Being Selective in Biotech: Carol Werther
Source: George S. Mack of
The Life Sciences Report
In an industry steeped in complex research and speculative
drug development, successful biotech investing requires real
sophistication. Senior Biotechnology Analyst Carol Werther of
Boston-based Summer Street Research Partners brings her
experience to bear on the trinity of unmet needs, reimbursement
and what physicians are willing to support with their
prescription pads. In this exclusive interview with
The Life Sciences Report,
Werther shares her high-percentage picks that present
opportunities for significant returns.
The Life Sciences Report:
Biotech stocks began the year with a powerful uptick. Is this
The uptick for the group was well deserved, but it's hard to
predict how long it will last. Last year I felt that the prices
of many of the companies I covered were quite depressed for a lot
of reasons, and then there was a lot of year-end, tax-loss
selling that really kept stocks down. It has been a very
difficult and spotty market and it has been very volatile, which
is typical in biotech. You have to really pick and choose your
winners. But, what surprises me the most is there seems to be
real inequality in how people look at valuations of certain
companies. There is momentum in certain therapeutic areas and in
certain stocks, and yet there may be no interest at all in other
companies that have something similar.
Is the industry in a secular uptrend?
I really don't know. It's hard to answer your question, in part,
because if the economy is getting better there will be other
places for people to put their money and, as usual, there are
always just a small handful of companies in biotech that are
profitable because everything else is in development. So, it's
hard to know, and I don't have a good answer for that.
Carol, do you expect merger and acquisition (M&A) activity to
be stepped-up for the rest of this year?
I certainly hope so. M&A has to happen because drug launches
have been so difficult. Even though companies are launching drugs
that meet clinical needs and are important, investors are not
being rewarded. M&A is hard to predict because a lot of it
has to do with management, and if management actually wants to
sell. I would have been wrong about Pharmasset being acquired [by
Gilead Sciences Inc. (GILD:NASDAQ) for $11 billion (
) on January 17, 2012] and the same with Inhibitex [acquired by
Bristol-Myers Squibb Company (BMY:NYSE) for $2.5B on February 13,
Why have product launches been so difficult?
Part of the reason is that the reimbursement process has taken
longer for expensive medicines, which honestly in my opinion is
appropriate. So, reimbursement is one issue that concerns
investors. I remember when Remicade (infliximab) and Enbrel
(etanercept) were launched. The arguments against the drugs were
that no one thought they would be reimbursed. Even though Enbrel
was expensive, the margins were not that great. But, at the end
of the day they have turned out to be really remarkable, and both
drugs really do improve health and quality of life of patients
with rheumatoid arthritis (
The one thing that's been very painful over the last two years
is following these emerging companies that are launching drugs
and then watching their stocks get crushed when the product
launches are a little bit slower than expected. This kind of
thing has been almost across the board. The only positive launch
that I recall was the 2011 launch of Alexion Pharmaceuticals'
Inc. (ALXN:NASDAQ) Soliris (eculizumab) for atypical hemolytic
uremic syndrome (aHUS), a very rare but life-threatening
In light of difficulties like these, it sounds like the IPO is
not a rational exit strategy for a typical biotech startup
I totally agree with you because it just takes so much money to
develop a drug, and these biotech markets are so volatile. Over
the last few years my venture friends have been telling me that
if a biotech came to the public market in an IPO, it means that
big pharma and big biotech had all looked at you and decided that
they didn't want to buy you. So, lots of times the companies that
have come public have been the ones that industry, rightly or
wrongly, didn't want to bet on. But it doesn't mean that the
companies aren't going to be successful. The IPO is not dead, but
you have to be a pretty unique company to be a successful biotech
IPO in these years, and I don't think this year is going to
really change that.
Given the industry today, do you have a theme?
It's been hepatitis C (HCV). In the last few years, big pharmas
have stepped up and said they wanted to be in the orphan disease
area as well. The investor base is obsessed with HCV. But I'll
just tell you, I have struggled with the HCV space because
generally everything looks really good preclinically, and then in
phase 1 as well. It's not until you get into larger patient
populations that you figure out the safety signals.
