Hammer Stock Blog

It finally happened. Yesterday, Genentech announced that they made a “go” decision to advance T-DM1 into a phase III trial. Although no official announcement is out as of yet, Genentech’s President of Product Development, Sue Hellmann, left no doubt in her prepared remarks:

“Additionally, we recently made a Phase III go decision for T-DM1 in the second line setting and plan to initiate a study comparing TDM1 to a Capecitabine plus lapatinib combination in the first half of 2009.”

Evidently, this kind of decision has tremendous implications on Immunogen from a financial stand point, as it is now closer than ever to receiving sales royalties on sales of a product that can be in the market as early as 2010. This kind of move should also trigger a substantial milestone payment. The company has not disclosed the exact size of the payment, but based on the $5 million Immunogen received after T-DM1 entered phase II and remarks made by Immuogen’s CEO, this milestone payment should be in the $8-10 million range. There are also plenty of additional implications on Immunogen’s ability to attract more partners and  sign more licensing deals, which is equally important because it will increase the number of Immunogen’s  shots on goal and provide a non-dilutive source of funding.

Amazingly, Genentech’s announcement is still not translated into an upward move in Immunogen’s stock, but it seems inevitable given Genentech’s position in the biotech field, T-DM1’s huge addressable market and the great validation of Immunogen’s technology. Genentech’s decision is also a good sign with respect to the ongoing phase II trial to be presented at the San Antonio Breast Cancer conference this December, since Genentech has access to up to date unpublished efficacy data.  

Small biotechs such as Immunogen are highly risky in the short run, and normally trying to predict  short-term movement of these stocks  would be futile. Nevertheless, I believe that the imminent official press release Immunogen has to publish (since it is a material event) creates a window of opportunity for  risk-tolerant investors, as the way I see it, a near term jump is inevitable.  Regardless of market conditions, Genentech’s  decision to promote a drug based on Immunogen’s technology into a registration trial is one of the most meaningful events a development stage biotech can have, and meaningful fundamental events eventually translate into meaningful moves in the stock price.

Author is long IMGN & DNA

History has shown again and again that times like these represent a huge long term buying opportunity. This may be particularly true for the biotech segment that, despite weathering the storm better than other segments, has had its share of price declines. During the past several weeks, great biotech stocks, from small early stage companies to fully commercialized companies have been thrown out of portfolios like bad auction rate securities, but the truth is that the value proposition of most of these biotechs did not change at all, and is not likely to change as a result of market conditions. This is why current prices create the best opportunity to get into the biotech segment since 2002.

In the past, the pharmaceutical segment served as a safe haven at times like these, based on the notion that drug sales, especially those for the treatment of serious illnesses, remain unaffected by recession. Unfortunately, most pharmaceutical companies are in the midst of an innovation crisis, where their traditional blockbusters are gradually being cannibalized by generic competition, so the next couple of years will be very challenging for them, recession or no recession. Consequently, investors may want to look for growth in the relatively new entrants to the field – biotech companies. 

Biotech companies can be divided into two groups, each has its own merits and pitfalls.

The first group includes fully commercialized companies with a healthy balance sheet and cash generating products. These include all the big biotech companies such as Genentech (DNA), Amgen (AMGN) and Gilead (GILD). Because these companies can be found in every typical portfolio, they all got hit pretty badly from the recent sell-off due to indiscriminate panic selling. Nevertheless, the impact of an anticipated recession will have on these companies, who are selling drugs that address diseases such as cancer and AIDS, will be marginal.

The second group consists of smaller, development stage companies, with no commercially available drugs and several cash consuming development programs. The good news is that fundamentally, these companies have nothing to do with the global economy because they are not selling anything. The bad news is that they have to constantly find resources to finance the costly development of their drug candidates. Thus, the most important implication a market crisis has on this kind of companies is that it makes cash-raising almost impossible.

This is why investors should invest only in development-stage biotechs which have found a way around this problem. Some companies can generate cash from licensing their technology or intellectual property, some, like Array (ARRY) and Poniard (PARD) arranged a line of credit, some, like Seattle Genetics (SGEN), were smart enough to do a secondary offering under good market conditions, some, like Exelixis (EXEL) and Immunogen (IMGN), licensed some of their products and have someone else paying for the development. 

