Hammer Stock Blog

Morphosys (MOR.DE) is one of the most unusual biotech companies, as it breaks three basic rules that apply to drug development companies:

Rule No. 1: Development-stage companies burn cash and therefore must constantly raise capital and dilute existing shareholders.

Rule No. 2: Development-stage companies are risky and volatile because they rely on a limited number of binary events.

Rule No. 3: Investing in cutting edge, growing segments of the pharmaceutical industry is associated with a high level of risk.

Morphosys is the only company I am familiar with that systematically breaks each and every one of these rules. It does not have any drugs on the market and is not expected to have any in the foreseeable future, yet it is profitable. It is involved in drug discovery which is associated with a high attrition rate, yet statistically, there is a very high chance that it will have commercial revenues at some point in the future. It is involved in one the fastest growing segments in the industry, but can be regarded as a conservative holding since it will never be dependent on a limited number of binary events. And finally, it has no need to raise cash in the coming decade in order to support its activities, as its costs are covered by other companies.

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The pharmaceutical industry is in the midst of a severe innovation crisis, where more R&D money results in less approved drugs. In parallel, sales of most traditional blockbusters are being cannibalized by generic competition, forcing the big pharmas to exploit new concepts and rush new drug candidates to their pipelines. Nearly half of all drugs that are expected to enter the clinic in the coming years will be aimed at the oncology market. Consequently, early stage drug development for cancer is going to be the most active area in the industry, with an abundance of investment opportunities, particularly in small and medium companies. Many investors prefer to stay away from oncology drug development, where success rates are at a worrying low, hovering around 5% compared to 10% for the whole industry. Nevertheless, among the hundreds of publicly traded companies which are engaged in oncology, there may be a group of companies which have better chances of succeeding in such a monumental task. These companies are what I like to call platform companies.

In this article, I will try to explain what makes a good platform company and why Exelixis (EXEL) can be regarded as a good (yet not a perfect) example.  For the sake of clarification, I certainly do not claim that platform companies are the only investment worthy biotech companies, however, when it comes to early stage drug development, platform companies are an excellent place to start.

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There is always a debate regarding market efficiency and to what extent stock prices represent the available information about a company. Micromet’s (MITI) surge last week shows that in some cases, the market is far from being efficient. The spike of more than 35% in the last two trading sessions is attributed to the publication of a short article in Science Magazine, one of the world’s most prestigious scientific journals. The article contained clinical data from an ongoing phase I trial of Micromet’s lead candidate, MT103 (partnered with Medimmune). The data was spectacular, showing a strong, dose dependent response in concert with a good safety profile, exactly the kind of data that can put a small biotech in the spotlight. Ironically, the article contained data which has already been presented more than two months ago at the ICML in Switzerland.

Regardless of whether market reaction was justified, publishing clinical data at such an early stage in Science should be viewed as an indication for the scientific community’s embrace of Micromet and its BiTE platform. The BiTE platform relies on monoclonal antibodies for stimulating the patient’s immune system to attack cancer cells that have managed to evade or suppress the body’s immune response. Although most attention is given to the first product from the platform, MT103, it can generate an unlimited number of agents against a variety of cancers, making it a potential revolution in the way cancer is treated.

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On June 18^th, Seattle Genetics (SGEN) announced it had received a milestone payment from Genentech (DNA) after the latter filed an IND (Investigational New Drug) application for an antibody-drug conjugate (ADC) powered by Seattle Genetics’ technology.  Intriguingly, there was no additional data about the new agent, nor was there any official announcement from Genentech. An article that will be published in this month’s issue of Nature Biotechnology may shed some light on the identity of the new ADC and the technology it utilizes. Based on this article, the new agent will not be based solely on the familiar Seattle Genetics’ ADC technology, but will also utilize a next generation platform with potentially disruptive implications.

