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Being Selective in Biotech: Carol Werther
Source: George S. Mack of The Life Sciences Report (3/1/12)
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.
Carol Werther: 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.
TLSR: Is the industry in a secular uptrend?
CW: 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.
TLSR: Carol, do you expect merger and acquisition (M&A) activity to be stepped-up for the rest of this year?
CW: 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 (B) on January 17, 2012] and the same with Inhibitex [acquired by Bristol-Myers Squibb Co. (BMY:NYSE) for $2.5B on February 13, 2012].
TLSR: Why have product launches been so difficult?
CW: 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 (RA).
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' (ALXN:NASDAQ) Soliris (eculizumab) for atypical hemolytic uremic syndrome (aHUS), a very rare but life-threatening disease.
TLSR: In light of difficulties like these, it sounds like the IPO is not a rational exit strategy for a typical biotech startup company.
CW: 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.
TLSR: Given the industry today, do you have a theme?
CW: 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.
TLSR: 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 now?
CW: 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.
TLSR: Could 7977 be a monotherapy in HCV patients with genotype 2 and 3?
CW: No, not a monotherapy. But genotype 2 and 3 are easier to cure. I'm very optimistic about the results.
TLSR: Carol, you follow some other very interesting companies that include BioMarin Pharmaceuticals (BMRN:NASDAQ), Human Genome Sciences Inc. (HGSI:NASDAQ), Ligand Pharmaceuticals (LGND:NASDAQ) and Vertex Pharmaceuticals Inc. (VRTX:NASDAQ). Can we talk about them?
CW: 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 (CF). 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 bright future.
TLSR: You're obviously very bullish on Vertex. Is it your top pick?
CW: 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 BioMarin.
TLSR: It's one of your top picks, but your target for BioMarin is only $40. That's roughly 10% upside from current levels.
CW: 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.
TLSR: Is there another idea you could talk about that might perform well for investors.
CW: 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 (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 world.
TLSR: Your target price of $23 for Human Genome represents an implied upside of nearly 200% from current levels.
CW: 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.
TLSR: What else are you talking to investors about?
CW: NPS Pharmaceuticals (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 hypoparathyroidism.
TLSR: 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 today.
CW: 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.
TLSR: 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?
CW: 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 these products.
TLSR: 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 like?
CW: 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 (MS), 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.
TLSR: Has uptake been difficult with physicians?
CW: 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.
TLSR: Neurologists tend to be isolated from their patients, don't they?
CW: 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 drug.
TLSR: Carol, it has been a pleasure speaking with you.
CW: 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: None.
2) The following companies mentioned in the interview are sponsors of 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.