Is Puma Biotech's High Stock Price Justified?

| About: Puma Biotechnology, (PBYI)
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One of the best performing stocks in 2013 was Puma Biotechnology (NYSE:PBYI). Puma's shares skyrocketed during the year, climbing over 400 percent from the January 2013 level of $19 to touch a high of $112.46.

Puma's investors are hoping that its drug, neratinib (formerly PB272) succeeds in the coming late stage trials but they are exposed to significant risk if it fails in any of the ongoing or upcoming trials.

If the drug does succeed, it will be lucrative for the company and investors. The potential success could also make Puma an attractive takeover target.

The company's market cap is currently around $3 billion. Puma has no approved product or income and its pipeline consists of a single drug.

But neratinib without a doubt is promising. The drug may prove itself in a variety diseases and the company has another big plus: the person running it. CEO and president Alan H. Auerbach is a capable and proven drug developer who ran Cougar Biotechnology, the company that sold Johnson & Johnson's (NYSE:JNJ) its prostate cancer blockbuster, Zytiga.

Neratinib

Puma's lead compound neratinib targets HER2-positive breast cancer.

HER2-positive breast cancer is a cancer that is testing positive for a protein called HER2 (human epidermal growth factor receptor 2), which promotes the growth of cancer cells.

This is the same target that Roche's (OTCQX:RHHBY) megaseller, Herceptin works against. Despite the success Herceptin has shown to improve the survival outcomes of HER2 positive breast cancer patients, about 70 percent of patients with HER-2 amplified breast cancer may have primary resistance to Herceptin. In addition, an important number of patients after responding initially to the treatment, develop secondary resistance.

After Puma acquired the rights to the drug from Pfizer (NYSE:PFE), it decided to focus on patients with HER2-positive breast cancer who have received prior therapy with Herceptin. The range of applications since then has been widened and a number of trials explore treatments in other HER2 mutated cancers, such as gastric, bladder, glioblastoma, melanoma, prostate, stomach, and uterine cancers.

At the 2012 Annual Meeting of the American Society of Clinical Oncology, a Phase 1 dose escalation study found that neratinib could be safely administered in combination with weekly paclitaxel and Herceptin. The patients received 160-mg or 200-mg doses of neratinib and experienced no dose-limiting toxicities.

A recent study, published in the British Journal of Cancer has found that patients with HER2-positive breast cancer who received a combination of neratinib and paclitaxel had a median overall response rate of 73 percent.

Phase 3

In the Phase 3 study, launched during the summer, neratinib is combined with Xeloda, and compared to Tykerb plus Xeloda in patients with metastatic HER2-positive breast cancer who have received two or more prior HER2-targeted therapies. Xeloda is an oral chemotherapy drug, made by Roche, Tykerb is an oral cancer drug made by GlaxoSmithKline (NYSE:GSK).

The trial will be conducted at more than 150 sites across North America, Europe, and Asia. The enrollment goal is 600 patients, and the study is expected to be completed in 2018. The progression-free survival data obtained from this trial is expected to serve as the basis for the accelerated approval request to the FDA.

In the experimental arm of the trial, neratinib will be given at a dose of 240 mg orally, once daily with food, continuously in 21 day cycles and Xeloda in the amount of 1500 mg per square meter of body surface in 2 evenly divided doses, orally with water within 30 minutes after a meal. It will be given on days 1 to 14 in each 21 day cycle.

In the comparator arm, Tykerb is given with Xeloda. Tykerb's dosage is 1250 mg orally, once daily, continuously in 21 day cycles, and the Xeloda's dosage is 2000 mg per square meter of body surface, daily in 2 evenly divided doses, orally with water within 30 minutes after a meal. It will be given on days 1 to 14 of each 21 day cycle.

I-spy 2 trial

In December Puma announced early results from the Phase 2 clinical trial called I-Spy 2 which caused a major run-up in the stock price.

This trial, currently in Phase 2, is a collaborative effort among academic investigators from 20 major cancer research centers across the country, the FDA, and non-profit foundations. The goal is to innovate clinical trials management and speed up the approval process.

