Shares of Tesaro Inc. (
) have recently traded to new all-time highs and are now sitting at
$29.40. The shares have now more than doubled since coming public
at $13.50 in June of 2012.
However, a series of near-term challenges to its lead drug
candidate could see the shares drop back below $21.00 in coming
The latest leg up for Tesaro has largely been the result of
optimism towards Tesaro's prospects with its cancer drug Niraparib.
Niraparib is a poly (ADP-ribose) polymerase ("PARP") inhibitor
being evaluated for use against solid tumors.
Earlier this year,Tesaro announced that it would be taking the
drug into phase III trials for ovarian cancer patients. Last week,
the company announced that it would also be conducting phase III
trials for Niraparib in breast cancer patients.
The progress of the drug into phase III trials along with the
large size of the addressable markets for these indications has led
analysts to upgrade the stock, causing it to briefly touch above
$30.00 before falling back into the $20's.
Visibility has now increased somewhat with Niraparib, which does
in fact merit a higher valuation for the stock. Yet the fact
remains that even if it is ultimately approved, the drug will see
no revenues until at least 2017.
For the time being, the only real determinant for the bulk of
the value of Tesaro remains its legacy project, Rolapitant.
Rolapitant is a "CINV" drug for treating and preventing nausea and
vomiting induced by chemotherapy. It is the reason why Tesaro was
founded and why the company purchased the rights to develop that
drug back in 2009.
The biggest near-term threat to Tesaro is that the risk related
to Rolapitant is surging even as the upside reward scenario has now
Morgan Stanley recently upgraded the stock and assigned a $29.00
target based on the near-term prospects for Rolapitant and the new
and improved, longer-term prospects for Niraparib.
With the shares hovering around $29.00, it should be expected
that any further good news will have limited effect, while any bad
news could send the shares sharply lower.
Leerink Swann also delivered a
to Tesaro, briefly sending the stock above $30.00. Yet the Leerink
report failed to include even a single mention of the impending
results from Netupitant, which are expected out in the next few
weeks. It also did not take into account the fact that another
competing NK-1 antagonist CINV will be going generic before
Rolapitant even gets to market.
And herein lies the near-term problem.
Rolapitant is a NK-1 antagonist CINV drug. There is an older
class of CINV drugs knows as 5-HT3 inhibitors. These include
Anzemet, Kytril, Zofran or Aloxi. These drugs are currently
marketed by Sanofi (
), Roche (RHHBF.PK), Glaxo (
) and Eisai (ESALF.PK), respectively.
Within the newer NK-1 antagonist category, Rolapitant will
compete with Emend which is marketed by Merck (
Problem number one is that by the time Rolapitant even comes to
market in 2015, Emend will already be marketed as a generic drug.
There will be little reason for doctors to prescribe a nearly
identical drug at a price which is several multiples higher.
Problem number two is much more severe and could have an impact
within the next few weeks.
Swiss company Helsinn recently completed phase III trials of its
own CINV, Netupitant, which actually combines the action of an NK-1
and a 5-HT3. Because Helsinn is not a public company, analysts have
largely ignored the market potential for this new drug. However,
when it is mentioned, they have expressed a positive outlook for
Netupitant's results from phase III.
The reason that this is a near-term problem is that ASCO is set
to meet in Chicago in May. Helsinn is also set to attend the
Jefferies healthcare conference on June 3rd. It is likely that one
of these venues will be used to announce the results of the
Netupitant trials. Results are widely expected to be positive. In
fact, results may also be released even before the ASCO
The catch-22 for Tesaro is as follows:
If the results were to be unexpectedly poor, then there would
likely be no boost to Tesaro given that the stock is fully valued
and success of Rolapitant is already priced in. If the results are
(as expected) quite positive, then the impact on Tesaro and
Rolapitant should be expected to be quite severe.
Doctors who prescribe a CINV will then have three clear
alternatives from which to choose.
Choose from one of the many existing 5-HT3's.
Choose a newer, yet generic NK-1 (Emend)
Choose a combined therapy NK-1 / 5-HT3 (Netupitant) which
has no generic.
Electing to prescribe a non-generic NK-1 (i.e. Tesaro's
Rolapitant) clearly does not fit into any of these sensible
alternatives and it raises the prospect of Rolapitant effectively
going straight to generic.
It also needs to be remembered that Rolapitant has not yet been
approved, even though Tesaro's share price seems to trade as if
approval (and market acceptance) were already guaranteed.
Aspara Biotech Research
recently put out a report on Tesaro that took an extremely dim view
of Rolapitant's prospects for phase III approval. It noted that the
rights to the drug had originally been purchased by Opko Health (
) for just $2 million at a time when Schering-Plough had already
discontinued development of the drug. At that time, 2008, phase II
trials had already been completed. Tesaro then paid a very small
premium above that $2 million to acquire rights to the discontinued
As noted by Aspara, Opko had disclosed in its 10K that
Development of Rolapitant and the other assets had been
stopped at the time of our acquisition and there were no ongoing
None of the assets acquired have alternative future uses
, nor have they reached a stage of technological feasibility.
The apparent reason for this halt in development was that
results from phase II had been quite marginal. There was therefore
substantial room for doubt regarding an ultimate phase III
approval. As a result, Schering-Plough discontinued work on the
drug before selling it for almost nothing.
The results of the trial were just barely significant at the 5%
level (p value of 4.5%) and the results also coincided what appears
to be a statistical aberration in the placebo arm. In other words,
even though Rolapitant appears to have received an artificial boost
to its observed effectiveness (a clear advantage), it still just
barely achieved statistical significance.
