Sunday 25 May 2014

Over-Skepticism: 3 Biotech Companies Trading Too Close To Their Cash - Bioassociate Latest for Seeking Alpha

Below is Bioassociate's latest article for Seeking Alpha, "Over-Skepticism: 3 Biotech Companies Trading Too Close To Their Cash", which covers AMBICNAT and TRGT:

(Read the original article here)


  • The recent sell-off in the biotech sector resulted in several companies with market caps very close to their cash levels. Three such companies that have near-term catalysts are reviewed.
  • Ambit Biosciences, which develops Quizartinib – a FLT3 positive AML drug in Phase III.
  • Conatus Pharmaceuticals, which develops Emricasan as a treatment for a variety of liver diseases and is currently running three Phase II studies.
  • Targacept, which develops neuronal nicotinic receptor modulators for the treatment of Alzheimer's disease and overactive bladder.
The recent sell-off in the biotech sector didn't leave any company unscathed - big or small, they all toppled, some more than others. The risk/reward ratio in the biotech sector was reshuffled, and new, as well as old, opportunities are emerging.
In the last couple of weeks, we have been looking for companies with solid technologies, clear and meaningful catalysts and a market cap relatively close to their cash levels. In our view, this represents an attractive investment opportunity that mitigates some of the built-in risks of the biotech sector. Nevertheless, it's important to note that even though the enterprise value of the companies mentioned below is small, failures in the upcoming catalysts could drive their stock prices further down, below the companies' cash levels.
The three companies that we are looking into are Ambit Biosciences (AMBI), Conatus Pharmaceuticals (CNAT) and Targacept (TRGT).
Ambit Biosciences : Market cap - $115M; Cash - $62M
Ambit Biosciences develops kinase inhibitors for the treatment of cancer and autoimmune diseases. The company's lead drug candidate is Quizartinib, an orally-administered inhibitor of FMS-like tyrosine kinase-3 (FLT3), developed as a treatment for acute myeloid leukemia (AML).
FLT3 mutations are the most frequent mutations in AML (34% of adult patients - over 6000 patients in the US), and studies have shown that AML patients with the FLT3-ITD (internal tandem duplications) mutation have poor survival outcome, mainly due to relapse. Quizartinib, which is the first FLT3 inhibitor in clinical development, is designed to inhibit the kinase activity of FLT3-ITD and consequently cause cell death.
Quizartinib can be integrated into FLT3-ITD positive AML therapy in several treatment lines and patient populations:
1. As monotherapy in relapsed/refractory patients
2. As frontline therapy in combination with chemotherapy (the current standard of care).
3. As maintenance therapy, following either consolidation therapy or a hematopoietic stem cell transplant (HCST)
In two Phase II studies (high dose study and low dose study), Quizartinib has shown encouraging activity in heavily pre-treated AML patients, achieving a composite complete response (CR) of 44-47%, of which most responders had incomplete hematologic recovery (CRi). Importantly, one third of Quizartinib-treated patients were stabilized for long enough to enable HCST - the most efficient AML treatment available.
Following a dialogue with the FDA, Ambit neglected its original plan to submit a NDA for accelerated approval for Quizartinib, and instead advanced the clinical program to show a survival benefit in a Phase III study.
Ongoing clinical programs
1. Ambit recently announced the initiation of the QUANTUM-R pivotal Phase III study, comparing Quizartinib monotherapy to chemotherapy in relapsed/refractory FLT3-ITS positive AML patients.
The QUANTUM-R trial is designed to demonstrate a 2-month survival benefit of Quizartinib. An important part of the study's protocol is the eligibility of Quizartinib-treated patients who proceed to HSCT to reinitiate treatment with Quizartinib following the transplant. The use of Quizartinib as a maintenance therapy following HSCT has the potential to extend overall survival in these patients.
2. Ambit also announced initiation of the Phase II cohort in the MD Anderson Cancer Center-sponsored Phase I/II study of Quizartinib in combination with chemotherapy.
3. Ongoing study of Quizartinib as maintenance therapy in AML patients post HCST.
2014 catalysts
Ambit's Phase III study was launched only recently and is not expected to provide news until 2015. However, several smaller catalysts are anticipated during the remainder of 2014:
1. A number of company and investigator-sponsored studies are planned or ongoing. These include combination trials in newly diagnosed patients and post-transplant maintenance trials. In the Q1 2014 results conference call, the company's management stated they expect to present new data at a scientific conference later in 2014.
