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Platform Technologies Promise Big Payoffs: Juan Sanchez
Source: George S. Mack of The Life Sciences Report (2/10/12)
Platform technologies promise big payoffs because they offer the prospect of nearly unlimited assets that might be developed to combat disease, but they make investors very nervous because of their propensity to burn cash in a hurry. In this exclusive interview with The Life Sciences Report, Ladenburg Thalmann & Co. Vice President and Senior Analyst Juan Sanchez makes his case for a few companies that could produce numerous products from their technology-rich pipelines.
Juan Sanchez: When the FDA's Critical Path Initiative first came out in 2004, it made a lot of sense. Back then, there were conversations on Wall Street about different parties and the FDA working together. That led to unique collaborations and kind of a different culture. But I'm not sure you can quantify the success of an initiative like that because you are, after all, at the mercy of biology as well as higher regulatory standards. The FDA is still approving 22–30 new drugs every year, and I think it was 30 new ones in 2011. The fact that this continues to be the case when clinical trials are becoming so much more complicated and so much more difficult, and when the low-hanging fruit of drugable targets has already been taken, tells us something important when a decent number of new approvals are still coming out. Just keeping up with the pace means something is working. However, I am not sure if this relative success can be attributed to the Critical Path Initiative. There are a lot of headwinds, and I'm not sure what the right measure of success is.
TLSR: Juan, you follow some companies with platform technologies, which are supposed to yield lots of products. From what you are seeing, do the platforms eat up capital? Do you see some of these as expensive science projects, or do you see them as prolific creators of value?
JS: Wall Street interest for platform technologies has been up and down throughout the years. With the sequencing of the human genome in the late '90s and early 2000s, everyone was going for platforms. Then they fell out of favor and fewer companies were attractive to investors. But recently there has been a second wave of understanding that platforms may have some real value. They do take a lot of money to operate. I believe platform technology companies need to have one or two projects perceived as promising early on. Otherwise the cost of capital to operate these companies could escalate, making it difficult to sustain infrastructure. However, even if a single platform seems very robust, I do believe the probability of having two successes out of that platform is low.
TLSR: Can you give me an example of a platform company?
JS: I follow Micromet Inc. (MITI:NASDAQ), which is a good platform story now being acquired by Amgen (AMGN:NASDAQ) for $1.16 billion (B). It wasn't a cheap company to run. It costs almost $100 million (M)/year just to run the business, but it has a really promising first product in MT103 (blinatumomab) for acute lymphoblastic leukemia, which is now in pivotal phase 3 trials. However, MT102 (adecatumumab) has been driving most of the valuation. Companies may also need to validate their platform technologies through some corporate collaborations. Without collaborations for earlier-stage programs, few investors are going to assign you much value for the platform technology. Micromet is a good example of a company with an important lead product combined with a plethora of earlier stage corporate collaborations. In fact, the hands-on experience that Amgen had with Micromet's technology could have been a definitive factor for the proposed acquisition. That tells you that Micromet's positioning was good, but in reality who knows if this platform technology is going to generate more than one product. I'm highly confident that the first program, MT103, is likely to be successful. But, time will tell if other products follow.
TLSR: Neurobiology has not been developed to the level of oncology or cardiovascular disease or even autoimmune disease. Are we beginning to see a sharper focus now on central nervous system (CNS) disease?
JS: Big pharma is not investing in central nervous system (CNS) disease as much as before. Some companies are walking away. That said, we have seen a lot of new CNS science over the last 15–20 years. New targets and approaches that were proposed in the '90s for depression and schizophrenia, for example, are now being evaluated in phase 2 clinical trials. Groups are now working on better ways to design and run clinical trials and on validating biomarkers so we can become smarter in developing CNS drugs. That is very encouraging. But, it is difficult to predict when that is going to result in the successful development of better drugs.
TLSR: You also follow companies focused on infectious disease, for instance Optimer Pharmaceuticals Inc. (OPTR:NASDAQ) with its newly approved product Dificid (fidaxomicin) for Clostridium difficile infection (CDI). But I'm wondering if there's enough incentive to develop antibiotics for new or old indications.
JS: There haven't been too many recent approvals in the space. But Dificid approved in May 2011 and Teflaro (ceftaroline fosamil) (Forest Laboratories Inc. (FRX:NYSE)) approved in October 2010 are important examples. There has been some stagnation in the development of antibiotics for a couple of reasons. One is that a lot of good antibiotics went generic, and there is not the willingness of payers and hospitals to pay for the expensive ones. Therefore, incentives for companies to compete in this space with poorly differentiated products do not exist. In addition, there was a period of regulatory uncertainty for indications such as community acquired pneumonia and acute bacterial skin and skin-structure infections. Recent draft guidance by the FDA on how to design clinical trials for these indications is reinvigorating investment. Finally, the two major drivers/incentives to develop antibiotics are the unavoidable obsolescence of existing ones due to resistance, and the second is the availability of novel antibiotic platforms, which we are now beginning to see.
