ThinkEquity Analyst Bets on Extraordinary Science and Clinical Data


Kimberly Lee Investing in companies devoted to orphan diseases sounds counterintuitive, but Senior Research Analyst Kimberly Lee of ThinkEquity has singled out the space as one with the potential for huge returns. In this exclusive interview with The Life Sciences Report, Lee shares her very best ideas, identifying companies that will be propelled by vigorously growing revenues and will also appeal to investors who understand the unmet needs of patients and the numerous incentives available for developing life-saving drugs.

The Life Sciences Report: Your specialty segment of healthcare and life sciences is orphan indications. Could you tell me how this came about?

Kimberly Lee: We believe regulatory enthusiasm through new initiatives has encouraged development of innovative drugs for rare diseases. Development of orphan drugs has been overlooked by big pharma and investors because they believed the return on the investment needed for drug development was low given small target populations. A number of genetic orphan diseases affect 500–1,000 people in the U.S. We are talking ultra-orphan indications. Prior to legislation, there were only 10 orphan drugs that had been approved because there were no economic or other incentives for drug companies to help recoup the costs of research and development (R&D) expenses.

The Orphan Drug Act was instituted in 1983 to promote drug development for rare diseases and to encourage innovation through incentives for drug companies. The act confers several advantages. First is orphan drug designation; second, there are federal tax credits that amount to about 50% of expenses incurred during clinical testing. In addition, there are provisions for seven-year marketing exclusivity in the U.S. and 10-year marketing exclusivity in Europe; there are research grants of approximately $4 million (M) per year for clinical research; drug application user fees are waived; and the act provides for accelerated approvals.

Not only do these incentives encourage big pharma participation, they also help support small startups. In our opinion, the most popular motivators are marketing exclusivity and accelerated approvals. We have witnessed numerous drug developers acquiring approvals for orphan indications—first, to rapidly reach the market, and then to expand drug labels to include larger market opportunities, such as cancer and rheumatology. Since the institution of the Orphan Drug Act, there have been more than 3,300 orphan drug applications and more than 360 orphan drug approvals.

TLSR: Kim, it sounds to me as if, as long as government supports these patients and these programs, this will be an ongoing segment of drug development. Is that the case?

KL: Yes. We believe the orphan category is here to stay, given the unmet medical need. Also, there is increased innovation in the space. Biotech companies realize that orphan drug development is a viable business model in a space where approximately 95% of rare diseases have no approved therapies. As patent cliffs for blockbuster drugs draw nearer, prompting the need to invigorate pipeline growth, we believe big pharma is turning its attention to the orphan market, where premium pricing can allow for potentially significant returns, there can be low marketing costs and there is the potential for indication expansion.

Genzyme, a Sanofi (SNY:NYSE) company, is a great poster child for orphan drug development. It helped pave the way for a successful rare disease business model. Now we see many companies in the space, following in Genzyme's footsteps.

TLSR: Let's talk about your companies. Tell me your favorite names.

KL: I'll name a few. BioMarin Pharmaceuticals (BMRN:NASDAQ) is one of my top ideas for 2012. It is a biotech company with four growing commercialized products that help fund new product opportunities. The company has a deep R&D pipeline of first-in-class and potentially best-in-class drug candidates that are poised to deliver a continuum of value over the long term through various ultra-orphan programs that are staggered in varying stages of development. We view its lead development product, called GALNS, or BMN 110, for Morquio syndrome (an inherited metabolic disease), as the company's key near-term value driver, with potentially positive phase 3 data expected in Q4/12. Positive data could lead to a potential approval and launch in H2/13, targeting a global market opportunity of approximately $575M, per our estimates. We believe that the company has improved the pivotal study design to increase the odds of success for this trial, and success could result in profitability for the company by H2/14.

"Not only do Orphan Drug Act incentives encourage big pharma participation, they also help support small startups. In our opinion, the most popular motivators are marketing exclusivity and accelerated approvals."

There are other value-creating, potential platform opportunities for the company, including PEG-PAL (pegylated recombinant phenylalanine ammonia lyase) in phenylketonuria (PKU; the inability of the body to break down phenylalaline). We expect some phase 2 data in Q3/12. There is also a drug called BMN-701, for treatment of Pompe disease (in which glycogen builds up in cells and causes the disability of certain organs and muscles, including the heart). We expect top-line phase 1/2 data in Q1/13. These clinical data could help the company. We view other programs in development as call options for the company. We see BioMarin as an undervalued investment based on a growing commercial franchise, a robust drug pipeline, potentially significant upcoming catalysts, a seasoned management team and compelling valuation.