2. The efficacy of Quizartinib-chemotherapy combination in newly diagnosed elderly AML patients will be assessed in the NCRI AML-18 trial. This European Phase III AML study is expected to begin enrolling in second half of 2014.
3. Ambit will present data at the upcoming ASCO meeting, including the final data analysis and sub-group analysis from the Phase IIb Lower Doses of Quizartinib doses study in relapsed/refractory AML patients.
Quizartinib bares characteristics of a very promising cancer drug candidate: it is targeted at a specific mutation with a well-defined biomarker, it addresses a disease with a great unmet need, and it's a first in class drug.
Ambit's current market cap and cash position mean that Quizartinib's value is less than $60 million - an incredibly low valuation, even when using very conservative success assumptions. Considering a $100k annual treatment price and a potential US market size of $600m, even a 20% market share will reflect annual sales of $120m.
Ambit's cash balance is sufficient for approximately 6 quarters - enough to take the company through the planned Phase III interim analysis in the second half of 2015 and possibly to complete the study. Combined with the low market cap, this makes Ambit a very attractive M&A target, with a fully-owned promising cancer drug and the funds for its Phase III program.
Conatus Pharmaceuticals : Market cap - $88M; Cash - $50M
Conatus's pipeline contains a single drug - Emricasan, a first-in-class, orally active pan-caspase inhibitor. Conatus is developing Emricasan as a treatment for a variety of liver diseases. By reducing the activity of caspases, which are involved in cellular pathways of both programed cell-death (apoptosis) and inflammation, Emricasan may potentially slow down the progression of liver diseases.
In both pre-clinical and clinical studies, Emricasan has been shown to reduce levels of the liver enzymes, Aspartate aminotransferase (AST) and Alanine aminotransferase (ALT), as well as of circulating caspase-cleaved cytokeratin-18 (cCK-18), an apoptosis marker. In several Phase I studies, Emricasan was well tolerated and did not have an effect on baseline levels of liver enzymes.
Ongoing clinical programs
Conatus currently has 4 in-house clinical programs with Emricasan:
1. Acute-on-Chronic Liver Failure (ACLF) - An acute deterioration of liver function in patients with cirrhosis, usually associated with a precipitating event, which results in the failure of one or more organs and high short term mortality. ACLF is an orphan disease.
CNAT is currently running a placebo-controlled, multicenter Phase IIb trial in ACLF patients, designed to assess the pharmacokinetics, safety and clinical outcomes of Emricasan treatment. During last January, the trial was expanded to clinical sites in the US.
2. Chronic Liver Failure (CLF) - Advanced liver cirrhosis causing the liver to lose its ability to function and regenerate. CLF patients either need to buy time while waiting for a liver transplant or need to regain sufficient health to qualify for a liver transplant.
Initiation of a CLF Phase II trial is expected in the second half of 2014.
3. Liver fibrosis post-orthotopic liver transplant due to hepatitis C virus infection and sustained viral response following anti-HCV therapy (POLT-HCV-SVR) - Patients who receive liver transplants as a result of hepatitis C virus (HCV) infection are at risk of residual HCV still being present in the patient's blood, which can immediately infect the new liver, resulting in accelerated development of fibrosis and progression to cirrhosis of the transplanted liver.
Conatus recently initiated a placebo-controlled Phase IIb trial to assess the efficacy of Emricasan in 60 POLT-HCV-SVR patients over a 24-month treatment period.
4. Non-alcoholic fatty liver disease/Nonalcoholic steatohepatitis (NAFLD/NASH) - NAFLD describes a range of conditions caused by a build-up of fat within liver cells. In some people, NAFLD can lead to a serious liver disease, such as NASH, which in turn may progress to liver fibrosis and irreversible liver damage.
In March 2014, CNAT launched a placebo-controlled proof-of-concept Phase IItrial in NAFLD and NASH patients. The study will test the efficacy of Emricasan following 28 days of treatment by measuring changes from baseline of liver enzymes and other liver damage biomarkers.
2014 catalysts
During the second half of 2014, Conatus is expected to publish results from the ACLF Phase IIb study, along with data from two small, supportive Phase I studies in renal impairment and hepatic impairment patients. Pharmacokinetic and dose response data from these experiments, along with a positive trend in efficacy parameters should support the initiation of a Phase III ACLF study.
