The Life Sciences
as part of our
conducted by George S. Mack of
The Life Sciences Report
Biotech stocks move on material news, which means clinical data,
regulatory progress, new partnerships and big contracts with new
customers. Analyst Ed Arce of MLV & Co. holds to these
principles as he shares compelling biotech names in this exclusive
The Life Sciences Report
The Life Sciences Report:
Your experience is very broad. Just four or five years ago, you
were a big pharma analyst at a major investment bank, where you
followed the largest drug makers in the world. From your
perspective today, as an analyst following small-cap biotech and
medtech, can you talk about the clinical assets that drive value in
From a market perspective, the key value drivers largely remain the
same. First, and by far most important, are the clinical data. The
stronger the efficacy, the better. But meeting clinical endpoints
needs to translate into a clinically meaningful benefit. An
outright therapeutic cure is optimal, but is also quite rare. Also,
the overall safety and tolerability profile of any new therapeutic
must be commensurate with the severity of the disease, and
comparable to the risk profiles of any existing pharmacotherapies.
Risk/benefit is obviously a trade-off. The U.S. Food and Drug
Administration (FDA), in attempting to balance the risk/benefit
equation, has leaned a bit in one direction or the other over the
The second point, from a market perspective, is the size of the
patient population and the degree to which that population has
been, or is, treatment naïve.
The third point is value driven by a long product life, in the
form of a long-dated patent suite, as well as any regulatory
exclusivity offered to the drug.
Last would be pricing. This has, for a long time, been strongly
correlated to the strength of the data, and rightly so. But
increasingly, companies are focusing one or more of their
development programs on rare diseases that qualify for the FDA's
orphan indication, with the candidate drug being entitled to
marketing exclusivity. In these cases, the pricing is much higher
than in broader indications.
You have alluded to a very interesting point regarding orphan
indications-incentives from the FDA for developing these products
and the pricing models available to companies for focusing on rare
diseases. It seems to prove that these programs have been
effective, does it not?
Yes. The FDA's orphan drug programs have been among the most
successful over the last couple decades. Originally the industry
was a bit slow to pick up on the commercial opportunity, but now,
and over the last few years, there has been a resurgence and an
awakening to the commercial opportunities concerning all of the
program's aspects, which include market exclusivity, tax benefits
and the other items. The incentives make development of orphan
drugs a much more profitable proposition.
You follow a few medical technology companies in addition to
biotechnology companies. Do you find differences in the way the
Centers for Medicare & Medicaid Services (
) treats device companies versus drug companies? What variances
have you noticed with regard to allowing reimbursement for devices
I've come to believe that there are, in many cases, more hurdles
regarding reimbursement for devices than for drugs. Specifically, I
think devices are much more likely to experience incremental,
piecemeal reimbursement approvals by private payers across the
country, even after CMS allowance. Typically, private-pay
reimbursement is much more rapid and uniform with drugs.
Generally speaking, where do opportunities lie for investors?
My focus is on companies and their fundamentals. In that regard,
opportunities for upside lie specifically with those companies that
have impactful and near-term catalytic events ahead of them.
With that bottom-up theory, let's talk about some of your favorite
ideas. Pick one that you like.
The first one I'll mention is NPS Pharmaceuticals Inc.
(NPSP:NASDAQ). NPS is a biotech company focused on developing
orphan therapeutics for rare gastrointestinal and endocrine
disorders. We believe its lead development product, Gattex
(teduglutide), for short bowel syndrome, is a key, near-term value
Gattex was recently evaluated by the FDA's Gastrointestinal
Drugs Advisory Committee and the panel voted unanimously in favor
of FDA approval. We believe Gattex significantly restores
intestinal absorption to patients and offers most of them one or
more days off the expensive standard-of-care therapy, which is
parenteral nutrition (PN). Not only is chronic PN treatment a huge
burden for these patients, it dramatically decreases their quality
of life, and it comes with some serious complications, including
catheter-related infections and even liver disease. I think the
likelihood is quite high that Gattex gains FDA approval on or
before its Prescription Drug User Fee Act (PDUFA) action date of
NPS also has a second, late-stage compound in Natpara
(recombinant human parathyroid hormone [rhPTH 1-84]), for
hypoparathyroidism. If approved, Natpara would be offered as a
hormone replacement therapy for patients who have no other
alternative than to take huge daily doses of oral calcium and
vitamin D. NPS expects to file a biologics license application
(BLA) for Natpara in mid-2013.