TLSR: This is your classic orphan disease company. The lysosomal storage disorders, genetically defined cancers, achondroplasia and Batten disease are all very rare and tough indications.

KL: Yes, they are.

TLSR: Incrementally, these could be tremendous value drivers over the years. Do you see this as a very long-term play?

KL: Yes, definitely. I liken BioMarin to a mini-Genzyme, or a classic pharma company, with a deep, robust pipeline and candidates in all stages of development, so there are always clinical data coming out. There is always a potential product approval within a year, a two-year or a three-year timeframe. I believe the company is here to stay. That being said, with such an attractive pipeline—and also with four marketed products—we believe this company could be a great takeout candidate, and probably is already on the target list of many of the big pharmas that are looking to either get into the orphan drug development space or to add to their own pipelines as patent cliffs near for their blockbuster drugs.

TLSR: I wonder if Sanofi could be a potential acquirer of BioMarin.

KL: We believe Sanofi could be a good acquirer since it is in the orphan space, as well as GlaxoSmithKline (GSK:NYSE) and Pfizer Inc. (PFE:NYSE). Glaxo and Pfizer, as of 2010, had developed specific units targeting the orphan disease space.

TLSR: Genzyme was taken out by Sanofi for $20 billion (B). BioMarin's market cap today is about $4.65B. Could you see it getting a mid-teen billion-dollar valuation?

KL: I believe it is quite possible that the valuation could be that high eventually, given that everything in its pipeline works.

TLSR: Your next idea?

KL: Aegerion Pharmaceuticals Inc. (AEGR:NASDAQ) is a compelling story to us. The company has developed a drug called lomitapide, which is currently at the U.S. Food and Drug Administration (FDA) for review, for the treatment of homozygous familial hypercholesterolemia (HoFH). That's a disease where patients are affected by high cholesterol levels, which can be as high as 500–1,000 milligrams per deciliter (mg/dL), whereas a normal cholesterol level is below 100 mg/dL. We view lomitapide as the main value driver for Aegerion. It's an oral, first-in-class, small-molecule inhibitor that has potential to be a best-in-class, low-density lipoprotein (LDL)-lowering treatment. Based on robust data, we view the probability of a U.S. approval by the end of this year at about 70%. We believe this drug could achieve commercial success, particularly when combined with diet and possibly statins. Based on 6,000 (6K) patients and drug pricing of approximately $250K per year, we estimate peak global sales in the adult setting could reach about $450M.

Aegerion is nearing milestones that could affect the company positively, one of them being an FDA advisory panel meeting on Oct. 17, at which it will be reviewed for potential approval. We anticipate potential U.S. approval by the end of this year, a U.S. launch in Q1/13, followed by European approval by the first half of next year. We view these all as value drivers.

TLSR: Isis Pharmaceuticals Inc. (ISIS:NASDAQ) will have an advisory panel meeting for mipomersen (also for HoFH) on Oct. 18. Do you believe these two drugs will have any effect on each other? You have the oligonucleotide, mipomersen, which will be delivered once a week by subcutaneous injection, and you have the small-molecule lomitapide, which can be taken by mouth daily. Do you think the advisory panel will make any judgment based on comparing the two products?

KL: We believe it's a possibility, since the treatments will be reviewed on consecutive days. The FDA has all the data from both drugs. Our view is that this space is large enough to support two drugs on the market. They have two different mechanisms of action. The two drugs have different efficacy and safety profiles as well. The more help we can get to patients with this fatal disease, the better. In our view, lomitapide looks to be the better drug based on data that we have seen so far. It seems to have a superior efficacy in its ability to lower LDL cholesterol and a better safety and tolerability profile, with fewer liver effects. But we'll see what the FDA has to say.

TLSR: Is it possible that a favorable panel opinion vote on one could exclude the other?

KL: Potentially. It depends on the FDA's view. If it believes one drug is superior to the other, it may approve of one and not approve of the other. It's a possibility.

TLSR: Your next idea?

KL: Corcept Therapeutics Inc. (CORT:NASDAQ) has one marketed product, launched in April, called Korlym (mifepristone), for the treatment of Cushing's syndrome (a disorder caused by exposure to high levels of cortisol). This is the company's main value driver. Our talks with endocrinologists lead us to believe that Korlym will become the mainstay treatment for postsurgical Cushing's syndrome patients based on robust efficacy data and a benign safety profile—and given the current, unmet medical need. Since the primary risk factor is identification of new patients, we expect a slow launch. That said, the company is focused on open communication with patient advocacy groups, as well as on increased patient and physician education, which we believe should increase the drug's adoption rate. The next catalyst for this company will be quarterly earnings, as we get a better sense of launch metrics and how the launch is going.

