Monday, March 14, 2011

"It's the greatest success of western medicine in our lifetime, and the success of HIV drugs is leading to its own demise."

...says Jacob Lalezari, an HIV clinical trials expert.

No rigorous analysis here, but I thought it worthwhile to post this story speculating that the efficacy of today's HIV drugs may impeded advances in fighting HIV.

I wish we having the same problem in all therapeutic areas!

Well, we have in at least one: CML (Chronic Myelogenous Leukemia). Gleevec is a very, very effective treatment, though not always effective against certain mutations (T315), and it seems that many patients may eventually relapse years later with a mutated form of the disease.

Still, Gleevec is to CML what Gilead's suite of HIV drugs are to HIV - very good treatments, not cures.

But, if CML is a guide, there is much to hopeful for among the HIV community. Even though Gleevec is an effective CML treatment, and addresses only about 5,000 new patients per year, two next generation drugs have been approved, with others in the pipeline. (NVS' Tasigna and BMS' Sprycel approved for second line use, even as researchers theorize that they may generate quicker responses than 1st line Gleevec.)

Considering Gleevec's total annual market is ~$2B, I would expect that there will be plenty of efforts to develop a cure for the $15B HIV market.

Oncology-related stocks with profits and no R&D risk? Yes, please!

I can't give much of a recommendation on their choices, but SeekingAlpha puts forward a list of stocks related to oncology that are also profitable.
Take a read here.
Their choices are Quest (DGX), Genprobe (GPRO), and Genoptix (being acquired by Novartis.) I'd also nominate Genomic Health (GXDX), Myriad Genetics (MYGN), and Qiagen (QGEN).

Each of these companies are squarely in the diagnostics space, so they offer the stability of selling a product, rather than the ups and down of product development (as in drug discovery/development ventures), while, in many cases, having the same IP moat as the drug disc/dev companies, as the diagnostic technology or target IP is often patented, or the 510K FDA approval rserves as a barrier to entry for competitors.

It is generally perceived that diagnostics offer less upside than drug disc/dev companies, but if you consider how aggressively young biotech companies partner away risk (and upside), you wonder if the diagnostics companies offer the same upside, with much less risk.

Consider 3 companies:

Exelixis (EXEL), a biotech founded in 1994. Market cap: $1.2B
Myriad Genetics, a molecular diagnostics company founded in 1991. Market cap: $1.7B
Genomic Health, a molecular diagnostics company founded in 2000. Market cap: $725M.

There's a huge amount of selection & survivor bias in this analysis, but if you assume that each company was seeded with $20M in equity at founding, you would see the following CAGR in valuation:

Exelixis: 27%
Myriad: 25%
Genomic Health: 38%

This is not to say that these companies have generated internal rates of return (IRR) at these levels, as each company had a different financing strategy. Very light analysis indicates that Exelixis was much less capital efficient than either Myriad or Genomic Health

Exelixis:$1.11B in paid in capital 
Myriad: $580M paid in capital
Genomic Health: $255M in paid in capital

Without knowing the exact dates and amounts raised by each of these companies, a precise rate of return can't be calculated, but simple observation (compare today's market caps to the amounts previously invested) suggests that not only were the diagnostics companies much lower in inherent risk, they are also higher in investment returns.

So, before buying into a drug discovery/development stock, consider following SeekingAlpha's advice, and look at profitable and growing oncology stocks like those listed above.

Saturday, March 12, 2011

Big speed bump on the way to the stem cell revolution

A report this week indicates that induced pluripotent stem cells (IPS), the technology whereby adult stem cells (ASCs) are used to create novel stem cell lines may be inherently flawed, as the resulting cells and cell lines have been found to have important mutations.

Adult stem cells in this case are more appealing than embryonic stem cells (ESCs), which come with ethical/moral challenges. So - assuming the research is confirmed - we're back to the core conflict with stem cells - do we use morally complicated ESC technology, or potentially flawed ASCs.

The news this week will be used to aggressively promote the still controversial ESC research over ASC, but I suspect that with research we will become very comfortable with the known mutations in certain applications, but not without time and additional research.

I mention all of this because - like most emergent life science technologies - stem cells have been substantially hyped and oversold.

I just took a look at the timeline of some of the hype involved. Christopher Reeve led a big PR campaign in 2001, and California passed Proposition 71 in 2004, which raised $3B to be spent by CIRM over 10 years on stem cell research in California.

We're in year 7 of CIRM, and presumably 70% of the bond proceeds ($2.1B) have been allocated and spent. Along with annual Federal (NIH) spending - estimated at $1.1B in 2010, state funding (estimated at $400M/year) other academic basic research, and billions by pharma (hard to track) we may be spending $2B/year on stem cell research, and likely >$15B since 2001. Funding doesn't seem to be the problem.

