Seeking Alpha
Value, research analyst, author, long only
Profile| Send Message|
( followers)  

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Yesterday, I wrote an article showcasing how combination therapies involving anti-PD-1s stand ready to control the future of treating cancer. Most analysts believe that anti-PD-1s will be used to treat a slew of cancers, but as of now, the most robust data is seen in treating late-stage melanoma. With that said, following my anti-PD-1 combination article, I received an email from a reader who said, "I realize that anti-PD1s are great drugs, but doesn't it seem like developing a melanoma drug is a bad idea at this time?" He added, "Melanoma is very crowded, so why should I invest in any company with a melanoma drug?"

This anonymous reader makes a good point, one that has been discussed at times, but never in a great amount of detail. Therefore, let's look at melanoma as a disease, why it is such a hot space, and how investors should view what looks like a highly competitive and crowded area of treatment.

The Melanoma Development Rush

Since the 1970s, melanoma has more than tripled in incidence, and is currently growing at a rate of 10% annually. In particular, it is a patient population between the ages of 18 and 35 who are seeing such rapid growth. Therefore, because of both the problem and its growth, biotechnology and large pharmas have invested hundreds of millions into research, in an attempt to develop the next novel melanoma treatment. Moreover, data continues to get better each year.

The market for melanoma drugs has investors very excited, and much stems from the commercial success of melanoma drugs such Yervoy and Zelboraf. It is expected that just over 75,000 people will be newly diagnosed this year. The patient population is large in size, but with so many companies developing in the space, melanoma is quickly becoming crowded.

The issue of the developmental melanoma space crowding is not one that many discuss. Due to recent data, melanoma products have mostly sparked optimism; but in reality, it might be because the disease is one of the first cancers that technology is allowing us to "nearly" cure. Consequently, we are now encountering a problem with too many companies putting their hands in the cookie jar, with only a limited number of cookies. Thus, we could see products that never realize "peak sales potential", or at least in certain patient populations. To better explain, I have created a chart below showing both approved treatments and those furthest in clinical development, which breaks melanoma down into stage and available treatment. Looking ahead, it will be competition in each "Stage" that ultimately allows blockbuster revenue or yields a commercial dud, thus creating shareholder gains or losses.

Stage 1

Stage II

Stage III A

Stage III B

Stage III C

Stage IV M1A

Stage IV M1B

Stage IV M1C

Surgery

Surgery

Surgery

Surgery

Radiation

Radiation

Nivolumab

Nivolumab

Nivolumab

Lambro

Lambro

Lambro

Yervoy

Yervoy

Yervoy

Zelboraf

Zelboraf

Zelboraf

Chemo

Chemo

T-Vec

T-Vec

T-Vec

ImmunoPulse

ImmunoPulse

Quite a Crowd for Stage IV

Right away, there are three stages that should catch your eye: Stages IV MIA, MIB, and MIC. Obviously, patients in these categories are the most difficult to treat, who currently have Yervoy or Zelboraf as treatment options. However, in the next couple of years, patients might have five options in each category, meaning that companies will have to share available dollars.

Yervoy is marketed by Bristol-Myers (NYSE:BMY), and the drug has been a spark of excitement for the company. In Bristol's last quarter, Yervoy saw growth of 33% year-over-year, producing sales of $238 million. In fact, Yervoy is given to about 50% of the Stage IV patient population, and has been popular because of its 11% overall response rate, a result that patients and physicians find preferable to chemo or death.

Zelboraf is marketed by Roche (RHHVY) and is given to patients who have a BRAF mutation. Therefore, its patient population is smaller, as the drug created sales of just $245 million in 2012. As a result, Yervoy is currently targeting the bulk of this patient population, and its explosive growth can be tied to a lack of competition at this time.

With that said, nivolumab is also being developed by Bristol-Myers for late-stage melanoma and had an objective response nearly three times greater than Yervoy. Nivolumab is Bristol-Myers' anti-PD-1 drug, which was a big deal at this year's ASCO. Hence, suggesting that Bristol-Myers has both Yervoy and nivolumab, and is testing both in combination, investors are confident with the company's place atop the melanoma treatment space. But should they be so confident?

While this thought process has pushed shares 60% higher over the last year, Bristol-Myers also faces intense competition. Merck's (NYSE:MRK) anti-PD-1, lambrolizumab, had a higher objective response (38%) and complete response in both the average and peak dose in its clinical trial compared to Bristol's drug. Moreover, Merck is also testing lambro as a combination treatment.

