Tesaro: Potential Nausea Benefit Or Lack Thereof Key To Valuation

| About: Tesaro (TSRO)

Tesaro (NASDAQ:TSRO) is an oncology focused biotechnology company that went public in June 2011. It enjoys solid institutional backing with private equity and venture capital firms holding a majority share of the TSRO stock. The company's lead drug Rolapitant is undergoing Phase III development with final data expected in 2H2013. The compound is being developed as a preventative for Chemotherapy Induced Nausea and Vomiting [CINV] and belongs to a class of medications called NK1 antagonists. TSRO has two additional products, which are in early stages of development.

NK1 Antagonists

NK1 inhibitors prevent nausea and vomiting by blocking the NK1 receptors from signaling the vomiting center in the brain. However, as NK1 is one among several nausea and vomiting inducing pathways, blocking it in isolation does not entirely prevent emesis. Several late-stage clinical trials have shown that concomitant use of an NK1 inhibitor along with a standard regimen of a 5HT3 inhibitor + steroid is most effective in preventing nausea and vomiting related to chemotherapy. In fact, the National Comprehensive Cancer Network [NCCN] requires that an NK1 inhibitor be given with standard therapy to patients on highly emetogenic chemotherapy [HEC]. However, NCCN supports but does not require the concomitant use of an NK1 inhibitor for patients on moderately emetogenic chemotherapy [MEC].

Rolapitant Phase II Trial Design

The study was run to evaluate the safety and efficacy of Rolapitant as prophylaxis for CINV in patients that received HEC (cisplatin based). The trial enrolled 454 patients who were randomized 1:1 to receive a regimen of ondansetron + dexamethasone + either placebo or 25mg/100mg/200mg of Rolapitant. The primary endpoints were overall complete response [CR], which means no emesis and no use of rescue medication for 0 to 120 hours. The secondary endpoints included CR in the delayed (>24 to 120 hours) and acute (0 to 24 hours) phases, safety and tolerability, as well as the incidence and intensity of nausea.

Phase II Complete Data Presented at ASCO 2012

The study demonstrated that Rolapitant was safe and effective in preventing CINV in patients on HEC. The strongest positive signals were observed in patients who received the 200mg dose of Rolapitant. In the overall phase, the 200 mg drug group demonstrated a CR of 62.5% vs. 46.7% seen in the placebo group (p=0.032). In the acute and delayed phases, the CRs of the 200 mg Rolapitant group vs. the placebo group were at 87.6% vs. 66.7% (p=0.001), and at 63.6% vs. 48.9% (p=0.045), respectively. The incidents of serious adverse events were in the range of 9% to 14% in both the 200 mg Rolapitant arm and the placebo arm and were related to either chemotherapy or the underlying cancer. Treatment related adverse events were mild and included constipation, headache, fatigue and dizziness.

Aprepitant/Fosaprepitant is the only FDA-approved NK1 inhibitor currently on the market to treat CINV. The drug was approved on the basis of two Phase III trials in HEC patients and one Phase III trial in MEC patients. It is interesting that even after controlling for the probability that patients enrolled in the Rolapitant study had a less favorable prognosis than patients in the Aprepitant studies, the data clearly appears to favor Aprepitant in the overall and acute phases of the studies. The results from the delayed phases of the trials are comparable with benefit over placebo arm of 31% for Rolapitant and 34% and 30% for Aprepitant. However, it is important to note that the Rolapitant results are based on a Phase II study and the 200 mg dose was tested in a small subgroup of patients enrolled. There is an equal probability that the trend seen in the Phase II Rolapitant study will be or not be sustained in Phase III. In addition, Rolapitant is not required to demonstrate non-inferiority to Aprepitant to secure FDA approval.

