Array Biopharma: Measuring The Strength Of This Small-Cap Pharma Stock

| About: Array BioPharma (ARRY)
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Here's a scenario: a company reports a quarterly loss, and on top of that, a bigger loss than the market expected, but within four days of results coming out, the stock gains 4% where it had been losing more than 10% previously. In addition, seven out of eight analysts recommend it as a strong buy.

That stock is Array BioPharma Inc. (NASDAQ: ARRY), a small-cap biopharmaceutical company engaged in discovery and development of small molecule drugs in the therapeutic area of cancer and inflammation. In the most recent quarter ended March 2013, the company reported 48% less revenue as compared to the same quarter previous year and a negative EPS of $0.19, which was $0.4 more than what the market was expecting. YTD the stock returned 51% to investors.

That's development stage biotech for you; everything here depends upon a growth thesis.

Impressive product pipeline

Over the last few years, Array has built an impressive pipeline of pharmaceutical candidates primarily for treatment of hematologic malignancies. The company's clinical stage drugs can be divided into two categories - self-owned (or proprietary) and partner-funded.

Array has four self-owned drug candidates and nine partner-funded candidates. The proprietary drug candidates are one each for multiple myeloma, pain, asthma and myelodysplastic syndromes, or MDS. All, barring ARRY-614 for MDS are in Phase II stage of development.

The company's partner-funded drug candidates: seven indicated for different types of cancer and one each for Hepatitis C virus and Type 2 diabetes. All, barring Genentech-funded Chk-1 inhibitors (GDC-0575 and GDC-0425) for cancer are in Phase II clinical stage.

The company focuses on discovery and development of cancer drugs but its strength lies in the diversity of compounds it is developing - an insurance that is denied to single drug/compound developers. This assumes greater significance from an investor's point of view because cancer drugs have an unusually high rate of failure.

Besides, Array derives its strength from its partners, some of which are the biggest names in the biotech industry and have big pockets for funding its development programs. It has a partner for each candidate - AstraZeneca (NYSE: AZN), Novartis (NYSE: NVS), Amgen (NASDAQ: AMGN), Eli Lilly (NYSE: LLY), Celgene (NASDAQ: CELG) Roche (OTCQX:RHHBY) and Genentech.

Strength at a cost

Funding research is one of the major issues of concern for early stage drug companies. More so for a company like Array that is working on a range of compounds. However, Array's strategic partnerships have allowed the company to raise funds without diluting shareholder value.

Since inception (1998) the company has spent $563.4 million on discovery and development programs and received $588.7 million from its partners by way of funding, up-front and milestone payments. Out of this $133 million were received from Novartis, Genentech and Amgen in the last three and half years.

Besides, Array stands to receive $3 billion as and when the company or any of its partners achieve objectives stipulated in the agreements. This is in addition to any royalty or revenue sharing agreement on commercialization of any of its nine partnered programs.

In the last nine months ended March 31, 2013, the company spent $42.6 million on proprietary programs.

Market's perception of Array's strength is demonstrated by the fact that the company has been able to raise more than $1 billion by issuing debt and offering common stock to the public.

Array's real strength

Array's value is derived mainly from its two partnered programs, both relating to MEK inhibitors, one with AstraZeneca (Selumetinib) and the other with Novartis (MEK162). Both drugs are expected to enter Phase III trials later this year.

Selumetinib, an Array-invented drug, is being tested for treatment of non-small cell lung cancer and thyroid cancer. AstraZeneca, Array's partner for this candidate, also plans to present data from its randomized Phase II study of selumetinib for melanoma of the eye. Apparently, selumetinib (previously known as AZD6244) has shown "promising results in a small subset of patients with metastatic uveal melanoma doubling the progression-free survival time at 114 days versus 50 days for temozolomide."

The other candidate, MEK162, also invented by Array, is being evaluated by Novartis for treatment of NRAS-mutant as well as BRAS-mutant melanoma. Array is conducting its first Phase III study for MEK162 on its own for low grade serous ovarian cancer. The company expects to feature both MEK compounds at the American Society of Clinical Oncology (OTC:ASCO) in June this year.

Besides promising results of the MEK inhibitors, the company also derives strength from two of its proprietary programs, ARRY-614 for MDS and ARRY-502 for asthma and expects to present top line results as early as this summer.

ARRY-502 is a CRTh2 antagonist and a new mechanism and for trials, the company has selected patients based on their Th2 signature. ARRY-614 is a p38/Tie2 dual inhibitor, for which expansion plans are in progress for identifying the ideal dose for future trials with patients with low or immediate one-risk MDS after having reached the maximum tolerated dose.

The growth thesis of Array does not end here as the Roche-partnered program, danoprevir, a Hepatitis C virus protease inhibitor, currently in Phase2b, is also approaching Phase III.

The flip side

Array's balance sheet as on March 31, 2013 shows cash position of $86.58 million in cash and cash equivalents and marketable securities. The company spent more than $56 million on R&D and $15 million on selling, general and administrative expenses in FY 2012. It does not appear that the company would be able to finance its future Phase III programs unless it is able to raise more capital, which may be through a public offering or non-dilutive capital from its existing partners.


The events to watch this summer are:

  1. Positive data from study of selumetinib for melanoma of the eye, which can bring in further funding from Array's partner, AstraZeneca
  2. Positive results from ARRY-502 trials following which Array plans to find another partner for its candidate for asthma.
  3. Presentation by Novartis before ASCO of data from the study of LGX818 in combination with MEK162 in adult patients with BRAF dependent advanced solid tumors. Positive results could prompt the FDA to give this combination a breakthrough designation, which can potentially speed up the approval process.

All three events have the potential of bringing in funding for continuing research and indicate continuation of Array's growth thesis. These events are also likely to seal Array's valuation near about the current market cap of $634.64 million and also prepare a launching pad for the stock to move further north.

Note: unless otherwise mentioned, all data sourced from 10-Q filing and earnings call transcript.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.