Three biotechnology firms with market caps below $1billion have been recently put in the spotlight; SYNTA (SNTA) with a market cap of 535.54 million, Array Biopharma (ARRY) with a market cap of 774.22 million, and Vanda Pharmaceuticals (VNDA) with a market cap of 320.45 million. In the past few days, the above-mentioned firms' stocks outperformed their group, attracting investors who were unappreciative of all of them as we can clearly observe from the stagnation of their stocks' prices and their small market caps. The reason for the lack of sympathy might be that they have yet to overcome their increasing losses through the long years of their existence.
The firms belong to the biotechnology industry whose routines differ totally from the traditional industries. Biotechnology represents a revolution that aims at taking treatment of diseases to a much higher level. Most of the suggested molecules are novel, which makes it a necessity subjecting the firms' drugs to thorough biological, preclinical and clinical testing, until they prove their safety and efficacy in treating diseases better than the existing drugs. The road to marketing new molecular entity drugs is long and difficult and the drugs take years to walk it and tons of money before they would reach the finish line and cross it to the market.
Let's figure out why the three above-mentioned companies' stock prices rallied recently.
Vanda Pharmaceuticals (VNDA) Investors' attention was drawn to the news coming from this firm. They rushed to buy the stock of the firm they had loved then hated then loved and hated again when in 2009, the stock tumbled following the FDA denying approval for Vanda's atypical antipsychotic drug Fanapt®, a serotonin 5-HT2 receptor and dopamine receptor antagonist. Not long after the rejection, investors who had kept the remaining penny stock and those who bought them went to sleep at night and woke up the next morning to find out that their stock is selling for $20. In an unexpectedly rapid move, the FDA decided to approve Fanapt overnight. Those who sold the stock at $20 made a huge profit. Those who kept it after the exceptional rally lost most of their gains later as the drug revenues couldn't help overcome the losses.
The recent perceived good news that drew investors' attention and money is the FDA acceptance of the firm's NDA for their circadian regulator drug Tasimelteon, a dual melatonin receptor agonist (DMRA) with selective agonist activity at the MT1 and MT2 receptors. The drug is intended for the treatment of Non-24-Hour Disorder that affects the totally blind. Investors considered excellent news the fact that the FDA decided to grant the NDA a priority review classification. Also perceived good news is that in case Tasimelteon would be approved, there is no approved treatment for Non-24. Vanda's drug would be the only drug approved for the Non-24-Hour disorder, i.e., there is no competition.
The FDA determined the action target date under Prescription Drug User Fee Act (PDUFA-V), to be January 31, 2014. The FDA has also tentatively scheduled an advisory committee meeting to discuss tasimelteon's application on November 14, 2013.
Tasimelteon, previously known as (BMS-214,778) is a selective agonist for the melatonin receptors MT17 MT2 in the suprachiasmatic nucleus of the brain, similar in action to the older approved drug Ramelteon. Tasimelteon has shown to improve both onset and maintenance of sleep, with a few side effects. However, for around a year, between 2011 to 2012, a study at Harvard was conducted on Tasimelteon in blind subjects suffering from Non-24 hour sleep-wake disorder. The drug worked.
If approved, the drug would bring a solution to a bad problem that has yet to find any.
The Non-24 condition is a disrupting chronic circadian rhythm disorder. It affects the blind who lack light sensitivity necessary to entrain the master body clock in the brain with the 24-hour day-night cycle. That's why blind people with this condition have a master body clock that keeps delaying, resulting in prolonged periods of misalignment between their circadian rhythms and the 24-hour day-night cycle. This disruption includes the timing of melatonin and cortisol secretion. The outcome is a significant discomfort caused by disorientation, disturbance in the sleep-wake cycle, in addition to impairments in social and occupational functioning.
In addition to the FDA granting priority review, the stock soared also on the news that Tasimelteon patent shows the drug is a new chemical entity with patent protection extending through December 2022, assuming a 5-year extension to be granted under the Hatch-Waxman Act. The drug has also been granted orphan drug designation for the treatment of Non-24 condition from both the U.S. and the European Union.