Is short bowel syndrome a surgical phenomenon, or is this product
for congenital conditions?
It is actually both, but the lion's share of the patient population
has had surgery, which is a treatment sometimes recommended for
Crohn's disease. In other cases surgery might have been for
treatment related to cancers.
How does Gattex actually work? Is this an active transport type of
mechanism in the bowel, able to increase permeability across cell
Teduglutide is a recombinant glucagon-like peptide-2 (GLP-2)
analog. It acts as a growth hormone specific to the intestines. It
has been shown in tests to increase the restoration of the
epithelial cells making up the intestinal lining. That increases
the level of absorption for the remaining section of the bowel.
What is the market opportunity for Gattex and Natpara? How big is
In the U.S., there are estimates of between 10,000-15,000 patients
who have short bowel syndrome and are dependent on parenteral
nutrition. That would be the key target patient population for
Gattex. With Natpara, for hypoparathyroidism, estimates range from
65,000-80,000 patients in the U.S.
What do those numbers translate to in dollars?
We believe both of these could generate several hundred million
dollars in peak sales for NPS.
NPS has an $800 million ($800M) market cap. The market opportunity
Yes, it would be significant. Both products have solid patent
protection out to the middle of the 2020s. I want to point out that
Gattex is known as Revestive in the European Union (
), and it received European market approval in September 2012. The
approval was received with NPS' partner, Nycomed, which was
acquired by Takeda Pharmaceutical Co. Ltd. (TKPYY:OTCPK). Revestive
is now in the process of launching country-by-country through the
region. NPS earns mid-teen royalties from sales of the drug in the
EU. For both Natpara and Gattex, once they are approved, sales in
North America would accrue entirely to NPS.
Both of these indications are relatively rare. The endocrinologist
would be managing the hypoparathyroidism, and the
gastroenterologist or internist would be managing the short bowel
syndrome. You don't need a huge sales force for either of these
products, do you?
That's right. In fact, NPS has been diligently preparing for the
launch of Gattex for more than a year now. The company is preparing
the infrastructure and starting with key managers on the commercial
side. The company is now in the process of following up with
medical science liaisons. It is also working with patient advocacy
groups and others to get the best understanding of where the target
patient population is, who treats those patients and how to manage
Gattex's PDUFA date is Dec. 30. Do you generally expect a stock to
sell off on the good news when the drug is approved?
That has been happening with more frequency lately. It all depends
on how much the stock has run up in the months before the advisory
committee date, and then how much it may have run up between the
time of the advisory committee and the PDUFA date. It also depends
on the investor base. In the case of NPS, I think the company has a
very solid, long-term institutional shareholder base that largely
reduces that risk. The institutional shareholders are about
That's pretty high. How do you bid up the price of shares when 90%
are already owned by institutional investors? Those shares could
actually be a source of supply. But that may be a rhetorical
question. Do you expect sales of Gattex, starting in January 2013
or thereafter, to begin driving this stock again?
It wouldn't surprise me if, after the run-up following the advisory
committee and the approval, the stock traded sideways for the first
two months of 2013, as we get an idea of what the early launch
sales trajectory looks like. But I would also mention that in the
same timeframe-the first few months of next year-NPS will be
wrapping up its BLA for Natpara. These two important compounds are
back-to-back, and serve as incremental catalysts for the stock now
and well into 2013.
What is your next idea?
I like BioCryst Pharmaceuticals Inc. (BCRX:NASDAQ), a
pharmaceutical company developing novel small molecules that block
key enzymes involved in inflammatory and infectious diseases. It
utilizes its state-of-the-art crystallography lab to do structured,
guided drug design. It has two late-stage compounds, and the key
value driver is its compound for gout, ulodesine. The main catalyst
is that this drug is phase 3-ready, following positive results
reported earlier this year. The catalyst that investors are
awaiting is announcement of a development and commercialization
collaboration with a partner to undertake the phase 3 program, and
ultimately to commercialize the product.
