Written by Scott Matusow and Kyle Dennis
Last year, Halozyme (HALO) was one of the high flying biotech stocks, increasing in value four-fold. Much of the big run occurred when we wrote that a company director bought 50,000 shares in the high $6 range. This same director bought 50,000 shares of Jazz Pharmaceuticals (NASDAQ:JAZZ) in 2009 for a price around $9 - she is a long term investor and still owns Jazz shares.
The speculation got hotter for Halozyme when SC Herceptin and SC MabThera approval catalyst dates approached late last year for the European market - both products eventually were approved there.
Roche pays a royalty to Halozyme for these two products, which really is not a significant value driver by itself - but many fail to understand Halozyme's platform monetary potential. We believe Halozyme's platform is far more valuable than many biotech investors realize.
Catalyst-Binary Event-Advisory Committee July 31, 2014
HyQvia is a combination of human immune globulin (the drug being enhanced) and recombinant human hyaluronidase (Halozyme's Enhaze enhancer). Halozyme and its royalty partner Baxter Pharma (BAX) are expecting an adcom meeting on July 31 for its Biologics License Application (BLA) for HyQvia, the company's investigational subcutaneous treatment for patients with primary immunodeficiency.
The adcom will give guidance to the FDA on whether the BLA is acceptable in its new amended form. In other words, they will decide whether or not to recommend HyQvia to the FDA for approval.
Baxter and Halozyme submitted additional pre-clinical data that was requested from the FDA in 2012, and amended their collective BLA. The FDA did not issue a CRL at that time but rather requested both companies to submit this data as part of an amended BLA. This is part of the PDUFA that the FDA will issue a decision on within 30 days after it receives input from the adcom on July 31.
In a nutshell, the FDA might not fully understand the "how's and why's" of HyQvia, and needs input from those who likely do, the adcom panel. In the time since the FDA asked for more information, Halozyme has been focused more on getting its platform approved in Europe, which it has successfully with its partner Roche, while Baxter has been taking the lead with the amended BLA.
We are Optimistic about Positive adcom Recommendation
In 2012, ViroPharma (VPHM) was using Halozyme's platform to develop a subcutaneous version of its Cinryze. Halozyme announced that ViroPharma was discontinuing the overall development of subcutaneous Cinryze with Halozyme's rHuPH20 technology after the Phase II trial observed an "unexpected increase and titer of non-neutralizing anti-rHuPH20 antibodies." However, there were no adverse effects from the increase in those antibodies. ViroPharma, however, was developing its own type of "enhancer" as a backup, and has since gone to this back-up to move its subcutaneous Cinryze forward without Halozyme.
The above is what the "bears" will point to suggesting the adcom and subsequent approval chances for HyQvia will result in a negative outcome. Although it's something to consider as a risk, we point out that Cinryze is an injectable prescription medicine that is used to help prevent swelling and/or painful attacks in teenagers and adults with Hereditary Angioedema.
Each biologic has its own matrix, and to the best of our and the European Medicines Agency's (EMA) knowledge, there are no known safety issues with HyQvia since it has already approved this product for use in Europe. If there were safety issues, the EMA would have rejected HyQvia.
We feel it is important having HyQvia already approved for use in Europe which was not the case in 2012. Halozyme and Baxter will certainly point this fact out at the adcom meeting, and is likely to use notes from the EMA approval decision if needed.
It's our opinion that a positive outcome from adcom is about 80%. If the adcom is positive, it is nearly certain that the FDA will follow suit and approve the BLA.
The versatility of Enhaze technology is the source of its value. Understanding the functions of hyaluronan (hyaluronic acid or HA) and the extracellular matrix are critical in assigning an accurate value to all of Halozyme's assets. The extracellular matrix is basically the subcutaneous area of the skin, just below the outer surface. Hyaluronan is a key component within this space and is naturally occurring in the human body. HA is a space-filling, gel-like substance that provides the structural properties of all normal tissues within the body, including skin and cartilage.