The trial enrolled women with newly diagnosed Stage 2 or higher (tumor size at least 2.5 cm) breast cancer to find out if adding certain experimental drugs to standard chemotherapy prior to surgery is better than standard chemotherapy.

The primary endpoint is pathological complete response in the breast and the lymph nodes at the time of surgery. The goal of the trial is to pinpoint patient groups with biomarkers that respond well to certain regimen.

7 experimental treatments are tested. Treatments that work better than the standard care, "graduate" and those that underperform, will be replaced by others. So far two drugs have graduated, Abbvie's (NYSE:ABBV) Velparib and Puma's neratinib.

Alan H. Auerbach, Puma's CEO and president commented, according to the press release linked to above:

"We are very pleased to have neratinib graduate from the I-Spy 2 trial and honored to have been involved with such an innovative trial. This represents the first clinical data on neratinib in the neoadjuvant treatment of HER2-positive breast cancer and suggests that the combination of paclitaxel plus neratinib has potent activity for the treatment of HER2-positive breast cancer. We look forward to advancing PB272 forward for the neoadjuvant treatment of HER2-positive breast cancer and look forward to potential future involvement with the I-Spy 3 trial."

Bayesian statistics

Among the innovations applied is statistics, especially the so called Bayesian predictive probability theory to show which regimen is statistically superior to standard therapy.

The I-Spy 2 trial involves patients with cancers confined to the breast, where a cure is possible but the disease is at high risk of spreading to other parts of the body. In one of the novel features is that the drugs are measured in their ability to eradicate the cancer in just six months, before any surgery to remove tumors.

Five other compounds are currently in the trial and several others are being evaluated to participate. Whether the promising results will translate into a speedier approval, or approval at all, is not certain.

Regimens that have a high Bayesian predictive probability of showing superiority in at least one of 10 predefined signatures graduate from the trial. Regimens are dropped for futility if they show a low predictive probability of showing superiority over standard therapy in all 10 signatures. A maximum total of 120 patients can be assigned to each experimental regimen. A regimen can graduate early and at any time after having 60 patients assigned to it.

The neratinib-containing regimen (neratinib plus paclitaxel followed by doxorubicin and cyclophosphamide) graduated from the I-Spy 2 trial based on having a high probability of success in Phase 3 with a signature of HER2-positive/HR-negative.

There were 115 patients assigned to neratinib in the trial, including 65 patients who were HER2-positive. The Bayesian probability of superiority for the neratinib-containing regimen was 95.3 percent, which is analogous to a statistical p-value of 0.047.

In addition, the Bayesian predictive probability showed a statistical superiority in an upcoming 300-patient Phase 3 randomized trial of paclitaxel plus neratinib versus paclitaxel plus Herceptin 72.5 percent. Based on the results from the I-Spy 2 trial, neratinib is now eligible to participate in the upcoming I-Spy 3 Phase 3 trial.

Innovations to speed up cancer trials

Typically, late-stage cancer drug studies succeed only 30 to 40 percent of the time, says Dr Laura Esserman, director of the breast care center at University of California San Francisco and co-leader of I-Spy 2. Such trials can involve several thousand patients, many of whom wind up taking drugs that don't help them, and can take nearly a decade to get an answer.

Dr Esserman said:

"Our goal is to improve the efficiency of trials and make it much easier for companies to develop and test drugs where they matter most. Our patients don't have 10 years to figure out what the right treatments are."

A key to the I-Spy strategy is that the FDA accepts a "complete response" at six months. Complete response means that no residual cancer cells can be detected after the tumor and lymph nodes are removed, as a surrogate for a long-term benefit. FDA's aim is to allow a drug on the market on that basis, with the condition that follow-up research demonstrates a long-term benefit.

In current medical practice, tumors are surgically removed before chemotherapy, after which doctors and patients wait months or years to see if the cancer comes back. Approval is based on that duration of benefit.