The one thing that is truly remarkable about the Pharmasset
HCV drug 7977 (now GS-7977), is that the safety profile has been
remarkably benign. It has been in over 300 patients in phase 2,
and it appears we're not going to get a whole lot of surprises on
the safety side. I think that's why Gilead felt confident in
buying Pharmasset for such a huge price. I want to put it in
context. I downgraded Gilead on that acquisition to a Neutral
from a Buy.
Following the acquisition and your downgrade there was
unfavorable news on results of a 7977 trial. The genotype 1 HCV
patients being treated with 7977 relapsed after treatment was
completed. You said that the Street had overreacted in the
selloff of Gilead shares. In that light, could Gilead be a value
Well, I think it can. I downgraded it at around $36, and then the
stock went to $50, and so I downgraded it early. The reason I
thought the selloff was an overreaction was because we know the
drug works in genotype 2 and 3, and so there's no question that
7977 is going to be a drug. But, the genotype 2 and 3 is the
smaller market. There has been excellent data for 7977 in
combination with interferon in genotype 1, the hardest to treat
patients, but the first data coming out without interferon in
that group did not work. The patients relapsed. You would like to
have a therapy without interferon if possible because it causes
flu-like symptoms that interfere with people's work or school.
Interferon is just a very difficult drug. But people should be
still very excited about the prospects for 7977.
Could 7977 be a monotherapy in HCV patients with genotype 2 and
No, not a monotherapy. But genotype 2 and 3 are easier to cure.
I'm very optimistic about the results.
Carol, you follow some other very interesting companies that
include BioMarin Pharmaceutical Inc. (BMRN:NASDAQ), Human Genome
Sciences Inc. (HGSI:NASDAQ), Ligand Pharmaceuticals, Inc.
(LGND:NASDAQ) and Vertex Pharmaceuticals Inc. (VRTX:NASDAQ). Can
we talk about them?
Ok. I'll start with the big one, Vertex, because to me this is
the most obvious disconnect in its market valuation. People are
so concerned that its HCV drug, Incivek (telaprevir), which was
one of the fastest launches in pharmaceutical history, is going
to be obsolete in two or three years. So the stock itself is very
heavily discounted. The company is still working on new HCV
drugs, and it has two nucleotide analogues in phase 1 for which
it gets absolutely no credit, even though every other company in
the HCV space is a takeout candidate.
What's so fascinating to me is that Vertex has four products
in its pipeline that have demonstrated proof of concept, and the
company just got a third drug, Kalydeco (ivacaftor), approved in
cystic fibrosis (
). Unfortunately it only treats 10% of the CF patient population
of this orphan disease. However, what's exciting is that this is
actually a disease-modifying drug, it doesn't just treat
symptoms, and this is the first drug for CF that does that. The
company has two other drugs in the pipeline for cystic fibrosis,
VX-809 and VX-661, that I think have a very high likelihood of
working. I had the pleasure of visiting the scientists at Vertex
last November in La Jolla, and what was really clear from talking
with them is that they finally understand the science enough to
design drugs that will modify the disease. VX-809 is the next
drug that should be approved, and although it's at least two
years away, it will probably treat 50% of the CF population. It's
truly exciting, but again, I don't think the company gets a lot
of credit for that. Vertex is overly discounted and has a very
You're obviously very bullish on Vertex. Is it your top pick?
