A One-Drug Story Today, But What A Drug
Teasing out biotech valuation is always a subjective exercise, but I don't think too many Rigel longs are going to quibble with the statement that R788 (fostamatinib disodium), also known as FosD, is a huge part of the company's current value.
FosD is an oral syk inhibitor that has shown very encouraging efficacy in rheumatoid arthritis. The potential of this drug early on was such that the company was able to sign a lucrative partnership with AstraZeneca (NYSE:AZN) and the end of the pivotal development process is in sight.
Although comparing the results of different trials (as opposed to actual head-to-head trials) is always potentially misleading, FosD's efficacy looks solid. FosD is arguably more effective than Pfizer's (NYSE:PFE) much-heralded oral Jak3 inhibitor tofacitinib and roughly equivalent to the injectable drugs Humira and Enbrel, sold by Abbott Labs (NYSE:ABT) and Amgen (NASDAQ:AMGN) (and co-marketed by Pfizer), respectively.
Safety is still a bit of a concern, but so far does not look like a block to final FDA approval. In addition to diarrhea, FosD has led to hypertension and elevated liver enzymes in some patients. Neither would likely be deal-breakers for approval, and it is not as though tofacitinib (or Humira, for that matter) has a perfectly clean safety profile.
The Road Ahead
AstraZeneca has not established a very good record for itself when it comes to shepherding drugs through the pipeline and to ultimate approval, but the FosD plan seems solid. The company is running three phase 3 studies, OSKIRA-1,-2, and -3, with data expected in early 2013. While the OSKIRA-1 study will compare FosD to placebo in patients who have failed methotrexate, OSKIRA-3 will enroll patients who have previously failed to respond adequately to an anti-TNF drug like Humira.
On first blush, this looks risky. An earlier study (TASKi3) studied FosD in anti-TNF non-responders and the trial was a failure (failing to meet the primary endpoint of ACR20 response rates). In retrospect, TASKi3 looks more like a failure of trial design. Not only did the study enroll highly refractory patients, but it was a short study and too many of the patients enrolled may have had inactive RA (leading to a higher placebo response rate).
Although there is a risk that the FDA will get hung up on any efficacy differences between the studies, the fact is that the FDA would almost certainly ask about the TASKi3 study and demand a trial in those patients who have previously used anti-TNF drugs. In other words, AstraZeneca were probably going to have to run a study like OSKIRA-3 anyway, so why not do it early and avoid the delays and disappointments of a Complete Response Letter?
A Deep, But Early-Stage, Pipeline
FosD's rheumatoid arthritis potential is a huge part of the Rigel story today, but it's not the only thing that the company has going for it. AstraZeneca is also studying the drug as a cancer fighter (starting a Phase 2 study in large B cell lymphoma) and Rigel has three other drugs in human trials.
Although Pfizer returned the rights to R343 to Rigel, the company is moving ahead with a Phase 2 study in asthma starting this summer. Rigel also has R333 queued up for Phase 2 studies in discoid lupus, as well as R548 in Phase 1 for transplant rejection. Behind these are several preclinical programs including a GDF8 inhibitor and an AMPK activator.
Breaking The Rules Sometimes Works
I'm rarely very positive about biotechs that have only one drug in Phase 2 studies, as the risks of having so much of a company's value tied up in one drug are so large. That said, FosD has been through a lot of studies and the efficacy really does stack up well against its likely rivals in what is a $12 billion to $14 billion annual market.
What's more, Rigel has a very highly motivated (some could say "desperate") partner in AstraZeneca that badly needs a successful drug here. AstraZeneca is not skimping on the trials and a three-pronged Phase 3 strategy should provide all the data that the FDA needs.
The Bottom Line
I will not be surprised if success in FosD and positive Phase 2 studies of R343 in asthma would lead AstraZeneca to consider buying the company outright. This could be one of those relatively rare companies with a leverageable technology platform, and Astra could certainly use that.
Based on FDA approval in 2014 and an eventual sales assumption of $2 billion for FosD in RA, but no value for any other pipeline drugs (since there is no Phase 2 data), I believe Rigel shares are worth about $16 a share today. That's not bad given the current price around $10.50, and success in asthma could push that target to $20. More patient investors may want to wait for the current bull run in biotech to ease, but Rigel is definitely a name worth further due diligence.