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 success of its blockbuster hemolytic anemia drug Soliris eculizumab.

The company closed 1Q with a market cap of $17.9 billion.

Soliris, a humanized mAb targeting complement 5 (C5), is approved to treat paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS).

One portfolio manager who asked not to be named said the commercial transition to aHUS from PNH has been going smoothly, though some pushback on pricing from payers is inevitable.

Alexion took a 5% haircut on Jan. 23 after the U.K. Ministers of Health deferred a decision on covering Soliris on the NHS for aHUS until NICE begins assessing high-cost drugs for rare conditions during the next fiscal year, which begins in April.

On the day, the company lost $4.44 to close at $92.96, leaving it with a valuation of $18.1 billion.

"You are bound to get smacked around a bit by technology assessment organizations if you are charging $450,000 a year, but almost every time ultimately they end up paying," the portfolio manager added.

Several other companies picked by buysiders for 2Q13 also play in the Orphan space.

Among them are BioMarin Pharmaceutical Inc., Aegerion Pharmaceuticals Inc. and NPS Pharmaceuticals Inc.

Gordon likes BioMarin's portfolio of Orphan products and history of clinical and commercial execution, and thinks the stock has more upside despite its being up nearly 500% since early 2009. The shares closed last week up $1.91 to $62.26, yielding a market cap of $7.8 billion.

This quarter, the company plans to submit a BLA and MAA for Vimizim elosulfase alfa (formerly GALNS), a recombinant human N-acetylgalactosamine-6-sulfatase, to treat mucopolysaccharidosis IVA (MPS-IVA, Morquio's syndrome).

"Even at BioMarin's current valuation I still see a lot of pipeline value is not in the stock," Gordon said.

The company plans to begin a Phase III trial of PEG-PAL to treat phenylketonuria (PKU) this quarter, and a Phase II/III trial of next-generation enzyme replacement therapy BMN-701 to treat late-onset Pompe's disease in December.

Mann Bioinvest's Andy Smith likes Aegerion and NPS because they are approaching their product launches conservatively and are working hard to manage expectations.

Aegerion is a popular pick among buysiders who like its de-risked story and feel the company has done a good job of setting expectations for Juxtapid lomitapide to treat homozygous familial hypercholesterolemia (hoFH).

"Aegerion was cautious on sales guidance for this year and I applaud that," said Smith. "People used to say 'sell before first quarter of earnings' but this company is doing the right thing and has already captured 80-some patients in a rare Orphan indication."

Juxtapid is priced at $200,000-$300,000 per year in the U.S. Aegerion expects to have 250-300 patients on therapy by year end, and said a total of 3,000 potential patients have been identified in the U.S. and Europe (see BioCentury, Feb. 4).

The small molecule microsomal triglyceride transfer protein (MTP) inhibitor is under review for hoFH in Europe, with a decision expected mid-year.

Smith also believes NPS will have a good launch with Gattex teduglutide, an analog of glucagon-like peptide-2 (GLP-2) delivered daily via subcutaneous injection. It was approved by FDA in December to treat short bowel syndrome (SBS).

NPS launched the drug in February with an annual price of $295,000, which it said was based on the lack of approved drugs for SBS, the small population, the drug's efficacy and its potential to reduce the direct and indirect costs associated with the disease (see BioCentury, Jan. 14).

NPS soon will start pricing and reimbursement negotiations in Europe for Gattex, which was approved there in August. Last month, the company regained ex-North American rights to the drug from Takeda Pharmaceutical Co. Ltd.

After its huge move, Orphan play Sarepta now is eliciting bearish comments from some buysiders. The company closed last week valued at $1.2 billion.

Sarepta's market cap has ballooned over 900% since last summer based on data from an open-label extension of a 12-patient Phase IIb trial of eteplirsen to treat Duchenne muscular dystrophy (DMD). The compound is a phosphorodiamidate morpholino oligomer (PMO) targeting exon 51.

The extension data showed weekly eteplirsen significantly slowed the decline in 6MWT in four juvenile patients vs. four patients receiving placebo (8.7-meter reduction vs. 78-meter reduction; p<=0.019).

In March, Sarepta said it would meet with FDA to discuss seeking accelerated approval - or possibly breakthrough drug designation - for eteplirsen.

However, buysiders are skeptical the agency will be willing to grant any approval based on such a small sample size, with one even questioning whether the effect was real.

"The patients' baseline characteristics make you wonder if this initial ambulatory improvement was a real signal, and I just don't think FDA is going to allow them to file on the data they have, as dire a need as there is in DMD," said Gordon.

Eteplirsen met the study's primary endpoint of increasing dystrophin-positive muscle fibers, but did not significantly improve clinical outcomes.

Smith and David Pinniger of International Biotechnology Trust also believe Sarepta is overvalued.

Steady targets

In addition to the Orphan space, Kolchinsky said targeted cancer therapies will continue to be a favorite for investors.

Because of biomarkers and personalized diagnostics, "oncology is turning into the kind of space where it's affordable to reach proof of concept in a Phase Ib-type setting by proving that your targeted mechanism is having the desired effect," he said.