Vertex is one of my two top picks for this year. My other top
pick is BioMarin Pharmaceutical Inc., which all of a sudden has a
lot of interesting drugs in the pipeline. It went from $30 to $13
on the disappointing launch of Kuvan (sapropterin hydrochloride)
for phenylketonuria (PKU) at the end of 2007, but the launch was
not a failure. In fact it drove the company to profitability. The
reason I kept my Buy on the stock was because I had visited the
company and talked with the chief scientist about the program
focusing on mucopolysaccharidosis (MPS), a lysosomal storage
disorder. He basically told me that the company's enzyme
replacement drug GALNS (N-acetylgalactosamine-6 sulfatase) for
MPS IVA (Morquio A Syndrome), was going to work. The exciting
thing is that the drug is working. We are probably going to have
results by the end of the year. You are asking governments to pay
a lot of money to treat orphan diseases, but I have seen drugs
get approved when the clinical trials didn't exactly meet the
endpoints just because it's clear that the quality of life of
these patients was improved. So, I remain very bullish on
It's one of your top picks, but your target for BioMarin is only
$40. That's roughly 10% upside from current levels.
I know. I have to raise it. It's not high enough. GALNS is as
close to a slam-dunk as you can get. The children have been
responding very well in phase 1 and phase 2, and now it's in
phase 3. They are growing and doing very well on the drug, and it
doesn't have any obvious negative side effects.
Is there another idea you could talk about that might perform
well for investors.
Well, one that I think could perform really well this year is
Human Genome Sciences Inc. The stock got down to $7 or $8 in
December, but it was as high as $29 or $30 last year. So,
basically it's been totally crushed. In March 2011 the company
launched Benlysta (belimumab), the first new drug in 50 years for
moderate to severe systemic lupus. It was a very poorly run
launch by GlaxoSmithKline plc (GSK:NYSE), and it got a very slow
start. One of the interesting things about Benlysta is that it
takes two or three doses, these are IV infusions given once a
month, before you see results. Also, the endpoint used in the
pivotal trial was a composite endpoint that isn't exactly the way
doctors look at their patients every day. So, the doctors need to
talk to each other to figure out which patients might benefit and
what to look for. In most cases the physician's goal is to reduce
the amount of steroids the patient is receiving to a safer dose.
So, it's a little bit of a challenge to find the right patient,
and then you've got to wait several months after successive doses
to see results. So, it's a different drug in the rheumatology
Your target price of $23 for Human Genome represents an implied
upside of nearly 200% from current levels.
I'm very optimistic that it's going to be a good drug. The side
effects of Benlysta have been very mild, and so that's just been
great. And for most of the physicians I've spoken to,
reimbursement hasn't been that much of a problem.
What else are you talking to investors about?
NPS Pharmaceuticals, Inc. (NPSP:NASDAQ) is a very interesting
small company with two orphan drugs in phase 3. One is Gattex
(teduglutide), which is a protein replacement for patients with
short bowel syndrome, and so this is a narrow market. Basically,
these patients cannot absorb enough nutrients. The NDA (new drug
application) was filed around the beginning of December, and the
FDA should have a panel meeting next quarter. I do believe it
will be approved this year. Also in phase 3 is Natpara
(recombinant human parathyroid hormone) for
Ligand Pharmaceuticals Inc. is another small-cap company you
follow. You have it rated Buy with a $22 target price. I'm
interested in this company because it has a true platform and a
steady revenue stream emanating from royalties. It's interesting
to see a scientific and business model that works this way
Ligand bought this little company in the Midwest that had this
Captisol technology that was basically going to move the company
to profitability pretty soon. Captisol is a formulation that
improves solubility, stability and pharmokinetics of drugs and
Ligand receives milestones and royalty payments from other
companies that range from low-mid single digits to double digits.
The lead program is Captisol-enabled melphalan, which the company
could partner. The product has met all its endpoints in a phase 2
trial in patients with multiple myeloma who are undergoing bone
marrow transplant. Ligand is going to begin a trial with 60
patients this year and plans to file a 505(b) NDA in 2013.
Ligand is up 48% during the past 12 months. It has something like
50 partnered programs, and so it's diversified. Could this be
considered a more conservative play?
Yes. In fact a Ligand investor called me about my model which is
very conservative. This investor wanted to know why I don't have
this or that in the model. I said I don't like taking products
out of a model later, and I would rather say, these are the five
things that I don't have in my model that could represent more
upside. So, yes, I do consider it to be pretty conservative.
