(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Both Puma Biotechnology (PBYI) and Lion Biotechnologies (OTCQB:LBIO) have some commonalities besides being named after big cats. Both companies focus on novel cancer treatments by licensing innovative drug candidates that are undergoing or have already been in clinical trials, then further develop these drugs for commercial use. Also both are young development stage companies with CEOs that have excellent track records of building a small company into market capitalizations worth hundreds of millions of dollars. And if last year is any indication of what to expect in 2014, both companies may well continue to see their stocks rise significantly this year.
PUMA - DEVELOPING A PIPELINE THAT SHOULD INTEREST BIG PHARMA
Puma was one of the top performing stocks in 2013 rising over 400%. The company's founder, CEO, and Chairman of the board is Alan Auerbach. Mr. Auerbach previously owned Cougar Biotechnology, which developed the blockbuster prostate cancer drug Zytiga. In 2009, while Zytiga was still in Phase 3 tests, Mr. Auerbach sold the company to Johnson & Johnson (JNJ) for one billion in cash. The question is can Mr. Auerbach strike gold again with his new company Puma?
I think there's a very good chance he can. Puma's lead candidate is neratinib, currently in tests for the treatment of advanced breast cancer in patients that have the protein human epidermal growth factor receptor 2 positive (or HER2-positive). The HER2-positive receptor promotes cell growth, and while found in only 20% of the breast cancer patients, it is far more aggressive than the HER2-negative receptors.
Neratinib is an irreversible tyrosine kinase inhibitor that blocks signal transduction through the epidermal growth factor receptors, including, HER1, HER2, and HER4. Though the company sees the drug's ability to treat other cancers, its initial focus is on the development as an oral treatment for patients with HER2-positive breast cancer. That can put Puma in direct competition with the blockbuster breast cancer drug, Herceptin, for HER2- positive patients from giant Swiss pharmaceutical company, Roche (OTCQX:RHHBY). Herceptin brought in over $5 billion in sales for the first nine months of 2013.
Puma licensed neratinib from Pfizer (PFE), and is currently in four late stage studies for breast cancer. The most recent announcement came in December when early results of its Phase II study (I-SPY 2), which involves an adaptive trial design based on Bayesian predictive probability that a regimen will be shown to be statistically superior to standard therapy in an equally randomized 300-patient confirmatory trial, have proven positive. Mr. Auerbach commented on the trial:
"This represents the first clinical data on neratinib in the neoadjuvant treatment of HER2-positive breast cancer and suggests that the combination of paclitaxel plus neratinib has potent activity for the treatment of HER2-positive breast cancer. We look forward to advancing PB272 forward for the neoadjuvant treatment of HER2-positive breast cancer and look forward to potential future involvement with the I-SPY 3 trial."
Puma is a developmental company and therefore has no revenue. It does, according to its latest 10K filing, have roughly $51 million in cash. However, in Puma's license agreement with Pfizer it established a ceiling for costs incurred by Puma for clinical trials -- and the ceiling has been reached, so Pfizer is responsible for paying the rest of the costs for the trials. That should give Puma enough capital to operate through 2014 without concern of additional funding diluting shareholder value.
What I like about Puma is that neratinib, if it gains approval, has the potential to take sales from Roche's Herceptin, thus making Puma an attractive buyout target-- something which I believe Mr. Auerbach had in his business plan from the beginning. I foresee Mr. Auerbach doing for Puma what he did for Cougar, and that is to push what could be a billion-dollar drug into late stage testing with the goal to make a deal with a major pharmaceutical company to either collaborate or buy out the company. Either one will bring Puma and its investors a hefty profit.
A recent USB report listed Puma as one of five stocks this year that, pending successful trial outcome and data presentations, could become a strong takeover candidate. Puma is a $3.3 billion market cap company. Its stock closed on February 4th at $115.16, almost 20% below its 52-week high. While the recent drop in price does make the stock a better entry point, Puma is still fairly pricey after its rise in 2013. However, if rumbles of a takeover do begin, look for the stock to continue an upward trend.
THIS LION LOOKS POISED TO ROAR IN 2014
I see Lion Biotechnologies in a similar position as Puma, except Lion has yet to experience its stock run up that Puma has. Lion is a development company helmed by Manish Singh, the previous CEO of ImmunoCellular Therapeutics (IMUC). Dr. Singh took IMUC from an OTC $6 million market capitalization company to a NYSE listed $200 million company. The question is can Dr. Singh do the same with Lion Biotechnologies?
I think Dr. Singh has a very good chance of striking gold again with Lion. In July of 2013 when Lion merged with Genesis the company had little business infrastructure, but solid scientific and clinical research. Within six months, Dr. Singh brought in a strong management team, engineered a 1 for 100 reverse stock split, and raised $21.6 million in private financing giving the company enough cash to operate through 2015.
