Pfizer (NYSE:PFE) has announced a definitive deal to acquire Anacor (NASDAQ:ANAC), a Silicon Valley drug discovery company. The immediate commercial opportunity is for Eucrisa, the trade name for a topical treatment for mild-to-moderate atopic dermatitis (abbreviated as AD herein), also called eczema. Eucrisa has had its NDA accepted for review by the FDA, with a PDUFA date in January.
From PFE's press release:
Pfizer Inc. and Anacor Pharmaceuticals, Inc. today announced that they have entered into a definitive merger agreement under which Pfizer will acquire Anacor for $99.25 per Anacor share, in cash, for a total transaction value, net of cash, of approximately $5.2 billion, which assumes the conversion of Anacor's outstanding convertible notes... Anacor's flagship asset, crisaborole [Eucrisa], a differentiated non-steroidal topical PDE4 inhibitor with anti-inflammatory properties, is currently under review by the U.S. FDA for the treatment of mild-to-moderate atopic dermatitis, commonly referred to as eczema.
"We believe the acquisition of Anacor represents an attractive opportunity to address a significant unmet medical need for a large patient population with mild-to-moderate atopic dermatitis, which currently has few safe topical treatments available," said Albert Bourla, Group President of Pfizer's Global Innovative Pharma and Global Vaccines, Oncology and Consumer Healthcare Businesses. "Crisaborole is a differentiated asset with compelling clinical data that, if approved, has the potential to be an important first-line treatment option for these patients and the physicians who treat them."
"Anacor will be a strong fit with Pfizer's innovative business, further supporting our strategic focus on Inflammation and Immunology, and is expected to enhance near-term revenue growth for the innovative business. Our dedicated Inflammation and Immunology group has strong existing in-market franchises with Enbrel and Xeljanz, as well as a robust mid-stage pipeline, and this acquisition has the potential to add a near-term U.S. product launch. We believe we are well positioned to maximize crisaborole's commercial potential through our strong relationships with pediatricians and primary care physicians," continued Bourla...
If approved, Pfizer believes peak year sales for crisaborole have the potential to reach or exceed $2.0 billion.
So far, there is no indication that I can find in the ANAC press releases, SEC filings or most recent conference call regarding Q1 earnings that it has applied for ex-US marketing approval. Whether PFE is planning applications in the EU or other ex-US venues is unclear.
Background of ANAC
ANAC specializes in drugs containing the element boron. Boron, chemical symbol B, is atomic number 5. ANAC has found chemical structures containing boron that are more chemically active than the prior boron chemistry allowed and which are relevant in pharmaceutical applications. Thus, it has discovered and received FDA approval for a drug for toenail fungus, Kerydin. This is marketed in the US by Sandoz, a Novartis (NYSE:NVS) subsidiary. Sandoz handles the generic, biosimilar and "me-too" drug marketing for NVS. Kerydin competes against inexpensive generics; ANAC received modest revenue in Q1 from this drug. I doubt that Kerydin was material in PFE's $5 billion payment for ANAC.
In addition to Eucrisa, ANAC has three pipeline candidates out-licensed. The company also disclosed that it has a number of pre-clinical candidates, which may include next-generation follow-ons to Kerydin and Eucrisa.
My guess is that this discovery platform induced PFE to do this deal.