Basically management is executing its plan, which has been in the
making for five years. But what really changed this for me was
buying the Captisol company and getting all these royalties on
You follow Avanir Pharmaceuticals Inc. (AVNR:NASDAQ) another
small cap. It's up 24% over the past three months. You have it
rated Buy with an $11 target price. What particularly do you
Well, Avanir launched Nuedexta (dextromethorphan hydrobromide and
quinidine sulfate) a year ago for a very unusual disorder called
pseudobulbar affect (PBA) which is the result of brain damage
that could arise from a variety of things. The dextromethorphan
is the active ingredient in cough syrup, and quinidine is a
metabolic inhibitor that keeps blood levels of dextromethorphan
high enough. These PBA patients have uncontrolled laughter and
crying, which is very socially isolating. When Nuedexta works, it
works remarkably well and there clearly is a difference in the
patients. So, the company is calling on psychiatrists and
neurologists, and there are trials to expand the label to central
neuropathic pain in multiple sclerosis (
), behavioral issues in Alzheimer's disease and diabetic
peripheral neuropathic pain. I think the drug does remarkably
well in patients with Alzheimer's and other dementias.
Has uptake been difficult with physicians?
You know, the number of scripts goes up every single week, and
the feedback is very positive. But, the main thing is that they
have had to document PBA. Often times the doctors say they don't
see this problem, especially the MS doctors. Well, the reason
they don't see it is they really don't ask the patients, and
there wasn't any effective treatment prior to this. Also, it's
embarrassing for some of the patients to talk about.
Neurologists tend to be isolated from their patients, don't
In some ways they are like oncologists were 15 years ago where
they feel that nothing works. Nothing gets better. Unfortunately
a lot of the patients they see are not going to get better, which
is tough. So, getting them to try something new has been
challenging. Now some of the doctors are doing questionnaires and
asking the patients about crying and laughing. Some patients
can't work because of PBA. So, I'm very excited about the
Carol, it has been a pleasure speaking with you.
Thank you very much.
Prior to joining Summer Street Research Partners, Carol
Werther worked as a biotechnology consultant for several firms,
including Winslow Management and Rx Capital. She has also held
senior biotechnology analyst positions at Think Equity and
Adams Harkness & Hill. Ms. Werther was recognized by The
Wall Street Journal's "Best on the Street Survey" in 2000 and
2001. She received an MBA from New York University, Stern
School of Business, and holds an MS and BS in nutrition
sciences from the University of Alabama in Birmingham and
Cornell University, respectively.
1) George Mack of
The Life Sciences Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Life Sciences Report:
Gilead Sciences Inc.
3) Carol Werther: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. Summer street has been paid by
Avanir Pharmaceuticals Inc. and NPS Pharmaceuticals, Inc. on
deals in the past. I was not paid by Streetwise for participating
in this story.
The Life Sciences Report
is Copyright © 2012 by Streetwise Reports LLC. All rights are
reserved. Streetwise Reports LLC hereby grants an unrestricted
license to use or disseminate this copyrighted material (i) only
in whole (and always including this disclaimer), but (ii) never
The Life Sciences Report does not render general or specific
investment advice and does not endorse or recommend the business,
products, services or securities of any industry or company
mentioned in this report.
From time to time, Streetwise Reports LLC and its
directors, officers, employees or members of their families, as
well as persons interviewed for articles on the site, may have a
long or short position in securities mentioned and may make
purchases and/or sales of those securities in the open market or
Streetwise Reports LLC does not guarantee the accuracy or
thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are
listed on the home page in the In This Issue section. Their
sponsor pages may be considered advertising for the purposes of
18 U.S.C. 1734.
Participating companies provide the logos used in The Life
Sciences Report. These logos are trademarks and are the property
of the individual companies.
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 981-8204
Fax: (707) 981-8998