What does this tell us:

-we should be EXTREMELY cynical in evaluating expectations for new life science technologies. It is not unreasonable to double estimated costs and timelines.

-technologies should be measured and advanced on the basis of their disease impact. The stem cell crusade in the 2000's was an effort to advance basic research as a whole. The better basis would be on a more accountable disease-basis, which would emphasize that stem cells would be one therapeutic tool among many.

-we should do whatever we can to keep technology development from being a political issue. I still believe that the kerfuffel over embryonic stem cells in the early 2000's was as much about a tug of war for $$$ (and pushback against the notion that politicians should have a voice in research agendas) as it was a morality debate. Ultimately, I do not know conclusively if the debate helped or hurt stem cell research (my guess is helped with funding, net), but it certainly drew a great deal of intellectually dishonest speculation.

-just plain don't invest in public companies at the front of a technology wave. Stem cells will ultimately have a commercial impact, but as anyone who bought Geron shares in 2000 at a price >$60 per share, investing too early represents dumb money. (10 years later, Geron is now trading for one 12th of the price ten years earlier.)

Of course, one might have been able to say the same thing about genomics (take a look at the HGSI valuation over time (peak of ~$25B in value, now worth $5B, after the approval Benylista), so let's hope that the billions spent on stem cell research have brought research to the tipping point.

Tuesday, March 1, 2011

Plexxikon: was it worth it?

Congratulations to Plexxikon, acquired today by Daiichi for up to $935M. (And unlike most reported deals, where the eye-popping total value number is based on contingent bio-dollars, the vast amount of the $935M is cash upfront ($805M).)

Plex has been a model of efficiency, raising only $67M in capital over nine years. The result is an outstanding-looking B-Raf inhibitor in P3 trials for melanoma. The potential for this product is in the realm of Onyx's Nexavar and provides an interesting valuation comparable.

ONXX's market valuation is $2.2B, based on their half-interest in Nexavar (a B-Raf inhibitor), which is on pace to break $1B in revenue in 2011. (Quirk: the bulk of Nexavar's revenues are recorded by Onyx's partner Bayer, but ONXX still booked $324M in gross profit from Nexavar in 2010.)

So, if a half-interest in a billion dollar (and growing) B-Raf inhibitor is worth $2.2B, it would seem that Plex got a decent price for its' late-stage product.

(All of this analysis ignores the valuation of other programs and regular items like cash balances, etc.)

So Plex is promising, management drove a good deal, and Daiichi now has a potential blockbuster. But I have to ask, was it worth it? (Not to pick on Plex, because I ask this question of all drug discovery ventures.)

When you consider the prospects of Plex's lead program and the capital efficiency during the company's lifetime, most every aspiring biotech and every drug discovery VC would today trade places with Plex. But, did Plexxikon create or destroy value?

It's a pretty close call.

Mining press releases for financing info reveals 3 rounds:

A: $8.3M in 2001
B: $27M in 2002
C: $32M (year undisclosed, but for purposes of analysis, assumed to be 2007.)

I plopped those figures - along with the $805M pay-off and a risk-adjusted value for the $130M in contingent payments - into a quick NPV calculation. The result: The $67M in investment probably created about $10M in net value.

(Key assumption: a 40% cost of capital. I know some risk-tolerant investors use 30% for a private drug discovery operation, but I think 40% is much, much more reflective of the inherent risk. Other folks will use 50% as a discount rate.)

The conclusion is so close that I took a look at the breakeven cost of capital: 44%. (Gosh, I love the goalseek function in Excel.)

This analysis is no way intended as criticism of Plexxikon or Daiichi, but rather the wisdom of the biotech model. Plex is in the top 5% of biotechs in terms of outcomes, yet only marginally of net value.

You can't argue with how Plex invested their capital. To generate a blockbuster lead in late stage development for <$233M ($67M in financing plus $170M in partnering revenues) is very, very impressive. I think every Pharma wishes that their R&D was that efficient.

I've already mentioned how I think Plex got a fair price on the sale, so if their net spend was efficient, and they got the best deal they could, the only way to increase the value created would be to do the drug development more quickly.

To me, the only possible way to accomplish this would be to keep the technology (leads/chemistry) in a non-profit (academic) setting as long as possible. In other words, future Plexxikons will be more attractive if the leads can be more greatly incubated in an academic setting.

Unfortunately, today there's no capital available within most universities to accomplish this (nor the expertise or risk-tolerance.) It seems a new model is needed and perhaps new institutions. Francis Collins at the NIH seems to have a good idea in the form of their Translational Medicine Institute, but this alone won't increase the odds of success or the ROI of efforts like Plexxikon's.

The only other levers are for pharma to shoulder more R&D risk (which is the opposite of current trends), or for non-profits (and their grant funding) to shift emphasis from basic research to applied research. I don't know how this is likely to change in the future. Until then, we'll celebrate infrequent victories like Plexxikon.