- Discovery and development platforms can efficiently multiply a drug pipeline. Regeneron leveraged its platforms to become a biotech paragon over the 5 years prior to 2014.
- Bluebird bio, Epizyme, Sangamo, and Benitec are among companies with platforms that could not only be force multipliers, but also change the way diseases are treated, i.e. be disruptive.
- Placing valuations on biotech companies is difficult; confidence in the platform is therefore essential.
I like it when a biotech company's Form 10-K begins with a detailed description of its scientific focus. Or when I can go to a company's website and be amazed at the research its team is conducting. If a company's focus is on research that will lead to new therapies, not just sales of existing ones, I become interested in investing.
I became interested in Regeneron (NASDAQ:REGN) while trying to discover attributes common to the most successful biotech companies. After some study, I concluded that what placed REGN a cut above its successful peers were its elegant genetic engineering platforms.
Platform is a term broadly used by the pharmaceutical industry. For example, a vaccine manufacturing platform can be egg-based or cell culture-based. Developing the ability to insert genetic material into a cell with a viral vector constitutes a platform. Developing a method of silencing genes with RNA interference or RNAi constitutes a platform; the same technology can serve as a molecular diagnostics platform. Lipid nanoparticles can be a delivery platform for getting interfering RNA molecules into human organs. Conjugating small cancer drugs to large proteins to get them inside the cancer cell is a platform.
Once a company has perfected a complex platform for one product, it can use it to create others at a reduced cost - it becomes a force multiplier. Some very elegant molecular platforms such as those of Sarepta, ISIS, Alnylam, and Seattle Genetics have been covered well enough on Seeking Alpha. What follows is a brief description of the elegant platforms of a few other companies I read about while searching for the next Regeneron.
bluebird bio (NASDAQ:BLUE) makes a compelling case on page 3 of its Form 10-K that the time for gene therapy has arrived. BLUE has developed a process for giving back to thalassemia patients (in a Phase 1/2 trial) their own red blood cell precursors (stem cells) after introducing into them healthy hemoglobin genes. This one-time treatment process requires "myeloablation" which means the bone marrow gets wiped out and then replaced with a transplant of the patient's own treated stem cells. Lentivirus is used as a so-called vector to introduce the healthy hemoglobin genes back into the patient's blood stem cells. BLUE's lentivirus platform is also being used for patients with sickle cell disease (Phase 1/2), for children with adrenoleukodystrophy (Phase 2/3), and for cancer patients (by beefing-up their immune cells). BLUE's 10-K starts with 27 pages of science that is not too technical, and is followed by a discussion of its alliance with Celgene (NASDAQ:CELG). BLUE intends to gear up its patented gene therapy platform to commercial scale.
Epizyme (NASDAQ:EPZM) also has a partnership with Celgene, and with several other large pharmaceutical companies. EPZM has a unique but so far non-patented platform for tailoring drugs (which are patented) to specifically attack enzymes called histone methyl transferases or HMT that misbehave as a result of oncogenic or cancer-causing mutations. For each drug candidate, EPZM develops a companion diagnostic test so that the treatment is given only for cancers with specific mutations causing or driving the cancer. This will spare patients the futility of receiving a drug, which will not be effective for their genotype of cancer even though it is the same general type, or phenotype, as a responsive cancer. The basis for the EPZM platform is spelled out on pages 7-9 of Form 10-K, and was published in the highly prestigious Proc Natl Acad Sci in 2013. EPZM may have developed one of the most selective and non-toxic therapies yet for certain, genetically unique leukemias (Phase 1/1b) and lymphomas (Phase 1/2).
Sangamo Biosciences' (NASDAQ:SGMO) gene-editing zinc finger platform was prominently displayed in New England Journal of Medicine on March 6, 2014 in a first-in-man feasibility study of patients with HIV. The SGMO platform is similar to that of BLUE in that it also uses a neutered virus (adenovirus) to transport the gene-cutting enzyme to its target in the lymphocyte immune cells. The idea came from an experiment in nature - people with a certain mutation in their lymphocytes don't get infected with HIV. When the mutated gene was identified in those persons, the zinc finger researchers designed a method to knock it out of others to make them resistant to HIV. The gene is called CCR5 and delta-32 is the mutation. The lymphocytes of HIV patients are treated outside their bodies, then given back to them - wiping out the bone marrow is not necessary. There are limitations; for example, complete resistance to and cure of HIV cannot be achieved by knocking out only 1 of the duplicate (diploid is the genetic term) CCR5 genes which everyone has. SGMO also has tools to insert new genes in place of ones that are excised as was reported in the May 28, 2014 issue of Nature for patients with a hereditary form of immunodeficiency. SGMO also has powerful tools to modify the activity of genes without having to disrupt or replace them. Despite early shortcomings, elegant seems not too strong a word to describe the SGMO platform. SGMO has numerous collaborators. A lucid description of the science begins on page 4 of Form 10-K. It includes this highly contentious statement: "We believe that our ZFP technology provides a unique and proprietary basis for a broad new class of drugs that have differential competitive advantages over small-molecule drugs, protein pharmaceuticals and RNA based approaches, enabling the development of therapies for a broad range of unmet medical needs."
