Endocyte – Surprise acquisition driven by scarcity value
Last week’s acquisition of Endocyte (ECYT) by Novartis (NVS) came as a surprise as Lu-PSMA-617 just started P3 and results are not expected until 2020. This is Novartis’ second radiopharmaceutical acquisition within a year, following the AAA acquisition, making Novartis the undisputed leader in targeted radiotherapy.
The decision to buy Endocyte was likely driven by the commercial performance of Lutahtera (originally developed by AAA), which generated Q3 sales of $56M compared to $24M in Q2. This trajectory in the first year of launch (approved January 2018) proves that radiopharmaceuticals can become meaningful products despite the logistic hurdles.
The resemblance between Lutathera and Lu-PSMA-617 are clear. Both agents target solid tumors and demonstrated a significant anti-tumor effect. Importantly, both are based on small targeting moieties (peptides) and 177Lu as a payload, which translate to a favorable safety profile in contrast to antibody-based products which suffer from a narrow therapeutic window.
Lutathera and Lu-PSMA-617 could mark the beginning of a new innovation cycle in targeted radiotherapy but from an investment perspective, there are very few publicly traded companies that develop radiopharmaceuticals, let alone companies with the desirable, clinically validated profile (small targeting moiety, beta emitters, solid tumors). Looks like the experience with this class of drugs has been so disastrous that investors will have to wait until more targeted radiotherapy companies emerge. This scarcity value probably played an important role in Novartis’ decision to buy Endocyte so early.
AVROBIO – Another gene therapy cautionary tale
So far, 2018 has been mixed for gene therapy. The only clear positive news came from Sarepta’s (SRPT) DMD program which demonstrated impressive biomarker data in 4 patients but clinical improvement and durability are still an open question. Most other companies, many of which I hold, published mixed to encouraging data (Spark, Audentes, Nightstar, Ultragenyx). Some, like Krystal (KRYS) presented positive data but sample size is too small to rely on.
The most disappointing readout was from AVROBIO’s (AVRO) Fabry program. As followers of this blog know, I was initially very excited about AVRO’s platform based on the premise of treating rare genetic metabolic diseases with a single ex vivo treatment. AVRO utilizes lentiviruses which integrate into the genome so the vector is not diluted over time as cells divide (as opposed to AAV-based therapies). Blood progenitor cells are collected from the patient, genetically modified to express the missing protein and then re-injected and populate the bone marrow. The concept is similar to that of Bluebird Bio (BLUE) but AVRO’s claim to fame is its mild conditioning regimen which is safer and results in less complications, making it relevant for broader patient populations.
AVRO went public with data from two Fabry patients (see below), demonstrating clinically meaningful levels of AGA, the missing enzyme in Fabry disease, after 12 and 3 months respectively. This data set was enough to support an IPO at a valuation of $450M, which climbed to $1.2B last month.
Earlier this month, the company provided an update which included additional follow up on the two initial patients as well as preliminary results from a third patient (the first to enroll in a company-sponsored study). As can be inferred from the figure below, both patients experienced significant drops in AGA levels with a troubling trajectory.
The trend was also seen with vector copy number (VCN) which is a way to quantify the number of transduced cells in the blood. As can be seen in the figure below, VCN number tend to fluctuate but are directionally correlated to the AGA levels. The company did not report AGA levels for patient 3 but his VCN value 1 month following treatment was very low. In retrospect, a declining VCN trend had already been seen at the time of the IPO with patient #1 but this was overlooked by investors (myself included).
While the trend is very troubling there is still a theoretical possibility that AGA levels for the first two patients will stabilize and stay within the clinically relevant range (above 1). Personally, I view it as unlikely based on experience with Bluebird’s Lentiglobin. Lentiglobin has had its share of setbacks but a quick look at some of the early data in beta thalassemia provides a clear example of how a good engraftment looks like. Expression reaches a plateau after 6-9 months and stays relatively stable (especially in non β0/ β0).
Source : Bluebird Bio , Dec 2015
This is definitely not the end of the road for AVRO, which is already working on improving its core technology. Nevertheless unless the curves for patients 1 and 2 miraculously stabilize, it’s back to the drawing board with a long waiting period. AVRO can still be a good investment long-term but even after the drop it has a market cap of $717M, which I find unrealistic for a company that doesn’t have a viable product. This is another testament for the dysfunctional nature of today’s public biotech market, where valuations are so out of touch with reality. When I look at companies like AVRO and some of its peers like Rubius (RUBY) (Market cap of $1.35B without treating a single patient) the problem is not with the companies but the unsustainable valuations the market ascribes to them.
Biotech portfolio updates
I am adding another portion of the ProShares UltraShort Nasdaq Biotech (BIS) as I think that the last volatile weeks are a beginning of a broad correction. I intend to keep a significant cash position which I hope to deploy next year.
Portfolio holdings – Oct 28, 2018