Exelixis (EXEL) and Immunogen (IMGN) will have important phase III readouts in 2014. For Exelixis, the readout is from 2 phase III trials in prostate cancer and for Immunogen, a phase III trial in 1st line breast cancer. This raises the question – why should investors hold the stocks throughout 2012-2013?
It is important to identify near term catalysts for biotech companies, but biotech stocks tend to be volatile and their movement is not always catalyzed by fundamental events. A good example for that is the recent surge in Pharmacyclics (PCYC) despite limited news flow. Unfortunately, we sold Pharmacyclics 6 months ago for a 413% profit, under the assumption that the company had no meaningful catalysts until 2014. Since then the stock is up more than 150%…
Exelixis raised $127.5M by issuing shares (at a price of $4.25 per share) and $250M via convertible notes (due 2019). Everybody knew Exelixis must continue to raise capital, yet the size of the deal and its timing are controversial. $375M (not including underwriters’ 30-day option) is a bitter pill to swallow for a company with a $600-800 million market cap. Looking on the bright side, for the first time the company has enough resources to take cabozantinib (cabo) to the finish line independently of a partner or the capital markets.
The recent fundraising, no matter how painful, does not change my perception of Exelixis. I still view cabo as a potential breakthrough in prostate cancer and believe it has utility in additional indications (especially renal and liver cancers). There are still open questions about the drug’s bone effect and exact mechanism of action, making it a high risk investment. Still, even assuming a 33% probability of success in prostate cancer and using Medivation (MDVN) as a benchmark ($3.5B market cap after successful phase III and a licensing deal), Exelixis’ valuation is still reasonable.
Exelixis’ primary catalyst for 2012 is FDA approval in a niche indication that could provide the stock a “floor” valuation of $400M, excluding any potential upside.
FDA approval in MTC (November 2012) – Exelixis recently filed an NDA for cabo as a treatment for medullary thyroid cancer (MTC), a niche indication (US peak sales <$100M). The deadline for FDA’s decision is November 29th. Cabo has high chances of approval based on an impressive progression-free survival effect in phase III and the fact the trial was run under a special protocol assessment (SPA). Risks include cabo-related toxicity (which was fatal in some cases) and lack of survival difference (data still not mature).
Financial implications are limited, however, the approval can put a floor to Exelixis’ valuation based on sales multiples. The only drug approved for advanced MTC is Asatrazenca’s Caprelsa, which recently got approved. It generated $12M in the first half of 2012, most of it in the US. As cabo appears more effective than Caprelsa, it can easily generate $40M in peak sales in the US alone. Assuming a similar opportunity ex-US and a sales multiple of 5, the MTC indication might be worth $400M for a pharma company with an oncology sales force.
Geographic deal (1H 2013) – Following approval in MTC, Exelixis could do a geographic deal that includes Asia or Asia+EU. This will probably be well received by investors as a source of non-dilutive funds and a way to cut down expenses. The company does not need a partner to get to 2014’s catalysts but in order to commercialize cabo globally, it will have to sell rights at least for Asia.
Phase II results in prostate cancer (1H 2013) – Exelixis will present updated results from a phase II trial in 150 chemo-pretreated patients. Although the trial does not have a control arm, it is a fairly large study with a homogeneous patient population that resembles the population in the ongoing phase III trials.
Initial data from this trial showed encouraging signs including bone scan responses in 67% of patients as well as effect on pain (usually caused by bone lesions) and bone metabolism markers. This degree of bone scan resolution is unprecedented, but it is still not clear whether it will lead to improved survival. In addition, cabo’s effect on traditional endpoints that are primarily related to soft tissue lesions (as measured by objective response rate, progression free survival and PSA) was modest.
Therefore, the most important aspect of the trial would be looking at overall survival and whether it correlates to bone scan responses. The only proof that targeting bone metastases improves survival is Algeta’s Alpharadin, which exclusively targets bone mets. Alpharadin prolonged survival of metastatic prostate cancer by 3.6 months. Interestingly, it does not lead to bone scan responses, so it is tempting to speculate that cabo’s survival benefit could be greater.
