Looking for Solid Science in Biotech

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Solid ideas in biotech come from solid research. I first spoke with analyst Carol Werther in early 1999 when I was preparing to write about Immunex, which had developed Enbrel (etanercept) for rheumatoid arthritis (RA). The product had just been approved by the FDA in November 1998, and it held the distinction of being the first in a new class of anti-tumor necrosis factor (TNF) agents that would treat autoimmune disorders, not just symptomatically but truly as a disease-modifying agent. Along would come others in this innovative category of anti-TNFs that now total approximately $15 billion (B) in annual sales and include the familiar names Remicade (infliximab) and Humira (adalimumab). . .

Werther, now senior biotech analyst at Boston-based Summer Street Research Partners, told me all those years ago that Immunex was a favorite because its science was solid. Validation followed when Amgen Inc. (AMGN:NASDAQ) bought the company for an outsize $16 billion (B) in stock and cash in December 2001. That deal was all the more significant considering that the economy was still reeling from the tragic events of Sept. 11, 2001.

Carol Werther had the knack then and now. Her other favorite play at the time was Genentech, which was majority-owned by Roche Holding AG (RHHBY:OTCPK), but had an option to complete its buyout in 1999 for a paltry price, and if Roche did not act, said Werther, Genentech shareholders would benefit greatly with a rising share price. Investors did profit greatly when Roche finally swallowed Genentech a decade later for a giant shareholder payday of approximately $46.8B. She also recommended Medimmune, which had just launched Synagis (palivizumab) to prevent respiratory syncytial virus (RSV) in newborns. She believed Synagis was superior to an RSV product sold by SmithKline Beecham (now part of GlaxoSmithKline [GSK:NYSE]). Medimmune would later be acquired in 2007 by AstraZeneca Plc (AZN:NYSE) for $15.6B. Sepracor was another winner that she began recommending at $15/share and was ultimately taken out by Dainippon Sumitomo Pharma Co. Ltd. (DNPUF:OTCPK) for $23/share or $2.6B.

I was excited about speaking with Werther again recently for a Life Sciences Report article, and I did get several ideas to consider. She doesn't just worry about the science and the unmet needs, she also considers reimbursement issues and how physicians might react on the uptake of a new product launch. Werther laments the trend of investors dumping shares of companies whose new products get a slow start. "The only launch I recall that was really positive in 2011," she says, "was the September launch of Alexion Pharmaceuticals, Inc.'s (ALXN:NASDAQ) Soliris (eculizumab) for atypical hemolytic uremic syndrome (aHUS)."

Indeed, she has seen some shares get demolished for various reasons, and some of these are giving investors another chance. She downgraded Gilead Sciences Inc. (GILD:NASDAQ) when it acquired Pharmasset for $11B in mid-January to gain its hepatitis C (HCV) franchise. But when some bad news on lead HCV product GS-7977, formerly a Pharmasset drug, emerged from a phase 3 trial in mid-February, she felt Gilead shares were treated too harshly. Asked if Gilead could be a value play at lower levels, she said, "Well, I think it can." The data for GS-7977 in combination with interferon in genotype 1 patients had been very good, but patients relapsed without interferon. GS-7977 will not emerge as a monotherapy as hoped, but the smaller market genotype 2 and 3 patients are easier to cure. "I'm very optimistic about the results," she says. "People should be still very excited about the prospects for 7977."

Her two favorite names are Vertex Pharmaceuticals Inc. (VRTX:NASDAQ) (Werther: Buy; Target $64) and BioMarin Pharmaceuticals (BMRN:NASDAQ) (Werther: Buy; Target $40). She sees Vertex as an "obvious disconnect" in its valuation. Investors are pessimistic on HCV drug Incivek (telaprevir) because they fear it will be superseded by newer products in a couple of years. However, investors are not factoring in two new nucleotide analogues that are now in phase 1 for HCV. Werther sees irony because, "Every other company in the HCV space is a takeout candidate," she says. The company also has newly approved product, Kalydeco (ivacaftor) for cystic fibrosis (CF). It treats only 10% of the CF population, but it is a disease-modifying drug that does more than treat symptoms. There are two other CF product candidates in the R&D pipeline, "And I think they have a very high likelihood of working," she says. VX-809 is at least two years from approval, but it could treat 50% of CF patients.

Her other favorite, BioMarin suffered through a disappointment with the launch of Kuvan (sapropterin hydrochloride) for phenylketonuria (PKU) at the end of 2007. But the product works and brought the company to profitability. BioMarin is working on a program now for lysosomal storage disorder mucopolysaccharidosis (MPS), and she feels quite good about the company's enzyme replacement drug GALNS (N-acetylgalactosamine-6 sulfatase) for MPS IVA (Morquio A Syndrome). "The exciting thing is that the drug is working," she says. "We are probably going to have results by the end of the year. I remain bullish on BioMarin."

She likes Human Genome Sciences Inc. (HGSI:NASDAQ) (Werther: Buy; Target $23) which has been beaten down, and she expects investors to get a near triple from current levels. A year ago the company launched Benlysta (belimumab) for systemic lupus. The product got a very slow start. Rheumatologists need time to gain a comfort level with the product, but it works well in patients after three months of dosing. Werther feels good about Ligand Pharmaceuticals (LGND:NASDAQ) (Werther: Buy; Target $22), which has a platform based on its Captisol formulation that improves drug properties such as absorption. The company's business model is to derive royalties from partnerships with other companies and nearly 50 partnered deals are in progress. She likes Avanir Pharmaceuticals Inc. (AVNR:NASDAQ) (Werther: Buy; Target $11) with its new product Nuedexta (dextromethorphan hydrobromide and quinidine sulfate), for pseudobulbar affect (PBA) which arises from brain disease or injury such as multiple sclerosis (MS) and Alzheimer's. Patients with PBA laugh and cry uncontrollably, and Nuedexta seems to work well for many. NPS Pharmaceuticals (NPSP:NASDAQ) (Werther: Buy; Target $16) has two orphan drugs in phase 3. Gattex (teduglutide) is a protein replacement for patients with short bowel syndrome, and the other is Natpara (recombinant human parathyroid hormone) for hypoparathyroidism.

DISCLOSURE:
1) George S. Mack of The Life Sciences Report 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. Gilead Sciences Inc. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for services.

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