Commercial opportunity for Eucrisa
This may not be the easiest sell in the world. The clinical trial data were not all that strong. From ANAC's 10-K, p. 8 (I have bolded the relevant response rates for your convenience):
In July 2015, we announced top-line results from our two Phase 3 pivotal studies of crisaborole in patients with mild-to-moderate atopic dermatitis. The studies consisted of two multi-center, double-blind, vehicle-controlled studies of over 750 patients each, aged 2 years and older with mild-to-moderate atopic dermatitis (defined as an Investigator's Static Global Assessment ("ISGA") score of 2 (mild) or 3 (moderate)). The ISGA is a 5-point scale ranging from 0 (clear) to 4 (severe). Patients were randomized in a 2:1 ratio (crisaborole:vehicle). Crisaborole or vehicle was applied twice daily ("BID") for 28 days. The primary efficacy endpoint was success in ISGA at day 29 (defined as the proportion of patients achieving an ISGA score of 0 (clear) or 1 (almost clear) with at least a 2-grade improvement from baseline). In Study AD-301, 32.8% of patients treated with crisaborole achieved the primary efficacy endpoint, compared to 25.4% of patients treated with vehicle (p=0.038). In Study AD-302, 31.4% of patients treated with crisaborole achieved the primary efficacy endpoint, compared to 18.0% of patients treated with vehicle (p<0.001). Secondary endpoints included the proportion of patients achieving an ISGA score of 0 or 1 (irrespective of a minimum 2-grade improvement) at day 29 and time to success in ISGA. In Study AD-301, 51.7% of patients treated with crisaborole achieved an ISGA score of 0 or 1 at day 29, compared to 40.6% of patients treated with vehicle (p=0.005). In Study AD-302, 48.5% of patients treated with crisaborole achieved an ISGA score of 0 or 1 at day 29, compared to 29.7% of patients treated with vehicle (p<0.001). The time course to success in ISGA between crisaborole and vehicle was statistically significantly different (p<0.001) in each study, with patients treated with crisaborole achieving success earlier than vehicle-treated patients.
What this shows is a moderately high response to placebo ("vehicle"). Adjusted for the placebo response (natural history of the condition?), only about 10% of patients actually responded to the drug. That's a weak response for a novel branded product that is competing with a number of generic drugs as well as "natural" non-drug therapies.
This analysis raises the question of how much PFE believes in the commercial opportunity for Eucrisa. There were Phase 2 studies in psoriasis; perhaps the company will go for that indication, and perhaps it will try to take Eucrisa ex-US.
A hint that PFE is not expecting truly great things from Eucrisa is that in its press release, it referenced generalists as the target prescribers - namely, pediatricians and primary care physicians. There was no mention that PFE is going back to the dermatology market, though of course it might, or it might find a marketing partner that concentrates on derm. Per Kalorama, PFE discontinued its derm division in 2007.)
Given the much higher marketing costs per sales dollar that results from the marketing effort to take Eucrisa to pediatricians and PCPs relative to specialists, and the limited pricing power for Eucrisa given inexpensive competition, my guess is that a significant part of the price that PFE paid for ANAC is for its drug discovery engine. PFE watchers may want to be alert to see if in the next couple of years anything promising arises from ANAC's labs, especially in the inflammation/immunology field that PFE references in its press release.
Implications for other eczema drugs
Certainly, PFE wants to make a profit on gross sales of Eucrisa. ANAC and others have mentioned that AD is increasing in incidence, and that its prevalence in adults has probably been underestimated. It has generally been looked on as a common annoyance of children that most outgrow. With PFE as a marketer nonpareil, that it is interested in a drug in this field helps support the view that it is commercially promising despite the well-known generic competition.
The two implications of this deal for Regeneron (NASDAQ:REGN)
Regeneron has an antibody called dupilumab that is expected to come to market in the US next year for AD. Whereas Eucrisa has been studied in mild-to-moderate forms of AD, "dupi" is intended for the modest minority of AD patients - initially adults only for safety reasons - with truly significant disease.
Implication #1 - The scientific and commercial success that dupi may represent in AD
The first thing to note is that despite treating more advance disease than Eucrisa, look at the efficacy data from a joint press release from REGN and its marketing partner for dupi, Sanofi (NYSE:SNY):
- For SOLO 1 and SOLO 2, respectively, 37 and 36 percent of patients who received dupilumab 300 mg weekly, and 38 and 36 percent of patients who received dupilumab 300 mg every two weeks, achieved clearing or near-clearing of skin lesions (IGA 0 or 1), compared to 10 and 8.5 percent with placebo (p less than 0.0001). This was the primary endpoint of the study in the U.S. and one of the primary endpoints in the EU.