Also in the second half of 2014, the NAFLD Phase II study is expected to readout. Emricasan's effects on the clinical endpoints of this study - reduction of ALT, AST and cCK18, have been repeatedly proven in past studies. The data from this study, together with Emricasan's safety and PK data from other programs, will support the advancement of the NAFLD/NASH clinical program once regulatory guidance for this indication will become clearer.
CNAT's share price spiked following Intercept's (ICPT) success in its Phase II NASH study back in January, and shared ICPT's stock decline when safety and regulatory issues started spoiling the NASH party. Amidst the NASH hype, investors forgot that Conatus is more than just about NASH, and that its orphan liver-related indications bare value too.
Although Emricasan currently has only limited proof of concept efficacy data, CNAT's enterprise value should be higher than the current $38m. With funding to take the company though 2015, Conatus is tremendously undervalued. At the current market cap, the risk/benefit of Conatus is favorable, especially when taking into consideration that the upcoming data readouts are expected to provide positive outcomes.
Targacept : Market cap - $126M; Cash - $132M
Targacept's drug candidates are neuronal nicotinic receptor (NNR) modulators. These drugs selectively target and modify the activity of this receptor family, which regulate neuronal functions.
Targacept hasn't been enjoying much success in recent years, seeing its clinical programs fail repeatedly. The biggest hit for the company was the failure of the huge TC-5214 Phase III depression program, which drove Targacept's then development partner, AstraZeneca (AZN), to abandon this program. The company's latest failure, the Phase IIb with TC-5619 in schizophrenia patients in December 2013, drove its stock price to under $4 - the lowest in years.
Targacept is now down to 2 clinical programs - TC-5214 for the treatment of overactive bladder (OAB) and TC-1734 for Alzheimer's disease (AD).
Ongoing clinical programs
1. OAB is a disorder that causes a sudden and often uncontrollable urge to urinate. OAB is a very common disorder, with 17 million individuals afflicted in the US and more than 100 million worldwide. 2012 OAB drug sales were just over $2 billion.
TC-5214 has been found to modulate nicotinic receptors located in the bladder, including its target - the α3β4 NNR subtype. Since TC-5214 is largely eliminated unchanged through the bladder, it has the potential to be an effective oral OAB treatment.
In May 2013, TRGT initiated a Phase IIb clinical study of TC-5214 in 750 OAB patients. The study tests 3 twice-daily doses of TC-5214 (0.5mg, 1mg or 2mg) vs placebo during 12 weeks of treatment. The study is powered to show a reduction of 1 event per 24h vs placebo in both primary endpoints: urination frequency and urinary incontinence.
2. Alzheimer's disease pathology has been long known to involve nicotinic receptors. This has spurred Targacept and AstraZeneca to develop TC-1734, a α4β2 NNR subtype modulator, as a treatment for cognitive decline. Following a successful Phase IIa study in age-associated memory impairment and a failed Phase IIb study in mild-to-moderate AD, AstraZeneca gave up on this program, leaving Targacept to continue the development on its own.
In late 2011, TRGT initiated a head-to-head Phase IIb study comparing the efficacy of TC-1734 with donepezil (Aricept - an approved AD drug) over a 12-month period. The study is subject to a Special Protocol Assessment (SPA) agreement with the FDA and is a potential registration trial.
2014 catalysts
OAB: On February 10, 2014, TRGT announced that the Phase IIb OAB study is fully enrolled. Given the 12-week treatment period, this means the study was completed in late April 2014. Targacept announced it expects to report top-line results from the study in mid-2014.
AD: On April 29, 2013, TRGT completed recruitment of patients in the Phase IIb study of TC-1734 as a treatment for mild to moderate Alzheimer's disease. Like the OAB study, the AD study was completed in late April 2014 and is expected to report top-line results in mid-2014.
Targacept is set to report top-line results from two Phase IIb studies in mid-2014. Given the company's previous failures, investors' expectations are low. The current market cap, which is more or less equal to the company's cash, indicates deep skepticism of either study's success.
However, the risk/reward ratio for holding a position in TRGT into the double data release is positive: if the company fails both experiments, the downside is fairly limited due to the cash balance. On the other hand, positive results in either study, especially in the AD trial, are likely to send the TRGT stock sky-high.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Saturday 29 March 2014