Tasimelteon's efficacy has been demonstrated through two randomized, double-masked, placebo-controlled, multicenter, parallel-group trials - SET (Safety and Efficacy of Tasimelteon) and RESET (Randomized withdrawal Study of the Efficacy and safety of Tasimelteon). Results from the trials demonstrated that Tasimelteon achieved the primary endpoints of synchronizing of the melatonin rhythm and clinical response. The drug has also demonstrated statistically significant improvement in measures of nighttime sleep, daytime nap duration, timing of sleep, and overall global functioning scale. It demonstrated that patients who continued treatment with 20 mg of Tasimelteon have maintained entrainment of melatonin and cortisol circadian rhythms at statistically significantly greater percentages than patients receiving placebo. The patients also maintained their clinical benefits while those who received placebo showed significant deterioration in all the above measures.
Having said that, the questions to ask are: What are the odds of approval? Will today's rally continue? Will the stock give back some or most of its gains to profit takers who would prefer to sell and run before other investors interrupt their celebration? What would be the intermediate and long-term status of VNDA with and without Tasimelteon's approval?
Regarding approvability, after looking carefully at the clinical trial results, we believe the drug will be approved. Regarding the stock performance in the short- and long-terms , our view is as follows: In the short-term, i.e., before the FDA committee's meeting in January, anything can happen, including both the possibility of further gains, or profit taking. It depends on the strength of argument between the buy-side and sell-side media, analysts and investors. Between now and January, there will be no news about the drug. Our experience, however, taught us that in such cases, profit taking is a big possibility to consider in the short-term, especially if the stock gains are big. At this period, all depends on the price tag over which stands the roof that separates the fair price from the overbought zone as speculated over by the majority of investors.
With the current rally, the market cap, which is less than 330 million has already added around 40% in the past couple of days. Even with this huge increase, the market cap is still small by comparison to other firms waiting for approval of a product that passed all the tests of clinical trials. However, to know exactly the market cap that represents a fair value of the company, one must be able to know at least the price the firm has put, or has yet to consider for Tasimelteon. Without this knowledge, we can speculate over the sales' volume of such a drug, but we cannot estimate revenues.
Making an intelligent guess based on the pricing of similar drugs sold as sleeping pills, we can suggest a retail price of $3600/year per person. Considering that 30%-35% of 75.000 cases would be on the drug, the sales could be crudely estimated between $70m- $90 million in 2017, provided the drug approval would be granted in early 2014.
Final Opinion: In case Tasimelteon would be granted approval, the current market cap would be ridiculously low, putting the stock in the oversold zone. As we said before, we do believe that the drug will be approved, yet we also believe that the drug's revenues are limited and cannot be compared to revenues of a breakthrough cancer drugs like those of Ariad (ARIA), Incyte (INCY) and ImmunoGen (IMGN), and the cancer drug expected to be soon approved for Pharmacyclics (PCYC). In targeted cancer drugs, the sky's the limit for their sales as they are extremely expensive and can be used in treating various cancer. Based on Vanda's drug's limitation to a category of blind patients, and on the possibility that the firm will be financing through dilution, we believe VNDA stock price target from now to the end of 2014 should not be less than $20, with $16 as our first target.
Synta (SNTA): The stock rallied, then investors' enthusiasm's life span faded, which demonstrates that many of those who benefited from the rally are traders and followers of good advice. Most of the rest falls into the "go with the flow" category that follows the movements of stocks without even knowing the whereabouts of the firms they buy or sell. The smallest category is comprised of savvy investors who know the difference between rallies based on hypes and gossip fabricated stories and those that originate from important news that can make a huge difference on the patients and the developing firms.
In this case, we can say that the nucleus around which investors rushed to buy SNTA is the firm's drug Ganetespib for HER2 breast cancer. They felt that the results of the ENCHANT-1 clinical on Ganetespib as monotherapy in patients with newly diagnosed locally advanced or metastatic HER2 positive and also triple-negative breast cancer (TNBC) patients, are genuine and compelling. The trials achieved the pre-specified criteria for advancing to the second stage of the trial. Needless to say that TNBC breast cancer patients have yet to find specific treatments and are recognized by their bad prognosis.
