Hepatitis C and Orphan Diseases Driving Big Biotech
Potential: Geoff Meacham
Source: George S. Mack of
The Life Sciences Report
It may seem counterintuitive that rare diseases might actually
be biotech growth drivers, but Senior Analyst and Managing
Director Geoff Meacham of JPMorgan Chase makes just that case. In
this exclusive interview with
The Life Sciences Report,
Meacham lays out his premise that hepatitis C and orphan
disease drugs can cure the woes of growth-starved investors.
The Life Sciences Report:
Geoff, what is your current theme?
We were very bullish on the biotech group in 2010 and 2011.
Fundamentals are still very good, but I would say we're more
cautious on the performance of the group for all of 2012. One of
the things we pointed out in our 2012 Global Biotech Outlook is
that the tone of the group before 2012, literally last fall, was
very negative. We offered a couple of ideas of what could change
the sentiment very positively. It turns out that a lot of that
stuff actually happened. Deals happened like the Bristol-Myers
Squibb (BMY:NYSE) $2.5 billion (
) acquisition of Inhibitex Inc. (INHX:NASDAQ). That caused a lot
of buzz at our J.P. Morgan Healthcare Conference that we just had
in San Francisco.
The second thing that happened is that a lot of drug launches
that previously were thought to be left for dead, for example,
Dendreon Corp.'s (DNDN:NASDAQ) Provenge (sipuleucel-T) for
prostate cancer and Human Genome Sciences' (HGSI:NASDAQ) Benlysta
(belimumab) for systemic lupus, have actually rekindled and we
have seen an uptick. Dendreon's most recent quarter was good as
was Human Genome's. The U.S. launch of Regeneron Pharmaceuticals
Inc.'s (REGN:NASDAQ) Eylea (aflibercept) straight out of the
gates following FDA approval in November was good. I wouldn't say
that the attitude or tone toward drug launches is strong right
now, but it's not nearly as negative as before.
The combination of those things has really set the group on
fire to start the year. Our message to institutional clients is
that we would not broadly chase the group, however. We still feel
like the European economic uncertainty is likely to be a little
bit of a headwind. The upside potential to revenue estimates is
really what drives a lot of these stocks, and it looks more
limited this year than in prior years. That's our sector tone.
It's good, but not very bullish for this year.
Geoff, is there a sweet spot in the market currently as far
as therapeutic focus?
Yes, it is hepatitis C virus (HCV). We've been talking
about that for about two years, and it is still going to be a
tremendous source of interest and innovation, no doubt about it.
I think what's attracted a lot of people is that you can derisk a
hepatitis C asset relatively early. A phase 2 study with a few
hundred patients, or maybe even fewer than 100, can inform the
design and likely outcome of a larger phase 3 study. We've seen
Pharmasset Inc. [acquired by Gilead Sciences Inc. (GILD:NASDAQ)
for $11B on Jan. 17, 2012] and its robust opportunity with
PSI-7977 in hepatitis C. Then in relatively small groups of
patients, we've seen Inhibitex with its INX-189 in phase 2. My
suspicion is that Idenix Pharmaceuticals Inc. (IDIX:NASDAQ) is
probably another [acquisition] candidate, given that it is in
hepatitis C and is in the so-called nuc (nucleotide or nucleoside
analog) class space with IDX-184 in phase 2b. This nuc space is
really hot right now. So hepatitis C is a sweet spot.
I also feel like orphan diseases are a sweet spot. In this
case, ViroPharma Inc. (VPHM:NASDAQ) with its Cinryze (complement
C1 esterase inhibitor) for hereditary angioedema (
) has had a huge run of late. I think it probably still has some
upside although more limited than a name like an Alexion
Pharmaceuticals Inc. (ALXN:NASDAQ) which had a big, big move last
year. Alexion has its orphan disease drug Soliris (eculizumab)
for paroxysmal nocturnal hemoglobulinuria (
), and it was also approved for its second indication atypical
hemolytic uremic syndrome (aHUS). We also like the potential of
Alexion's new asset ENB-0040 (asfotase alfa) for the very rare
disease hypophosphatasia (
) that came with the acquisition of Enobia Pharma Corp. That
looks pretty robust.
Then on the smaller-cap side in orphan diseases, InterMune
Inc. (ITMN:NASDAQ) is a stock that we've liked a lot. It has
really been decimated. The performance this year is okay, but
last year it dramatically underperformed on fears of a weak
launch in Europe for its drug Esbriet (pirfenidone) for
idiopathic pulmonary fibrosis (
). But it does look like the patient demand is there.
Hepatitis C and these orphan indications are two therapeutic
categories I would point to that could continue to do well in
What about the sweet spot in market cap?
In large cap, and by large cap I really mean the biggest
ones, there is Celgene Corp. (CELG:NASDAQ), Amgen Inc.
