Biogen, Isis Pharma And The Attraction Of The Orphan Drug Business

Sep.29.13 | About: Biogen Inc. (BIIB)

In September Biogen Idec (NASDAQ:BIIB) and Isis Pharmaceuticals (ISIS) entered into a multi-year collaboration to use antisense technology to develop new drugs for neurological diseases. The deal combines Biogen's expertise in neurology with Isis' deep background in antisense technology.

This is the fourth collaboration between the two companies in the last two years.

Carlsbad, CA-based Isis Pharmaceuticals is a leading force in antisense therapeutics. It has a drug on the market, Kynamro, and 25 more in development.

Kynamro is a so-called orphan drug. Orphan drugs are becoming very popular with pharma companies because they command high prices and are hugely profitable to their makers. A push back from the payers may be expected.

The Isis deal

The agreement is for a six-year research collaboration, during which Biogen Idec will gain exclusive rights to the use of Isis' antisense technology to develop therapies for neurological diseases.

Biogen is giving Isis an upfront payment of $100 million, and milestone payments, license fees and royalties, which could reach as much as $220 million.

The collaboration starts out with a search for neurological disease targets.

Isis will be responsible for antisense therapies, while Biogen will be responsible for small molecule treatments and antibodies if those approaches are found better suited for a specific disease. This is the fourth collaboration between the companies, which included work on spinal muscular atrophy, myotonic dystrophy type 1, and a third project on three novel targets for neurological disorders.

The four transactions provided Isis with more than $170 million in upfront payments and the potential to earn milestone payments from licensing fees in excess of $4 billion as well as double digit royalties.

Antisense technology

Antisense works by turning off a specific gene that is known to be the cause of a certain disease. It is possible to synthesize a strand of nucleic acid that will bind to the messenger RNA, which is the go-between from the gene to the protein expressed by the gene.

This synthesized nucleic acid is termed an "anti-sense" because its sequence is complementary to the gene's messenger RNA's sequence, which is called the "sense" sequence.

At first look the antisense concept is simple; the difficulty lies in making the technology work in the clinic. It took a painfully long time and experimentation to get anything approved because the drugs developed were unstable. Also, the antisense molecules are cleared too fast from circulation by the body's renal system, usually in less than an hour, and have not enough time to be effective.

Isis' Kynamro is one of the first antisense drugs approved and Isis is the leader in the field. It has been at it for a long time, since 1989.

But when it works, the antisense platform can be very prolific.

Isis is able to add three to five new drugs every year to its pipeline. The platform is broadly applicable to lots of different types of diseases and disorders. Isis has programs in metabolic disease, cardiovascular disease, cancer, and a variety of inflammatory diseases, as well as a growing neurology program.

Projects with Isis

In September Isis reported that data from a Phase 1 study of ISIS-SMNRx in children with SMA (spinal muscular atrophy), showed that most SMA children receiving the two highest doses of the drug continued to show improvements in muscle function up to 14 months after a single injection of the drug.

In the Biogen relationship, this drug, ISIS-SMNRx is the most advanced, in Phase 2 now and Phase 3 is planned for next year.

Spinal muscular atrophy is the leading genetic cause of death in infants. The disease comes in two versions. The infant-onset form is diagnosed early, typically between two and four months when it is noticed that baby is failing to thrive and grow. This form of the disease is lethal, the infants are typically die before their second birthday.

The childhood-onset form of the disease is diagnosed later. These children have a range of disabilities: some can't roll over or can't sit up or can't feed themselves and most of them are wheelchair-bound.

It is a horrible disease.

The fundamental defect is that the children don't make a protein called SMN1. There are two genes involved: SMN1 And SMN2. SMN2 makes a protein that is dysfunctional for whatever reason but looks identical to the SMN1 protein that is critical and missing.

So Isis' big idea is to slicing out an exxon from the SMN2 gene that makes the dysfunctional protein and include it in the SMN1 protein.

In Phase 1 clinical trial, the drug was well tolerated and showed some preliminary but encouraging data in which number of the children at the highest doses did improve functionally.

A second drug in the Biogen collaboration, ISIS-DMPKRx, a treatment for DM1 (type 1 myotonic dystrophy), is currently in early development. The drug will target genetic instructions for the DMPK protein, and is expected to be tested in a Phase 1 clinical trial in 2014.

Of particular interest to both companies is ALS (amyotrophic lateral sclerosis), otherwise known as Lou Gehrig's disease, in which a drug called ISIS-SOD1-Rx is going to target the SOD1 protein.

