By David J. Phillips
Can a biotech stock that’s appreciated a ginormous 11,700% since January 2009 still be considered “undervalued” viewed through the looking glass of traditional valuation metrics? In the case of Pharmacyclics (NASDAQ:PCYC), which is expected to generate just $240 million in revenue this year from its new blood cancer drug developed and marketed under a joint venture with Johnson & Johnson’s (NYSE:JNJ) Janssen subsidiary, the answer is a surprising yes!
PCYC 5 Year Price Returns data by YCharts
Imbruvica (ibrutinib), a novel small-molecule drug targeting B-cell malignancies in non-Hodgkin lymphomas (NHL), was approved by U.S. FDA regulators on November 13, 2013, for the treatment of mantle cell lymphoma (MCL) in relapsed/refractory patients who have received at least one prior treatment.
Imbruvica blocks the function of Bruton’s tyrosine kinase (BTK), a key signaling protein of the B-cell receptor signaling complexes that stimulate malignant B-cells to grow and divide uncontrollably. (See our earlier article for more on the clinical promise of Pharmacyclics’ Imbruvica.
To date, first-line treatment has usually consisted of Roche’s (OTCQX:RHHBY) monoclonal antibody Rituxan (rituximab) – which is directed against the CD20 antigen found on B lymphocytes – combined with a multi-agent chemotherapy regimen, most often CHOP (cyclophosphamide, doxorubicin, vincristine, and prednisone).
MCL affects the white blood cells called lymphocytes found in the “mantle zone” of a lymph node. A rare form of NHL, and most prevalent in older adults (mean age, 68), MCL is an aggressive B-cell malignancy affecting about 6% of the 72,000 new cases of NHL diagnosed in the U.S. annually.
Given the complex pathophysiology of the disease (multiple cell-signaling division triggers), combined with a late-stage diagnosis typically discovered after the spread to the GI tract and bone marrow, MCL is characterized by short median survival times (3 – 5 years).
A look at YCharts’ financial advisor tools suggests that by standard fundamental metrics, on a peer-comparable basis, the valuation of Pharmacyclics looks absurd:
PCYC PE Ratio (Annual) data by YCharts
Through the NHL therapy market through 2022 should continue to be dominated by patient-share leader Rituxan, according to analytics firm Decision Resources, novel therapies like the kinase inhibitor Imbruvica will still afford a biotech like Pharmacyclics untapped commercial prospects in a market forecasted to reach annual sales of $10 billion by then. Especially either in a combination therapy setting or as an adjunct in currently underserved NHL sub- populations (there are more than a 60 different kinds, depending on chromosomal or protein cell-surface marker identifications).
The company is submitting supporting data to regulators in both the U.S. and Europe for a second-line CLL labeling based on a clinical trial that demonstrated Imbruvica achieved significant improvements in both progression-free survival and overall survival compared to GlaxoSmithKline’s (NYSE:GSK) already-approved Arzerra (ofatumumab). U.S. regulatory review is expected by next month.
Pharmacyclics is showing impressive clinical data in late-stage trials pursuing NHL indications for other sub-types too, ranging from diffuse large B-cell lymphoma to follicular lymphoma.
In addition to hard science, lobbying momentum could be another catalyst driving sales significantly higher in coming years. The National Comprehensive Cancer Network (NCCN), which is an alliance of leading global cancer centers, issues recommendation protocols reflecting the consensus standard-of-care practices in oncology. Irrespective of formal FDA regulatory approval, an NCCN endorsement can be highly determinative of which therapies are reimbursed by the Centers for Medicare & Medicaid Services (CMS) and private insurers in a given indication.
In other words, forget ICD-9 diagnostics codes! In addition to the formally approved indication of relapsed/refractory MCL, updated NCCN guidelines now already recommend Imbruvica for the “off-label” treatment of refractory and relapsed CLL and other NHL subtypes, according to JMS Securities.
Notwithstanding hematologists’ experience with the R-CHOP protocol – and formidable competition from Takeda’s (OTCPK:TKPHF) and Celgene’s (NASDAQ:CELG) FDA-approved agents Velcade (bortezomib) and Revlimid (lenalidomide) – the unmet need in NHL markets has analysts asseverating Ibruvica could generate more than $6 billion in sales by 2025 (a 50-50 split with JNJ), when a critical composition-of-matter patent expires.
What’s more, Pharmacyclics is more than just a one-product oncology company. A promising compound under investigation is abexinostat hydrochloride (PCI-24781), an oral compound that interferes with the regulation of DNA expression critical to cancer cell division. The experimental drug shows promise in slow growing (indolent) lymphomas and MCL.
Additionally, many cancer cell types, particularly pancreatic tumors, express high amounts of tissue factor (TF). In 2013, the company completed an ongoing multicenter trial of its patented TF Factor VIIa (PCI-27483,) where study patients were randomized to receive either the chemotherapy agent gemcitabine alone or gemcitabine plus PCI-27483.
As the immediate goals of the trial were satisfactorily met – to assess pharmacological safe and active dose levels and to assess potential inhibition of tumor progression – the company is now “defining the next step in the drug’s development.” In other words, though the company might have more than $560 million in cash on hand, look for management to secure a partner to mitigate developmental risks.
Yes, by traditional valuation metrics, the company’s stock price looks rich – but is its PE ratio of 102X so outrageous when compared with that of its NHL oncology peer Celgene’s PE of 178X during the latter’s nascent years a decade ago, when all Celgene had in its medicine bag was a worrisome cancer drug, Thalomid (the one with a history of deforming babies while still in their mothers’ wombs), and Revlimid (lenalidomide) for patients with multiple myeloma?
CELG Market Cap data by YCharts
Assume peak sales of $6 billion [$3 billion to PCYC] in 2024 for Imbruvica and $2 billion for its other two novel products. Applying 40% probability rates for successful commercial development (of the two investigational drugs), and applying a 13.0% discount rate (cost of capital, given key product already approved), the risk-adjusted, net present value of Pharmacyclics in today’s dollars is about $1.0 billion.
“Prophesy is a good line of business, but it is full of risks,” said Mark Twain. Sure, Pharmacyclics commands a market capitalization a rich ten times implied worth. Then again, would most rational investors back in 2005 have predicted that Celgene would be valued at a staggering market cap in excess of $68 Billion in 2014?