HA acts by providing "free space" to cells in tissue, as well as facilitating hydration in tissue. This substance has also been found to accumulate in certain types of cancerous tumors, providing infrastructure and an essential "cocoon" around malignant cells and the blood vessels that feed them. HA essentially acts as a barrier under the skin, which is then broken down by hyaluronidase to allow the subcutaneous delivery of therapeutic agents.
Halozyme's technology takes advantage of HA and its role in tissue. The company has created rhuPh20, a synthetic form of the natural enzyme hyaluronidase. Unlike HA, which is derived from animal specimen, synthetic rhuph20 is pure, therefore less antigenic and more potent. The enzyme is designed to temporarily degrade, or break down HA.
This structural breakdown creates a temporary, "opportunistic" window that allows for the facilitated penetration and delivery of certain types of drugs and fluids. Therapeutic agents can then be easily passed through the skin subcutaneously, allowing for a more effective, faster, and widespread delivery.
Enhaze technology is conveniently applied to such a wide range of therapeutic agents. The subcutaneous delivery system has allowed Enhaze to be combined with several blockbuster drugs. Patent life is also extended with these new subcutaneous combinations under new FDA rules.
Herceptin SC - Approved in the EU (Herceptin $6B Therapy)
HyQvia SC - Approved in the EU, US Approval Pending ($1.6B Potential)
MabThera SC - Waiting Approval in the EU Q1/Q2 (MabThera $6B Therapy)
Alpha 1-Antitrypsin (Preclinical)
Pfizer - 4 Chosen Targets RN-316 & PCSK9
PEGPH20 - P2 Trials (Biggest Potential Revenue Generator If Successful)
Analog Insulin PH20 - (Co-formulated Hylenex/Lispro Phase II Trials)
HTI-501 - P2 Cellulite Trials (Results to be released in Q1) HYLENEX - FDA approved Recombinant Hyaluronidase
PEGPH20 for Pancreatic Cancer
Halozyme's proprietary pancreatic cancer therapy is in early clinical stages, but there is key data to take away from the ongoing Phase Ib trial. Although too early to assume any certainty of success, we believe the crown jewel in the company's pipeline is undoubtedly PEGPH20 (PEG). The fact that we do know this proprietary enzyme is effective against hyaluronan helps provide some enlightenment in regard to speculative potential for success.
What differentiates PEG from any other type of therapy is how it works, as PEG's mechanism of action is a possible breakthrough in modern cancer treatment. Furthermore, this type of therapy has the ability to cater to any tumor that accumulates high levels of hyaluronin, including ovarian, colon, breast and prostate cancer. As with Enhaze, the versatility of this therapy may open up doors for partnerships with companies with the most commonly used cancer agents on the market.
How PEG Works
Pancreatic cancer cells secrete high levels of hyaluronic acid, filling any empty space within the body of the tumor. This filling creates a high pressure environment, causing a type of cocoon to form around the cancer cells and the blood vessels that feed them. Since blood vessels deliver chemotherapy directly to the rapidly replicating tumor cells, the high internal tumor pressure reduces the access and effect against the malignancy. This is where Halozyme's enzyme technology comes into play.
PEGPH20 uses the same recombinant enzyme technology that is used in its subcutaneous platform. In treating cancer, Hylenex must be delivered to the tumor intravenously in combination with the chemotherapeutic anti-cancer agent. A PEGylated version was thus created for this reason.
The process of PEGylation basically extends half-life of a substance in the blood stream, allowing it to stay active for a longer period of time. This enables delivery of specific compounds to reach the intended sites (organs). After this process, IV delivery will allow for PEG to reach its intended site, the pancreas.