Latest Bioassociate for SeekingAlpha: Tonix's Clinical-Stage Drug, TNX-102SL, Is Completely Unneeded

Below is Bioassociate's latest article for SeekingAlpha, "Tonix's Clinical-Stage Drug, TNX-102SL, Is Completely Unneeded", tell us what you think!

  • Tonix Pharmaceuticals' clinical-stage product - TNX-102SL is a disintegrating sublingual tablet containing a very low dose of cyclobenzaprine, targeted for bedtime administration for the treatment of Fibromyalgia.
  • TNXP was a sub-$5 stock following its recent NASDAQ up-listing until a series of articles drove a stock price rally, regardless of any real fundamental advancements or news.
  • Tonix's reformulated cyclobenzaprine doesn't provide any benefits over generic cyclobenzaprine pills that are commonly used as a Fibromyalgia treatment and will not be accepted by physicians and payers.
  • Even if TNX-102SL will be FDA approved, its patent expiration date grants only 3 years of market exclusivity. Consequently, Tonix has no chance of even recouping its development costs.
  • We argue that Tonix's current market cap is inflated and that Tonix's stock price should be traded only slightly over the company's cash (~$6 per share).
Tonix Pharmaceuticals (TNXP) is a small virtual company that focuses on developing treatments for CNS conditions related to central pain. Tonix, which currently has only three employees, a CEO and Chairman, a CFO and a CSO, develops a single clinical-stage product - TNX-102 SL, a disintegrating tablet containing a very low dose of cyclobenzaprine (CBP) that is designed for sub-lingual administration at bedtime. Apart from TNX-102 SL, Tonix has a preclinical asset - TNX-201 for the treatment of tension headache. Tonix is initially developing TNX-102 SL as a treatment for Fibromyalgia (FM), a neuropathic pain disorder with unknown etiology, characterized by widespread pain and fatigue. A second indication for this drug candidate is post-traumatic stress disorder (PTSD).
CBP has been approved by the FDA in 1977 for the relief of muscle spasm associated with acute, painful musculoskeletal conditions as an adjunct to rest and physical therapy. A very low dose of bedtime CBP as a treatment for Fibromyalgia was originally developed by Dr. Iredell Iglehart, acquired in 1998 by Vela Pharmaceuticals (founded by Seth Lederman, Tonix's founder and CEO) and returned to Seth Lederman years later, without any major R&D advancements over a period of a decade and a half.
One must question, if TNX-102 is such a promising technology with great commercial potential, why was it held from proper development through all these years? And why did Vela, which was acquired for only $30 million, pass on the opportunity? The answer is simple - because it already exists on the market, and at bottom low pricing.
Due to its currently unknown etiology, treatment options for FM patients include 3 approved drugs: Pfizer's (PFE) Lyrica, Eli Lilly's (LLY) Cymbalta and Forest Laboratories' (FRX) Savella. In addition, FM treatment relies heavily on numerous generic drugs that are prescribed as off-label FM treatments. These drugs include anti-depressants, pain medications and muscle relaxants, one of which is a low dose of bedtime CBP, with its generic 5mg CBP sold for a few cents a pill.
TNX-102 SL for fibromyalgia
Tonix is developing TNX-102 SL as a treatment for FM, stating this is both a reformulation and repurposing of the original drug, CBP (company presentation). While TNX-102 SL is clearly a CBP reformulation (oral to sublingual formulation), claiming it is repurposed is nothing but a demagogic argument since CBP pills (such as Flexeril and Amrix) have been widely usedas a FM treatment for many years.
According to Tonix, TNX-102 SL will differ from the currently available generic versions of CBP by a faster absorption time and faster clearance from the blood. This, according to Tonix, will result in a faster onset of the drug's action and is expected to reduce the morning drowsiness that is sometimes associated with bedtime CBP (much like many sleeping pills and muscle relaxants). Importantly, in a CBP surveillance program, the reported incidence of morning drowsiness among 10mg CBP users was 16% (about a third of the reported incidence in clinical trials). The equivalent extrapolated morning drowsiness incidence for the 5mg CBP dose is 10% (see p.7-8 here). It seems as if CBP-induced morning drowsiness is not such a problem as the company wants investors to believe.