Just as Exelixis’ fate is tied to cabo, Immunogen’s stock performance is dependent on T-DM1, a promising drug for breast cancer . Following the spectacular phase III data earlier this year and an almost certain approval, the next major milestone with T-DM1 will be data from the MARIANNE trial in 1st line metastatic breast cancer. Overall, Immunogen’s market cap prices in high expectations from T-DM1 and new catalysts are needed to push the stock higher.
On top of T-DM1, Immunogen has 10 additional clinical stage programs in its pipeline, 3 proprietary and 7 partnered (with Sanofi, Amgen, Bayer and Biotest). It is safe to say that at least with one target, Immunogen’s antibody-drug conjugate (ADC) technology works very well. With 10 programs in clinical trials (9 of which are ADCs), it looks like Immunogen has statistics on its side. Most of these programs are expected to generate results in the coming 12 months.
At its quarterly call earlier this month, Immunogen’s CEO made an intriguing comment about 3 partnered programs (not including T-DM1) with a potential to enter pivotal studies in 2H13. These can be either classic phase III trials or pivotal phase II trials that lead to accelerated approval. This could be very significant for Immunogen, as the market ascribes very little to its pipeline. Of course, one has to assume that these remarks are based on feedback from Immunogen’s partners based on clinical data.
One of the three is probably Sanofi’s SAR3419 (anti-CD19), which already demonstrated clinical activity in lymphoma patients. Sanofi will probably advance it to phase III but commercial success is not guaranteed as the CD19 field is packed with highly effective drugs in development.
Of the 6 remaining partnered programs, only 3 could actually have sufficient data to merit considering pivotal studies. In all 3 cases, available data is with monotherapy administration, which makes the data more reliable and development route easier.
BT-062 (Biotest) – This is an ADC targeting CD138 for multiple myeloma. Phase I with this agent given every 3 weeks showed some activity as a single agent but it is not potent enough to justify a pivotal trial. Biotest is evaluating BT-062 in 2 additional trials: A single agent trial where the drug is given every week (recruiting since September 2010) and a very recent combination trial with Revlimid (recruiting since July 2012). Theoretically, if the weekly study generates a response rate of 20+% in refractory myeloma patients, this agent could be approved based experience with Onyx’s (ONXX) carfilzomib.
SAR650984 (Sanofi) – This is a CD38 naked antibody that entered phase I in mid-2010. Sanofi did not report results from this trial but Genmab (GEN.CO) reported excellent results for its CD38 antibody, daratumumab. Genmab’s antibody looks extremely active as a single agent in multiple myeloma with a response rate of 42% and a good safety profile. Sanofi’s SAR650984 looks similar to daratumumab in preclinical testing, so it is likely that Sanofi is also seeing promising results.
SAR566658 (Sanofi) – This is an ADC targeting a novel epitope on MUC1, which enterd phase I in September 2010. Sanofi did not report any data from the study but after almost 2 years it should have a good sense of the drug’s clinical profile.
Each of the programs above (BT-062, SAR650984, SAR566658) represents a blockbuster opportunity. Licensing terms are modest (similar to T-DM1) as the deals were signed prior to the validation with T-DM1 (BT-062 is an exception since Immunogen has a co-development option). Nevertheless, even if one of the programs generates promising data in the coming year as monotherapy, the impact on Immunogen’s stock should be dramatic. Results for SAR3419, BT-062 and SAR650984 might be presented at this year’s ASH meeting in December.
The other 3 partnered programs are still too early in phase I: BAY94-9343 (Bayer, anti- mesothelin) started phase I in September 2011, AMG 172 (Amgen, anti- CA-IX) started phase I in December 2011 and AMG 595 (Amgen, anti-EGFRvIII) has still not been given to patients.
Meaningful data on Immunogen’s proprietary pipeline is expected only in 2013. IMGN901 (anti-CD56) will have randomized data in small cell lung cancer in 2H 2013. IMGN529 (anti-CD37) and IMGN853 (anti-folate receptor 1) are expected to have phase I data in non-Hodgkin’s lymphoma (NHL) and solid tumors respectively.
Biotech portfolio update
Portfolio holdings as of August 26th, 2012