In the Phase Ib trial, patients were divided into two subgroups consisting of low and high hyaluronan-containing tumors. Stage IV Patients were randomized to gemcitabine/PEG or gemcitabine alone. While the low HA-containing subset saw no added benefit over gemcitabine alone, the high hyaluronan group incredibly eclipsed the median overall survival (MOS) of all its precursors. Below is a comparison:
- Gemcitabine MOS: 180 Days
- Gemcitabine/Abraxane MOS: 255 Days
- Folfirinox MOS (Stage 4b): 333 Days
- High HA/Gemcitabine MOS: 529 Days and Increasing (Patients Still Alive as of 9/13 ESMO Meeting)
Four patients are still alive using Halozyme's therapy and represents 2/3 of the group. The longer that these patients survive, the longer this historic MOS figure continues to grow. Repeating a 529 day survival in Phase II trials would place PEG in the same class of a breakthrough therapy as Pharmacyclics' (PCYC) Imbruvica. Imbruvica was approved by the FDA in February of this year to treat chronic lymphocytic leukemia patients who have received at least one previous therapy (2nd line treatment).
Imbruvica is designed to target a protein called Bruton's tyrosine kinase which is critical to the growth and survival of B-cells, the type of immune system cells affected in 85% of non-Hodgkin lymphoma - lymphoma is the most common type of blood cancer.
An FDA breakthrough designation expedites the development and review of drugs that are intended to treat a serious condition where preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy on clinically significant endpoints.
If PEG is ultimately approved by the FDA, it will be a first line treatment, as it will be the only treatment for pancreatic cancer that has gone past the very early stage of the disease.
Pancreatic cancer effects about 30,000 people in the United States yearly. The estimated global market for pancreatic cancer drugs is projected to reach $1.2 billion by 2015. This only takes into account drugs designed to treat the very early stages of the disease.
The overall global market size for a treatment like PEG, if ultimately approved is certainly higher than $1.5B, because there are currently no treatments to treat the later early stage to late stage of this horrible cancer.
Risk/Reward of PEG
Halozyme and the FDA halted all clinical trials for PEGPH20 in pancreatic cancer in early April following the announcement of a potential safety concern related to the thromboembolic (blood clotting) event rate between the PEG-PH20 arm and the control arm of a Phase II trial.
The FDA later agreed to lift the halt. We believe the reason for this is because pancreatic cancer is basically a death sentence, so blood clotting is an acceptable risk. Pancreatic cancer is untreatable except in very early stages. Because of this, the risk/reward ratio for eventual PEG approval is very favorable if efficacy continues to confirm over the clinical progression of PEG.
We believe that in time, there is a good chance for PEG approval for use with gemcitabine and Abraxane to treat pancreatic cancer. Our reason is based on the excellent survivability rates we list above.
If approved in a few years, PEG it would be the only effective treatment for late-early to late stage pancreatic cancer. Potential approval of PEG for pancreatic cancer should arrive somewhere in 2018 with subsequent New Drug Applications (NDAs) for other cancers such as breast and prostate by 2020.
Our estimate of 2018 potential approval for PEG is based on the standard regulatory process. We still have Phase II and Phase III clinical trials to go for PEG. However, if the signal continues to show strong survivability, the treatment could see acceleration to market as a breakthrough treatment.
Therefore, while certainly a speculative investment, its longer term potential, if everything goes according to plan, could see a similar price move that Intercept Pharmaceuticals (NASDAQ:ICPT) has seen.
Intercept is an example of just how high a developmental biotech company's stock can get on positive data for a wide open unmet need.
In January of this year, Intercept rallied from $70 a share to in excess of $450 a share on news that the company's "FLINT" trial of obeticholic acid (OCA) for the treatment of nonalcoholic steatohepatitis was stopped early for excellent efficacy data shown from an interim analysis. More importantly, the analysis revealed that the primary endpoint of the trial was met, so no further efficacy trials were needed.
NASH is liver inflammation caused by a buildup of fat in the liver. Because of this inflammation, liver functions in some patients are greatly decreased which can cause a whole array of serious issues. Some patients can see scarring of the liver, which leads to cirrhosis (healthy tissue in the liver replaced with scar tissue)
This form of liver disease is a wide open unmet need, so with the data being so positive, Intercept immediately attracted a wealth of new money wanting to "get in" on this news.
