In 2013 the biotechnology sector continued to advance, with the biotech index showing a rise of 24.1% in comparison with a rise of 9.1% for the S&P. Nevertheless, the strength in the sector is still not fully priced in. Despite the positive last two years, valuations for biotech firms remain attractive with average compounded earnings growth in 2012-15 equal to 18%. The key fundamental drivers are 1) late stage clinical trial success, 2) regulatory approvals of innovative products, 3) solid current business performance combined with strong growth prospects, 4) strong alliances with leading pharmaceutical companies. These fundamentals determine high stock price appreciation for a number of biotech companies.
One of the most impressive gains was made by Celgene, Inc. (CELG) whose growth was driven by myelodysplastic syndromes (MDS) drug Revlimid (lenalidomide), which generated just over $1 billion, up 16%. Revlimid can also be expanded to include mantle cell lymphoma and possibly lymphoma and leukemia. Following positive Phase II trial data for mantle cell lymphoma, the company filed an NDA for the indication and received a PDUFA date for June 2013.
Turnover of Vidaza (azacitidine), which is approved for the treatment of MDS and acute myeloid leukemia, jumped 10% to $204 million. Abraxane brought in $123 million, up 18% whereas sales of Pomalyst, which was approved in the USA in February, reached $29 million. In addition, data from a Phase III trial studying Pomalyst as a treatment for myelofibrosis are expected in the first half of 2013. Overall, Celgene's robust pipeline is paying off. Earnings per share have grown 47% compounded annually over the past 5 years. As a result, Celgene raised its net income estimate for 2013 to $5.55-$5.65 per share and affirmed sales guidance for the full year of $6.00 billion (11% increase). Its share price has increased by 53.8% from $78 to $120 this year.
Another company, Athersys, Inc., (ATHX) has a market cap around $90M and ended 2012 with $25M in cash or cash equivalents. The company burns approximately $4M per quarter but that may be increasing some as the company indicated they are expediting enrollment in the stroke study. Athersys has historically generated operating capital through grants, cash infusion from partnerships and through stock offerings. At the present time, Athersys has enough capital to last at least another year. Assuming no financial grants, Athersys may be generating significant money soon without stock dilution.
First and foremost is the partnership with RTI Biologics, Inc. (RTIX) for bone allografts for orthopedic purposes. RTI is using Athersys's patented stem cell technology and Athersys is entitled to $30M from RTI for milestone payments in addition to royalties from sales. Next, Athersys's partnership with Pfizer (PFE) for Inflammatory Bowel Disease (IBD) is worth around $105 million in milestone payments, not counting royalties. The company also expects a significant partnership for 5HT2c for obesity, diabetes and schizophrenia. Considering the compound exhibited superiority over Locaserin in preclinical studies, Athersys has yet another real opportunity to strengthen their balance sheet by having a cash infusion as part of the partnership in addition to more milestone payments and eventual royalties if the compound is ultimately successful. Everyone knows the value of weight loss drugs given the growing concern for obesity and diabetes. Athersys has already negotiated similar deals with RTI and Pfizer and Athersys has openly stated that they are actively engaged in a variety of partnering discussions for 5HT2c solely for obesity, solely for schizophrenia, or both. As a result of these developments its share price this year has risen by 87% from $1.15 to $2.15.
(click to enlarge)Isis Pharmaceuticals (ISIS) has developed a drug discovery platform based on RNA-targeting as opposed to traditional protein targets. Isis Pharmaceuticals is building an impressive pipeline of more than 28 drugs that utilize this technology to treat diseases such as cardiovascular diseases, metabolic disorders, severe and rare diseases, and cancer.
It was the first antisense player to date to receive regulatory approval back in 1998 for its antiviral drug Vitravene, and more recently, this January, Isis and Genzyme, a Sanofi company (SNY), received FDA approval for their drug Kynamro to treat inherited cholesterol disorder. In addition, in the beginning of April Isis announced that it initiated a Phase 1 study of its atherosclerosis drug ISIS-APOARx. The company benefited from its three strategic alliances with Biogen Idec (BIIB), and another strategic alliance with AstraZeneca (AZN). As a result, its stock price skyrocketed by 115% from $10.82 at the beginning of 2013 to $22.46 now.
OncoSec Medical (OTC:ONCS) exhibits similar potential for growth, but it is undervalued to a very high degree. Recently it announced positive, durable response results in an update on interim data from its Phase II metastatic melanoma trial. The data was presented at the Melanoma and Cutaneous Malignancies Conference on March 22nd, in New York City. All melanoma lesions that demonstrated at least a partial or complete response to treatment with ImmunoPulse with 68% and 45% of treated lesions demonstrated a durable response at three and six months, respectively. For comparison, Amgen (AMGN) is developing a treatment for melanoma that is currently in phase III trials. The first results provided by the company showed 16% of trial patients on the engineered virus had a durable response compared with 2% of those on the control therapy GM-CSF. Thus, OncoSec has a potential investment opportunity; there is virtually no downside, but a tremendous amount of upside. The analysts' consensus is $1.5 in comparison with the current price $0.24 per share. The company has raised money through financing and has very low operating costs, losing just $1.22 million last quarter in operating activities. Whereas its market capitalization is $29 million, it's another product NeoPulse alone has more than $1 billion in potential revenue.