Tonix has so far conducted two Phase 1 pharmacokinetic studies in healthy subjects that showed that a sublingual formulation of TNX-102 is delivered to the systemic circulation more efficiently and faster than the ingested CBP tablet (company's S-1, p.52). Tonix admits that the final formulation of TNX-102 has not been reached yet, and further studies are planned before the final formulation will be ready (S-1, p.46-7).
Tonix is basing their hypothesis of the very low dose (VLD) CBP for the treatment of FM solely on the results of the Moldofsky Study - "a phase 2a study, a randomized, double-blind, placebo-controlled trial, which demonstrated that up to 4mg of CBP in a capsule swallowed between dinner and bedtime resulted in significant decreases in next-day pain and other core FM symptoms after eight weeks of treatment, as well as in a significant improvement in sleep quality" (S-1, P.50). In fact, the Moldofsky Study has demonstrated, like previous clinical studies (herehere and here), that various doses of CBP in its currently marketed ingested pill form are affective FM treatments. The Moldofsky Study does not provide any proof that a sublingual formulation of CBP, or specifically Tonix's sublingual formulation, is an effective FM treatment.
Tonix is currently enrolling FM patients to its Phase 2b BESTFIT study - a double-blind, randomized, multicenter, placebo-controlled study to evaluate the efficacy and safety of TNX-102 SL 2.8mg tablets at bedtime in patients with FM. The study's results are expected towards the end of 2014. Note that the Phase 2b" title is misleading - while Phase 2b usually indicates a late-stage clinical study, the BESTFIT study is the first time TNX-102 in its sublingual formulation is actually tested for efficacy.
The question for investors is simple - is Tonix's reformulated CBP version meeting an actual need in the FM treatment field?
The answer is plain and simple - No. TNXP tells an allegedly compelling story about why TNX-102 SL would be the perfect drug for FM. However, when digging into the details of the story, contradictions, unsupported claims and half-truths arise as will be demonstrated.
Let's start by reviewing the company's statements as to why TNX-102 SL has/should have advantages over the currently marketed, low cost, generic CBP oral pills:
Tonix's S-1 (p.44) states "We believe that TNX-102 SL is an optimized CBP product for the treatment of FM and PTSD, and is distinct from current CBP products in three ways:
(1) It is being developed at a dose level significantly below the lowest marketed doses of current CBP products;
(2) It is placed under the tongue, to disintegrate, dissolve and provide sublingual absorption, whereas current CBP products are swallowed and provide absorption in the small intestine; and
(3) It is being developed for chronic use, whereas current CBP products are marketed for two to three weeks of use."
The key to Tonix's statement is "We Believe" as there is no clinical evidence to the company's claims. Let's go over these arguments:
(1) Lower CBP dose: Given the bioavailability of oral CBP (33-55%), the plasma levels of a 5mg CBP pill should be more or less equivalent to the TNX-102 2.8mg sublingual dose. Regardless, it has not been established yet, by Tonix or anyone else, that a 2.8mg sublingual dose is either safer or more effective than a 5mg oral pill. As mentioned above, Tonix claims that in TNX-102 SL, CBP is absorbed faster into- and is cleared faster from the blood circulation. Could the reduced dose of TNX-102 SL, together with its claimed shorter plasma time cause the drug to lose its original efficacy? Maybe. No one knows the answer to that because Tonix had never actually tested the SL formulation's efficacy.
(2) Route of administration: According to Tonix, the sublingual route has 2 benefits:
(i) "since TNX-102 SL avoids first-pass metabolism by the liver, a psychoactive metabolite of cyclobenzaprine, norcyclobenzaprine (nCBP), is not generated" (Company website).
Tonix (or anyone else in the scientific world for that matter) has NEVER established that nCBP has psychoactive effects or any other adverse effects. A search in Pubmed for "norcyclobenzaprine and psychoactive" yielded ZERO results! Furthermore, a similar Google search does not provide a single hit that is not related to Tonix! In addition, Tonix has never proved that TNX-102 SL administration does not result in nCBP generation.
Much to one's surprise, in a clinical study that tested oral CBP in FM patients for 6 months, none of the enrolled patients ended up in a mental hospital due to the (never-heard-before) "psychoactive effects" of nCBP.