TLSR: On Aug. 8, you lowered your target price from $7 to $6, and the stock has been very weak recently. Is this about disappointment in the launch?

KL: Yes, it is. The sales numbers came in below consensus estimates, and that's why the stock has been underperforming. But given the market for this drug, which we estimate to be approximately $400M/year, there is a significant opportunity here. We believe the drug will eventually get to that point. It's just a matter of time. With many orphan drugs, it takes a while to reach peak sales.

TLSR: Could this be a value stock right now, at its current price?

KL: Certainly. It's highly undervalued at current levels. Even given that we lowered our price target to $6, there is still significant upside from current levels.

TLSR: Your next idea?

"As patent cliffs for blockbuster drugs draw nearer, prompting the need to invigorate pipeline growth, we believe big pharma is turning its attention to the orphan market."

KL: We also like Amicus Therapeutics, Inc (FOLD:NASDAQ). This company is developing a drug called migalastat (expected trade name is Amigal). It's a novel therapeutic alternative to the conventional enzyme-replacement therapies (ERTs) currently on the market to treat Fabry disease (a genetic disease in which lipids are not metabolized and build to harmful levels). We view the drug's unique mechanism of action as somewhat validated by the company's commercialization agreement with GlaxoSmithKline. We believe this unique therapy has the potential to gain market share rapidly due to its ease-of-use formulation, its favorable safety profile and its potential to improve ERT activity when used in combination with marketed products. We view Genzyme's Fabrazyme (agalsidase beta) as migalastat's closest competitor, as Fabrazyme also treats Fabry patients. Migalastat should gain market share quickly, in our view, based on the drug's efficacy and safety profile to date. We estimate peak global sales could reach almost $500M/year, based on 5,500 patients and a drug pricing assumption of $200K/year. This year should be transformational for the company, as we anticipate the first phase 3 data set from migalastat in Q4/12. Following that, we should get input from the FDA at a pre-new drug application (NDA) meeting.

TLSR: This could be a better method of treating Fabry disease because Fabrazyme is an enzyme replacement, whereas migalastat is an enzyme stabilizer.

KL: Correct. The company calls it a pharmacological chaperone. It is a protein that binds to target proteins to induce correct folding.

TLSR: Your next idea?

KL: We just launched on Sarepta Therapeutics (SRPT:NASDAQ), which is developing a drug called eteplirsen for the treatment of Duchenne muscular dystrophy (DMD; a devastating disease that causes muscle weakness and eventual death in boys). Eteplirsen is first-in-class and a potential disease-modifying therapy. The company recently presented unprecedented 36-week phase 2b data, which look very promising. The next event is 48-week data, which should come in October. That will be a critical inflection point for the company, followed by an end-of-phase 2 meeting with the FDA, likely in December or January, to clarify the regulatory pathway. The company has a ribonucleic acid (RNA) platform, with other R&D candidates in the pipeline, which helps differentiate its products via increasing potency, bioavailability, tissue selectivity and therapeutic index. Sarepta is utilizing this technology to potentially modify diseases.

TLSR: Does eteplirsen inhibit synthesis of the protein, or does it modify the synthesis?

KL: The technology can create drugs that skip the exons, or the bad parts of genes, that are causing disease. It's called exon skipping, and it is exciting. This drug is unique in that it has the potential to alter the disease progression and could be complementary to current standard-of-care therapy.

TLSR: The company has promoted eteplirsen to retail investors. Does that offer you any cause for concern?

KL: Not really. There is a lot of retail action with the stock, as we've seen evidence of just recently. However, institutional investors do their due diligence, and there are several great institutional investors in the stock.

TLSR: The stock is up 250% over the past 12 weeks.

KL: Yes. It's amazing what positive data can do.

TLSR: Your next idea?

KL: Synageva BioPharma Corp. (GEVA:NASDAQ) is developing drug candidates to treat ultra-orphan genetic diseases. Its lead product is SBC-102, which is a potentially disease-modifying enzyme-replacement therapy for patients who are affected by a disease known as lysosomal acid lipase (LAL) deficiency. This is a really rare disease that causes fatty material to build up in various organs and has both early and late onsets. Based on some encouraging interim phase 1/2 data, we believe this drug could be approved, and that it could hit peak global sales of about $1.2B. That number is based on an assumption of a target population of 9,100 patients and a drug pricing at about $350K/year.

