If you have any acquaintance with the biotech and small pharma market, you know who Dr Elemer Piros is. Top-ranked by the Wall Street Journal and Financial Times in different years, he is with Burrill Securities as a Managing Director and Senior Biotechnology Analyst. He was the lead life sciences analyst at Rodman & Renshaw in their years leading the life sciences banking business, after serving at Ladenburg Thalmann and Spear Leeds & Kellogg/Goldman Sachs. He holds a PhD in Neurosciences from UCLA. No stranger to a laboratory, before joining a Wall Street firm, he spent eight years conducting research in biophysics, biochemistry and molecular biology at Cornell and at UCLA.
I had the good fortune to talk to Elemer about his views on today’s biotech marketplace and, as I anticipated, his vision is clear and precise, as well as incisive and comprehensive. I think you will agree.
JA: The market roared back today after a very weak performance last week. I wonder if you can tell me broadly how your part of the market is doing, and how you think it will do for the balance of 2013?
EP: Biotech companies have had a very strong run over the last two years since the beginning of 2011, up 85% to 90%. Leadership by large biotechs has been especially notable. The market value of some of the leaders went up by $20 billion overall in that period of time. That, of course, creates capital to reinvest in new issues, and there has been a very strong IPO market in biotech. So far this year there have been 16 new companies going public, raising an aggregate of about $1 billion or so .
If some of the larger funds take a fraction of the profits they have made in larger biotech, they can easily fund the newer biotechs. And indeed the market looking forward continues to look very strong. There are in fact more than 20 more filings that indicate companies are planning to continue the strong IPO market that we have seen so far this year. As far as we can tell, the next four to six months will be as strong in terms of IPOs as it has been during the first half of 2013. IPOs in this market are looking very healthy indeed.
This is a function of the overall market, and we have seen good performance in both the broad market and the biotech market in the first half at least. These are companies that are relatively advanced in clinical development, and there is speculation that beside the specialist funds who have a solid track record in biotech, the generalist funds are starting to buy or invest as well. The first 16 IPOs this year are up 25% to 30% as a group.
We are very optimistic for the second half based on milestones we foresee in the industry. There was tremendous activity on a number of fronts at the recently concluded American Society for Oncology (ASCO) conference in Chicago, with positive results dominating the meeting.
JA: There have been lists recently of best- and worst-performing biotechs. Your comments on these?
EP: Regulus Therapeutics (RGLS) is one of the “fresh” biotech IPOs that is up 80% to 90% as of today (6-17-13). That does not surprise me; it is pretty much drive by clinical data. If you look at the 2-year chart of Infinity Pharmaceuticals (INFI), the stock went from $7 to $50, and is now back at $17 based on early oncology trials. They have a very promising approach to treat some leukemias. They compete directly with Gilead (GILD), which has a market cap that is four times larger. Gilead has a first in class PI3K kinase inhibitor, and early data from a follow on compound drove Infinity to 50. During the ASCO conference they showed very promising efficacy, but their safety profile was not as good as expected, which has accounted for the recent decline.
JA: Does that mean Infinity is worth looking at?
EP: Yes, it might be a company to look at, at these levels. There has been a bit of an overreaction. Just a couple of weeks ago we held a conference very specific to what they are doing. Infinity is involved with a drug that targets a specific kinase, referred to a “PI3K” kinase. The clinicians presenting at the conference from Memorial Sloan-Kettering did not think the safety profile was all that bad and potentially manageable, so Infinity might be a value at these levels due to an overreaction.
JA: I have read that Angelina Jolie’s double mastectomy will spur the biotech market, but it happened almost simultaneously with the Supreme Court’s Myriad Genetics decision. How do you view these?
EP: I have a fairly strong opinion on those. I believe there will be increased activity based on Angelina Jolie’s well-publicized double mastectomy. First of all, there will be broader awareness that there is a pretty definite test for that type of breast cancer gene. Of course it is interesting that with regard to Myriad Genetics (MYGN), the Supreme Court’s decision that gene sequences as found in nature are not patentable. However, gene sequences that are manipulated can be patented. What does that mean?