It's just really unknown from our point of view how high Halozyme stock can go. As we mention prior, if PEG is eventually approved, it would be the first of its kind treatment which would provide real hope for patients who suffer from this disease past the very early stages.
Other Potential Rewards for Halozyme
1. Potential for a continuous news flow of partnerships for its Enhaze rHuPH20 tech would likely cause price spikes and a good opportunity for investors and traders to take healthy profits.
2. Potential for an early acquisition: A surprise acquisition sometime in the next year is not entirely out of the question. If the company feels the risk/reward profile is in their favor and an acceptable offer materializes, it could be considered wise to sell - we saw this with Trius last year. However, an acquisition in the shorter term could prove to be a very difficult proposition if Roche, Baxter, and others have "right of first refusal clauses" in their respective deals with Halozyme.
3. Finally, the biggest reward is if PEG eventually is FDA approved for the pancreatic cancer indication. Without a doubt, it would be a first line treatment in what is basically an unmet need area. Any such FDA approval would come no earlier than 2018, and possibly 2019.
Although we feel the chance is low, adcom could possibly give a negative vote on July 31 which would equate to a short term risk to the stock. Additionally, any negative news on PEG could bring strong sell pressure. A negative adcom vote could cut Halozyme's price up to 20% initially, while negative news on PEG could cut the stock price up to 40%. Even if these risks came to fruition, Halozyme should still maintain a good amount of fundamental and speculative value because of its FDA and EMA approved drugs along with other early stage proprietary products.
While we believe this will not happen, we feel investors should not be over-hyped here. Instead, potential investors in Halozyme should understand that the large potential reward is in the long term, while the potential short term price appreciation will be associated with the adcom meeting coming up on July 31. We believe Halozyme has very large long-term potential, but the company must realize this potential - we think it will in time.
Heading into the adcom meeting on July 31, it's our opinion that Halozyme's stock price should move significantly higher. This adcom meeting is a significant event for the company, as approving the BLA in its amended form likely means the FDA will approve the product. As mentioned, it's our opinion that a positive adcom here stands an 80% chance.
We could see Halozyme gain stronger speculation as new royalty deals are announced that could take the stock into the low $30 range and/or volatile bumps in the road that move it back down to the current level under $9.
Because its Enhaze technology can work with an array of existing drug treatments to make them better, new partnerships can come at any time, which would likely add a short-term instant boost to the stock price.
Investors should also understand that Halozyme's stock price is likely to see a lot of volatility over the next year or so, in a manner similar to what Celldex Therapeutics' (CLDX) stock experienced over the last year for example.
We started covering Celldex in 2012 when the stock was around $4 a share. Since that time, the company has seen a high of over $38. In between, the stock has traded in a very wide range, coming back down from $38 to near $10 in a relatively short period of time. Currently, Celldex is trading in the $17 range.
While we like Celldex, we feel Halozyme offers a better risk/reward profile. The main reason for our opinion is related to what some have pointed out, that Celldex is lacking human clinical data for its highly speculated drug, Rindopepimut.
Rindopepimut is a form of immunotherapy that targets the tumor specific oncogene EGFRvIII, a functional and permanently activated mutation of the epidermal growth factor receptor. Immunotherapy in general while promising, has yet to be the confirmed blockbuster platform many believe it will be, mainly because of the lacking human data - Halozyme's Enhaze platform has not only been confirmed, but approved both by the FDA and EMA.
Even with its potential stock price volatility, we feel Halozyme offers one of the best speculative long term risk/reward ratios currently in developmental biotech. As we have already noted, early clinical data on PEG has been very promising, and the treatment targets a wide open unmet need with the potential to make billions in the future, if eventually FDA approved. Continued regulatory success will be the most significant value driver for Halozyme over time. We lean about 70/30 to the positive/upside in this regard, as we believe its regulatory issues (PEG Halt) are mostly behind the company.
We like Halozyme as a long-term spec investment as its potential long term reward is very large, notwithstanding that we believe the stock should see nice price appreciation in the short term as we move closer to the adcom meeting on July 31.
Disclosure: The author is long HALO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser