterna also plans to submit an NDA this half for Solorel macimorelin (AEZS-130), an oral growth hormone secretagogue to diagnose adult growth hormone deficiency (AGHD).

As for Micromet, Müller believes the company has built an impressive pipeline of antibody products based on its bispecific T cell engager (BiTE) technology.

The company's lead product is blinatumomab (MT103), a BiTE combining epitopes recognizing the CD3 and CD19 surface antigens. It is in Phase II testing for acute lymphoblastic leukemia (ALL) and non-Hodgkin's lymphoma (NHL).

Anderson noted that Micromet was one of his best performers last year, along with IS Pharma plc and Sinclair Pharma plc, a pair of U.K. specialty plays. Those stocks were up 22%, 7% and 23%, respectively, in 2010.

One specialist fund manager, who asked to remain anonymous, told BioCentury that his small-cap picks for the coming year are Depomed Inc. and Santarus Inc.

Depomed's DM-1796 (formerly Gabapentin GR), a once-daily formulation of gabapentin using the company's Acuform delivery technology, is in development to manage post-herpetic neuralgia (PHN). The stock has doubled over the last six months ahead of a Jan. 30 PDUFA date, he noted, and has the potential to double again on a positive decision.

The buysider sees Santarus as another underappreciated company based on its $192.4 million valuation at year end despite plans to submit an NDA for oral Budesonide MMX to treat ulcerative colitis (UC) in 2H11.

Muijrers believes the respiratory space will be particularly interesting, specifically chronic obstructive pulmonary disease.

He thinks that the real game-changer in COPD could be QVA149, a combination of indacaterol and NVA237, an inhaled muscarinic receptor antagonist, which is in Phase III testing. Novartis AG has rights to NVA237 from Vectura Group plc and Sosei Group Corp. (see BioCentury, April 18, 2005).

"We are talking about large markets and a big unmet need, so if the early data play out people are really going to start taking notice," he noted. Vectura is in line to receive up to $157.5 million in regulatory and commercialization milestones from Novartis, plus royalties.

Novartis also has the most advanced COPD program: indacaterol (QAB149), an adrenergic receptor beta 2 agonist for maintenance treatment of airflow obstruction in COPD patients. The once-daily bronchodilator will be reviewed by FDA's Pulmonary-Allergy Drugs Advisory Committee on March 10.

The pharma markets indacaterol as Onbrez Breezhaler in more than 40 countries, including in the EU.

The specialist buysider who asked to remain anonymous also sees 2011 as a big year for COPD, though he tabbed Theravance Inc. as a potential beneficiary.

Theravance and partner GlaxoSmithKline plc have Relovair fluticasone furoate/vilanterol (GW685698/GW64244) in Phase III testing for COPD. The fixed-dose combination of an inhaled corticosteroid and a long-acting adrenergic receptor beta 2 agonist (LABA) also is in Phase III testing for asthma.

Technical analyst Stan Weinstein of Global Trend Alert pointed to Medivation Inc. and Enzon Pharmaceuticals Inc. as being two names on his buy list going into 2011. "On market corrections like the one we are seeing right now, these are stocks I'd be looking to buy rather than something that is already blown up," he said.

"You need to look at the risk/reward, and Medivation is a good example of a company with a solid base underneath it," Weinstein said. "Even if I turn out to be...

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