(ii) "Despite the approved uses of CBP in treating muscle spasm, we believe current marketed formulations of CBP are limited for treating FM by slow and unpredictable absorption" (S-1, p.50).
Tonix's only clinical efficacy data for TNX-102 (the above mentioned Moldofsky Study), which used CBP ingested pills (not the SL formulation) proved the complete opposite when it demonstrated a significant benefit of CBP pills to FM patients. More importantly, there are several published papers showing that the currently available CBP tablets are an effective treatment for FM (see herehere and here), contrary to the company's "belief."
(3) Chronic use: That is correct but utterly irrelevant, as the 2-3 week treatment is related to the muscle spasm indication. In fact, in clinical studies that tested CBP in FM patients, dosing periods of up to 6 months are recorded (see herehere and here).
To summarize so far, CBP has been helping FM patients for over two decades by off-label use of the currently marketed pills. Tonix's sublingual formulation is not addressing any real unmet needs, and might, on the other hand, result in the loss of the efficacy of the marketed formulation due to overly-reduced plasma levels over 24h caused by the reduced dose and faster clearance from the body. The most worrying thing for Tonix's investors, though, is that the company's statements regarding its drug's alleged benefits could not be regarded as a valid investment thesis.
In addition to the above, Tonix is trying to mask a major problem TNX-102 SL will be facing - a long development cycle coupled with a short-term Intellectual property protection: in its company presentation, Tonix estimates that the NDA for TNX-102 will be filed during 2016 and FDA approval is expected in 2017. A closer look at the time-line forecast provided by Tonix in its S-1 (p.47), shows that NDA submission will not happen before 2017, and potential FDA approval will occur not before 2018 (just add up the time periods stated by the company for each stage). The granted patents (hereand here) that protect TNX-102 include formulation and method of use patents that expire in 2020 (S-1, p.60). Given the 505(b)(2) pathway for FDA approval stated by Tonix (S-1, p.3), which grants only 3 years of market exclusivity - the problem does not require further explanations.
So what stands behind the incorporation of a virtual company that employs only 3 people and develops an old drug that is not really needed?
Looking at the financial benefits Tonix's founders and executives are entitled to may give a hint to the answer. Tonix spends a lot of its cash on G&A, at some points even double the amount it spends on R&D (Q3, 2013 and 2012financial reports for example). Moreover, Tonix spends more on G&A than companies employing dozens of employees. For example, Biodel Inc. (BIOD), which spends three times as much on R&D than it does on G&A and has 30 employees, spends on G&A an amount similar to that of Tonix ($1.5m per Q). This 3:1 R&D/G&A ratio is a common feature in many micro- and small-cap biotech companies. Tonix is an exception here with its high G&A costs and low R&D expenditure.
The much discussed biotech bubble has been supporting inflated company valuations and is enabling many companies to easily raise funds, sometimes regardless of the quality of their scientific assets. Tonix's expedited and premature transfer to the NASDAQ capital market was done during mid-2013 with a reverse stock split, followed by NASDAQ up-listing in August 2013. A few months following the NASDAQ up-listing, a media blitz (from December 2013 to February 2014), which included a series of articles and publications, helped drive Tonix's share price from around $4 to almost $20 without any fundamental reason behind it. The blitz period ended, naturally, with an offering.
Even if TNX-102 SL will be eventually approved, 4 years from today, it will have to fight an uphill battle, hampered by the price premium of a branded drug, against many, equally effective and cheap generic drugs, including Cymbalta and the soon-to-be generic Lyrica. Will physicians switch patients from CBP pills to the unneeded sub-lingual form? Will payers agree to pay a premium price just to reduce some rare cases of morning drowsiness? We seriously doubt that.
Given the lack of any relevant clinical data, questioned market potential and short patent coverage of its only clinical-stage drug, Tonix's stock is extremely over-priced and should be traded close to cash at ~$6 per share.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Tuesday 11 February 2014