Rolapitant (200 mg) and Aprepitant Data in HEC Patients
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Source: ASCO 2012 Rolapitant Abstract; Aprepitant Label;

Importantly, patients in the 200 mg Rolapitant group (n=90) vs. the placebo group (n=91) experienced statistically significant benefit in the no significant nausea end-point in the overall, acute, and delayed phases from cycle 2 through 6. The nausea benefit observed in the 200 mg Rolapitant group is critical because Aprepitant HEC Phase III studies were unable to show statistically significant difference between the drug and placebo groups on the no significant nausea endpoint. Since patients mention nausea as a primary concern associated with chemotherapy, the nausea benefit could clearly differentiate Rolapitant from Aprepitant.

No Significant Nausea Outcomes on 200 mg Rolapitant and Aprepitant
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*Statistically Insignificant
Source: ASCO 2012 Rolapitant Abstract; Aprepitant Label;

Rolapitant Phase III Trial Design

In February 2011, TSRO began enrolling patients in three Phase III studies to evaluate the safety and efficacy of a 200 mg dose of Rolapitant. Two of these studies will enroll 530 HEC patients each and the third will enroll 1,350 MEC patients. Participants in each study will receive standard regimen + either placebo or a 200 mg dose of Rolapitant prior to their chemotherapy regimen. The primary end-point of each study is CR that is no nausea and no emesis in the delayed phase (>24 to 120 hours). The secondary end-points are CR in the acute and overall phases, safety and tolerability, as well as incidence and intensity of nausea. The company expects to report complete data on the studies in 2H2013.

In order for the two HEC studies to be considered successful they will at the least have to replicate results seen in the 200 mg Rolapitant group of the Phase II study. In addition, to get the nausea benefit on the label, the HEC studies will also have to demonstrate statistically significant difference between the Rolapitant and placebo arms on the no significant nausea endpoint. Since the NCCN guidelines require the concomitant use of NK1 inhibitors with standard regimen when patients receive HEC treatment, the HEC studies are critical. The Phase III MEC study will have to achieve statistically significant difference between the drug and placebo arms on the CR endpoint at the least. The Aprepitant Phase III MEC study demonstrated a statistically significant CR rate of 51% vs. 43% (p=0.015) and a statistically insignificant 61% vs. 56% on the no significant nausea endpoint.

NK1 Inhibitors: Competitive Landscape

The CINV market is dominated by 5HT3 inhibitors. However, since Rolapitant is being developed for concomitant use with a 5HT3 blocker, the 5HT3 class does not represent competition. Instead Rolapitant will compete predominantly with Aprepitant and its intravenous (IV) formulation Fosaprepitant. The two drugs are approved for suppressing CINV in patients receiving HEC or MEC treatment. Aprepitant and Fosaprepitant are marketed as Emend in the U.S. and as Ivemend in various international territories by Merck (NYSE:MRK). Rolapitant has several advantages over Aprepitant.

Rolapitant has a half-life of up to 180 hours and patients receive a single oral dose on day 1 before chemotherapy. Conversely, Aprepitant has a 9 to 13 hour half-life and has to be given on day 1 before chemotherapy, and on day 2 and 3. Since patients on chemotherapy run the risk of nausea and vomiting for 5 days following chemotherapy, a single dose CINV drug that can provide coverage for 5 days (such as Rolapitant) represents a clear benefit. However, a 150 mg IV version of Fosaprepitant is dosed only on day 1 prior to chemotherapy. As such, Rolapitant has an advantage over oral Aprepitant that has to be dosed on day 1, 2 and 3. However, the benefit is offset to some extent by Fosaprepitant, which is also dosed just once before chemotherapy and provides coverage for 5 days.

In addition, Aprepitant carries a warning on its label for interactions with certain drug types that are metabolized through the CYP3A4 enzyme. These drug-to-drug interactions can potentially change the mechanism of compounds and alter their plasma levels in the blood. Single dose Fosaprepitant 150 mg on the other hand is a weak inhibitor of CYP3A4 and therefore exhibits a milder drug-to-drug interactions profile. Importantly, such drug-to-drug interactions are yet to be observed in Rolapitant clinical trials.

Furthermore, doctors are highly likely to choose Rolapitant over Aprepitant/Fosaprepitant or potential competitors if Phase III Rolapitant studies demonstrate that it reduces nausea in patients on chemotherapy. The nausea factor could be a potential game changer in the NK1 CINV market.