Myriad has a series of patents expiring in 2015 on “BRCA1” and “BRCA2” genes, which are used as diagnostics for susceptibility to the type of breast cancer that ran in her family. The cost of the genetic testing is about $3,000, which puts it out of reach for a lot of people. Now other companies are beginning to announce that they will be launching less costly test that will bill out at between $1,000 and $2,000. They will be available from more than one vendor and at a lower cost.
But the caveat is that Myriad has spent the last decade gathering information on gene mutations related to BRCA1 and BRCA2 testing – and some of that information has been published, while other parts of that information are undoubtedly not published. There are literally hundreds, if not thousands of mutations possible in these genes. Some can be harmful, and others are completely meaningless, not leading to disease. Myriad is probably keeping the majority of these mutations as trade secrets, which is a treasure trove of data. So if a woman wants a reliable test, they may still have to turn to Myriad, because all the other vendors will only have the information made public – not the full data bank that resides only at Myriad. If a woman goes and has herself tested and she gets a result that is not determinable, she may have wasted her money. If you go to Myriad, for a mutation not in the literature, they might be able to give a definite answer.
JA: Any names of the companies ready to enter that market?
EP: One is based in Israel and is called Gene By Gene Ltd. Another is Ambry Genetics, based in Aliso Viejo, California.
JA: How about orphan drugs? It is possible for investors to make a good return on small indications?
EP: Definitely yes. There are some shining companies out there. I visited a few funds on the west coast last week and one of those has $1 billion under management, with 70% of the assets invested in orphan drugs. Alexion Pharmaceuticals (ALXN) is one orphan success stories. They have made a success of and are valued at about $18 billion from one single drug that is currently indicated for 2 ultra-orphan indications. This year their estimated sales are expected to be about $1.5 billion, with a market cap that is 12 times that. They have a very solid pipeline and people speculate they could repeat the performance of Soliris, which is the drug that accounts for their revenue now. Soliris annual treatment cost is about $400,000 per patient, and it is a chronic lifelong therapy.
This leads to something even more interesting, and we also had a conference at Burrill focused on gene therapies – and we have one practical example in Europe – that would fix an enzyme deficit with a once-in-a-lifetime treatment. So in the case of the first drug approved for gene therapy in Europe, the drug is Glybera, and the company is called uniQure, a private company based in the Netherlands. They are thinking of charging 1 million euros for the treatment, but it would be a cure, with no further costs for the patient or the healthcare provider. The Alexion type of treatment – which is for a different indication, but I mention it as a type of treatment only – is $400,000 per year in perpetuity. So the very costly one-time treatment may well be more attractive to all parties.
Here is an indicator of how much interest there is there is for gene therapy. There is a company called bluebirdbio, headquartered in Cambridge, MA. It is one of the 20 companies that have filed for IPOs that have not been brought yet this year. They have gene therapies in clinical development, and about two or three years away from the market, but there is tremendous receptivity among investors. We will see how it will perform, and I believe it is slated to be priced this week. These would be one-time treatments. There is also a gene therapy in development for hemophilia, which is also an enzyme deficiency. Hemophiliacs have to go for enzyme infusions up to twice a week, and I believe the gene therapy clinical have patients who have not had an infusion for up to 3 or 4 years.
JA: Is there any potential for rejection of enzyme replacement therapies?
EP: Enzyme replacement therapy drugs are sometimes derived from animals and sometimes there are recombinants, manipulated in the laboratory. The body can develop antibodies to either of these, which might mean that patients could stop being able to receive treatments. The one-time treatments would potentially eliminate that problem.
JA: What are the “big” indications this year that investors should watch?
