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Array’s (NASDAQ:ARRY) shares keep on fluctuating in the $2.5-$3.5 range, relatively unchanged from the beginning of 2010. It seems that the market is having trouble assessing the real value of the company and its pipeline, which includes 13 (!) drugs in clinical trials. With a market cap of ~$170M, the market puts an average price tag of $13M per asset, a ridiculously low valuation (assuming no value is assigned to the company’s discovery platform). The company’s long term debt (due in 2014) could be partially blamed for this anomaly, but the problem seems to be more related to the company’s business model. The good news is that during the next year the company is looking at multiple events that might change the way Wall Street views Array.

Array’s strength is also its Achilles’ heel: It has too many things going on and the majority of the programs are in early stage development without a clear and fast route to market. In that sense, the situation is very similar to that of Exelixis (NASDAQ:EXEL), as I discussed two months ago. In order to get a realistic price tag from Wall Street, both companies must come up with a “killer app”, an indication that represents high probability of success, short time to market and a commercial opportunity of at least $100M. Although Array is not there yet, it could become highly attractive due to three trends: Out- licensing of wholly owned agents, maturation of partnered and proprietary programs and attrition.

Maturing pipeline

Array announced two lucrative licensing deals in the past 12 months. In December 2009, Array outlicensed its glucokinase activator to Amgen (NASDAQ:AMGN) in a deal that included an upfront fee $60M and $666M in potential milestones. In April 2010, Array partnered its next-gen MEK inhibitors with Novartis (NYSE:NVS) for an upfront payment of $45M and potential milestones of $422M. Following the two deals, the company is left with only 4 wholly owned drugs, a reasonable amount for its size.

Array has two large discovery collaborations with Genentech (DNA) and Celgene (NASDAQ:CELG) which were signed in 2003 and 2007, respectively. These collaborations may be seen as another validation for the company’s discovery capabilities but very little was known about them. In 2010, the two discovery pacts finally started to bear fruit with the first IND from the Genentech collaboration. Celgene also provided more clarity as it revealed three preclinical programs, the first of which will probably enter clinical testing in the coming months.

In addition, many of Array’s programs are advancing into mid stage clinical trials where their real value can be evaluated. In particular, there are two agents investors should keep an eye on: AZD6244 [MEK inhibitor, licensed to AstraZeneca (NYSE:AZN)] and ARRY-520 (KSP inhibitor, wholly owned by Array). Both drugs could have important data in the coming months with a potential value creation event for ARRY-520 in December.

Example #1 -AZD6244

AZD6244 is Array’s first generation MEK inhibitor, which was licensed to AstraZeneca in 2003. After years of disappointments, this drug seems to gain renewed momentum owing to a new formulation that provides better exposure as well as a broad development program driven by biomarkers. The drug is also in several combination trials, including an intriguing study with another investigational agent from Merck (NYSE:MRK).

This MEK inhibitor, together with the one licensed to Novartis, position Array as a leader in the field of MEK inhibitors. Although there are no approved MEK inhibitors, MEK is considered a hot target because it is part of a pathway that is often dysregulated in cancer. As I explained in my last post on Array, the pathway became hot on the heels of spectacular results with Plexxikon’s BRAF inhibitor, PLX4032, which inhibits the same pathway.

The early data with MEK inhibitors, primarily AZD6244, curbed the industry’s enthusiasm for MEK as a target. This was emphasized by the success with Plexxikon’s BRAF inhibitor which was much more effective among BRAF mutated melanoma patients than AZD6244. Since then a lot of new data have emerged, which once again put MEK inhibitors in the spotlight.

In particular, a collection of landmark publications from research groups at Genentech, Plexxikon, Amgen, Memorial-Sloan Kettering Cancer Center and UCSF demonstrated the complexity and potential drawbacks of BRAF inhibitors. It is now well appreciated that BRAF inhibitors are active in cells with BRAF mutations(especially melanoma but also colorectal cancer to some extent) but from that point onwards the picture gets more complex.

Without getting too deep into science, it turns out that RAF inhibitors could paradoxically activate the same pathway they intend to inhibit. In BRAF mutated tumors this differential activity profile is viewed as an advantage, providing a very wide therapeutic window. However, these findings show the limitations of BRAF inhibitors in tumors without BRAF mutation and also cast a shadow over their long term safety profile. These findings imply that MEK inhibitors could have broad utility either in combination with RAF inhibitors, after relapse on RAF inhibitors and most importantly, in patients and settings where RAF inhibitors are deleterious.

