The recent pullback in the biotech sector hit the vast majority of small/mid cap biotechs. As a group, it is hard to argue biotech stocks are cheap right now but some stocks are becoming attractive after losing 30-50% in several months. Below are 6 companies that are approaching or already are at attractive valuations. A key theme for all 6 is that they have been sold off alongside the general market rather than for fundamental reasons. Market fluctuations in 2014 may present investors with attractive entry points. Agios – De-risked lead program and validated platform
Agios (AGIO) is the undisputed leader in the ever-so-hot cancer metabolism space and will probably be the first company to get a cancer metabolism drug approved. Cancer metabolism deals with how cancer cells reprogram their metabolic networks to support their growth. Interest in cancer metabolism grew significantly in recent years and there are now tens of programs in development.
Last month at AACR, Agios surprised the medical community and reported spectacular results for its IDH2 inhibitor (AG-221) in AML. The efficacy data set included only 10 patients with IDH2 mutation (IDH2+) who received the 2 lowest doses in the study. Of the 10 patients, 6 achieved an objective response including 5 (50%) complete responses. Having this level of activity already in the first 2 cohorts in a dose escalation trial is extremely rare and efficacy is likely to improve with higher doses.
According to the company, 15% of AML cases are IDH2+, which translates to 7,200 cases in developed countries. Celgene (CELG), which has global rights for AG-221, will pay Agios royalties of 10-15%. Assuming $100k per patient on average and 75% penetration, Agios’ potential royalties could reach ~$70M per year. This can further increase as there are several thousands of additional non-AML patients who are IDH2+.
The AG-221 results are of historic significance as they validate the cancer metabolism approach, proving that targeting metabolic enzymes can lead to profound anti-cancer effect. They also validate Agios’ platform and have positive read-through for the company’s second drug (AG-120) which targets IDH1. The similar biologic functions to IDH-2 and the selection of patients with IDH1+ tumors bode well for AG-120’s likelihood of success.
Agios estimates there are 31,000 cases of IDH1+ cancer in developed countries across multiple tumor types with varying degrees aggressiveness. Assuming a conservative penetration of 30% translates to a $900M opportunity (~$400M of which in the US). Similarly to AG-221, AG-120 may generate preliminary signs of efficacy early on in phase I already in 2014.
With a market cap of $1.37B, Agios is one of the best performing IPOs of 2013. Surprisingly, although nobody expected AG-221 to demonstrate this type of efficacy so early on, the stock is only 37% higher than its price before AACR. The royalty stake in AG-221 alone should support a valuation of $600M, implying a $800M price tag for AG-120, a third drug for a rare metabolic disease and Agios’ platform.
Foundation Medicine – The future of cancer diagnostics
It is hard to overestimate the importance of Foundation Medicine’s (FMI) approach to the future of cancer treatment. The company uses next-gen sequencing to provide a genetic blueprint of tumors, looking at mutations in more than 250 (and counting) genes with relevant mutations.
Until recently, this information had no significance as tumors were treated based on origin and histology. The arrival of targeted therapies that are relevant only for genetically defined subsets of patients creates the need to assess many genes in parallel. Today, in order to find out if a patient is eligible for a specific drug (e.g. Tarceva, Xalkori, Herceptin) a sample from the tumor is assessed with a dedicated companion diagnostic kit. As more and more drugs that require patient selection reach the market, it will become increasingly complex and unfeasible to use a diagnostic kit for each drug.
A single test that can guide treatment with multiple drugs and replace multiple expensive and labor intensive tests is therefore crucial for informing treatment selection.
Foundation Medicine’s products (Foundation One and Foundation One Heme) are the market leaders for solid and blood cancers, respectively. Given the commercial potential and the increased availability of next-gen sequencing, competition is inevitable. Nevertheless, its first mover advantage should allow it to capture a significant share of the $8-10B global market opportunity. Foundation Medicine should not be traded based on its current sales but on its explosive potential 5 years from now. My bet is that the company will not stay independent for long.
