Hammer Stock Blog

Immunogen becomes a $1B company

Immunogen (IMGN) concluded the week with a market cap of ~$1B, up 200% in less than a year. This valuation is quite unusual for a company that ascribes the vast majority of its value from a 3-5% royalty stake in a single drug - Roche’s T-DM1. T-DM1, which utilizes Immunogen’s antibody-drug conjugate (ADC) technology, comprises of Herceptin conjugated to a drug payload. It is in two phase III trials and multiple phase II studies in breast cancer. If proven effective, many believe T-DM1 will eventually replace Herceptin, at least in certain treatment lines.

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Earlier this week, Incyte (INCY) announced positive phase III results for its lead agent, INCB424, in myelofibrosis (MF). Although the full data set was not published, it will almost certainly lead to FDA approval, opening up a $200-$300 market in the US alone. Another similar phase III trial which will be reported in the coming months should support approval in Europe as well.   

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As expected, earlier this month at the annual American Society of Hematology (ASH) meeting, Seattle Genetics (SGEN) reported positive results that will likely lead to the company’s first ever regulatory approval for Brentuximab vedotin (SGN-35). The data will transform Seattle Genetics into a commercial stage company, with an initial market opportunity of ~$250M in the US alone. In addition, the results further validate the company’s ADC (antibody drug conjugate) technology, which has broad utility and huge commercial potential. In particular, Seattle Genetics could become a market leader in hematology by next year’s meeting, with results for two additional ADCs.

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A drug with an almost certain approval and immediate sales potential of hundreds of millions of dollars is an asset very few biotech companies possess. In that sense, Incyte (INCY), which is developing a breakthrough drug for blood disorders, represents a unique opportunity in an industry plagued by risk and uncertainty. Incyte is also unique in its problematic capital structure, which makes an otherwise simple investment decision into a tricky one.

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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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Of all the healthcare companies that took a beating in 2009, Celgene (CELG) seems to be the most undervalued one. Looking at the company’s financial performance and upside potential, it is very hard to understand how a growing biotech company with virtually no potential threat to its leading products is traded at such a low price, a real steal. I typically write about development stage companies, where financial metrics are irrelevant and the focal point is on scientific and medical data. In Celgene’s case, all that is needed is to examine the financial performance and the markets in which the company operates.  

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 In the previous article, I discussed the pharmaceutical industry’s race after approved drugs and late stage agents with proof of concept in humans. I mentioned Rigel’s (RIGL) lead drug, R788, as a likely target for collaboration due to its impressive activity, the huge addressable market and the fact it is an oral drug. For the past year, Rigel’s management has been consistently and rigorously claiming it will have a partnership in place during the first quarter of 2009. Although the company has had more than one opportunity to change this forecast, it stuck by its original statement. For example, when new safety data got published last year and worried investors sent the stock down 50% in two trading sessions, many believed that the imminent deal was not going to materialize. To their surprise, Rigel reassured investors the time frame for a partnership remains intact, explaining that none of the recently published data was actually new to potential partners. Then, Rigel appeared in countless investor conferences, the last of which was only last month, promising investors a licensing deal is forthcoming. 

Last week, the company announced it no longer expects to have a deal by the end of March. Instead, it intends to wait until it has results from two ongoing trials, due this summer. Deciding to wait until more data is available makes a lot of sense, providing the data is good. Typically, the further a drug gets in clinical development, the higher its value in the eyes of potential partners. The problem is not the decision itself, but its timing, as this kind of decision could have been made long ago. So what led Rigel’s management to suddenly change its mind after a year of expectations build up?

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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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