Rolapitant will also compete with an NK1 + 5HT3 combination treatment being developed by Helsinn. The therapy, which will feature oral Netupitant and oral Palonosetron, is being developed in collaboration with Eisai (OTCPK:ESALY), and is currently being tested in three Phase III studies (n=2,600) as preventative for CINV. Two of these studies will enroll patients on HEC and one will enroll patients on MEC. The primary end-point for the studies is CR in the delayed phase, and secondary endpoints include CR in the acute and overall phases. The company expects to report complete results from the trials in Q12013. The therapy if approved will likely be launched in the U.S. and European markets in 2014. Like Rolapitant, the treatment will be a single oral dose given on day 1 before chemotherapy.

Rolapitant: Best in Class Compound
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Source: Tesaro Corporate Presentation January 2013;

Importantly, TSRO's management has relevant experience in the CINV space. The team was previously at MGI Pharma where it drove the development and commercialization of Aloxi, a 5HT3 CINV drug. Aloxi was successful in capturing market share from large drug companies that populated the 5HT3 inhibitor space because of its convenience factor. Aloxi, like Rolapitant had a long half-life and a single dose, compared with multiple doses associated with competitive drugs.

Commercialization Strategy and Low Near-Term Share Dilution Risk

Management has indicated that it intends to develop an in-house sales and marketing infrastructure to sell Rolapitant in the U.S. and in international geographies, although it might enter into royalty agreements on a case-by-case basis. TSRO raised $81 million from its IPO and exited 3Q2012 with ~$140 million in cash and equivalents. Based on the company's typical burn rate, I estimate TSRO is not likely to raise capital until 2H2014. The company has a relatively low outstanding share count of 26 million.

Share Value Pegged To Rolapitant Nausea Endpoint

In 2011, 6.6 million doses of standard regimen for CINV prevention were administered to patients on day 1 of their chemotherapy. Roughly 60% of these doses were given to patients that were to receive HEC treatment and ~24% were given to patients on MEC. As per NCCN guidelines concomitant use of an NK1 inhibitor is mandatory with standard treatment in the case of HEC patients. Conversely, an NK1 inhibitor use is endorsed though not required in cases of patients receiving MEC.

If Rolapitant is unable to prove nausea benefit in the Phase III studies, it will face fierce competition not only from Aprepitant and Fosaprepitant, but also from the Netupitant/Palonosetron combination. In addition, Aprepitant and Fosaprepitant are going generic in 2016 and 2019 respectively.

Incorporating these data points, and assuming Rolapitant secures a label for nausea benefit, a penetration rate of 30% for the HEC and 20% for the MEC categories, and a price of $310/treatment, I estimate 2018 revenue of $467 million. Applying a revenue multiple of 5, and assuming a probability of approval of 45%, and a discount rate of 20%, I arrive at a value of $19.41/share for Rolapitant.

In contrast, assuming the drug is unable to prove nausea benefit in the Phase III studies, and incorporating a penetration rate of 20% for the HEC and 10% for the MEC categories, and a price of $310/treatment, I estimate 2018 revenue of $295 million. Applying a revenue multiple of 5, and assuming a probability of approval of 60%, and a discount rate of 20%, I arrive at a value of $16.35/share for Rolapitant.

If Phase III results are favorable and TSRO files an NDA for Rolapitant, my assumption on probability of approval would go to 80%, and the value/share would increase accordingly.

TSRO has two additional drug candidates under development: TSR-011, which is currently being evaluated in a Phase I study for ALK+ non-small cell lung cancer (NSCLC); and Niraparib, which has completed a Phase I study for solid tumors. Since the company has not publicly identified the tumor types Niraparib will be examined as treatment for, it is not possible to estimate a value/share for the drug. For TSR-011, I estimate a value of $1.49/share based on 5x my 2019 revenue estimate of $200 million.

Combining a Rolapitant blended value of $17.88/share with a $1.49/share value for TSR-011, I arrive at a 1-yr Price Target for TSRO of $19.37/share.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.