Hammer Stock Blog

Yesterday Pfizer (PFE) announced that Sutent failed to prolong survival of lung cancer patients when given in combination with Tarceva. The drug led to an increase in progression free survival (PFS), which was the secondary endpoint of the study. The results are not published and there are several open questions such as the extent of PFS improvement, benefit across different subtypes and use of Sutent in patients from the placebo cohort after progressing on Tarceva. Nevertheless, chances to see Sutent+Tarceva  as a standard of care for 2^nd/3^rd  line NSCLC are slim.

Pfizer’s failure provided some clarity for Arqule (ARQL) and its partner Daiichi Sankyo, who plan to initiate a phase III study for ARQ-197 in combination with Tarceva. The indication Arqule is pursuing is very similar to that pursued by Pfizer, so had the Sutent trial been successful, it would have adversely affect ARQ-197’s prospects in general and potentially the required clinical route. (more…)

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On top its JAK programs, Incyte has been developing two additional programs it intends to out-license. The first program is INCB13739 for diabetes, which already reached clinical proof of concept and could be licensed imminently. The second program, INCB7839 for breast cancer, is less advanced but could become very interesting later this year depending on data from an ongoing trial.

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Last week, Incyte (INCY) sold over $130M worth of stock and $400M worth of convertible debt in an effort to solve its balance sheet issues. Thanks to the stronger cash position, the company can finally be evaluated based on its promising pipeline rather than its capital structure. More importantly, it will be able to complete a series of business development deals and focus on becoming a commercial stage company.

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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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The past two weeks were anything but easy for Rigel’s (RIGL) shareholders, who saw their shares crash more than 50%. Rigel started 2008 on the right foot after a 200% jump in a single day last December, following impressive data for the company’s flagship product, R788, in Rheumatoid arthritis (RA) patients. Less than one year after, Rigel has given back all its gains, following the disclosure of additional data from the same trial. 

R788 was perceived as such a promising drug because it represented a highly anticipated paradigm shift in the treatment of RA: An oral drug that may be as effective as the current standard of care biologic agents. RA is a severe auto-immune disease, where the patient’s immune system attacks the body’s tissues, leading to a gradual destruction of the joints, which results in severe pains and disabilities. The rate of disease progression varies from patient to patient, but in the vast majority of cases, the disease is incurable, progressing over the patient’s lifetime. Therefore, despite the relatively low incidence of the disease, it has a high prevalence, affecting 1.3 million patients in the United States alone. Since there is no cure for the disease, patients must be treated indefinitely in order to delay disease progression and reduce its debilitating symptoms. This makes RA one of the most lucrative indications in the pharmaceutical industry, estimated at more than $10 billion annually.

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