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Many terms can be used to describe Immunogen’s (IMGN) recent stock behavior, but it seems the word “schizophrenic” is the most suitable one. Immunogen gained almost 50%  in the three weeks prior to the ASCO annual meeting, just to give it all back in the 8 trading sessions following the conference, thus it is clear that the rollercoaster in the company’s share price had a lot to do with what was (or was not) presented at the conference. Immunogen is involved in multiple clinical programs, but for the past year the vast majority of the attention it has received was directed at T-DM1, which is being developed by Genentech (DNA) based on Immunogen’s technology. T-DM1 is garnering more attention than all the rest of Immoungen’s programs combined because it has all the necessary ingredients for the ultimate biotech story: Huge addressable market, a strong partner, impressive (yet preliminary) clinical activity and an opportunity to validate a disruptive technology. Accordingly, it is only reasonable to expect Immunogen to be traded in tandem with T-DM1’s development.

Wild swings in biotech stocks are commonly an outcome of clinical results publication, and indeed, the presented data at ASCO could be partially blamed for the violent market reaction. Nevertheless, in this particular case, Immunogen was affected from a lack of positive news rather than the release of negative news. Genentech had previously stated it would decide whether to advance T-DM1 into a registration trial during 2008, based on an ongoing phase II trial. This led many to believe that Genentech would use the ASCO platform to announce its intention to commence a phase III trial already this year. In the last day of the conference, when the market realized Genentech was not going to give the dramatic announcement nor was it going to release data from the ongoing phase II trial during the conference, the reaction was brutal.

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Poniard Pharmaceuticals – Platinum Rediscovered (Part II)

This article will discuss the development of Poniard’s lead drug, picoplatin, for the treatment of small cell lung cancer (SCLC). A General introduction for picoplatin can be found in the first part of this article.

As a novel platinum compound, picoplatin seems to be the ultimate “platform” product, with potential application in multiple indications, including some of the most lucrative oncology markets. Nevertheless, the only chance Poniard has to generate sales from this product in the next 4-5 years lies in a relatively modest indication - Small Cell Lung Cancer (SCLC).

SCLC accounts for 13%-15% of all lung cancer diagnosed in the US (32,000 cases in 2007). When diagnosed early, the disease is curable with surgery in some patients, however, in most cases, patients either develop recurrent disease or are diagnosed at an advanced stage. The common treatment for SCLC is a platinum-containing chemotherapy regimen, which typically leads to a very high response rate, however, the vast majority of patients eventually relapse, thus creating a second line market of around 70 thousand patients in developed nations. Although this market represents a rather small market for picoplatin, it can certainly be viewed as the most underserved one.

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Forty years after the accidental discovery of their anti-cancer properties, platinum based compounds represent one of the most important classes of oncology drugs. Platinum compounds are effective in treating a wide array of malignancies including lung, ovarian and colorectal cancers. Cisplatin was the first approved platinum drug (1978) followed by carboplatin (1989) and oxaliplatin (2002), which together generated annual worldwide sales of approximately $3 billion in 2007. These drugs exert their antitumor activity by binding to DNA and interfering with DNA replication, ultimately leading to cell death.

Despite their impressive activity, platinum drugs suffer from two primary drawbacks. The first drawback is the appearance of undesirable side effects and toxicities. Cisplatin often leads to kidney toxicity, while carboplatin and oxaliplatin often lead to bone marrow and nerve toxicities. The most urgent safety issue is the nerve toxicity caused by the use of oxaliplatin in colorectal cancer, as it sometimes forces physicians to stop the administration of the drug. The second drawback of platinum compounds is the emergence of platinum resistance in most patients during or following treatment. These patients stop responding to treatment after an initial response within several months of initial treatment. Moreover, some cancers are inherently resistant to platinum even before being exposed to platinum drugs. Fortunately, many resistance mechanisms tumors utilize to block the anti-cancer effect of platinum drugs have now been elucidated, and this knowledge will hopefully provide the basis for the development of the next generation of platinum drugs.

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