Bioassociate Reiterates BUY Recommendation on RedHill Biopharma

Redhill biopharma Feb 5  2014 Update Thumbnail
In a report published on February 9, 2014, Bioassociate reiterated a Buy rating on RedHill Biopharma (NASDAQ: RDHL) (TASE: RDHL.TA), and set an ADS price target of $18.1. The report contains a detailed discussion of RedHill's pipeline advancements during the preceding months and adjusted cash flows.
The Update Report is available at:
In the report, Bioassociate noted, "RedHill Biopharma has initiated late-stage clinical studies in the company's two leading programs - RHB-104 for the treatment of Crohn's Disease and RHB-105 for eradication of H. Pylori. In addition, the submission of the RHB-102 NDA is expected by the end of Q1 2014. The RHB-103 program's FDA approval will be delayed by a few months following a request by the FDA for additional CMC information. Importantly, in January 2014, RedHill completed three Private Placements of shares/ADSs for an aggregate gross amount of $20.2 million, ensuring sufficient funding of the company's operations until the end of 2015. Given the latest advancements, we reiterate our BUY recommendation and our target price of $18.1 per RedHill ADS."

Sunday 19 January 2014

Biotech & Pharma 2013 Licensing & Partnering Activity Review: Diminishing Upfronts, Increasing Platform Licenses Indicate Stronger Risk Aversion among Big Pharma

Let’s face it: everyone finally realized that Pharma’s traditional business model was only as good as the piles of money thrown at it every year. Now that players are feeling the pinch of financial crises and therapeutic droughts, some ingenious dynamics are beginning to play out on the dealmaking landscape. And to begin with, the bulky, disincentivized and unproductive in-house R&D monster is going away forever, leaving behind a legacy of chronic phobia of go-it-alone risky drug development ventures.

So what is replacing the cumbersome in-house R&D? Risk-diluting options are. Although strategies which lower risk by sharing or buying options in clinical programs were already visible in 2005, it wasn’t until the financial burden of the most recent patent cliff that companies really had to implement ways of doing more with less.

Nowadays, in-house clinical projects bear a higher financial risk than ever before

Commitment to traditional in-house drug development model played out all-or-nothing scenarios, where losses were compensated by an abundance of therapeutic targets. But times have changed. Me-too drug niches are saturating at cosmic speeds, which is a clear indicator that emergence of novel disease targets through basic science is simply not up to speed with industry demands.  

Then there’s the dollar-per-approval conundrum: R&D spend has increased with vicious speeds over the last decade, with little growth in the number of approved drugs to show for it (save for 2012 – see fig. 1). Most people would have considered the pharmaceutical industry a pull market, but here, too competition has become another vice, and another major risky step in development, to worry about.

Not only do collaborations lower risk and allow companies to embark on more projects, they also ensure that companies are not competing for the same disease niche. Patent exclusivity times no longer serve as the ultimate protection of the drug's market when there can be up to 10 molecules developed for the same disease target at any given time.

Last year Vertex Pharmaceuticals, for example, had to completely sell off its Incivek (telaprevir) Hepatitis C business after revenues of the drug dropped to zero upon expectation of AbbVie’s and Gilead’s oral competitors. Telaprevir was approved only a year prior to its abandonment, having earned Vertex just under $1 billion in total sales.

All of this boils down to immensely increased financial risk per each drug in development. Because most Big Pharma are becoming acutely cash-aware, new business strategies are much more about risk than gains.

Figure 1. Total spend on drug development vs. number of New Molecular Entities (NMEs) and Biologics License Applications (BLSs) approved each year by the U.S. Food and Drug Administration

Risk is lower together

Nowadays, even when companies choose to outsource the bulk of their pipeline, projects are co-developed with service providers, utilizing risk-diluting and reward-sharing milestone programs. And, amidst what seems like a decade-long criticism of pharma’s secretive nature, the veil of R&D isolationism has suddenly lifted to uncover a series of Big Pharma dating exercises in the form of actual 50-50% pipeline collaborations and data sharing agreements.

Traditional licensing, where a company acquires clinical assets at any stage of development and assumes all further responsibility and cost, is playing out a very visible downward trend. Popularity of traditional licensing has dropped by nearly 10% in just 5 years, while collaborations which assume shared responsibility and rewards increased by 15% (fig. 2).