But earlier this year, the FDA granted accelerated approval to Roche's drug Perjeta for treating breast cancer in such patients, based on the complete responses achieved before surgery. Full approval is conditional on data from another trial confirming a long-term benefit.

Partly to address the long-term issue, Dr. Esserman and colleagues are launching a new trial called I-Spy 3, an international study in which they hope to enroll enough patients for each drug studied to test both the early complete response and the long-term follow up.

Rivals

Neratinib's superiority to Herceptin in the I-Spy 2 trial is a game-changer: it has elevated neratinib's potential from being a second or third line player in metastatic breast cancer and mutation subgroups, to having the potential to compete with high flyers, like Roche's Perjeta and Kadcyla, in the larger breast cancer segments.

Herceptin generated more than $5 billion in sales during the first nine months of 2013 for Roche. Xeloda, Perjeta, and Kadcyla, all Roche's drugs, recorded sales of $1.3 billion, $206 million and $173 million, respectively.

Brain metastases are frequent occurrences in metastatic breast cancer.

There is an ongoing Phase 2 trial of neratinib with or without Xeloda in patients who have been previously treated with GlaxoSmithKline's Tykerb. Data from this study are expected in the second half of 2014 or the first half of 2015 could establish neratinib as an option in patients with metastatic disease.

Some analysts believe that if this and other studies continue to read-out a more efficacious profile versus Herceptin or Tykerb, then neratinib can become the treatment of choice for the large percentage of Herceptin treated patients who develop brain metastases.

Auerbach

Puma was founded in 2010, with Alan H. Auerbach having served as Puma's chairman of the board, chief executive officer, and president since its inception.

Previously, Auerbach served as co-chairman at Cougar, the company that was responsible for the development of Zytiga for the treatment of prostate cancer, before selling it to Johnson & Johnson. In 2011, Puma completed a reverse merger and reached an agreement with Pfizer to license the worldwide commercial rights to the novel therapeutic compound neratinib, which Pfizer had been developing. Pfizer inherited the compound in the Wyeth acquisition.

Breast cancer

Breast cancer is the most common cancer in women worldwide. In 2011, an estimated 230,000 women were diagnosed with breast cancer in the U.S. alone, with an estimated 40,000 deaths, making it the second most common cause of cancer related death in women.

Up to one third of patients with early stage disease will subsequently develop metastasis. Over the past two decades, breast cancer mortality rates have declined by a substantial 30 percent, but metastatic breast cancer remains incurable, with an estimated 5-year overall survival rate of only 23 percent.

A more recent data from the SEER-Medicare database paints an even more pessimistic picture, showing median overall survival of Medicare patients with metastatic breast cancer to be only 22 months.

Investors' summary

Puma reported a loss of $14.3 million, or $0.50 per share, for the third quarter, compared to a loss of $25.9 million, or $1.29 per share, for the same period, previous year. The loss for the first nine months of the year was $38.7 million, compared to $52.4 million, for the previous year.

Net cash used in operations in the third quarter was $12.0 million, in the nine months $41.4 million.

At the end of September, Puma had cash and cash equivalents of $51.3 million and marketable securities of $44.4 million, compared to $137.4 million of cash and cash equivalents at December 31, 2012.

Puma's license agreement with Pfizer for neratinib established a limit to Puma's expenses in paying for clinical trials. Puma reached that limit during the fourth quarter of 2012; from then on Pfizer is responsible paying for the trials. At the end of September Puma reported having receivables amounting to about $11.3 million owed to it in that respect.

To answer the question asked in the title "Is Puma Biotech's high stock price justified?", the answer is yes and no. Yes, it is way too high for a company with no income and no product to sell.

But stock prices is more about future earnings potential than anything else. And in future prospects Puma appears to be pretty strong.

Neratinib could possibly make it into the class of billion dollar sellers (like CEO Auerbach's previous drug Zytiga has done), and that prospect justifies a pretty high price tag.

Investors should not lose sight of the fact, however, that any damage done to the outlook of this potential blockbuster will severely damage the stock itself.

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.