(AMGN:NASDAQ), Biogen Idec Inc. (BIIB:NASDAQ) and Gilead
Sciences. We also like Vertex Pharmaceuticals Inc.
Going back to HCV for just a moment, what is it about the
disease that allows you to derisk a proposed drug so early in a
phase 2 trial powered with as few as 100-200 patients, say
compared to an oncology candidate?
When you have an oncology asset, most companies will look
at a drug in a variety of tumor types. So they will do a phase 1
all-comers' trial that could include breast cancer, colon cancer
and lung cancer, and these are going to be very, very refractory
patients. Usually, you'll see the drug have some activity, and
that guides you for the next trial, which would be a dose-finding
study. Then you try to figure out if there's a subset within a
certain tumor type that looks good. Then your larger phase 3
trial is oftentimes based on tenuous assumptions when it comes to
either overall survival (OS) or progression-free survival (PFS).
A lot of companies will go into a phase 3, having very good
response rate data, but not really knowing whether that is going
to lead to PFS or OS net benefit.
With hepatitis C in a phase 1 or phase 2 trial you gain
experience in a much more finite number of variables, and so you
can figure out who your best and worst responders are.
Oftentimes, if you have data in 100 patients, that actually turns
out to be very predictive of something in a much larger phase 3
setting of 500 or 800 patients. Although the rate of clinical
trial failures is probably higher due to unforeseen toxicities,
you can derisk on the efficacy side, in other words, whether your
drug works or not. You can determine that very early in hepatitis
C. That's a lot different than, say, oncology or multiple
sclerosis or other biotech markets.
Alexion's Soliris has received approval for a new
indication, aHUS, as you've mentioned. You indicated this stock
has done quite well, and indeed it is up 72% over the past 52
weeks. Can this orphan disease drug be a growth product?
What I think is fascinating with the Alexion story is
simply the mechanism of complement inhibition. It's very clear
that it's not just PNH and aHUS, it's an entire alphabet soup of
other indications that could include optical disease
neuromyelitis optica (NMO) and myasthenia gravis. Other diseases
talked about include cold agglutinin disease (CAD), dense deposit
disease or even kidney transplant. A lot of them are
ultra-orphan, meaning fewer than 5,000 patients in the world, but
there are a number of them.
But the mechanism is crystal clear. Its complement is driving
the pathology. So there is a blueprint. But what the Street has
to get comfortable with is that the drug will work in these other
indications, which is why we like the stock this year. NMO is
often associated with a central nervous system disorder, but it
is complement-mediated. By mid-year, I think we'll have some
visibility on whether it will work with myasthenia gravis or
I think continuing approvals for new indications is a
factor we have probably overlooked in the past when looking at
I think that's right. There's a blueprint really for new
indications. What Alexion did with PNH was to get approval in the
U.S., Western Europe and then it marched to Eastern Europe, then
to Japan and then to other emerging markets, countries like
Brazil and Russia. My suspicion is that because it has PNH
approval in dozens and dozens of countries, it would make sense
that reimbursement discussions for the next indication, aHUS,
would be a little easier.
How do you start with these new indications in orphan
It's interesting. Because these indications are
ultra-orphan, you can't simply run a trial on 100 patients. In
fact, the approval pathways for Soliris in PNH and aHUS were
really based on one lead phase 2 trial that showed a first hint
of efficacy. Oftentimes, these are centers where one physician,
who has an interest in a certain orphan disease, enrolls some
patients. The next study would be not that much bigger, say half
a dozen centers across the world and maybe fewer than 50
patients. That's the good thing about ultra-orphan diseases; the
incremental expenses are fairly modest to run and execute a
trial; however, it is not a drug until you move that first proof
of concept dataset across the goal line.
You've mentioned several companies, but can you briefly
tell me what your best ideas are?
Our favorite stock for this year in large-cap land is
Gilead. Admittedly, we've liked the stock for a few years, and so
for full disclosure, this has been a top pick for a couple of
years. I think the reason why we kept it for 2012 was simply that
we think the Pharmasset drug PSI-7977 is going to yield a lot of
data over the course of this year, and that's going to give the
Street comfort that it will be a very big drug in hepatitis C. In
the next two years, this company could have $2B, $3B or $4B in
hepatitis C revenues that weren't originally in the model. As a
result, I think you'll see some multiple expansion. In fact, the
stock is up and pretty robust year-to-date (YTD), and the
multiple has gone from about 9 to 11. It's actually still cheap
because the group has something in the 14-15 multiple range. So
it's still a discount to the group. So I'm actually very
comfortable still buying it up here where it's already up 15-16%
YTD. So that's one of our favorites in large-cap biotech.