Lion is developing and commercializing adoptive cell therapy (ACT) using autologous tumor infiltrating lymphocytes (TILs) for the treatment of melanoma and other solid tumors. TILs are the body's natural defense system and are found in cancer patients whose tumors are growing. In the early stages of cancer, these TILs migrate to the tumor and launch an attack. However, this effect is usually short-lived because cancer adapts to evade immune detection and suppress the immune system's response. The problem is there aren't enough TILs produced by the body to effectively fight the cancer.
Lion's ACT therapy attempts to correct that by removing the TILs from the patient, then infuse the cells with an FDA approved cytokine interleukin-2, and grow the TILs from millions to billions, and re-administer the new cells back into the body via an IV. Thus, what Lion is doing is creating an army of "super TILs" to attack the cancer tumors. In a study conducted between 2003 and 2011 by the National Cancer Institute (NCI) the TILs therapy demonstrated efficacy in Phase 2 clinical trials, indicating objective response rates of 49% in Stage 4 metastatic melanoma-- and when Total Body Irradiation was added the response rate rose to 72%.
Look for Lion to provide an update in the first quarter of this year on enrollment in a second Phase II trial under its cooperative research and development agreement with NCI, which it expects to validate the results from the previous study. After the completed Phase 2 study for second line metastatic melanoma, Lion plans on launching a Phase 3 study sometime in 2015. The company is also conducting a Phase 1 study for first line metastatic melanoma with the NCI for its ACT in conjunction with Roche's BRAF enzyme inhibitor, vemurafenib, and expects to report initial data from the study later this year. The study is designed to determine if the TILs combined with vemurafenib can delay tumor growth in patients with the BRAF mutation. Look for initial data from the study to be released in the second or third quarter of 2014.
Lion is also in two pilot trials with the Moffitt Cancer Center for first line metastatic melanoma using ACT in combination with Bristol-Myers Squibb's melanoma drugs, ipilimumab and nivolumab. Currently Lion is focusing its ACT on metastatic melanoma, but the company believes that the TILs technology can be used for other indications such as ovarian, lung, colorectal, and head and neck cancers.
2014 - PROGRESS TO LOOK FOR WITH LION
Lion has plans to advance and deepen its pipeline. The company also plans to expand its operations and explore strategic business development opportunities. Another company goal is to up-list its stock to either the NASDAQ or NYSE in the second half of the year, which will give the company more exposure.
One way of expanding its pipeline is that the company is working with the NCI to develop the next generation of TILs that exhibit the greatest anti-tumor activity. This would mean that fewer TILs would be needed to achieve the same effect, and that could result in faster treatments that are also less expensive. Within the next six months Lion intends to license this new "next-generation" TILs technology from NCI and the National Institute of Health. This will then lead to further clinical developments and increase the intellectual property portfolio of Lion.
What I'm finding most interesting comes from the company's February 3rd letter to its shareholders where a number of topics were discussed. In the letter the company states, "… there will be significant interest from pharmaceutical companies (including those developing checkpoint inhibitors) in using T-cells to develop new treatments. Because Lion Bio is the only public company solely focused on T-cell based therapies, we expect to attract significant interest in potential partnering and other strategic business development opportunities."
To me, this validates that the company is building up its pipeline and its intellectual portfolio with a focus to make it more attractive for a major pharmaceutical company to either collaborate or buy out the company. And just like Puma, if there are any rumbles of such action this stock should move significantly higher.
Lion is a $105 million market cap company. It is a pure development company and has come a long way in a very short time. As the company grows the stock could experience swings, as shown recently when the stock was hit hard. The stock drop was probably due to profit taking and investors exercising warrants from the earlier financing deal. However, the company is now in a better financial position, with $23 million in cash. That should keep Lion operational for the next 24 months, thus reducing the risk of financing in the future, and stock dilution for quite some time. Lion stock closed on February 4th at $5.00 per share, which makes it an excellent entry point.
Both Puma and Lion are young companies run by executives who have proven track records of building small biotechs into much larger companies, and making big profits for investors. I look for both of these companies to actively pursue large pharmaceutical companies as collaborators or for a buyout. Developmental biotech stocks carry more risk than more established names like Johnson and Johnson or Roche, and investors need to be aware prior to investing.
Puma to date has advanced further, but I'm not convinced the company warrants a $3.3 billion dollar value. Lion is not as advanced, but if 2013 is any indication of the direction the company will take in 2014, I think the company is well undervalued. And if a collaboration deal is struck, this stock could move considerably higher. Only time will tell which of the two biotech cats will be king of the biotech jungle.