Positive Pipeline News Boosts Pharmacyclics, But Increased Costs May Spur Public Offering

Jun.16.11 | About: Pharmacyclics, Inc. (PCYC)

On the back of positive data from lead product PCI-32765, Pharmacyclics (NASDAQ:PCYC) has had a good run of late. Since abstracts from the cancer conference Asco were released in May, shares in the California oncology specialist have climbed one-third to $8.87 in early trade today as expectations have risen for the kinase inhibitor in a range of blood cancers (Asco EventAnalyzer - 2011's winners and losers, June 8, 2011).

Analysts believe partnership talks are well under way, while Pharmacyclics is planning for Phase III trials in leukaemia and lymphoma to begin in early 2012. However, with the rise in its shares the group may also be pondering another fundraising to support expansions in its clinical programme.

Ahead of the pack

PCI-32765 looks to be the only inhibitor of Bruton's tyrosine kinase (Btk) in clinical-stage development. Btk is believed to interfere with the B-cell antigen receptor signalling pathway necessary for tumour expansion and proliferation; disrupting the pathway prevents B-cell maturation and induces the death of cancerous cells.

The interim Phase Ib/II data in chronic lymphocytic leukaemia and small lymphocytic lymphoma presented at Asco showed that PCI-32765 achieved an objective response rate in 13 of 21 treatment-naïve patients after six months of follow-up and 12 of 27 relapsed or refractory patients in a low-dose arm after nearly eight months. Most were judged to be partial responses, and most patients remain on medication.

Pharmacyclics executives took the Asco opportunity to announce plans to start a Phase III trial in the two indications in early 2012. Success in a Phase II trial in mantle cell lymphoma, the data from which are expected to be presented at Ash, will trigger planning for a Phase III trial to begin in mid 2012.

In addition, the company hopes to initiate Phase I/II clinical work in multiple myeloma toward the end of the year, and other indications and trials in combination with other therapies are also planned or under way.

Whilst there is growing excitement about the compound's potential, analysts have yet to forecast sales, although share price targets from analysts for the whole company range from $10 to $16. In an investor briefing accompanying the Asco presentations, Pharmacyclics executives noted that the target population may number 200,000 patients if it succeeds in a number of indications.

Late stage backing

As a mid-stage clinical development company, Pharmacyclics appears well-funded: a $52m share offer to institutional investors a year ago left the company with $54.4m in cash and cash equivalents at March 31. Partnership income has been running at about $2m a quarter in the nine months ended March 31, and in April the firm banked a $7m milestone payment from Servier for development of HDAC inhibitor S-78454.

Yet accelerating clinical activities appear to have taken a toll on its finances. In the nine months ended March 31 R&D spending has doubled over the year-earlier period, $24.6m versus $10.7m. Pharmacyclics cannot expect to fund itself through full clinical development of PCI-32765. With two even more expensive Phase III trials expected next year, along with a continuation and widening of mid-stage work, R&D costs can only be expected to increase.

Thus, a new fundraising or partnership seems inevitable. Given the share run-up of late, tapping the equity markets may be a sensible choice if the group wants to improve the value of PCI-32765 before licensing it. Last year's direct offering came after an Asco-related rise, so a repeat would not be a surprise.

Analysts from RBC Capital Markets believe partnering of the compound is nearing, in the next six to nine months, because of the need for "significant new capital." Analysts from Roth Capital Partners say they believe Pharmacyclics is in "active discussions across its pipeline," giving it multiple options for licensing.

Given that Pharmacyclics' only other Phase II compound is already partnered, PCI-32765 is the prize of its pipeline and likely the only one that can draw significant bio-dollars. Strategically, however, another share offering may make sense, as the company turns its attention to the rest of its pipeline.