January 8, 2015
During the past year or so, biotech experienced an unprecedented number of companies going public. Over that period, we have added two such names to our portfolio – PCRX (2012) and FPRX (2014). A handful of these stocks have achieved remarkable valuations in a very short time – a sign of investor enthusiasm is having significant “new†positions in “new†names, and parking away big pieces for the long-term. Many of these companies have similar and/or competing technologies or compounds that are included in MTSL Companies. In fact, we believe the success of some of our companies has paved the way for others to go public – and that have rapidly commanded impressive market caps. For example, the astounding ascendance of PCYC with Imbruvica, we believe, has led to what investors currently believe stocks like KITE and JUNO may do or even better over time. Based upon the stocks’ post-IPO performance, investors are not waiting around to act, granting JUNO a $4 billion valuation and KITE a $3 billion valuation in a remarkably short period of time. Both companies are leaders in the exciting CAR-T field of immuno-therapy, but remain years away from either a bonafide product let alone sizable earnings. Nonetheless, they seem to be akin to what Google, Facebook or Twitter were – high-profile managements with exciting potentially revolutionary technology raising tons of capital privately at high valuations with Blue Chip investors who then doubled down after the IPOs and socked them away for the long-term.
Having said all that, in our view, there are a number of MTSL companies that have either a) similar proprietary technology as the supposed “new leadersâ€; b) superior intellectual property; and/or c) more and/or later stage data than the “new winnersâ€. Moreover, they trade at significant discounts to their respective peers (see table below). A brief comparison is made below. Notably inexpensive on this relative basis are SGMO, MDCO and NVAX. In addition, FPRX, ISIS and PCYC look attractive using this valuation method.
SGMO – BLUE ($3 billion): SGMO has a proprietary second generation gene therapy platform with lock solid IP. Their beta thal and sickle cell programs are right behind BLUE’s and have been validated by the impressive Biogen partnership. In addition, SGMO has a very interesting Phase II HIV “functional cure†in development and will file four INDs in 2015 as their powerful platform is poised to deliver significant news flow throughout the year. BLUE currently trades at $2.9 billion market cap while SGMO’s valuation is $1 billion.
ISIS – ALNY ($8 billion): ISIS’ IP is extremely strong and has positioned the company to be a leader in the antisense/RNAI sector from the beginning. ALNY is in fact a sub-licensee of ISIS’ IP and ISIS receives a portion of their revenue (not the other way around). More importantly, ISIS has translated its dominant IP into a monster pipeline with 34 drug candidates in clinical development. While ALNY is a quality company and also has a broad pipeline, until recently its valuation has exceeded ISIS’ despite the vast discrepancy between both the pipelines and the fact that ISIS is more advanced. Lastly, the validating partnerships for ISIS, in our view, both in number and in value will continue to grow as we expect ISIS to deliver two additional major partnerships in 2015.
PCYC or FPRX – JUNO/KITE/BLCM (>$7 billion combined) – PCYC has an approved oral cancer drug in Imbruvica that is also very safe and represents one of the best cancer drugs ever developed. It is well on its way to establishing itself as the cornerstone of CLL/MCL therapy. This year, the company will have Phase III RESONATE 2 results that are likely to propel Imbruvica into the front line and solidify it as the cornerstone of treatment. While the space is competitive, no other single agent comes close (e.g., ABBV, GILD, INFI, etc.). Longer-term, Imbruvica or its follow-ons have significant potential in both I/O and autoimmune disease.
Another compelling comparable is FPRX’s $500 market cap to JUNO’s $4 billion. The odds of FPRX rising eight times in valuation to equal JUNO’s are significantly higher, in our view, that JUNO delivering eight times valuation or $32 billion. FPRX has a dominant second-generation antibody platform company with excellent IP and technology validating partnerships with I/O leader Bristol. Meanwhile JUNO is in a hyper-competitive space that are all targeting the same niche markets with their limited first generation therapies.
JUNO/KITE/BLCM plus NVS are the major competitors in the CAR-T arena. CAR-T T cell therapy involves engineering patients’ own immune cells to recognize and attack their tumors. And although this approach, called adoptive cell transfer (ACT), has been restricted to small clinical trials so far, treatments using these engineered immune cells have generated some remarkable responses in patients with advanced cancer, included ALL and CLL. Several like PCYC have received Breakthrough Therapy Designation, and they are aligned with the very top academic universities/researchers in oncology.
We believe that CAR-T will be extremely useful to treat acute patients and end-of-the-road patients quite well. However, there are still several unanswered questions. There is some controversy over the percentage of patients that actually can qualify for T Cell therapy; many patients that could not have their cells engineered were excluded from data presentations and analyses. There are some acute toxicities that investors’ now believe will be solved over time, these procedures are very invasive and will be very expensive, and there’s still a very big patent fight brewing down the road. It will be difficult to get CAR-T performed in the community setting. Hence, with a cumulative market cap of more than $7 billion of JUNO/KITE/BLCM – we believe PCYC is looking even more attractive. One cannot discount NVS and the other major pharma and bios participating (although AMGN/KITE just struck a impressive partnership.)
MDCO – CBST ($8.4b)/ALNY – MDCO’s franchises in acute care cardiovascular and its emerging infectious disease portfolio need to be taken into account when comparing its valuation to two leaders in the same fields. First, MRK acquired CBST late last year at an astounding $8.4 billion valuation. While MDCO is not a pure play in the anti-infectives space, they do have an existing product line led by the recent launch of Orbactiv, and a much more exciting mid- to late-stage pipeline of four compounds. Furthermore, ALNY is MDCO’s partner for ALN-PCSsc – which is one of the hottest areas in biotech right now, led by AMGN and REGN/SNY antibodies. They are about to be approved this year and expectations are in the multiple billions. Hence, ALNY’s $7 billion valuation certainly includes the potential of ALN-PCSsc. Therefore, with its valuation depressed almost entirely due to the Angiomax patent overhang – trading at just $1.5 billion – MDCO to us is utterly attractive.
NVAX – Alios ($1.8 billion, acquired by JNJ) – Last year, JNJ paid $1.8 billion to acquire closely-held Alios. While we are not very familiar with the company, the lead compound in the acquisition is AL-8176, an oral nucleotide for RSV currently in Phase II trials. To us, AL-8176 seems very similar to Tamiflu – an oral nuc for the flu – which is a well-known drug for the flu but one with little efficacy. As we all know, NVAX has completed four positive Phase II trials for its RSV F protein vaccine, with readouts beginning around the middle of the year for three more important ones (elderly, pregnant women, pediatric). Despite that, NVAX, which owns 100% of its vaccines, still trades at a nice discount to the Alios purchase price. An effective and safe RSV vaccine has significant commercial potential – and we expect the release of the next bunch of trials will bring.