Biotech Forum Daily Digest: Relypsa Gets Bought Out, Biogen's Big Beat, Biotech Continues To Rally

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Includes: ACAD, ARDX, ATRA, AZN, BIIB, FLXN, GILD, RLYP, ZFGN
by: Bret Jensen

Summary

The biotech sector has had a good couple of days and has rallied to within three percent of what has proven to be a stubborn resistance level.

Helping sentiment especially on the small cap portion of the sector was Relypsa, which was bought out by Galencia for a 60% premium Thursday.

A number of other small caps rose in sympathy yesterday. Here are the news events and analyst ratings that have caught my eye around the sector recently.

"Correction does much, but encouragement does more" - Johann Wolfgang von Goethe

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Biotech has been in rally mode since our last Biotech Forum Daily Digest post on Wednesday. It was one of the strongest areas of the market on Wednesday and continued its rally on Thursday. Helping the action on the sector yesterday was a buyout of small cap Relypsa (NASDAQ:RLYP), which has been highlighted in this column myriad times.

The sector is now within approximately three percent of a level that has proven to be stubborn resistance point to further upside. Maybe if we get better than expected results starting next week from large biotech stalwarts like Gilead Sciences (NASDAQ:GILD), we can finally move past that resistance level to the upside.

As mentioned above, Biotech Forum holding and hyperkalemia play Relypsa was purchased on Friday. The suitor was Galencia which paid $32 a share in cash for the privilege of doing so. This was a 60% premium to Wednesday's closing price.

Based on chatter and analyst chatter, a decent size breakup fee and the trading action in the equity and the options of Relypsa on Thursday; I don't believe the chances are likely that a rival bidder will emerge.

Numerous small caps moved up in sympathy with Relypsa on Thursday including other speculated buyout targets like Acadia Pharmaceuticals (NASDAQ:ACAD). Also continuing its strong recent move was Ardelyx (NASDAQ:ARDX), a small cap biopharma concern with a compound also targeting hyperkalemia in development.

Also helping the sentiment on biotech was large cap Biogen (NASDAQ:BIIB) reported better than expected results both on the top and the bottom line on Thursday. Total revenues for Biogen rose 12% year-over-year to $2.9 billion, bolstered by its multiple sclerosis business. Earnings were up better than 20%. The company also announced that its CEO of six years is stepping down and a search for his successor has begun. The company has stumble of late up to these results, recently laying off more than 10% of its workforce and discontinuing trials in Lupus and other areas.

AstraZeneca (NYSE:AZN) has had mixed news this week. The company's attempt to use a recently issued Orphan Drug status for one indication to extend protection on its blockbuster drug Crestor failed in Appeals Court after the company sued the FDA in an effort to keep generics hitting the market. The statin drug does approximately $5 billion in sales annually.

On the brighter side the company's new diabetes combo drug was approved for distribution in Europe given it first-mover advantage even as the drug has run into costly delays imposed by the FDA in the United States.

Not surprisingly given its earnings report, Biogen received several analyst comments on Thursday. H.C. Wainwright, Cowen & Co. and Morgan Stanley all reiterated Buy ratings with price targets ranging from $360 to $385. Piper Jaffray stubbornly sticks with its Hold rating and $293 price target. I think the optimists have it right on this large cap biotech concern after its impressive earnings results.

Flexion Therapeutics (NASDAQ:FLXN) continues to get positive mention from analysts. Yesterday Lake Street initiated the shares as Buy with a $35 price target. Last week it was BMO Capital with a Buy rating and $38 price target.

In late May, the FDA informed the company that its safety and efficacy data from clinical studies assessing lead product candidate, Fast Track-tagged Zilretta (FX006), for the treatment of pain associated with osteoarthritis of the knee are acceptable to support a New Drug Application (NDA) which the company plans to file in the fourth quarter. The company used the opportunity provided by the good news to raise $60 million in funding in the secondary markets in early June.

The tale of woe for small cap Zafgren (NASDAQ:ZFGN) continues to grow. The company recently stunned investors by announcing it was curtailing development of anti-obesity drug candidate beloranib and laying off a third of its workforce.

After more than five months of no analyst activity; Leerink Swann, FBR Capital, Cowen & Co. and Canaccord Genuity all place Hold ratings on Zafgren this week. Looks like it is circle the drain time on this small biotech.

Note: New analyst ratings are a great place to start due diligence, but nothing substitutes for deeper individual research in this very volatile sector of the market. Many of the small-cap names highlighted in the "Analyst Insight" will eventually appear in the "Spotlight" section, where we do deeper dives on this type of promising but speculative small-cap concern.

Our Spotlight feature today is Atara Biotherapeutics (NASDAQ:ATRA). Seth Klarman's Baupost Group has a large stake in Atara and the company has had some positive events in 2016.

Company Overview:

Atara Biotherapeutics is a clinical-stage biopharmaceutical company that is focusing on developing therapies for patients with severe and life-threatening diseases. The company came public late in 2014, is based in California. Currently stock has a market capitalization of just over $600 million and a stock price just north of $22 a share.

Pipeline:

The company has a fairly deep pipeline and its programs include T-cell product candidates and molecularly-targeted product candidates. Its products under development include EBV-CTL, which is Phase II clinical trials for the treatment of malignancies associated with Epstein Barr Virus {EBV}, including EBV-associated post-transplant lymphoproliferative disorders. In March of this year Atara received a breakthrough therapy designation for its optioned cytotoxic T lymphocytes activated against EBV-CTL for the treatment of EBV-associated lymphoproliferative disease (EBV-LPD).

EBV is also known as human herpesvirus 4, is a member of the herpes virus family. It is one of the most common human viruses. EBV is found all over the world. Most people get infected with EBV at some point in their lives. Many people become infected with EBV in childhood. EBV infections in children usually do not cause symptoms, or the symptoms are not distinguishable from other mild, brief childhood illnesses. In immunocompromised patients, EBV causes lymphomas and other lymphoproliferative disorders

Also in development is CMV-CTL that is in Phase II clinical trials for the treatment of cytomegalovirus {CMV}. WT1-CTL is in Phase I clinical trial for the treatment of cancers expressing the antigen Wilms Tumor 1. Finally, STM 434 is in Phase I clinical trial for the treatment of ovarian cancer and other solid tumors. The company has several other compounds in pre-clinical testing.

Analyst Support & Balance Sheet:

Analyst commentary is generally quite positive on Atara Biotherapeutics. After no analyst ratings in 2016, since early June Canaccord Genuity, Jefferies and JMP Securities have all reiterated Buy ratings on ATRA. Price targets proffered range from $25 at Jefferies to $47 at JMP. The median price target on the stock by the analyst firms that cover it is right at ~$35 a share. Cash and investments as of March 31, 2016 totaled $306.4 million, which the company believes will be sufficient to fund its planned operations through 2018.

Outlook:

Atara has multiple "shots on goal" I like to see before taking a small stake in a developmental firm. The company also has funding in place to proceed with all trial development for a couple of years; another positive. However, the company also seems years away from any commercialized success. I feel there are myriad small and attractive biotech concerns with nearer term catalysts, so I may buy a few shares of Atara and put it on my "watch" list for further developments. I will pass from making a decent size purchase at this time, however.

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long ACAD, ARDX, BIIB, GILD.

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.

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