A Super(Gen) Play on Cancer Biotech Consolidation

 |  Includes: ASTX, CELG, HSP, JNJ, MOGN, PHRM
by: Mike Havrilla

SuperGen (SUPG) is a small-cap cancer biotech with a solid balance sheet, a history of regulatory success with a total of five approvals, and a rapid cancer drug discovery platform [CLIMB] with a pipeline that currently includes five compounds.Dacogen is licensed to MGI Pharma (MOGN) domestically and Johnson & Johnson (NYSE:JNJ) outside of North America; while the Company closed a deal in April to sell the remaining worldwide rights to Hospira (NYSE:HSP) for the cancer drug Nipent. SuperGen enjoys a strong balance sheet with $87 million cash/equivalents, zero debt, and expected FY07 operating income of $7.6 - $8.6 million with about $47.7 million in total operating expenses. SuperGen has 57.5 million shares of common stock outstanding with 68.5 million shares fully diluted and a market cap of just $218 million based on its most recent closing price of $3.79 per share with 11.6% of all shares outstanding currently shorted (6.7 million).

The Company's lead pipeline candidate, MP470, is an oral cancer drug with a dual mechanism of action that includes inhibiting signal transduction and preventing DNA repair. MP470 is currently in Phase 1 clinical trials for both solid tumors and lymphomas with enrollment ongoing at two centers, and by year-end the compound will begin a Phase1b trial in combination with standard treatment regimens for a variety of malignancies. Data from an ongoing Phase 1a trial of MP470 in solid tumors and lymphomas is anticipated in 2Q08. A pre-IND meeting for MP529 was recently completed with plans to file an IND in 1H08 and enter clinical testing for solid tumors such as breast, colorectal, pancreatic, and prostate cancers. Being developed as a next generation version of Dacogen, S110 represents a pro-drug version of decitabine with a longer half life, designed to increase exposure of the drug and decrease dosing requirements with the potential for less side effects. An IND submission is expected during 2008 for a PIM kinase inhibitor, which has shown pre-clinical activity in a variety of solid and blood-borne cancers. Also in pre-clinical development is a JAK2 kinase inhibitor, which has demonstrated activity in solid tumors and myeloproliferative disorders.

Dacogen is FDA approved with a broad label for myelodysplastic syndrome [MDS] and the compound is currently being evaluated in more than 30 clinical trials, including pending survival results in 1H08 from a MDS Survival Phase 3 European Organization for Research and Treatment of Cancer [EORTC] trial. JNJ has guided for EMEA submission in 2008 for European marketing approval in the treatment of MDS based on these results, and Dacogen is also being studied in an elderly acute myeloid leukemia [AML] Phase 3 trial. The primary licensing deal for Dacogen with MGI Pharma (recently acquired by Eisai of Japan) included an initial $100 million in upfront payments, equity investments, and milestones; of which $24 million is remaining to be earned from registration of the drug in Asia and Europe. The royalty rate begins at 20% and is reset annually based on the first $50 million of net sales and increases in 2.5% increments for each additional $50 million in net sales up to a 30% royalty rate on total worldwide sales for a 20 year period.

The domestic market for MDS is estimated at over $1 billion and MGI has provided FY07 guidance for $115 million in Dacogen sales with 15% quarter-over-quarter growth on 3Q07 sales of $34.6 million. MDS is estimated to affect up to 50,000 patients in the US and about 80,000 patients in the EU. Ex-US sales are estimated at two to three times peak domestic sales for Dacogen, representing a significant growth opportunity for the drug, which is expected to produce $22 million in royalties for SuperGen during 2007. Based on IMS data through August 2007, Dacogen captured a 53% market share for MDS over the other hypomethylating drug on the market, Vidaza, from Pharmion (PHRM), who was recently acquired by Celgene (NASDAQ:CELG). More recently, Vidaza tallied $33.3 million in domestic sales for 3Q07, and Pharmion expects to file for EU approval by EOY07. In August, shares of SuperGen slumped while Pharmion surged following the release of strong Phase 3 MDS survival data for Vidaza, which included a 74% increase in survival among higher risk MDS patients and nearly a doubling in two-year survival rates. Pending EORTC survival data expected in 1H08 will be crucial to the future of Dacogen sales and support the filing for EU approval by JNJ, assuming similar positive results as those achieved by Vidaza.

Since Dacogen and Vidaza are very similar structurally, SuperGen bulls are expecting to achieve the same survival benefit (i.e. a class effect) in the EORTC trial. Those with a bearish outlook on the prospects for the Company and Dacogen point out that the trial parameters are not ideal, including a smaller number of patients, a less than ideal dosing regimen, and differences in how the two drugs work in the body despite their structural similarity. Recently, data presented at the annual meeting of the American Society of Hematology demonstrated the clinical utility of Dacogen administered as a more convenient five-day dosing regimen for both patients with MDS and elderly patients with AML. I expect Dacogen to demonstrate a survival benefit in the EORTC study sufficient to support JNJ's plan for European approval and marketing, even if the data falls somewhat short of the high standard set by Vidaza. With shares of SuperGen currently trading at a new 52-week low, the stock is a buy for speculative biotech investors as the risk/reward ratio is now in favor of longs as the Company enjoys a strong balance sheet with key upcoming clinical trial data likely to support both the sales growth of Dacogen (especially in Europe longer-term with the power of JNJ's marketing muscle) and the development of an early-stage pipeline of cancer drug candidates. However, new investors should scale into any long positions in SuperGen as the stock has not yet shown any signs of breaking a recent downtrend, which has led to new 52-week lows. Increased M&A activity among cancer biotechs also bodes well for an increased valuation of SuperGen from its currently depressed levels, especially in light of Eisai's $3.9 billion cash offer for domestic Dacogen partner MGI Pharma.

Disclosure: none