- For SOLO 1 and SOLO 2, respectively, the percent improvement in EASI from baseline was 72 and 69 percent in patients who received the 300 mg weekly dose, and 72 and 67 percent for patients who received dupilumab 300 mg every two weeks, compared to 38 and 31 percent for placebo (p less than 0.0001).
- For SOLO 1 and SOLO 2, respectively, 52.5 and 48 percent of patients who received dupilumab 300 mg weekly, and 51 and 44 percent of patients who received dupilumab 300 mg every two weeks, achieved EASI-75 compared to 15 and 12 percent with placebo (p less than 0.0001). This was the key secondary endpoint in the US and one of the primary endpoints in the EU.
For the primary endpoint, the percentage of responders for the primary endpoint after subtracting the responders to placebo was about 25%. Other placebo-adjusted comparisons also strongly favored dupi.
Dupi has received Breakthrough Therapy designation from the FDA. EU and eventually global filings are to be expected subsequently.
It's not possible to extrapolate from the PFE press release to the commercial opportunity for dupi in adults and then, assuming trials in pediatric patients are similarly successful, in the younger population. However, the ANAC and other data I have read leads me to believe that the number of patients who are appropriate candidates for dupi for AD is substantial, say in the low six figures. (That's just a guess.)
Looking at the investment opportunity, dupi has expensive, successful drugs that we can look at. Within biologics, there are the Humira/Enbrel types of drugs that now have US list prices around $40,000 per year. Within oral biopharma drugs, we have Otezla for psoriasis and psoriatic arthritis with US list prices above $25,000 per year.
So, I think it's reasonable to think of dupi at peak to have the potential of treating, say, 200,000 patients per year at a blended price (in today's dollars) of $20,000, giving revenues of $4 billion to REGN and SNY. That may be too optimistic, but I think it's possible. It will definitely not get there all at once, as with certain antivirals, but I think it's a target. Also note, SNY is the senior partner in dupi, and I expect it will make slightly more than half the profits from it, if any.
The other well-known and very large target for dupi is asthma. If the ongoing Phase 3 study is successful, as the pivotal Phase 2 study was, then I expect dupi to be approved for refractory (or, moderate-to-severe) asthma in 2018 in the US. The differentiating factor here is that it could be the first biologic agent approved for "low eosinophil" asthma, which may account for half of all asthma cases. If so, and if all else is roughly equal with the several biologic competitors that dupi will have for asthma, then I believe it could be the dominant force in asthma as well as in refractory AD.
Overall, I like the idea that PFE will be raising the consciousness of physicians and perhaps patients of AD (via DTC ads). I think it will end up benefitting and revitalizing the entire field, and will help give insurers the confidence that if a patient has failed both steroids and Eucrisa, it's necessary to pay up for the much more expensive dupi.
Implication #2 - The potential importance of platform drug discovery technology
Just my thoughts again, that Eucrisa and the parts of ANAC that are publicly known are not really worth $5 billion or more to PFE. Again, there's no certainty here, but this statement from the ANAC CEO in the PFE press release suggests that there's more in ANAC's and PFE's thinking than just Eucrisa:
"We have a deep respect for Pfizer, and it is clear that they share our commitment to addressing the significant unmet medical needs in inflammatory disease.
Significant unmet needs, in the plural, is the way I would have the PR people word the press release if part of the friendly takeover involved a meaningful valuation for the ANAC drug discovery pre-clinical compounds and its general discovery engine.
Anyway, as Barron's wrote in its lead article in the most recent weekly edition:
Regeneron: The Best Bet in Biotech Stocks
Regeneron has created tools and technologies that speed the drug-discovery process.
The emphasis here is on the platform nature of REGN's VelociSuite process of discovering and manufacturing all-human antibodies. When a company has such a system, it is much less dependent on any one product, because there are always new products in the pipeline.