Biogen and Isis plan to look at a large number of potential targets for neurological diseases to find the best ones for drug development.

As it was explained during the conference call on September 9 (linked to above), if it is found that the best approach is an antisense drug, Isis will receive a $10 million milestone payment. Isis will do the drug discovery work, the Phase 1 and Phase 2 clinical trials. And once the human proof-of-concept data is obtained, Biogen will have the option to license the drugs for a large license fee, milestones, and ascending double-digit royalties.

If it is decided on the other hand that the best approach is developing a small molecule, Isis still gets a $5 million milestone and up to $85 million additional dollars as the drug proceeds forward, but Biogen will do all the development work.

Orphan drugs

Rare diseases are a growing focus for drug companies, with prices for some treatments for ultra-rare conditions running into hundreds of thousands of dollars a year.

Traditionally, drugmakers have relied on mass-market pills to fight mass problems such as high cholesterol. But generics have undermined their profits in this area. By contrast, rare diseases offer premium prices and far lower competition.

The class of orphan drugs was created by Congress with the 1983 Orphan Drug Act. Companies are encouraged to develop treatments for rare diseases, affecting relatively small numbers of people.

Rare means fewer than 200,000 people in the U.S. and no more than 5 in 10,000 in Europe. Which also means that the number of patients available to enroll in trials is limited. A smaller trial reduces costs. Also, typical randomized controlled trials may not be possible for a rare disease, so alternatives such as open label studies and use of surrogate endpoints eliminate the need for a control arm, further reducing trial enrolment and cost.

Developers are having other advantages as well, such as federal tax credits for the research done, a guaranteed 7-year monopoly on drug sales for approved drugs, waivers of application fees and annual FDA product fees.

Prior to the passage of the Orphan Drug Act, few orphan drugs were available to treat rare diseases. Since the Act more than 200 orphan drugs have been approved in the U.S.

Orphan drugs command sky-high prices.

Take for example, Isis' orphan drug, Kynamro, which was approved earlier this year for HoFH (homozygous familial hypercholesterolemia), a rare genetic disease. Genzyme, Isis' marketing partner for Kynamro, has set the price of the drug at $175,000 for a year's supply, which is cheaper than competitor Aegerion Pharmaceutical's Juxtapid with a price tag of $235,000-$295,000.

Until now, governments and insurance companies have largely accepted prices that can run into the hundreds of thousands of dollars. As only a handful of patients needed treatment, the overall cost to health budgets was relatively small.

But there are about 6-7,000 rare diseases that affect less than 1 percent of the population. The orphan drug market was worth more than $50 billion in 2011 and it is growing fast. It generates blockbusters at the same rate as the broader industry, according to a Thomson Reuters analysis.

Healthcare systems around the world are under increasing financial pressure and all of them are starting to look very carefully at what they get for their money.

Investors' summary

For the second quarter Biogen reported total revenues of $1.7 billion, an increase of 21 percent compared to the second quarter of 2012. Non-GAAP net income was $549 million, an increase of 25 percent.

Earnings per share were $2.30, an increase of 26 percent over the second quarter of 2012.

Revenue gains were led by Avonex ($774 million), Tysabri ($387 million), Tecfidera ($192 million) and Rituxan ($289 million).

A strong start for Tecfidera in the U.S., as well as approvals in Canada and Australia strengthened Biogen's leadership in the treatment of multiple sclerosis.

As of June 30, 2013, Biogen had cash and cash equivalents totaling $775 million.

For the full year of 2013 Biogen's revenue growth is expected to be approximately 22 to 23 percent, and capital expenditures are planned to be in the range of $250 to $270 million.

Recently, the FDA and EMA approved the manufacture of Tysabri at the large-scale manufacturing facility in Hillerød, Demark. The site is now ready to supply patients outside the U.S. It also serves as a back-up to the Research Triangle Park plant in North Carolina.

Biogen's stock price ranged from $134.00-$248.95 in the past 52 weeks and the market cap is over $57 billion.

Isis' 52 weeks range was $7.55-39.83 and its market cap is $4.39 billion.

Biogen is trying for new directions and its collaboration with Isis to develop treatments for neurological disorders is a promising one. The huge $100 million signing fee for what is no more than a technology alliance underlies Biogen's interest in the technology and in the company.

Neurological disease is a complex area, requires strong science and even stronger finances. The Biogen and Isis collaboration has both, so results should be forthcoming.

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.