TLSR: Juan, are you a little bit disappointed in the uptake of Dificid?
JS: No, on the contrary the launch was better than expected. We'll see what happens this year. Generally it's tough to start selling a premium-priced new drug, especially when you partially depend on hospitals, as in this case. But Optimer has taken very robust commercial measures for a strong launch.
TLSR: Some other products are coming along and under development for CDI. For instance, Merck & Co. Inc. (MRK:NYSE) has two monoclonal antibodies designed to be used together in phase 2 studies. What effect might that have on Dificid when newer products for CDI are approved?
JS: I don't think it will have a great effect because the size of the CDI problem has been significantly underestimated. That's an important variable. Existing data on incidence of infection are not accurate, and so all we can assume is that the market is bigger than what current data shows. As for antibodies, I assume they are going to be used in the most severe cases of high recurrence and in combination with Dificid and other approaches. Therefore I don't believe Dificid will be negatively affected.
TLSR: Are you still rating Optimer a Buy?
JS: Yes, I am and the target price is $15.
TLSR: Another platform company?
JS: If you're looking at platform technologies, you need to pay attention to a Swiss company called Addex Pharmaceuticals (ADXN:SIX). Its allosteric modulator technology platform has a lot of intrinsic value.
TLSR: The Street tends to focus on negative aspects. Addex had a positive allosteric modulator (a metabotropic glutamate receptor 4 (mGluR4)) under development for Parkinson's disease with partner Merck & Co. After a four-year collaboration, Merck returned the product with all rights to Addex this past September. Is this going to be a psychological barrier for the shares?
JS: It was back then. The stock went down when it happened. I don't think there's anything wrong with that program, but investors and Wall Street usually take a skeptical approach to these events. An asset is not truly validated until positive news starts to emerge. But, in 2012 you are going to have news from two different Addex drugs. The first is dipraglurant-IR, an mGluR5 negative allosteric modulator in Parkinson's disease levadopa-induced dyskinesia (PD-LID). We expect initial proof-of-concept, phase 2a data, in the first half of this year. The second one is ADX71149 (an mGluR2 positive allosteric modulator) in a collaboration with Johnson & Johnson (JNJ:NYSE) for schizophrenia. The product returned by Merck to Addex is a very small part of the story. Addex has a platform technology with multiple partnerships. You lose one partnership, that's something that happens in the industry.
TLSR: You also follow Valeant Pharmaceuticals International Inc. (VRX:NYSE; VRX:TSX). What do you like about them?
JS: Valeant is a very well-run company with Michael Pearson, a very pragmatic CEO who is adept at allocating capital and thinking big. There's a very good management team here, which is getting stronger by the day. As a long-term player, this company is likely to continue growing mainly through acquisitions and finding efficiencies at every level of the organization. The most recent is a small $150M-acquisition of Probiotica Laboratorios Ltd. in Brazil. But whenever Valeant does an acquisition, it also makes sure it continues to grow organically. I think for the next few years there are enough assets out there in the world for Valeant to continue with its acquisition strategy. When you have a good management team that has proven itself many, many times, you trust in them more and more. As a long-term investment, I like Valeant.
TLSR: You follow Questcor Pharmaceuticals Inc. (QCOR:NASDAQ). Do you still have it rated as a Buy?
JS: Yes, and my target is $46.
TLSR: The company has increased the size of its sales force. How long will it take to see the result of this?
JS: We are already seeing very positive results in Acthar (repository corticotrophin) prescriptions for neprhotic syndrome (NS). By mid-year we will see another sales force expansion to support NS efforts.
TLSR: You are also following AMAG Pharmaceuticals Inc. (AMAG:NASDAQ). The company has had some organizational turmoil, which has hurt sales performance. Is it making any progress in getting by these issues?
JS: AMAG is trying, but it is not clear how successful it will be on its own. At this point the Street is focused on the potential for AMAG being acquired.
TLSR: Who would be a plausible suitor?
JS: Takeda Pharmaceutical Co. Ltd. (TKPYY:OTCPK) is AMAG's partner in Europe and Canada.
TLSR: Juan, I appreciate your time. Thank you.
JS: Thank you very much.
Dr. Juan F. Sanchez is a vice president at Ladenburg Thalmann & Co. Inc, Research Division. He covers biotechnology and nanotechnology sectors with a focus on central nervous system therapeutics. Dr. Sanchez's previous experience includes oncology marketing at Bristol Myers Squibb and post-genomic strategy planning at the Office of the Vice Provost, Columbia University. He has five years of experience in clinical medical practice. Dr. Sanchez received a Master in International Affairs from Columbia University, a Master of Business Administration from University of Los Andes and a Medical Doctor degree from Javeriana University.
1) George S. 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: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Addex Pharmaceuticals SA. Streetwise Reports does not accept stock in exchange for services.
3) Juan Sanchez: 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. I was not paid by Streetwise for participating in this story.