Kolchinsky added: "Improving survival is still what really matters, but there are certain cancers where you can make the case that having a profound effect on the tumor can translate to real improvement," thus allowing investors and partners to ascribe real value to programs earlier.

"The remarkable moves by Pharmacyclics and more recently Infinity highlight the amount of interest in targeted oncology drugs," he added.

Pharmacyclics is up 432% since the beginning of 2012, valuing the company at $5.8 billion, while Infinity Pharmaceuticals Inc. has gained 448% over the same span, giving it a market cap of $2.2 billion.

Pharmacyclics' ibrutinib is a Bruton's tyrosine kinase (Btk) inhibitor partnered with Johnson & Johnson (NYSE:JNJ). It is in Phase III testing for chronic lymphocytic leukemia (CLL) and mantle cell lymphoma.

Infinity's IPI-145 is an oral inhibitor of phosphoinositide-3-kinase (PI3K) delta and gamma that is in Phase I testing for hematological malignancies, and in Phase II for asthma.

The company also is developing retaspimycin (IPI-504), a small molecule heat shock protein 90 (Hsp90) chaperone inhibitor that is in Phase II testing for non-small cell lung cancer (NSCLC).

"If you can frame your story around a particular cancer and get it declared 'the new CML' and your drug 'the new Gleevec,' then Pharmacyclics and Infinity become your comparators. That's what companies are trying to do," said Kolchinsky.

Little lovelies

Among the $500-$999 million group, buysiders like names such as Acadia Pharmaceuticals Inc. and Keryx Biopharmaceuticals Inc., which have attracted interest based on strong data in large commercial settings.

Acadia hit its 52-week high on March 21 after reporting additional data from a Phase III trial of once-daily oral pimavanserin to treat Parkinson's disease psychosis (PDP). The day's gain left the company at $8.81 with a market cap of $693.9 million.

Pimavanserin is a small molecule serotonin (5-HT2A) receptor inverse agonist that Kolchinsky said should be useful for treating psychosis in several more settings, including AD and schizophrenia.

"This is a clean molecule with strong efficacy in one Phase III trial being developed by a company that is well-capitalized to complete a second Phase III trial by the end of 2014," he noted. "The drug could generate billions in sales and has a long patent life, yet Acadia is only valued at $700 million."

Acadia raised $86.4 million in a private placement in December that will fund a second Phase III trial of pimavanserin in PDP. That study will start this half, with a Phase II trial in AD psychosis slated to begin in 2H13.

Keryx's market cap has soared since January when it reported that Zerenex ferric citrate met the primary endpoint in a Phase III trial to treat hyperphosphatemia in patients with end-stage renal disease (ESRD).

"This is a fascinating drug that kills two birds with one stone in the CKD world by lowering phosphate but also, since the drug is iron-based, addressing anemia. It can save dialysis clinics money by reducing their use of IV iron and EPO products," said Kolchinsky.

He noted Keryx also will have a major advantage on pricing because its cost of goods for Zerenex is much lower than what it costs Sanofi to make Renagel sevelamer, a nonabsorbed phosphate binder.

Soon after jumping 77% on Jan. 28 - the day the data were reported - the company raised $80.4 million in a follow-on.

Keryx then gained $0.76 (12%) to $7.19 on March 1 after media reports surfaced suggesting that GlaxoSmithKline plc was considering a bid to acquire the biotech.

Keryx was off $0.02 to $7.05 last week, valuing the company at $573.5 million.

Aghazadeh likes Celldex Therapeutics Inc., which he said is an undervalued cancer platform company with a pipeline "that gets more interesting the deeper you go."

The company shored up its balance sheet with a $103.5 million follow-on in February, providing it with runway through 2015.

Celldex's lead program, rindopepimut (CDX-110), is in a Phase III trial to treat to treat newly diagnosed, EGFRvIII-positive glioblastoma multiforme (GBM) following surgical resection and chemoradiation. Data are expected in 2015.

Rindopepimut is a vaccine targeting EGFR variant III (EGFRvIII). It is also in Phase II testing for recurrent GBM.

Next up is CDX-011, a human mAb against glycoprotein NMB (GPNMB) linked to the tubulin inhibitor monomethyl auristatin E (MMAE). It is in Phase IIb testing for advanced GPNMB-expressing breast cancer. A pivotal trial is slated to begin next half.

Celldex has three more programs in Phase I testing for cancer, including a vaccine, a mAb and a protein therapeutic. It closed last week with a market cap of $933.3 million.

One 2Q13 milestone that buysiders are not enthusiastic about is a Phase III readout from Rigel Pharmaceuticals Inc. and partner AstraZeneca plc for fostamatinib in rheumatoid arthritis (RA). The study is testing the oral spleen tyrosine kinase (SYK) inhibitor in combination with DMARDs.

One buysider who didn't want to be named said expectations for fostamatinib dropped after some disappointing results in a Phase IIb trial were reported over the winter.