It should be noted that there are many different RAF and MEK inhibitors, each one of them could have a totally different activity and safety profile. In addition, the theoretical aspects above could be proven or disproven in future clinical trials for any given drug and the fact that BRAF inhibitors have limitations does not necessarily mean that MEK inhibitors will eventually succeed.

Assuming that MEK inhibition is a valid strategy, Array is well positioned with three promising MEK inhibitors in clinical trials. Other companies with MEK inhibitors include Exelixis (licensed to Genentech), GSK, Merck Serono and Ardea (licensed to Bayer). GSK will publish first data for its compound at ESMO later this month and based on the title of the presentation, investigators are seeing preliminary activity with the compound.

AZD6244 is in several phase II clinical trials, including two randomized studies that will be crucial in determining AZD6244’s potential.

One study is evaluating AZD6244 in combination with Taxotere in lung cancer patients with KRAS mutation. This trial is extremely important because these patients are relatively resistant to Tarceva and are probably not good candidates for BRAF inhibitors. RAS, which is mutated in ~30% of all human cancers, is considered an undruggable target for technical reasons. In light of recent data that shows that RAF inhibitors could have a detrimental effect in these patients, MEK inhibitors remain the last option for inhibiting the RAS-RAF-MEK pathway in RAS mutated tumors.

Another study is in melanoma patients with BRAF mutations in combination with chemotherapy. These patients are considered extremely sensitive to Plexxikon’s PLX4032 as a single agent and the decision to combine AZD6244 with chemotherapy implies that as a single agent it is not potent enough. Nevertheless, recent data from ASCO 2010 included promising preliminary efficacy for the combination in melanoma patients. The combination will probably still be less effective and more toxic than PLX4032 monotherapy but it could be a good option for patients who progress on the drug. Unfortunately, the current study includes first line patients so AstraZeneca will have to run a new trial in PLX4032 treated patients to fully answer this question.

Example #2 - ARRY-520

ARRY-520 is shaping up as an important asset on the heels of an efficacy signal and a potential value creation event at ASH this December. ARRY-520 inhibits KSP (also known as Eg5), a protein involved in cell division which is a hallmark of cancer biology. Several companies have developed KSP inhibitors, including GSK and Merck, but to date results with these agents were disappointing. A wave of next gen KSP inhibitors from Lilly (NYSE:LLY), Arqule (NASDAQ:ARQL) and Array recently entered clinical trials.

Interim results for the drug were presented several months ago at ASCO and showed the drug is safe and active as a single agent in heavily pretreated multiple myeloma patients. Of 20 patients, there was one partial response in a patient with eight prior lines of treatment, 2 minor responses and multiple cases of prolonged disease stabilization. Notably, the PR was still ongoing after more than a year and 5 cases of disease stabilization were ongoing for 4-8 months. The minor responses were also still ongoing but with a short follow up.

Historically, multiple myeloma has been notoriously difficult for targeted agents such as ARRY-520. Multiple antibodies, kinase inhibitors and HDAC inhibitors all generated limited single agent activity in the form of a single digit response rate and several cases of stable disease. Consequently, these agents are being pursued in combination with approved agents, primarily Celgene’s (CELG) Revlimid and Millenium’s (now Takeda (OTCPK:TKPHF)) Velcade. Although incorporation into standard treatment lines represents the biggest commercial opportunity, it involves long and expensive clinical trials. In addition, because Velcade and Revlimid are extremely effective, it is hard to prove efficacy by adding mildly active (even if potentially synergistic) drugs.

Revlimid and Velcade are both extremely effective even after disease relapse but they are not curative. This creates a large patient population of relapsed/refractory patients who are bereft of approved treatment options. As these patients represent the highest unmet need in multiple myeloma, regulators are willing to consider accelerated approval for these patients based on relatively small uncontrolled single arm trials. The unofficial efficacy bar for new drugs in this setting is a response rate of ~25% with a median duration of response of ~6 months although results have to be evaluated for each drug specifically.

Therefore, patients who progress on Velcade and Revlimid represent a fast route to market with very lucrative economics. This is why people got so excited with Onyx (NASDAQ:ONXX) following recent data with carfilzomib. According to Onyx’s press release, carfilzomib led to a response rate of 24% and median response duration of ~7 months in heavily pretreated patients. Although Velcade received accelerated approval based on better results (~27.7% response rate and response duration of 12 months) this could still be enough for accelerated approval.

