Array’s (ARRY) recent licensing deal with Novartis (NVS) is another evidence of pharma’s appetite for new oncology compounds, especially for targeted agents. Facing a patent cliff and dwindling internal pipelines, pharmaceutical companies are willing to pay a generous price for promising early stage compounds.
This is why companies with broad platform technologies that can feed the industry with new compounds represent an attractive investment opportunity. These companies include (in alphabetical order) Arqule (ARQL), Array, Exelixis (EXEL), Immunogen (IMGN), Micromet (MITI) and Seattle Genetics (SGEN). From that list, Array has been the worst performer in 2009 due to liquidity fears as well as lack of exciting clinical data for its proprietary compounds. The two recent deals with Amgen (AMGN) and Novartis helped Array strengthen its balance sheet, but more importantly, they prove that the company’s discovery and early stage development capabilities have been underestimated by the market.
Novartis in-licensed Array’s MEK inhibitors, including ARRY-162, currently in phase I in cancer patients. The deal included an upfront payment of $45M as well as double digit royalties on international sales and opt-in rights for the US. Although large licensing deals for early stage oncology compounds with limited efficacy data are not a rare event, Array’s deal with Novartis stands out as it has already out licensed a similar compound to AstraZeneca (AZN) several years ago. The AstraZeneca deal, which was announced in late 2003, covered AZD6244 (a preclinical stage compound nearing IND at the time) and backup compounds for an upfront payment of $10M.
The interesting part of the Astra agreement was that it permitted Array to develop other MEK inhibitors but only for non-oncology indications. This restriction was set to expire in April 2009. During that period, Array advanced two additional MEK inhibitors to clinical trials as part of its inflammation pipeline, one of which, ARRY-162, failed in a phase II trial in rheumatoid arthritis last year. Despite the failure, ARRY-162’s value kept going up, as the interest in MEK as a target for cancer therapy reached unprecedented levels in 2009.
MEK is part of the MAPK pathway, one of the two major signaling axes in cancer, on which multiple signals converge and lead to cell growth. The other axis is the PI3K pathway. The current approach with targeted therapies such as MEK inhibitors is to combine them with other drugs in order to block several cascades in parallel. The hottest trend right now is modulating both the MAPK and the PI3K pathways simultaneously, as cancer cells often activate both of these pathways. A good example for this trend is an ongoing phase I trial combining Astra’s MEK inhibitor (AZD6244) and Merck’s Akt inhibitor (MK-2206). This is probably the first time in history two pharmas decide to combine two drugs at such an early stage of development.
Array was not the first to strike a large MEK inhibitor deal. In April of last year, Ardea (RDEA) sold rights for a phase I MEK inhibitor to Bayer in a deal that included an upfront payment of $35M and low double-digit royalties. Array managed to get better terms, as its drug has a comprehensive safety and pharmacokinetics data package thanks to the inflammation program. In addition, ARRY-162 was the last unpartnered clinical stage MEK inhibitor in the market, which probably helped Array in the negotiation table.
On the clinical front there were mainly two factors that positioned MEK as a hot target. The first was a spectacular data set from a phase I of PLX4032, a drug developed by privately held Plexxikon and Roche for melanoma. Although PLX4032 does not target MEK , the fact that it hits a different target in the MAPK signaling pathway (BRAF) seems to further validate MEK as a target. Another reason for the great interest in MEK inhibitors was large amount of clinical data for AZD6244, the MEK inhibitor Array licensed out to AstraZeneca more than 6 years ago. Although, AZD6244 failed in three phase II trials and did not reach a registration trial, it still demonstrated interesting signs of efficacy, especially in tumors harboring certain mutations. This has led some to blame the AZD6244’s delays on a poorly designed clinical program rather than the compound itself. Therefore, ironically, the effort and money put into AZD6244 by AstraZeneca enabled Array to sign such a lucrative deal for its other MEK inhibitor with Novartis.
From Novartis’ stand point, it added another promising kinase inhibitor to the armamentarium. The company’s kinase inhibitor pipeline for cancer comprises of 9 compounds in development and three approved drugs, including Gleevec, the best selling kinase inhibitor to date. The company will probably have a fourth drug in the market next year following data from a registration study for INC424. This is the place to admit the size of the INC424 deal, which included an upfront payment of $210M for rights outside of the US, easily topped my predictions which turned out to be ridiculously low.
In contrast to INC424, ARRY-162 is still an early stage compound with no clear route for approval. As discussed above, its value will probably be in combination with other drugs, which is why large companies like Novartis aspire to have a diverse pipeline of targeted therapies that could be mixed and matched according to the clinical setting. Novartis, for example, has a strong presence in the PI3K arena, with one drug (Affinitor) already approved for kidney cancer and two others in clinical testing with what appear to be early signs of efficacy. On top of Array’s MEK inhibitor, Novartis also has a phase I compound which hits BRAF, another component of the MAPK pathway. Coincidentally or not, at last week’s AACR annual meeting, Array presented an extensive preclinical project on the combination of its ARRY-162 with Novartis’ Affinitor. This will probably be just one of many combinations Novartis will evaluate in the clinic.
In summary, the collaboration with Novartis is a great achievement for Array and a testament of excellent long term strategic planning. The company’s MEK inhibitors are now being developed in the hands of two of the top 5 pharmaceutical companies. The Novartis deal comes after a lucrative deal with Amgen in diabetes, which increase the number of clinical stage partnered compounds to 8. This is on top of four wholly owned compounds in the clinic.
Even after the recent climb, Array’s market cap is still under $200M, which is substantially lower than other companies with kinase inhibitor platforms such as Exelixis and Arqule. The only thing that separates Array from these companies is the fact that it does not have one drug with a clear path to market. Most of Array’s drugs are still in early clinical development, so investors cannot put a price tag on them. Once investors see the light at the end of the tunnel with at least one of Array’s drugs (partnered or unpartnered), the company’s valuation should increase dramatically. It is hard to predict the timing of such an event, but with the amount of shots on goal Array has, it is probably only a matter of time.
Since its inception 18 months ago, the biotech portfolio, managed by Ran Nussbaum and myself is up 82.3%. The table below compares its performance to other general and life sciences-oriented indices and ETFs. Although the portfolio is still at the no.2 spot, we managed to narrow the gap to 3%.
The biotech portfolio as of Apr 25th 2010