In December, AZ said fostamatinib was inferior to AbbVie's Humira adalimumab on the co-primary non-inferiority endpoint of change in Disease Activity Score using 28 joint counts (DAS28) scores from baseline to week 24 in the Phase IIb OSKIRA-4 trial. The study enrolled RA patients who had never received a DMARD or were intolerant or refractory to DMARDs.

Pinniger said two cancer plays he likes in the sub-$500 million group are GTx Inc. and TG Therapeutics Inc.

For GTx, Pinniger is bullish about a pair of Phase III trials of enobosarm to prevent and treat muscle wasting in patients with NSCLC that will read out next quarter.

Enobosarm is a non-steroidal selective androgen receptor modulator.

As for TG Therapeutics, Pinniger noted the company "is only 12 months behind Infinity with an identical PI3K asset plus a next-generation anti-CD20 mAb and yet a market cap that is one-twentieth the size."

At last week's close, TG Therapeutics was valued at $106.8 million vs. $2.2 billion for Infinity.

Let's get takeout

Several names bubbled up about potential takeout targets.

"There has not been a lot of M&A over the last few quarters but it might just take one big one to get things going again, especially as the cash continues to pile up on the pharma side," said Aghazadeh.

One buysider, who did not want to be named, volunteered Amarin Corp. plc as a company that should sell itself.

Amarin had explored being acquired after its Vascepa icosapent ethyl was approved last July but ultimately decided to launch the hypertriglyceridemia drug itself in January. It also looked into partnering the product.

A different buysider said Optimer Pharmaceuticals Inc., which lost its CEO in April and began exploring strategic alternatives, is another likely acquisition target.

Optimer co-promotes Dificid fidaxomicin with Cubist Pharmaceuticals Inc. in the U.S. to treat Clostridium difficile-associated diarrhea (CDAD).

Smith suggested the sector might benefit if Elan Corp. plc gives in to overtures from Royalty Pharma, which is seeking to buy the Irish biotech for about $6.5 billion (see BioCentury, March 4).

"I think the deal would be good for the sector because it would give investors a warm feeling about biotech returning value to them rather than sitting on the money for the next 30 years," Smith said.

COMPANIES AND INSTITUTIONS MENTIONED

AbbVie Inc. (NYSE:ABBV), Chicago, Ill.

Acadia Pharmaceuticals Inc. (NASDAQ:ACAD), San Diego, Calif.

Achillion Pharmaceuticals Inc. (NASDAQ:ACHN), New Haven, Conn.

Aegerion Pharmaceuticals Inc. (NASDAQ:AEGR), Cambridge, Mass.

Alexion Pharmaceuticals Inc. (NASDAQ:ALXN), Cheshire, Conn.

Amarin Corp. plc (NASDAQ:AMRN), Dublin, Ireland

Amgen Inc. (NASDAQ:AMGN), Thousand Oaks, Calif.

AstraZeneca plc (LSE:AZN; NYSE:AZN), London, U.K.

Bayer AG (Xetra:BAYN), Leverkusen, Germany

Biogen Idec Inc. (NASDAQ:BIIB), Cambridge, Mass.

BioMarin Pharmaceutical Inc. (NASDAQ:BMRN), Novato, Calif.

Bristol-Myers Squibb Co. (NYSE:BMY), New York, N.Y.

Celgene Corp. (NASDAQ:CELG), Summit, N.J.

Celldex Therapeutics Inc. (NASDAQ:CLDX), Needham, Mass.

Cubist Pharmaceuticals Inc. (NASDAQ:CBST), Lexington, Mass.

Elan Corp. plc (NYSE:ELN), Dublin, Ireland

Gilead Sciences Inc. (NASDAQ:GILD), Foster City, Calif.

GlaxoSmithKline plc (LSE:GSK; NYSE:GSK), London, U.K.

GTx Inc. (NASDAQ:GTXI), Memphis, Tenn.

Infinity Pharmaceuticals Inc. (NASDAQ:INFI), Cambridge, Mass.

Johnson & Johnson (NYSE:JNJ), New Brunswick, N.J.

Keryx Biopharmaceuticals Inc. (NASDAQ:KERX), New York, N.Y.

NPS Pharmaceuticals Inc. (NASDAQ:NPSP), Bedminster, N.J.

Optimer Pharmaceuticals Inc. (NASDAQ:OPTR), San Diego, Calif.

Pharmacyclics Inc. (NASDAQ:PCYC), Sunnyvale, Calif.

Regeneron Pharmaceuticals Inc. (NASDAQ:REGN), Tarrytown, N.J.

Rigel Pharmaceuticals Inc. (NASDAQ:RIGL), South San Francisco, Calif.

Royalty Pharma, New York, N.Y.

Sanofi (Euronext:SAN; NYSE:SNY), Paris, France

Sarepta Therapeutics Inc. (NASDAQ:SRPT), Cambridge, Mass.

Takeda Pharmaceutical Co. Ltd. (Tokyo:4502), Osaka, Japan

TG Therapeutics Inc. (OTCBB:TGTX), New York, N.Y.