Two other agents which are active but probably not enough to be given as monotherapy are Biotest’s BT-062, an antibody drug conjugate powered by Immunogen’s (NASDAQ:IMGN) technology and Immunogen’s wholly owned IMGN901, both discussed here. Due to the limited trial sizes and differences between the studies (dosing schedule, patient population) it is hard to pick a winner between the two. Based on the limited data for the two ADCs, both have some sort of single agent activity in the form of a couple of responses and several cases of disease stabilization.

Looking at the ASCO data for ARRY-520, it seemed that it was going the same path as other targeted therapies but following the recent quarterly conference call and a follow up call I had with CEO Bob Conway and CSO Kevin Koch, the compound still has a shot as a single agent in relapsed/refractory multiple myeloma.

The company intends to present updated results later this year (probably at ASH) which should include an additional ~15 patients. The ASCO data included patients from the dose escalation portion, which means that patients might have received suboptimal doses. According to the company, the MTD has already been reached so at ASH we could get an initial sense of the drug’s activity at the maximal dose. As with any oncology drug, one could expect better activity with higher doses but this is not always the case.

In order to get the data presented in a large medical meeting, companies must not disclose the data prior to presenting them. Still, based on remarks during the call, it was obvious Array is seeing additional responses with the drug and this was confirmed in the conversation I had with the company’s management. Another interesting statement was that the drug takes up to 3-4 months to reach maximal effect, which implies that some of the cases reported at ASCO as stable disease or minor response could have improved to an objective response.

Another interesting aspect of the trial is the potential utility of biomarkers for patient selection. The current study includes all comers but the company is evaluating potential biomarkers to predict response, which could guide future trials. My impression from the conversation is that although there is reason for optimism, it is still very early and the biomarker issue remains an open question.

Important catalyst at ASH

Results for ARRY-520 next December could be an important catalyst for Array, depending on the data. A single digit response rate will put the drug in the growing list of agents that have to be combined with other drugs and undergo long and expensive clinical program. On the other end of the spectrum will be a 20-25% response rate, which could make the drug very interesting. A response rate of ~15% will require the company to identify and validate biomarkers for patient selection in future trials if it wants the drug to become approved as a single agent.

The acquisition of Proteolix by Onyx last year demonstrates the high demand for good myeloma drugs. The acquisition included an upfront payment of $276M as well as over $500M in future milestone payments. At the time of the transaction, the recent potentially pivotal results were still unavailable, so it is safe to assume that had the acquisition taken place today, the price would have been higher. Last month, Onyx sold the Japanese rights for the drug in a $339M deal with Ono Pharmaceuticals (OTC:OPHLF) that included a $59M upfront payment. Ono owns the ex US rights for MDX-1106, which is one of the most promising oncology drugs in development, as discussed in a previous entry.

Array recently announced plans to start phase II trials for ARRY-520 both as monotherapy and in combination with Velcade. This decision insinuates that the unpublished results merit further evaluation as a single agent. This is in contrast to other targeted agents for multiple myeloma which advanced to phase II only as part of a combination regimen. Even if Array shows comparable response rate and duration of response to those of carfilzomib, it will probably need to run a large phase II trial to for the drug to be considered for accelerated approval . One advantage ARRY-520 has over carfilzomib is its novel mechanism of action and the ability to be combined with Velcade, as opposed to carfilzomib that competes directly with Velcade.

It looks like the market ascribes very little value to this drug, just like the rest of Array’s pipeline, so the downside going into ASH is limited. Another clinical program that could surprise to the upside is ARRY-614 for MDS, with first data also expected at ASH.

Summary and portfolio update

In summary, there is a big gap between Array’s present value and its market cap. As a small cap biotech, Array is still very speculative, but with 13 drugs in clinical testing and multiple potential value creation events down the road, it looks like a very cheap speculative investment.

Unfortunately, Friday’s positive news on ARRY-380 prevent me from adding a new position in Array as I can only make changes on Sundays assuming no meaningful data are published after market close. As a result, I plan to add more Array to the portfolio next week as part of a write up on Seattle Genetics (NASDAQ:SGEN).

Portfolio holdings as of Oct 3rd, 2010 [click to enlarge]



Disclosure: See portfolio above.

Source: Array Biopharma: A Wall Street Anomaly