More than once, I've made the point that one of the hardest parts of biotech investing is the interminable waiting periods between clinical data. In the absence of anything real to go on, stocks can get batted around by data from rivals, bullish or bearish sell-side reports, and bullish/bearish commentaries from writers like myself. While there is nothing new in hand to help determine if Rigel Pharmaceuticals' (RIGL) lead drug R788 will prove to be safe, effective, approvable, and commercially viable in the oral rheumatoid arthritis (RA) market, we are about six months closer to knowing and this stock remains an appealing speculation.
R788 Still The Big Dog In The Yard
While Rigel does have some interesting prospects further back in the pipeline (more on those later), R788 is far and away the value-driver today. R788 is an oral syk kinase inhibitor in pivotal studies for rheumatoid arthritis. Rigel has partnered this drug with AstraZeneca (AZN) on favorable terms, and could see not only nine-figure royalties with regulatory and commercial success, but also royalties that top out in the mid-30%s.
At present, AstraZeneca is investigating R788 in multiple Phase 3 studies, as well as a Phase 2 study that will compare it head-to-head with category-leader Humira (marketed by Abbott Labs (ABT)). To date, the data have been quite encouraging - a study of 150mg of the drug twice a day showed a 36% ACR70 response at 12 weeks. That compares to the mid-teens to 20% response seen from Pfizer's (PFE) oral RA drug tofacitinib and the injected tnf inhibitors sold by Abbott and Johnson & Johnson (JNJ). Do remember, though, that these studies were not designed as head-to-head studies and the data is not strictly comparable (the data for Abbott and JNJ is 24-week data, for instance). Even still, I'd say that data is encouraging enough to be very optimistic.
Although there had once been the hope of seeing pivotal data this year, it now sounds like data won't be available until the first half of 2013. If so, filings would probably follow in the second half of the year.
What Can A Good Oral RA Drug Do?
To appreciate the potential of R788, consider that Humira is a roughly $8 billion per year drug, though not all of that is from RA. Overall, RA is thought to be a market worth $12 billion to $16 billion today, and oral drugs like R788 and tofacitinib may help grow the market - there are many patients who do not respond to, or cannot tolerate, the current therapies on the market. Should R788's early-stage data hold up through pivotal studies (and especially if the head-to-head with Humira goes well), this could be a $2 billion drug so long as the safety data supports it.
Speaking of safety, there are some concerns about hypertension and overall CV risk. Provided that cases of elevated blood pressure can be resolved with medication, though, this drug should be approvable. It's also worth noting that drugs like Humira and tofacitinib don't have flawless safety profiles, so R788 does not have to be perfect. What's more, the strong efficacy seen so far raises the possibility that lower dosages can deliver approvable efficacy with a more palatable safety profile.
Risks Will Remain Up To, And Through, Approval
Certainly there is much that can still go wrong. The biggest risk would be that efficacy data in the Phase 3 OSKIRA trials simply doesn't measure up. Given that AstraZeneca has had some issues in the past with pipeline management and drug trial design, that cannot be completely dismissed. Likewise, there is the aforementioned safety risk.
Even if the data are clean, though, there are other factors to consider. Pfizer is likely to hit the market with its drug about two years before AstraZeneca/Rigel, even with a recent FDA approval delay. What's more, there will be competition.
Bristol-Myers, Vertex (VRTX), Lilly (LLY)/Incyte (INCY), and Abbott are all looking at oral RA drugs, and the latter two have interesting and potentially differentiated approaches. Speaking more broadly, I'd be shocked if there was a Big Pharma player that wasn't trying to get an oral RA drug on the market ($16 billion or more in revenue potential tends to attract attention).
Other Shots On Goal Are Much Further Back
Rigel's present-day valuation may be almost solely based around R788, but that does not mean the company's cupboards are bare. While Pfizer ended a partnership with Rigel earlier this year, the company is moving ahead with a Phase 2 study of its inhaled syk inhibitor R343, and the study should begin momentarily. Likewise, the company is pushing on with a Phase 2 study of R333 in discoid lupus that should begin soon.
Further back, the company has a small collection of drugs for transplant rejection, dry eye, and various muscle ailments. The company also recently formed another partnership with AstraZeneca to cover R256 - a preclinical JAK inhibitor for asthma. I'm in no rush to assign a value to these drugs at this point, but strong phase 2 data could offer catalysts in 2013 and future partnership opportunities.
The Bottom Line
Investors considering Rigel need to appreciate the above-average risks of biotech stocks and the volatility that these shares can show even in the apparent absence of any news. Likewise, Rigel shareholders should expect to hear from bears from time to time looking to highlight the problems with the TASKI3 study (which you can read about here).
Right now, I see fair value for Rigel in the mid-to-high teens on the basis of $2 billion in R788 revenue near the end of the decade. At the same time, I recognize that a faster-than-expected ramp of sales, Phase 2 success with other compounds, and/or the prospect of AstraZeneca buying Rigel out (particularly if the Phase 3 studies go well) can lift that fair value into the $20s. Either way, this is a stock that I think is well worth consideration from aggressive investors.