The company's near-term success is directly linked to the success of this drug. However, the company does have a novel technology platform, which could provide other drug candidates to treat other orphan opportunities, like MPS IIIB (Sanfilippo syndrome B, which causes central nervous system degeneration). We view all of these as call options, given their early stages of development. A couple of upcoming catalysts, such as additional extension data in H2/12, as well as initiation of a pivotal study by the end of this year or early next year, may create value. We like the name based on its strong clinical candidates, promising data, significant near-term potential milestones and seasoned management team.

TLSR: The stock is currently at about $1.2B in valuation, and you said there was about a $1.2B annual opportunity for the drug. I know it's over your target price by about $1, but you still like it, even at a $1.2B market cap?

KL: Yes. I do like the name. We could revisit our price target after seeing the extension data in Q4/12. If it continues to be positive, development risk could be reduced.

TLSR: Your next idea?

KL: Raptor Pharmaceutical Corp. (RPTP:NASDAQ) is a biotech company focused on developing its lead candidate, RP103, for the treatment of nephropathic cystinosis (a buildup of cystine forming crystals that can damage organs, particularly the kidneys and eyes). This drug would be a preferred alternative therapy to Mylan Inc.'s Cystagon (cysteamine bitartrate), which is the current standard of care. We think RP103 could become standard of care based on its ease-of-use formulation, convenient dosing schedule, lower pill burden and superior side effect profile. Also, given significant drawbacks and side effects with Cystagon, we believe RP103 would gain market share rapidly upon approval. RP103 currently is at the FDA for review. We'll see some potentially meaningful catalysts on the horizon, which could bolster shares.

TLSR: Your next idea?

KL: We just initiated on Vertex Pharmaceuticals Inc. (VRTX:NASDAQ). This company has two products on the market. The first is called Incivek (telaprevir) for hepatitis C (HCV), and the second is Kalydeco (ivacaftor) for cystic fibrosis (CF). We view Kalydeco as the main value driver for this company. It is a best-in-class, disease-modifying therapy for cystic fibrosis, and we believe there is significant potential to expand the drug's CF footprint through label expansion and combination therapy.

TLSR: What percentage of CF patients can you treat with this drug?

KL: Currently, Kalydeco is marketed to treat a specific mutation called G551D, which represents approximately 20% of the CF population. That's why success in combination therapy would be so important, as that population represents approximately 80% of the cystic fibrosis population.

TLSR: Was there another company you wanted to mention?

KL: Alexion Pharmaceuticals Inc. (ALXN:NASDAQ) has one marketed product called Soliris (eculizumab) for the treatment of ultra-orphan indications paroxysmal nocturnal hemoglobinuria (PNH; a disorder characterized by the periodic destruction of red blood cells) and also atypical hemolytic uremic syndrome (aHUS; the formation of blood clots that can cause kidney failure). We've really been impressed by Alexion's success in these two indications but mainly in PNH, since that has been on the market for five years now. The five-year compounded annual growth rate in revenue is about 108% since approval in these two indications.

TLSR: This company had a market valuation of about $11B a year ago. Today, it has a $20.57B market cap. Do you think this company is perfectly priced currently?

KL: Currently, yes. We believe the stock is fairly valued at current levels. What we'd like to see is continued growth as it expands into untapped markets. However, we do expect temperance as the major markets mature. The ramp-up in the aHUS setting may be a little slower than what we've seen with PNH, given the high mortality rate for this disease.

TLSR: Kim, thank you very much.

KL: Thank you. I have enjoyed it.

Kimberley Lee is a senior research analyst at ThinkEquity LLC, where she focuses on the biotechnology sector. Prior to joining ThinkEquity she covered the biotechnology industry for more than 11 years, most recently as a managing director at Global Hunter Securities LLC. She has also held sell-side roles at Stephens Inc., Jefferies & Co. Inc. and Wedbush Securities (formerly Pacific Growth Equities). Prior to her Wall Street career, Lee was trained as an obstetrician/gynecologist. She holds a bachelor's degree in biological sciences from Stanford University and earned her doctorate in osteopathic medicine from Kirksville College of Osteopathic Medicine.

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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: Isis Pharmaceuticals.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Kimberly Lee: 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 Reports for participating in this interview.

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