Figure 2. Collaboration vs License purchases as % of year’s total, 2007-2012
Basic License: Buyer assumes all development responsibility with one-off upfront payment and optional royalties Collaboration:  Shared responsibilities on all or a portion of the drug’s development; shared rewards
Source: Suzanne Elvidge, 2012

Options in the form of success-dependent milestones or pipeline insurance deals are becoming more popular

Collaborations are overtaking one-off license purchases as they allow for lower up-front payments and hedge risks of failure into success-dependent milestones. In M&A exits, too, upfront payments as proportion of total deal value have been on a significant decline (fig. 3), indicating that acquirers are diluting risk through future options and milestones are now holding more and more of the value.

Figure 3. M&A Upfront payments, total deal value and upfront payments as % of total deal value, 2005 -2012
Source: Silicon Valley Bank

For public companies, options in the form of Contingent Value Rights (CVR) stocks seem to be more and more populous on exchanges. Most recently Cubist issued CBSTZ for Obtimer shareholders – the stock will pay out certain dollar per share if Optimer’s Dificid sales targets are met. Meanwhile Sanofi-Genzyme’s Lemtrada-approval-dependent GCVRZ might have actually played out Wagner’s “Ride of the Valkyrie” in the unpredictable days between a negative FDA review and a final approval:

2013 Collaborations, Co-Developments and Licenses: Top 50

Table 1 has some of 2013’s top licensing, co-development, collaboration and general partnership deals. 
(Clicking the picture will open PDF file)

Development Stage

Figure 4 shows the development stage segmentation of last year’s largest licensing and collaboration deals.

The majority of the top 50 largest licensing deals of 2013 involved molecules in Phase II stage of clinical development. Platform technologies which granted companies access to novel methods of drug development, screening and synthesis were the second most popular target of licensing and collaboration.

Platforms are perhaps the most effective way of capitalizing on investment as they may cover several projects at a time, thereby yielding the highest probability of success – which explains their rising popularity for discovery and preclinical projects. For instance, the $1 billion Gilead-MacroGenics collaboration is a prime example of efficient risk hedging. The deal will provide Gilead with access to the MacroGenics’ Dual‐Affinity Re‐Targeting (DART) technology on up to four cancer projects, totaling a reasonable $250 million per oncology lead with zero upfront fees.

Figure 4. 2013 and 2012 top 50 Pharma licensing and collaboration deals by stage of development

Therapeutic Area

In 2013, cancer became an even more popular target of licenses and collaborations than in 2012. 42% of all top partnership deals were in the area of oncology, in contrast with 37% in 2012 (fig. 5). This was followed by Central Nervous System (17%) and Autoimmune Disorders (15%). Alzheimer’s and Parkinson’s disease were the most targeted CNS disorders in 2013. 

Figure 5. 2013 and 2012 Pharma partnerships, collaborations and licenses by therapeutic area

Financials: Commissioning Success

In 2013, the top 50 collaborations, partnerships and licenses cost an average of $99 million in upfronts and $641 million in total deal values.  The largest upfront ($1130 million) was paid by Aspen to GSK for the company’s two divested thrombosis brands, Arixtra and Fraxiparine, both of which are marketed. The lowest upfront payment ($0 out of a total deal value of $1150 million) was made to MacroGenics by Gliead following 9-month negotiations. The deal covers MacroGenics’ Dual‐Affinity Re‐Targeting (DART) technology which produces dual specificity “antibody-like” therapeutic proteins capable of targeting multiple different epitopes with a single recombinant molecule.

Unsurprisingly, upfronts in 2013 were directly proportional to the stage of development. Platform technologies were worth an average of $46 million in upfront payments, while marketed and Phase III products cost an average of $355 million in upfronts.

Deals are increasingly shifting towards long tail royalties and earn-outs at the expense of larger upfront payments. Combined with the fact that a large portion of licensing deals are signed for products in early development stage, it seems that pharma companies aim at starting deals earlier, with less upfront payments, and share the risk with their partners. In other words, when it comes to licensing agreements, it looks as if Big Pharma's strategy is going for many small deals, rather than a few big ones.   

The presence of zero upfront payments in 2013 is likely to be shortly setting the trend of “commissioning” success in Pharma.