Bearing in mind that in the foreseeable future, licensing of technology and products will be the preferred way of getting cash, it would particularly be wise to pay attention to companies with unpartnered assets that are generating robust data in clinical trials as well as to platform companies that can license their technology on a non-exclusive basis. Evidently, when small companies have one way of raising cash blocked, it might reduce their leverage position in the alternative route of partnering. However, thanks to the pressure traditional pharmaceutical companies are currently under, they are starved for new promising candidates, which means that a good drug candidate still has tremendous value in the eyes of big pharmas. A good example for such a promising candidate is Rigel (RIGL) Pharmaceutical’s R788 that showed impressive results in treating rheumatoid arthritis, a disease with a market size exceeding $ 10 billion. Another good example for that may be Arqule’s (ARQL) ARQ-197, which already demonstrated its potential in a wide array of cancers and has a blockbuster potential.      

In order to put this approach to the test, I asked Pontifax’s Ran Nussbaum his help in building a virtual portfolio of promising biotech stocks. This portfolio is not intended for short term trading, but for long term investment of at least several years. Although we do not expect active trading in this portfolio, from time to time there may be changes as additional stocks will be added and existing holdings may be sold. Any future changes can be made only when markets are closed. On a more cautionary note, regardless of the attractiveness of all of these companies, all the inherent risks associated with biotech remain, including long time to market and statistically low success rates.

                                        Biotech Portfolio as of October 9th 2008

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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A lot of clinical data was published at the American Society of Hematology (ASH) meeting, some of it quite impressive. Naturally, established drugs such as Millennium Pharmaceuticals‘ (MLNM) Velcade, Genentech’s (DNA) Rituxan and Celgene’s (CELG) Revlimid got most of the attention. In my opinion, the real star of the conference is MT-103 which is being co-developed by Micromet (MITI) and MedImmune, the biologics division of AstraZeneca (AZN). I won’t go too deep into describing the mechanism of action and the platform based on which MT-103 is built (I intend to do that in a review I hope to publish next week). However, the clinical data presented by Micromet is so impressive and so groundbreaking from several perspectives, that it must not be ignored.

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CD70 program

CD70 is a receptor expressed on many types of blood cancers as well as the majority of renal cancer cases. The expression profile of this target is highly restricted to cancer cells, which, combined with its ability to internalize antibodies, makes it a desirable target for ADCs. Seattle Genetics is evaluating a naked antibody as well as an ADC that target CD70, both candidates are based on the same antibody, which was licensed from CLB-Research and Development. The naked antibody, SGN-70, is evaluated for certain blood cancers and is expected to enter phase I during 2008. Another possible use for SGN-70 is for autoimmune diseases, as it is expressed on white blood cells that are involved in the disease, but not on “resting” cells.

SGN-75 is an ADC based on SGN-70, which is currently evaluated pre-clinically for Renal cell carcinoma. This disease, although not as common as prostate and lung cancers, represents a large market opportunity with over 43,000 new cases and almost 13,000 deaths expected in 2007 in the US alone. Although surgical resection of the kidney has high chances to prevent the disease from spreading, nearly one third of patients are diagnosed at advanced stage, where the cancer has spread to additional organs. In addition, more than 30% of patients who undergo resection will eventually develop metastatic disease, for which very few therapeutic options exist. SGN-75 is expected to enter the clinic only in 2009.

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Antibodies have been proven as excellent tools for specifically targeting cancer cells, however, the damage they inflict upon cancer cells is minimal, especially when compared with chemotherapy drugs. (more…)

Metaphorically, antibodies can be described as unarmed guided missiles, which have extraordinary precision and targeting abilities, but once they hit the target, they inflict minimal damage. Chemotherapy and radiotherapy can be described as artillery, very powerful, but unguided. In order to optimally use the two, the most logical step is arming those unarmed missiles with a variety of explosives. Using the same reasoning, there is a true need to develop anti-cancer therapies which have an antibody-like specificity as well as chemo/radio-therapy-like potency. Doing so enables us to take advantage of the selectivity of antibodies and the potent toxic activity of chemo/radio-therapy, thus creating superior cancer treatments. The antibody binds the target on the tumor, delivers its payload and kills the cell. Arming antibodies with effector molecules like chemotherapy agents and radio-isotopes results in a hybrid agent referred to as an Immunoconjugate. An antibody which is not conjugated to an effector is referred to as “naked” antibody.

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