You have said that you consider gout to be an untapped market.
Allopurinol has been on the market for the longest time, and other
generics, such as probenecid, are available. There are also newer
products, such as Takeda's Uloric (febuxostat) and Savient
Pharmaceuticals Inc.'s (SVNT:NASDAQ) Krystexxa (pegloticase). Also,
AstraZeneca Plc (AZN:NYSE) has a product, lesinurad, that has been
in phase 3 studies now for a year. Why is ulodesine so important?
Why do you think of gout as an untapped market, with all the other
products out there?
On face value, I agree with you. It would seem that there are
several products addressing this condition. But let's go over them
one by one. First of all, you're right: The standard of care, used
to treat well over 90% of patients, is the widely genericized drug
allopurinol, which has been around for 40+ years. Despite the
entrance of Krystexxa and Uloric, that has not changed much over
the last few years. Uloric is a slightly more efficacious version
of allopurinol. It works by the same mechanism of action, and given
that it produces incremental improvement, it hasn't garnered much
market share relative to the much cheaper generic alternative. At
the other end of the spectrum is Krystexxa. This is a potent drug,
is an injectable and is intended for the most severe gout patients,
those who have severe tophaceous gout that is not responding to
allopurinol. Even by its own label, Krystexxa is targeting a subset
of patients who suffer from the worst symptoms.
Essentially, the majority of patients who have gout-in fact,
about 60% of them-are on treatment but are underserved and are not
reaching the therapeutic goal, which is to reduce serum uric acid
levels to below 6 milligrams per deciliter (mg/dL). Until patients
reach that level, they will likely continue to experience sporadic
episodes of painful gout flares. The only way to address the
underlying condition is to reduce the uric acid level well below
the 6 mg/dL. The two lead, late-stage compounds in development, as
you mentioned, are ulodesine and AstraZeneca's lesinurad.
I understand that the phase 2 data for combination therapy of
ulodesine and allopurinol showed a doubled response rate versus the
control arm of allopurinol alone. Are you concerned about the
toxicity of these two products used together? Is that going to be
the major risk factor to share price as this combination enters
There have been, in the past, some concerns about the safety
profile of ulodesine given the mechanism of action. There are
specific actions with ulodesine in combination with allopurinol
that act synergistically in the urate metabolic pathway. The
question about the safety has been, in my view, answered thoroughly
by tests done on infection rates in both B cells and T cells. My
view is that the drug is safe and well tolerated.
BioCryst is a small-cap company with a $204M market valuation. The
company has about $54M in cash and cash equivalents on its balance
sheet, and that should hold it for another 18 months or so. Is the
company going to be squeezed into giving away too many points when
it licenses ulodesine?
No, I don't think so. In fact, I think the company is in a rather
strong position to negotiate some favorable terms with a future
partner because of the market dynamic we've just discussed.
Ulodesine is the last remaining, unpartnered, late-stage gout
We also expect that in the interim, the company's second-lead
late-stage compound, peramivir, a neuraminidase inhibitor for
influenza, could wrap up its phase 3 trial and show some positive
data by late next year. The trial is evaluating intravenous
peramivir in patients with acute influenza in the hospital setting.
If it is approved on the basis of positive phase 3 data, it is
highly likely that the U.S. government, in the form of the
Biomedical Advanced Research and Development Authority (BARDA),
will grant a contract for $100M or more, just based on BARDA's past
purchases of these types of drugs, both influenza vaccines and
Even with thin margins, that amount of money is going to be
important for the company. Is the Street giving peramivir any value
currently, or is it a call option?
It really is a call option. At this point, I include it in my model
and valuation because I believe the data speak highly to the
prospects for approval. Of course, it is appropriately
risk-adjusted. But having said that, I don't think peramivir has
been given much credit by the Street. It will be a significant
catalyst when the data come out positively.
Ligand Pharmaceuticals (LGND:NASDAQ) is a biotechnology company
that has been around since the mid-1990s, but it has been through
several iterations. Today it has a large, diverse pipeline of
mostly partnered assets that are in various stages, from
preclinical through phase 3. Several of those assets are now
In addition, it acquired CyDex Pharmaceuticals Inc. in January
2011. Through that acquisition the company now has the Captisol (a
polyanionic beta-cyclodextrin derivative) formulation platform
technology, which is in six marketed drugs as well as a handful of
compounds that are in the clinic.
