12:00 AM
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Apr 01, 2013
 |  BioCentury  |  Finance

2Q13 Financial Markets Preview: Manning the middle

Biotech 2Q13: Buysiders pick Orphan, cancer plays; big names to lose steam

Buysiders are being drawn to mid- and small cap biotechs with solid balance sheets and/or near-term inflection points going into 2Q13, a period that may be relatively quiet for some of the sector's largest names.

The challenging environment for illiquid micro-caps seems likely to persist, though investors chasing returns will inevitably take some fliers on smaller names.

Companies developing targeted cancer agents or Orphan programs may be poised to benefit as investors search for this year's versions of big movers Pharmacyclics Inc. or Sarepta Therapeutics Inc.

Sleeping giants

ClearBridge Investments' Marshall Gordon said 2Q13 is shaping up to be a subdued quarter for big names like Amgen Inc., Gilead Sciences Inc. and Regeneron Pharmaceuticals Inc.

"Amgen doesn't really have much going on this quarter, Gilead won't be launching sofosbuvir in HCV for a while, and Regeneron is past its launch period for Eylea," he said.

Sofosbuvir (GS-7977) is a nucleotide analog HCV NS5B polymerase inhibitor in Phase III to treat HCV infection.

Eylea aflibercept, which is partnered with Bayer AG, is approved in the U.S. to treat wet age-related macular degeneration (AMD) and macular edema following central retinal vein occlusion (CRVO) and in the EU to treat wet AMD.

The two big cap exceptions are Biogen Idec Inc. and Celgene Corp.

Industry watchers are keen to see how strong a start Biogen gets with its launch of multiple sclerosis drug Tecfidera dimethyl fumarate (BG-12), which FDA approved last week.

Gordon said his only concern will be Biogen's ability to manage the Street's expectations.

"I think it is going to be a good launch but my only worry is that in the very near term the Street may be getting ahead of what is possible. I strongly believe in the long-term value of the drug though and think Biogen is working as hard as it can to set realistic expectations," said Gordon.

Earlier in March, EMA's CHMP issued a positive opinion on an MAA for the oral drug, which activates the NF-E2-related factor 2 (Nrf2) pathway to treat adult patients with relapsing-remitting MS.

venBio's Behzad Aghazadeh is watching for a readout from Celgene's Phase III MM-020 study, which is designed to expand use of Revlimid lenalidomide into the front-line multiple myeloma (MM) setting. Data are expected in late 2Q13 or 3Q13.

"Celgene's recent updates have been positive as far as Revlimid not increasing the incidence of secondary cancers, so the consensus seems to be that '020 will be a success," he said.

The thalidomide analog is approved in the U.S. and EU for relapsed or refractory MM, and in the U.S. for myelodysplastic syndromes (MDS).

The list of notable 2Q13 milestones includes a large number of regulatory submissions, meaning the real catalysts for these events won't come for several quarters (see "2Q13 Milestones," A13).

Perhaps the most notable submission will come from Gilead, which will seek approval of sofosbuvir for use in combination with ribavirin to treat HCV genotype 2/3 - potentially making it the first all-oral, interferon-free HCV therapy.

Over-hepped?

Given the massive run-up last year in the large cap group, it may come as no surprise that some buysiders think certain names might be poised for deflation (see BioCentury, Jan. 7).

Multiple investors told BioCentury the commercial opportunity for HCV products is being overhyped, and that Gilead's valuation could decline if sofosbuvir's eventual sales don't meet expectations.

Every time the "next big thing in HCV" is about to come out there is talk about a huge pool of patients waiting on the sidelines, according to Gordon. "It has been going on ever since pegylated interferon was first made available, so we've been waiting for all these patients to appear for 15-20 years - but they never do."

RA Capital's Peter Kolchinsky thinks Gilead also may face more competition on pricing and that simply having the best data may not be enough to dominate the market.

Kolchinsky said the Street is valuing Gilead based on expectations it can maintain dominant market share while charging $50,000-$80,000 per course.

"Achillion, for example, is singularly focused on HCV. Their drugs look solid and, once they get to market, they will find a clearing price. With a valuation around $800 million, they can discount by 20%, 50%, or 80%, whatever it takes to wrench share from Gilead, and still offer tremendous upside for shareholders," he noted.

"I think Gilead's investors will wake up to the competitive pressures in HCV pretty quickly," Kolchinsky concluded, noting that a decrease in market cap in the second biggest biotech would weigh on biotech indices.

Gilead also may be competing for scrips with the likes of AbbVie Inc., Bristol-Myers Squibb Co. and others.

Achillion Pharmaceutical Inc.'s biggest value drivers are two HCV products being tested as a fixed-dose combination in a Phase II trial set to begin this quarter. Investors were sufficiently intrigued by the programs in February to provide the company with $141.9 million in a follow-on.

The company closed last week with a market cap of $697 million, which Kolchinsky said is based primarily on its two lead HCV products.

Gilead closed out the week valued at $74.5 billion.

Orphan plays

Alexion Pharmaceuticals Inc. has sailed to a 470% increase in market cap since early 2009 on the...

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