EP: Prostate cancer is one. We have the therapeutic Dendreon (DNDN) vaccine, Provenge, which is not doing well commercially, but that is not necessarily an indication of how well it works. The upfront cost of Provenge is about $100,000, and reimbursement takes up to 90 days, so if a clinic or physician has 10 patients, it could have a $1 million liability in getting the drug. The market doesn’t really like this type of payment setup. We have to see if Dendreon can find a solution for that and expand the market acceptance. Johnson & Johnson (JNJ) has Zytiga that was launched some two years ago, but this drug has an inconvenient factor in that it has to be co-administered with steroids to calm the body’s reactions to it. The other drug that was launched about a year go is Xtandi, which is from Medivation (MDVN) and their pharmaceutical partner, Astellas. The advantage of Xtandi is that there is no requirement for steroid pre-treatment.
But an interesting wrinkle on this just came out today. Johnson & Johnson announced it will buy Aragon, a private company that has a second-generation drug related to Xtandi, both of which were developed at UCLA. Medivation sued to gain access to the second generation drug, but lost the case, and now Johnson & Johnson is paying $650 million up front, in a defensive move to potentially make up for market share lost due to Xtandi’s success over Zytiga.
One small cap is OncoGenex (OGXI), which is in development with a Phase 2 trial for OGX-427 for the same type of prostate cancer. This is interesting again because they are looking at people who are failing with Xytiga. Note that an affiliate of Burrill Securities beneficially owns more than 1% of the equity securities of OncoGenex.
JA: How about another indication?
EP: The wet form of age-related macular degeneration, AMD, which became very interesting last year when Regeneron Pharmaceuticals (REGN) launched Eylea. The reason that is big news is that first year sales of Eylea were about $800 million. They are getting visual improvement, as well as stopping the decline in vision. Eylea is an anti-VEGF drug, which inhibits new blood vessel formation in the eye, and wet AMD is caused by leakage from new vessel formation. Eylea inhibits that formation, so the retina can become functional again.
I should say that the dominant player in wet AMD is Roche/Genentech. They are the leader in this $4 billion market in the US with Lucentis, which has to be given as an injection in the eye every 6 weeks. It is not painful actually, and I have spoken with patients, but before and after the injections they have to spend 2-3 hours at the clinic. I visited a clinic and they had nine physicians at work, who together inject 220 eyes in a day.
One of the advantages of Eylea is that you don’t have to go quite as frequently, once every 7 weeks instead of 6, yet this was enough from the patient perspective to sell $800 million worth of the drug in the first year. The projection this year is for $1.3 billion in sales, up another 40% to 50%. This is where a small company comes in, Ohr Pharmaceuticals (OHRP). I cover this company with a Market Outperform rating; it was uplisted to Nasdaq last week. It inhibits blood vessel formation through a different mechanism of action, so their drug can be complementary to both the Roche and Regeneron drugs. And it is an eyedrop, not an injection.
The Ohr phase 2 trial has 120 patients half being treated, half with a placebo. Every patient gets a Lucentis injection on Day 1, then they use the eyedrops for the next 9 months, with further Lucentis injections only as need to prevent further vision loss. The goal is to see if you can reduce Lucentis injections. Even if they go from once every 6 weeks to once every 7 weeks, it is worthwhile, as Eylea has proven.
Another small cap public company in this space is Lpath Inc (LPTN), that has a Phase 1-2 trial ongoing, also an injection, working with Pfizer. One last thing that is a bit futuristic is Avalanche Biotech, in the Bay Area, which is developing a gene therapy that might be a cure rather than an ongoing therapeutic.
JA: What is the likelihood that a biotech company will grow and prosper instead of being bought out?
EP: The Aragon deal today is a late preclinical company that got bought out, and that sort of thing drives valuations. Some VCs or crossover funds are only interested in investing in products that can be placed in big pharma companies, even if that is five to seven years down the road. Very few are like Celgene or Alexion. In most cases they do not have the requisite capital to go through all the steps of development and commercialization with their own products.
JA: Do you have a crystal ball projection on how well biotechs will do this year?
EP: Based on profits by the larger funds in the first half of 2013, we expect some reinvestment one or two tiers lower, which would put that investment in the range of sub-$500 million market caps. That could project better activity for the smallcap space. Of course all bets are off if the broad market goes south.
JA: Thanks, Elemer.