The other one that we like is Celgene, another large cap. It's
had a good year so far, up about 9%. Its lead drug is Revlimid
(lenalidomide) which is indicated for multiple myeloma, a type of
blood cancer. It's been on the market since 2006 in the U.S. and
2007 in Europe. Management has executed very well. The drug is
unpartnered globally, and it is just launching in Japan, which
means high margins. I think the gross margins on this drug are in
the 97% range. But the big driver for Revlimid in 2012 is its
approval in first-line multiple myeloma. It has a 10% share in
Europe across the continent, but is moving toward between 30-40%
in the next year to 18 months, and that will be a big driver of
revenue growth. That pretty much is the crux of our bullish
thesis on Celgene. There is more to the pipeline in terms of news
flow this year than in prior years, and pipelines obviously do
matter for these stocks.
Celgene's drug apremilast (CC-10004) will have some phase 3
data in psoriatic arthritis. This drug is not in anyone's model,
including ours. It is also filing for another myeloma drug,
pomalidomide (CC-4047, Actimid). Then there will be new
indications for Abraxane (paclitaxel injection), which is under
review at the Federal Drug Administration (FDA) for lung cancer.
That could come by year-end. So there is a lot to think about in
terms of underlying fundamentals, within the pipeline and also
regulatory events. There is a lot of action event-wise.
Is apremilast an anti-tumor necrosis factor (TNF)
It's an oral drug similar to an anti-TNF. The issue is that
the efficacy we've seen in phase 2 in psoriasis looks a little
bit south of where Humira (adalimumab) is from Abbott
Laboratories (ABT:NYSE) and closer to Enbrel (etanercept) from
Amgen Inc. (AMGN:NASDAQ), but those two drugs are injectable. The
commercial rationale is that if these have efficacy that's close
enough, they could go upstream.
On the smaller-cap side, you mentioned InterMune that had
been beaten down.
The reason why the Street was so skeptical of this stock
last year is that people did not like drug launch stories, and
this was a launch story for Esbriet for IPF in 2012. People were
really worried about the economic situation in Europe, and this
drug is launching exclusively in Europe. But IPF is an officially
unmet medical need, and Esbriet is the only thing approved in
Europe for IPF. The product was approved officially mid-2011, and
it got reimbursement in the first country out of the gates, which
was Germany, in September. So it is rolling out reimbursement all
across the big five countries in Europe. But what we saw in early
January was that the sales were in line more or less. Our target
on this stock is $45. I think this one does have a lot of upside
The only other name I'd highlight in small-cap biotech is
Idenix, which is in the hepatitis C space. The company released
data on its nuc, IDX-184, at our J.P. Morgan Health Care
Conference that showed that it was safe. But about a year and a
half ago, the company released data on a study it undertook of
IDX-184 in combination with a protease inhibitor IDX-320. There
was some liver toxicity, and the FDA didn't really know whether
that was due to 184 or to 320 or to both. The company went on
full clinical hold on both the assets. Then it went to the end of
the earth last year to show the FDA that in fact the toxicity was
due to 320 and not 184.
The stock this year is up 89%. The reason for that is because
if Inhibitex was bought for its nuc-and by the way there were
five bidders for Inhibitex-then it is very likely that other
companies would be interested in Idenix. What's different about
Idenix is, instead of having one drug like Inhibitex, it has
four. It has IDX-184, and it has two other nucs. And it has
IDX-719, an NS5A inhibitor that's just starting phase 1. It also
has a very good reputation in the field in terms of chemists and
basic scientists. And it has intellectual property, dozens of
patents. Officially, Inhibitex doesn't have a single issued
patent. Now that we have the data for IDX-184, there is a
rationale for that company being bought for more than Inhibitex,
which was $2.5B. That's one that we like a lot. I think the
strategic attraction of this is clear. There are multiple buyers
in the hepatitis C space, and this company has as good an asset
as anyone else in the space with the exception of Pharmasset,
which is clearly in the lead.
Bristol/Inhibitex is obviously what has driven Idenix,
which has a four-week return of 84%. Plus, it has tripled from 12
months ago. What is your target price on Idenix?
During the J.P. Morgan Health Care Conference, we raised it
from $12 to $25. So it's another $11 of upside.
Geoff, I've enjoyed this greatly.
Well, thank you so much.
Geoff Meacham joined J.P. Morgan in 2004 as a senior
biotechnology analyst. He previously was an equity analyst at
UBS following early stage biotech and life science companies
for about four years. Geoff has been ranked for the past five
years in the Institutional Investor poll, including a #2
ranking for the past four years. His research coverage spans
from large-cap biotech companies with a global reach to small,
development stage companies. He has also worked in the
pharmaceutical industry for two years in a R&D capacity and
he holds a Ph.D. in Cell Biology and a Bachelor of Science in
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
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3) Geoff Meacham: I was not paid by Streetwise for participating
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