Immunogen – Multiple catalysts ahead
Long time followers of this blog will remember Immunogen (IMGN) was one of my top picks for years before selling the stock at $15 3 years ago. Back then, the main issue I had with Immunogen was the lack of catalysts beyond T-DM1 (Kadcyla). The company’s lead proprietary ADC (IMGN901) was only mildly active and had safety issues, whereas the company’s partnered pipeline lacked exciting programs like Kadcyla.
Today, Immunogen is in a completely different place. Kadcyla is generating significant sales for Roche ($115M in Q1 2014) and is likely to grow based on geographic expansion and 1st line results in breast cancer (expected later this year). Immunogen’s wholly owned pipeline is early with 3 phase I programs but 1 ADC (IMGN853, anti- folate receptor) already generated signs of efficacy. Another ADC (IMGN289, anti-EGFR) will probably have meaningful results only in 2015 but its target and design make it very attractive. As for its partnered pipeline, Immunogen finally has a program with strong efficacy as monotherapy and a clear route to market (SAR650984, anti-CD38).
Kadcyla and the 3 programs mentioned above are expected to generate significant news flow in the coming 12 months. For Kadcyla, the biggest event is data from a phase III in 1st line breast cancer (2H14). The trial evaluates Kadcyla alone or with Perjeta vs. standard of care. A positive outcome should push Kadcyla to annual sales of $1.5B. Assuming an average royalty rate of 4%, Kadcyla should earn Immunogen $60M annually for 10+ years. Expansion to adjuvant/ neo-adjuvant breast cancer or gastric cancer represents additional upside.
IMGN853 will have updated phase I results at ASCO that might alleviate investors’ skepticism following safety issues and the recently announced failure of Endocyte’s (ECYT) vintafolide. On the safety front, Immunogen already implemented dosing modifications that appear to improve the safety profile (especially ocular toxicity) but this needs further validation with longer follow up.
The phase III failure of vintafolide, which targets folate receptor with a competing technology (small molecule drug conjugate), increases the risk around folate receptor as a target but IMGN853 could succeed where vintafolide failed. IMGN853 is better positioned for unlocking the therapeutic potential of Folate receptor as a target given its higher potency and favorable exposure in humans (days vs. hours). This explains why, in contrast to vintafolide, IMGN853 has activity as monotherapy already in phase I.
IMGN289 is Immunogen’s most intriguing program (at least from a scientific standpoint). Although EGFR is a validated target for naked antibodies (Erbitux, Vectibix), it is considered unsuitable for ADCs due to safety concerns (especially skin toxicity). Immunogen circumvented the toxicity issue by identifying an antibody that does not lead to significant skin toxicity in cell culture and animals. The company then armed the antibody using the same linker and payload as in Kadcyla (EGFR is HER2 are similar structurally and functionally). The new ADC (IMGN289) demonstrated potent activity in animals but without EGFR-associated toxicities. Initial results are expected in 2H14, but they will probably not be mature enough to demonstrate clinical proof of concept.
SAR650984 (anti-CD38 naked antibody) belongs to the most exciting class of myeloma drugs in development. The antibody (licensed to Sanofi [SNY]) generated a promising efficacy signal that appears comparable to that of daratumumab, Genmab’s (GEN) anti-CD38 currently in pivotal studies. Both antibodies will have updated results at ASCO.
Immunogen’s market cap (~$1B) is predominantly derived from the Kadcyla royalty stake ($600-700M assuming $1.5B peak sales). Immunogen’s pipeline (10 programs in clinical development), partnership deals [Sanofi, Novartis (NVS), Lilly (LLY) and Amgen (AMGN)] and the technology platform are assigned a reasonable valuation of ~$350M. At ASCO, clear efficacy for SAR650984 in multiple myeloma or IMGN853 in ovarian cancer should lead to further price appreciation.