REGN's first discovery engine produced two "trap" molecules that have led to 3 approved drugs. One trap became Arcalyst, and the same trap molecule led to both Eylea and Zaltrap.
Then, the VelociSuite antibody platform has led to the approved drug Praluent, with a pending 2016 BLA approval for sarilumab for RA, and the presumed approval of dupi for AD next year.
Without attempting in this article to delve into valuations from the approved drugs, near-term approvals, and pipeline, my take is that there are a number of ways for REGN to reward its shareholders in a significant way as it continues to discover and commercialize state-of-the art drugs.
PFE may have overpaid for ANAC. For all we know, it could end up losing money when it commercializes Eucrisa, and otherwise not receive much of value from the out-licensed drugs or ANAC's pipeline candidates. If so, investors will shrug and forget about it, just so long as this does not become a habit of the company going forward.
A specific matter I could be guessing wrongly on is that, as I tried to emphasize above, perhaps PFE so likes what it sees in Eucrisa and the other marketed and clinical development-stage parts of ANAC that the pre-clinical compounds added little value to its view of the deal.
REGN is attempting to make what has sometimes been a difficult transition, from a primarily one-product company (Eylea) to a fully integrated discovery and marketing company that will be valued on a P/E basis. So, there are plenty of P&L and stock market risks here on any time frame one looks at.
From the standpoint of PFE, it may be that it is thinking strategically about ANAC's discovery engine in making this acquisition. As a recent purchaser of PFE stock, I'd like to think so, because as I mentioned in last week's PFE article, a trend I'm beginning to see in this company is exactly that point: leveraging the science between one drug to develop an improved, next-generation compound.
My bullish case on PFE is that it is undervalued relative to its Big Pharma peers and to other "steady Eddie" dividend-paying large cap/mega cap stocks. My goal is that it gives a total return at least 10% above those peers over the next 12 months.
For REGN, it's true that Eucrisa will have some overlap in the moderate AD category. After all, "mild-to-moderate" and "moderate-to-severe" have some significant semantic overlap. Clinically, my guess (and it's just a guess) is that the limited efficacy Eucrisa demonstrated in Phase 3 trials is going to produce minor usage overlap with dupi, assuming both drugs receive marketing approval.
So, again, given that AD has been a quiescent space for innovation for about 15 years, I'm liking the entry of Eucrisa to help raise awareness that new treatments are arriving - "help is on the way" is always a good marketing message for people suffering from a chronic condition.
Finally, as Barron's points out, and as PFE might be thinking with the ANAC deal, proven platform technology drug discovery engines are uncommon. With Eylea, REGN has proven that its first-generation trap technology has birthed a mega-blockbuster. With Praluent on the market and, it is hoped, dupi next year, it's possible that its antibody platform will be responsible for one or two more blockbusters and possibly mega-blockbusters. Either way, whether it's PFE's interest in the AD space and/or its potential interest in paying for access to a proven drug discovery engine, this $5 billion vote of confidence in ANAC by PFE looks to me to be positive for my bullish long-term thesis on REGN. My guess is that REGN's basic technology for discovering therapeutic targets and then moving them efficiently into the testing and manufacturing stage has a significant value apart from the known products that it markets and has disclosed in its pipeline. I think this provides some margin of safety for investors in what is clearly a stock with some significant downside risks.
REGN, which I doubt will pay a dividend for years to come, if ever, has been suffering with other large-cap biotechs (NASDAQ:IBB) and also on account of the horrible Praluent sales. I maintain much higher price targets than its current $390 (intraday Monday) price with a patient, multi-year time frame. If ANAC, which has almost no revenues, is worth at least $5 billion in a takeover, my judgment is that REGN's current approximately $40 billion market cap is not at all priced for its takeover value.
Long PFE and REGN with a patient approach to both stocks.
Disclosure: I am/we are long PFE,REGN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.