Going forward, Ligand has two key value drivers. The first is
Kyprolis (carfilzomib). This is Onyx Pharmaceuticals Inc.'s
(ONXX:NASDAQ) drug for relapsed and refractory multiple myeloma,
which was just approved by the FDA a few months ago. Indications
are that the launch with Onyx is going well. Ligand, because of its
formulation technology with Captisol, gets 1.5-3% of annual sales.
Normally this percentage would be considered small-and perhaps even
insignificant-but for a company the size of Ligand, with a $336M
market cap, and for the market opportunity that we see in Kyprolis,
specifically for patients who have come to the end of the line and
have no therapeutic alternatives left, we see this as one of the
key value drivers, especially starting next year.
Kyprolis is labeled as a third-line therapy for multiple myeloma.
The patient has to fail two prior therapies, including Velcade
(bortezomib; Takeda). Is the company doing studies to advance this
product to earlier-stage disease or earlier-stage treatment?
There are late-stage studies evaluating just that question. I think
that as the months roll over and prescribing physicians gain more
experience with the drug, some off-label prescribing could occur on
the margins, because there is the view that Kyprolis could be both
efficacious and safe.
Is there another company you wanted to talk about?
Affymax Inc. (AFFY:NASDAQ) is a very interesting story. The company
is known for its drug Omontys (peginesatide), a treatment for
anemia in patients with chronic kidney disease who are on dialysis.
Omontys is a synthetic, pegylated, peptidic compound that binds to
and stimulates the erythropoietin receptor. It is an
erythropoiesis-stimulating agent (
), like Amgen Inc.'s (AMGN:NASDAQ) Epogen (epoetin alfa). The key
difference is that Omontys is administered once a month for
dialysis patients, as opposed to three times a week, typically,
with Epogen. Earlier this year Affymax and its partner, Takeda,
were granted approval before the PDUFA date, and the product has
been doing very well in the first few months of its launch.
I find this company so interesting. The stock performance is off
the chart, up 385% over the past 12 months and up 100% in the past
three months. It flagged after the drug was approved, and then it
seemed to take off on new contracts with dialysis providers. Those
were the great big catalysts for the company.
In fact, within fewer than three months after approval, the company
signed an initial supply agreement with the world's largest
dialysis provider, Fresenius Medical Care (FMS:NYSE), which became
an early adopter of Omontys. The initial contract, signed in July,
was for a little more than 100 dialysis centers in the U.S.,
representing about 10,000 patients. In August, Affymax signed with
U.S. Renal Care.
The bigger picture is that Epogen has been the only ESA
available to dialysis patients for more than 20 years. This was a
long-standing monopoly with monopoly pricing. Affymax has been very
successful in the first few months of the Omontys launch, and it is
getting some key suppliers to adopt the product. In fact, we think
it's likely, perhaps even as early as the end of this year, that
Fresenius and Affymax will announce a longer-term and much broader,
comprehensive agreement to supply Omontys throughout all of its
dialysis centers, or many more of its dialysis centers than it
Ed, thank you so much for your time.
Thank you very much. I enjoyed it.
Ed Arce joined MLV & Co. in April 2011 as an equity
analyst in the Life Sciences Equity Research group, covering
biotechnology, biopharmaceutical and specialty pharmaceutical
companies. Prior to joining MLV, he worked as a senior research
associate at Wedbush Securities and UBS Securities, covering the
biotechnology and U.S. large-cap pharmaceutical industries,
respectively. Arce started his equity research career in 2005 as
a research associate at First Albany Capital (now Gleacher &
Company Inc.), covering specialty and generic pharmaceutical
companies. Arce holds a master's degree in finance from Boston
College. In addition, he holds a bachelor's degree in civil
engineering from Florida International University (FIU), and is a
graduate of the executive master's degree program in business
administration at the Chapman Graduate School of Business at FIU.
Arce is a board-licensed professional engineer (PE), and a level
III CFA candidate.
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