Xenoport – A Tecfidera (not so) fast follower
Xenoport’s (XNPT) value proposition relies heavily on XP23829, an anti-inflammatory drug with the same active ingredient as Biogen’s (BIIB) Tecfidera. Tecfidera’s launch in multiple sclerosis (MS) is the major driving force behind Biogen’s recent performance, as the drug approaches an annual run rate of $2B after only 1 year on the market. XP23829 is still years from the market but the attractiveness of a “Tecfidera-like” drug with a de-risked development program is straightforward, especially for potential acquirers.
Last week, Xenoport presented phase I data in healthy volunteers where 2 formulations of XP23829 were compared with Tecfidera. On top of assessing the drug’s safety profile, the trial was intended to compare the PK profile as well as the pharmacodynamic effect of the drugs. Tecfidera leads to a drop in lymphocyte counts and increase in eosinophil counts, which is viewed as a surrogate for the drug’s activity.
Overall, XP23829 had a similar exposure and led to the expected drop in lymphocytes but the reductions were stronger than those observed with Tecfidera. This discrepancy is puzzling given the fact that it was observed even with blood exposures similar to Tecfidera. It is hard to assess whether this differentiation represents a fundamental difference between the drugs and whether lower doses of XP23829 will be sufficiently active.
In order to reach clinical proof of concept , Xenoport chose psoriasis as a first indication based on the short timelines and the fact Tecfidera generated an efficacy signal in this indication. Results are expected in 1H15 and will trigger the decision to pursue phase III in psoriasis and/or MS.
In January, the company raised $77M to support clinical development of XP23829. This removed a major overhang and allows the company to generate phase II data in psoriasis.
Xenoport also has an approved pain medicine on the market for 2 niche indications. The company got rights for the drug from GSK and is now marketing the drug in the US (Astellas has commercial rights in Japan). Horizant revenues are still limited (~10M a year run rate) but it appears that Xenoport is successful at increasing sales and could eventually reach sales of $25M in 2016-2017.
Xenoport’s depressed market cap of $230M appears attractive assuming the market ascribes $100M to Horizant. Although the higher than expected drops in lymphocyte counts observed in phase I increases the risk associated with the project, Xenoport will have meaningful phase II data next year. If positive, Xenoport will be the owner of a de-risked “phase III ready” program targeting 2 multi-billion dollar markets.
Bluebird – Gene therapy comes of age
Gene therapy is making a huge comeback but the field is still dealing with many challenges, most notably delivery to target cells. Bluebird’s (BLUE) approach circumvents the delivery issue by focusing on genetic diseases of the hematopoietic system that can be treated with stem cell transplant. The company’s treatments aim at achieving the clinical effect of stem cell transplant without the associated toxicity and donor availability issues.
Bluebird has 2 programs, Lenti-D and Lenti-globin for ALD (A rare neurological disease) and beta-thalassemia /sickle cell disease. The three diseases are characterized by a single genetic defect that is important for the function of certain blood cells. Today, the only effective option for these diseases is a stem cell transplant from a healthy donor. A transplant is associated with complications that are often fatal, a high failure rate and in many cases a matched donor is not available.
Bluebird’s process starts with collecting hematopeitic stem cells from a patient and genetically engineering them to express a functional copy of the defective gene. The cells are then re-infused to patients who are engrafted with a modified version of their own bone marrow. This approach has multiple advantages as it has no delivery issues (cells are treated outside of the body), uses available technologies of stem cell transplant and should have a favorable safety profile.
Proof of concept for its two lead products, using earlier product versions, has been established by the company or academic collaborators. An older version of Lenti-D halted disease progression in 4 ALD patients (initial 2 patients reported in 2009 by a French group). Lenti-globin was evaluated in 3 beta-thalassemia patients and led to a dramatic durable response (measured by transfusion- independence) in one of them. Importantly, the products above were technically inferior to the newer generation Bluerbird currently has.
