Biotech Buyout Portfolio: Momenta Pharmaceuticals

Momenta Pharmaceuticals, Inc., a biotechnology company, specializes in the characterization and process engineering of complex molecules. These complex molecules include proteins; polypeptides; and cell surface polysaccharides, such as heparan-sulfate proteoglycans (HSPGs). The company applies its technology for the development and commercialization of generic versions of complex drug products, as well as for the discovery and development of novel drugs- From Yahoo Finance

Momenta (NASDAQ:MNTA) is a stock I added to my portfolio last week when the company's shares fell over 20% on news that a federal appeals court stayed a lower court injunction preventing Watson (WPI) and its partner Amphastar from marketing a competing generic formulation of Lovenox, also known as enoxaparin. Without Watson, Momenta and partner Sandoz/Novartis (NYSE:NVS) have the sizeable generic Lovenox market to themselves. Momenta's reformulation generated $300 million in revenues in its first 69 days on the market. Management is hopeful its patents will be upheld:

"While disappointing, this decision does not reflect a final ruling on the appeal or the ultimate case," commented Craig Wheeler, President and CEO of Momenta. "Any launch by Watson or Amphastar would be at risk and we continue to pursue our claims in the District Court. We have confidence in the strength of our patents."

The Timing is Right for Biosimilars

While the recent setback should not be underestimated and competition for generic market share is intense, there is no denying the tremendous opportunity for biosimilars. Two specific events set the stage for increased activity and more rapid introduction of generic biologics or biosimilars.

1) The U.S. Government is hoping to lower healthcare costs by accelerating the approval process for biosimilars:

President Obama has proposed to reduce the period of exclusivity for biologics to seven years from twelve in an effort to reduce healthcare costs in the face of large deficits. While industry is pushing back and the outcome is still unclear, the push is on to open the market earlier to generic competition.

The Patient Protection and Affordable Care Act (Affordable Care Act), signed into law by President Obama on March 23, 2010, amends the Public Health Service Act (PHS Act) to create an abbreviated licensure pathway for biological products that are demonstrated to be "biosimilar" to or "interchangeable" with an FDA-licensed biological product. Under this new law, a biological product may be demonstrated to be "biosimilar" if data show that, among other things, the product is "highly similar" to an already-approved biological product.

2) A Large Number of Biologics are Coming Off Patent

Even with twelve years of protection, the market for biologics is massive and the first of many blockbuster drugs are starting to come off patent protection now and many more over the next decade, opening the door for companies like Momenta.

The Opportunity: According to research firm Evaluate Pharma, by 2016, 48% of global revenues of the top 100 drug products will be from biotechnology - bio-engineered vaccines and biologic drugs - compared to 31% in 2009. For instance, after Lipitor, the world's top-selling drug, goes generic, the next biggest product will be rheumatoid arthritis drug Humira, a biologic, says Evaluate, with estimated sales of $10 billion in 2016. Between 2008 and 2015, industry estimates indicate that $59 billion worth of biologics will go off-patent . Since patented biologics are expensive, governments and payors are keen to embrace biosimilars - generic variants of biologic drugs.

Momenta Has Demonstrated Expertise in a Challenging Field

The challenge of biosimilars is that they are just that "similar", expected to serve the same function as the original, but given the complexity of biologics, not exact reproductions. From Zacks Research:

Biopharmaceuticals/biologic drugs, which are large-protein molecules derived from genetically modified cell lines, are structurally much more complex as compared to the traditional small molecule medicines. Thus, the manufacturing of the generic versions of these drugs requires much more rigor and involves higher costs.

While Lovenox is not defined as a true biologic, many believe its complicated structure makes it a strong test case for the approval of future generic biologics and is a testament to the capabilities of Momenta's technology platform.

Lovenox is technically not a biologic, yet functionally and effectively it is," writes Sanford Bernstein analyst Tim Anderson in an investor note. "Many in industry have felt that if FDA ultimately approves generic versions of Lovenox and it makes those generics fully substitutable - which it just has - then this might signal what FDA may also ultimately do when it comes to 'true' biologics that generic companies are also pursuing.

Large Industry Players Recognize Momenta's Capabilities

Momenta's technology for analyzing and replicating complex structures for developing biosimilars is being rewarded with lucrative partnerships from some of the industry's leading generic drug companies. Momenta is partnered with Sandoz for generic Lovenox and recently signed a deal with Baxter (NYSE:BAX) to develop up to six biosimilars.

The Stock is Inexpensive

Given the recent pullback, shares of Momenta appear attractive at current levels. Its market cap is roughly $800 million, the company is profitable, has over $300 million in cash and book value of $8/share. The company also has a demonstrated expertise in a difficult and sought after area of drug discovery and impressive partnerships with drugs in development with billions of dollars in revenue potential. The company will likely continue to succeed independently or will make a nice acquisition for a larger company or partner looking to solidify its presence in the emerging field of biosimilars.

Disclosure: I am long MNTA.