The conclusion from this is that there is in fact a much
higher-than-normal likelihood that the marginal statistical
significance seen in phase II will reverse itself when shown in
phase III results.
Once again, it is the case that there is little remaining upside
to a successful phase III. But in the event that the phase II
results do reverse themselves following the marginal phase II
study, the results will be negative to the extreme. It would then
be the case that the value of Tesaro would be solely dependent upon
its other two drug candidates. Neither of these is expected to
produce revenues until 2017-2019.
As a result, if Netupitant posts positive results in May, then
we can expect to see the share price quickly retreat back to around
$21.00. But if the very marginal Rolapitant then fails its phase
III later this year, then the share price certainly falls into the
teens, down around 50%.
The body language coming out of Tesaro suggests that the company
is aware of this quickly impending problem. Tesaro appears to be
de-emphasizing Rolapitant in case the drug either fails in phase
III or else can't compete with generic Emend.
In March, Tesaro raised $95 million ($91 million net of
underwriting commissions) via an equity offering at $18.00, around
40% below current levels. At the time, the company still had $125
million in cash, such that there was no pressing need to raise new
money. In addition, there was no specific use of proceeds disclosed
in the prospectus. Tesaro disclosed that:
We anticipate that we will use the net proceeds of this
offering to fund our development programs, including clinical
trials for our product candidates, for working capital and for
general corporate purposes
We may also use a portion of the proceeds to in-license or
acquire, as the case may be, product candidates, technologies,
compounds, other assets or complementary businesses, though
we have no current understandings, agreements or commitments
to do so
The result of this offering is that Tesaro now has a very
healthy cash balance of $198 million, equating to $6.10 per share.
When the price was still at $18.00, this meant that there was
actually a very significant downside cushion for investors in the
stock. However, with the stock now hovering near $30.00, this $6.10
in cash per share offers minimal downside cushion.
But it should be clear from this offering and its disclosed use
of proceeds that Tesaro is attempting to diversify away from
Rolapitant. It should also be clear that Tesaro hasn't even decided
how it will specifically do so. Instead it is just raising money
while the share price will allow it.
This should certainly have been even clearer for anyone who
listened to the last
quarterly conference call
. Hopefully, it did not escape the attention of listeners that
Enrollment continues in each of our three Phase 3 trials of
As shown at
, Rolapitant was originally scheduled to conclude its phase III
trials by December of 2012. The trial has been enrolling at 200
sites around the world. Yet the company has not even been able to
complete enrollment and it is 5 months past the scheduled
Rolapitant is currently undergoing multiple phase III trials
which are scheduled to release top line data (only) later this
year. In addition, Rolapitant is the only near-term revenue
candidate for Tesaro.
Yet despite this critical importance to Tesaro, on the
conference call, we can see that any discussion of Rolapitant is
limited to a few brief paragraphs. The focus of the call is then
entirely switched to Niraparib and TSR-011, neither of which has
any revenue potential for at least 4 years.
In evaluating these developments, one must remember that Tesaro
is entirely dependent upon Rolapitant for any revenue potential
within the next 4 years. One must also remember that the phase II
results for Rolapitant were in fact quite marginal.
Phase III trials for Rolapitant are now being repeatedly delayed
as enrollment continues well beyond the deadline.
First, this does not bode well for the overall results of
Rolapitant in phase III.
Second, even the mere delay of phase III results is highly
problematic for Tesaro. This is because the delay will negatively
impact Tesaro's ability to actually sell the drug due to Emend
going off patent as well as the coming launch of Netupitant.
As a result of these factors, Tesaro is clearly trying to
position itself as a company which has other alternatives and
opportunities beyond Rolapitant. The company is raising money
without a defined use of proceeds and is de-emphasizing Rolapitant
in its conference calls. In short, Tesaro is well aware of the
impending problem, even though investors are not.
It remains the case that at least 80% of the value of the share
price is a function of the prospects for Rolapitant. Even optimists
do not predict Niraparib revenues until 2017.
As a result, when Helsinn releases results for Netupitant in the
next few weeks, Tesaro shareholders should expect a volatile ride
with the share price potentially heading back to below $21.00,
where it began the month of April.
Investors also need to keep in mind that over 18 million insider
shares of Tesaro were locked up due to the recent equity offering.
This lockup expired on April 28th, just in time for the shares to
hit all-time highs. Yet this is also just in time for selling to be
possible just as Netupitant results are coming to market.
I am short [[TSRO]], [[OPK]]. I wrote this article myself, and it
expresses my own opinions. I am not receiving compensation for it.
I have no business relationship with any company whose stock is
mentioned in this article.
The author was previously an investment banker for a major global
investment bank and was engaged in investment banking transactions
with a wide range of health care companies including
pharmaceutical, genomics and biotech companies. The author has not
been engaged in any investment banking transactions with US listed
companies during the past 5 years. The author is not a registered
financial advisor and does not purport to provide investment advice
regarding decisions to buy, sell or hold any security. The author
currently holds a short position in the stock of TSRO and has
provided fundamental and technical research to investors who hold a
short position in the stock. The author may choose to transact in
securities of one or more companies mentioned within this article
within the next 72 hours. Before making any decision to buy, sell
or hold any security mentioned in this article, investors should
consult with their financial adviser. The author has relied upon
publicly available information gathered from sources which are
believed to be reliable and has included links to various sources
of information within this article. However, while the author
believes these sources to be reliable, the author provides no
guarantee either expressly or implied.
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