Given the unmet need, the favorable safety profile to date and the potential for a durable response or even a cure, even a low success rate is enough for wide adoption of Bluebird’s treatments. The major risk with any gene therapy is long term safety, with an emphasis on development of blood cancers (which plagued the gene therapy field in the past). To date, Bluebird’s treatments have demonstrated a good safety profile but this will continue to be an issue until data for more patients and longer follow up are available.
Bluebird started a pivotal trial for Lenti-D in ALD last year and expects to complete enrollment in 2015. The primary endpoint will be measured 2 years post transplant but the company may share results from the study based on secondary endpoints for the initially treated patients. Lenti-globin is being evaluated in 2 studies in beta-thalassemia and sickle cell disease, with initial results expected in the back end of 2014.
In summary, Bluebird has the potential to revolutionize treatment of multiple rare genetic diseases by offering one-time treatments with curative potential. Lenti-D and Lenti-globin represent a commercial opportunity of $250M and $1B, respectively. Acknowledging the technical and clinical risks, modifying cells ex-vivo coupled with early proof of concept for Bluebird’s approach make it a good risk/reward story.
Ambit – Undervalued Ph3 program
Ambit (AMBI) is down almost 70% from its 52-week high (October 2013). This represents the market’s disappointment with the failure to gain accelerated approval for quizartinib in FLT3+ AML. The FDA required Ambit to show a survival benefit in a phase III trial, which started last month. Beyond the regulatory setback, the negative sentiment is based on additional issues with quizartinib’s clinical profile. These include short durability of response and the fact that most quizartinib-induced responses were CRi (elimination of leukemia cells with incomplete neutrophil recovery), which are traditionally associated with inferior long- term outcome.
Even after factoring in the issues above (as well as the terrible success rate the industry has in AML), quizartinib is still a promising drug for a disease with very limited options. In its phase II, the drug generated a CR rate (most were CRi) of 47% in heavily pre-treated patients, an unprecedented effect for a targeted therapy. Despite the short response duration, a high proportion (32-42%) of patients were able to receive a transplant following quizartinib. This is the most important clinical outcome as a successful transplant represents the only opportunity to achieve long term remission.
The phase III trial is evaluating quizartinib vs. chemotherapy and is designed to demonstrate a 2-month survival difference. Importantly, patients on the quizartinib arm who proceed to transplant will be able to receive the drug as maintenance therapy after transplant. This further increases likelihood of success as it may enhance quizartinib’s overall effect in over a third of patients.
Although phase III results are expected in late 2015/early 2016, quizartinib will have multiple data readouts from combination and maintenance studies. There is a strong rationale for adding quizartinib to standard of care as the drug’s mechanism (Flt3 inhibition) and safety profile are distinct from those of available drugs. Preliminary results for quizartinib in combination with chemotherapy in Flt3+ AML included a 100% CR rate. According to Ambit, an investigator-sponsored combination phase III trial is planned.
Therefore, quizartinib is not a “wonder drug” but it is has sufficient activity that may lead to long term benefit in patients who have very limited options. At the end of the day, it gets the job done (bridge patients to transplant) with limited toxicity and has even greater potential in combination with chemotherapy or as maintenance treatment.
Quizartinib represents a significant market opportunity of ~4500 patients in the US (25% of AML patients are FLT3+). Assuming $100k per patient, the commercial potential is $450M in the US alone and ~$1B globally. Even after factoring in a 25% likelihood of success, 50% penetration and peak sales in 2021, Ambit’s valuation should be $330M (still quite low for a wholly owned p3 program). Therefore, with a market cap of $120M, Ambit is extremely undervalued.
We are adding a third position in Ambit which appears oversold as a phase III company with a strong clinical validation. We are selling our position in Infinity (INFI) as well as 2 of 4 positions in Array Biopharma (ARRY) following the uncertainty created by the GSK/Novartis deal and the increased dependence on filanesib.