Of the initial five HER2-positive patients enrolled in the study, two achieved objective tumor response and two achieved stable disease (SD) within the three cycles of treatment on study (12 weeks). Of the initial ten TNBC patients enrolled and evaluable for response, two achieved objective tumor response and three achieved SD following treatment with Ganetespib monotherapy. These results are what attracted most scientists and oncology researchers' attention. Of the thirteen TNBC patients with post-baseline PET scans, six achieved metabolic response.
Ganetespib is a selective inhibitor of heat shock protein 90 (Hsp90), a molecular chaperone, which controls the folding and activation of a number of client proteins that drive tumor development and progression. Many solid and hematologic tumors are dependent on Hsp90 client proteins including proteins involved in oncogene addiction, in resistance to chemotherapy and radiation therapy, proteins involved in angiogenesis and proteins involved in metastasis.
Proof of concept was offered In preclinical models, as Ganetespib's inhibition of Hsp90 resulted in the inactivation, destabilization, and degradation of these cancer-promoting proteins. Ganetespib is being evaluated in over 20 clinical trials including a Phase 3 trial in non-small cell lung adenocarcinoma, as well as additional trials in lung, breast, colorectal, and hematologic malignancies.
A promising case is cited about a 68-year old woman that enrolled in the trials after being diagnosed with inoperable TNBC. Her cancer had spread to her lymph nodes. The week 3 PET scan showed metabolic response in all lesions and the week 12 physical examination demonstrated no evidence of tumor. Treatment was adjudicated a complete clinical response, and her disease was restaged from inoperable to operable. Earlier this month, she successfully completed a mastectomy with curative intent.
It is indeed, a strong clinical response in a devastating disease, particularly with a single-agent regimen that is well tolerated. The most common adverse event seen with Ganetespib in the ENCHANT-1 trial was mild to moderate, transient diarrhea, which was generally manageable with standard medication. These safety results allowed for the evaluation of the combination of weekly paclitaxel and ganetespib in the expanded ENCHANT-1 trial.
Ganetesnib demonstrated far-reaching results as monotherapy on life-threatening, difficult to treat cancer. The mode of action of this drug makes it capable of acting on metastatic and resistant cancers breasts and could prove promising for other cancers The results of the trials are gripping. The stock trades at $6.71 and our one-year target currently is $14.
ARRAY BIOPHARMA (ARRY): The stock was stimulated recently as a result of news announcing that its asthma drug ARRY-502 - an oral CRTh2 antagonist had positive results from a double-blind placebo-controlled, randomized Phase 2 trial on mild to moderate persistent allergic asthma. ARRY-502 achieved the primary endpoint - significant improvement in pre-bronchodilator Forced Expiratory Volume in one second (FEV1), a measure of lung function. ARRY-502 was well tolerated with fewer adverse events compared to placebo. These positive results support continued development of ARRY-502 in allergic asthma.
Dosed at 200mg and given twice daily, ARRY-502 achieved statistical significant improvement in FEV1 by 3.9% versus placebo. Secondary efficacy endpoints also achieved statistical significance including reduced short-acting beta agonist (OTCPK:SABA) inhalers' use.
The frequency of adverse events was lower in the ARRY-502 group, including fewer asthma exacerbations versus the placebo group. There were no treatment-emergent serious adverse events in patients receiving ARRY-502; all treatment-related adverse events were either mild or moderate in severity. Out of 184 patients 4 patients on ARRY-502 and 11 discontinued the treatment.
ARRY-502 is the second oral targeted drug for asthma. The first, called Singulair (montelukast) is a leukotriene antagonist. It was FDA approved years ago and is sold all over the world. ARRY-502 is an oral CRTh2 antagonist. There is evidence suggesting that in severe asthma, a greater presence of the mediator prostaglandin D2, or PGD2, and an upregulation of CRTh2. the biologically relevant receptor for PGD2-mediated allergic response, that is expressed on inflammatory cells, may play a important role in more pronounced symptoms of asthma such as coughing, difficulty breathing, lower lung function and possibly exacerbations. ARRY-502 has demonstrated a high level of anti-inflammatory activity.
Based on the role of CRTh2 in mediating the actions of PGD2, a selective antagonist of CRTh2 like ARRY-502 will be seen as indispensable for complementing the existing asthma treatments. The drug presents an additional therapeutic treatment for allergic diseases. The drug is very promising.
Disclosure: We are long ARRY and SNTA.