Benitec (OTCPK:OTCPK:BNIKF) or (OTCPK:OTCPK:BTEBY) and its licensees including Calimmune have taken a new approach to RNA-interference or RNAi therapy: components of viruses - rendered nonpathogenic - that have a strong predilection for certain tissue cell types (like liver cells) are designed to deliver DNA weaponry that, once inside the cell, directs the synthesis of interfering RNA molecule(s) that in turn direct an attack against a disease-causing gene or against multiple targets in the genes of viruses like hepatitis C. This DNA-directed approach permanently switches on the cell's own RNA interference mechanism for gene-silencing. When directed against viral genes, it does more than inhibit virus replication - which is what small molecules used to treat HCV and HIV do - it destroys them in a one-time only, irreversible treatment. Benitec's methodology is described in this article. The company 10-K and website are informative, and I found the proceedings of the NIH Advisory Committee in June 2013 quite compelling. If the Phase 1/2 trial of TT-034 for HCV and the Phase 1/2 trial of dual gene transfer construct Cal-1 for HIV, which just began dosing a 2nd cohort, are successful, the odds of success for this platform will rise well above the 1 in 20 historical odds for Phase 1 drugs. And if this technology - which is also being applied to genetic diseases and cancer - is successful, there may be less need for: 1) small molecule anti-virals that must be administered for a long time, 2) gene therapies that are only able to knock out 1 of two disease-associated copies (or alleles) of a gene, 3) RNA interference therapies that require multiple doses or 4) complex lipid nanoparticles delivery systems.
Valuations are difficult for biotech. I still look at the market cap-to-revenue ratio (commonly referred to as P/S ratio), but revenue and its recognition on the balance sheet can be highly erratic for small biotech. Rather than relying on simple ratios, it is probably more meaningful to look at revenue over a period of time, and at the company's market cap relative to peers. After all, if a company fails, the lower the market cap, the lower the total amount of wealth lost, right? In the table below are cash flows and net current asset values for the most recent FY (2013 except 2012 for SGMO).
|Millions||RecentFY||Prior FY||RecentFY||Prior FY|
|Cash Flow||Cash Flow||NCAV||NCAV|
|BLUE||$ 43.45||$ (21.04)||$ 139.27||$ 62.55|
|EPZM||$ (53.70)||$ 44.20||$ 100.97||$ (54.01)|
|SGMO||$ (8.08)||$ (25.90)||$ 50.74||$ 78.48|
|BNIKF||AUD (2.73)||AUD (3.32)||AUD 0.61||AUD 2.63|
Growth. When I previously looked for attributes in common to the top 5-year earnings growers, I found market presence, revenue growth, pipeline depth, R&D budget, and manufacturing capability (see January 2014 SA article). Among the 7 top biotechs, REGN was #1, and its market cap appreciated in 5 years from $2B to $27B. I concluded that its wide-moat genetic engineering capabilities, i.e. platform, were what set REGN apart from its successful peers. That is why I began to focus on platforms. The following table summarizes what I consider to be growth attributes for the 4 companies whose platforms are featured in the present article. None has a product on the market.
|Ticker||Market Cap||3-yr/5yr Revenue Growth||R&D >50% of revenue||Phase 2&3/ 1&preclinical candidates||Commercial Scale Manufacturing|
na = not applicable
*Benitec revenues for 2013-2008 were in millions AUD: 0.64, 0.32, 0.34, 0.18, 0.31, 0.48. Market cap based on 115M share count. BTEBY ADR = 1:5 shares = 23M ADR.
! Benitec's candidates includes those out-licensed.
+Pre-clinical EPZM candidates are only those I found listed at website, not undisclosed candidates.
Opinion. REGN was just in time to catch the huge wave of therapeutic monoclonal antibodies and fusion proteins that have flooded the market over the past 5 years. REGN had powerful tools that were used to manipulate the genes of mouse embryos, inducing the resulting mice to produce whatever fully human protein they wanted to design. REGN, BLUE, EPZM, SGMO, BNIKF and others are now putting their genetic engineering skills to work in humans. In my opinion, the scale of this work is comparable to putting man on the moon. For a recent discussion of the ups and downs of gene therapy, try this one in the journal Nature.
My top pick to become the next Regeneron over the next 5 years is bluebird bio for the following reasons: 1) time for gene therapy has arrived and will change the way diseases are treated more dramatically than monoclonal antibodies have, 2) precedent has been set: EMA approval of Glybera, 3) FDA is supporting administratively, big pharm is supporting financially, 4) bluebird has a powerful platform described in great detail in its 10-K, 5) bluebird is investing "with a view towards supporting our …[gene therapy] candidates, if approved, at commercial scale." Commercial scale manufacturing is very unusual among small cap biotechs these days, but that is one of the capabilities that set Regeneron apart from its peers over 5 years ago.
- Regeneron is a biotech paragon with a lot of growth ahead of it, and I consider its stock safe to buy if it is held long-term.
- I do not recommend that anyone invest in any of the 4 small biotechs featured unless they can afford to lose their entire investment. Benitec's market cap of $129M is attractive to me, but its balance sheet and large pool of unissued shares presents a risk.
- Although nearly $1B of investor wealth is at risk, I believe bluebird bio could have the greatest impact, and in 5 years is likely to have the largest market cap of the 4.
- Don't invest in a company with just a smart drug, invest in a company with a platform that can be used to develop novel therapies - FDA New Molecular Entities - for multiple diseases.
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