Since Bristol-Myers already has a large melanoma ecosystem in place, Merck will not completely eliminate Yervoy as a treatment, but lambro will steal dollars from Bristol-Myers. Then, as we look further down the road, Roche also has an anti-PD-1 to treat melanoma, which is not listed. It too will compete with both Bristol and Merck in this space. Thus, the multi-billion dollars in peak sales potential for these three programs may never actually materialize, except for the best in class.

Overall, in treating Stage IV melanoma, Bristol-Myers has the most to lose. It already has a blockbuster product on the market, and its best pipeline product faces competition from an even better pipeline product from Merck. Roche looks to be an under-the-radar player, already having Zelboraf and developing an anti-PD-1 that will likely see some success. Yet, I'm placing my bets on Merck, believing it could be the company with the most to gain, having the best product right now, and the best chance to reach billion-dollar potential.

What about Stage III?

As of now, treating Stage III cancer is not nearly as crowded. Currently, surgery and radiation are the only options available; yet both are too invasive and often create more health harm than good. Therefore, meet the two leading products in development: T-Vec from Amgen (NASDAQ:AMGN) and ImmunoPulse from OncoSec (OTCQB:ONCS).

T-Vec is the first virus-based vaccine to show a clinical benefit at treating cancer. It creates an immune response by replicating until causing cancer cells to rupture. In Stage III testing it produced a survival rate of 16% and an objective response of 18%. Clearly, T-Vec's data is better than that of Yervoy, but at the same time it's also being tested on a less aggressive patient population.

Nonetheless, Amgen's data has many believing that T-Vec could temporarily own Stage IV M1A and Stage III. Hence, T-Vec could produce blockbuster sales very quickly; it does not have to share the market with any other FDA approved treatment. Then, when you incorporate Amgen's recent acquisition of Onyx, it is clear the company is well on its way to being a major player in treating cancer. At 18 times earnings the stock is not cheap, but given its developments the company should see a multi-year growth period.

ImmunoPulse is a bit more speculative, having treated only 25 patients versus T-Vec's trial of more than 400 patients. Nonetheless, ImmunoPulse's objective response of 53% and complete response of 15% is noteworthy and must be considered as a potential threat to Amgen long-term. The reason to consider ImmunoPulse a threat to T-Vec is because of the amount of data OncoSec has produced regarding its technology.

The company uses electroporation, which is a method of creating electrical currents to increase the uptake of a drug by creating temporary pores in tumors. In testing melanoma and Merkel cell carcinoma, OncoSec has proven this technology effective with no serious side effects. Also, Inovio (NYSEMKT:INO) uses the same exact technology with its synthetic vaccines, and in 2013 we've seen Inovio trade higher by 280% following data from several electroporation studies. Furthermore, OncoSec uses IL-12 with electroporation, which is a very potent drug.

Back in March, I interviewed an immunologist, Dr. Rahul Jasuja, who mentioned IL-12, saying it is too toxic to be given systemically. Then, he gave a personal experience, saying:

"When I was in academia I worked in a lab where I would collect blood samples from patients who had been given IL-12 systemically and the treatment would have modest efficacy, but was extremely harsh and toxic -it would make patients weak, tired, sick, and would create the worst flu-like symptoms. So the quality of life is lousy. Thus, the potential to deliver IL-12 locally has major implications if it shows efficacy and safety in current studies."

With that said, the purpose of electroporation is to increase the uptake of a drug which then decreases its side effects, as less of the agent is needed. OncoSec is trying to deliver an effective agent, and if it can diminish the side effects then there is reason to believe that ImmunoPulse will be a success. However, I don't know if ImmunoPulse will challenge or overtake T-Vec in treating Stage III cancer, but with data expected in the next couple months, it is worth following nonetheless, with the most to gain and not much to lose.

Final Thoughts

When it's all said and done, this is a crowded space where only a few will excel. Roche may be okay, but I think Merck is the clear winner with the best product in development for Stage IV. Consequently, Bristol-Myers has traded higher this last year in large part due to Yervoy's success and data from its anti-PD-1 program. Thus, I think it has the most to lose.

In treating Stage III, Amgen's T-Vec has a clear path to blockbuster sales, which combined with its other cancer products might make the company a compelling investment opportunity. However, given the early clinical results from OncoSec and its proven technology, I'd monitor the company's data, as I wouldn't be surprised one bit if ImmunoPulse eventually challenges or surpasses T-Vec in annual sales.

As a result, there are a lot of changes taking place in this space and even more when you consider companies such as NewLink Genetics are also developing in the space. With that said, I think the crowd of companies in melanoma tells us one thing: Data might be good and enough to move stocks, but investors must acknowledge and monitor potential competitors. When it's all said and done, competition is what will either allow or prevent companies from reaching full potential, because only the best drugs will survive.

Source: Treating Melanoma: Only The Best Shall Survive