Motivation: I already own Biogen (NASDAQ:BIIB), Celgene (NASDAQ:CELG), Amgen (NASDAQ:AMGN), Gilead (NASDAQ:GILD), and Regeneron (NASDAQ:REGN), the top five holdings in the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB). Of the next four IBB holdings, I already follow and write about Vertex (NASDAQ:VRTX) and Illumina (NASDAQ:ILMN), but don't own them. I do own Mylan (NASDAQ:MYL) and Alexion (NASDAQ:ALXN). The next three top IBB holdings I don't own or follow closely are Pharmacyclics (NASDAQ:PCYC), BioMarin (NASDAQ:BMRN), and Incyte (NASDAQ:INCY). Should I start following them or even buy them, or should I go even deeper down the list for potential acquisitions?
Table 1: Financials. Q4 2014, except market capitalization & % of IBB holdings, is for March 24, 2015
|Market Capitalization||$19.6 B||$20 B||$16 B|
|Q4 2014 revenue||$290 M||$231 M||$124 M|
|Q4 2014 net income||$63 M||($ 70) M||($37) M|
|Ending cash & equiv.||$857 M||$945 M||$600 M|
|% of IBB||2.81%||2.73%||2.38%|
Table 2: Pipeline statistics
|# of Commercial||1||5||1|
|# in Phase 3||0||2||3|
|# in Phase 2||2||2||2|
|# in Phase 1||1||2||5|
|Q4 R&D expense||$47.5 M||$142.1 M||$98.7 M|
The three companies form a nice group, though they target different therapy types for differing diseases. Their market caps are within a 20% spread. The revenue spread is greater, with Pharmacyclics running over 2 times Incyte's revenue, but Incyte showed a better net loss than BioMarin. They all have substantial amounts of cash. All three have commercial products and rapidly growing revenue. Pharmacyclics looks like it is in the best overall shape, based on Table 1, as the only company that has reached profitability. Unless this is simply mispricing, that would indicate investors believe BioMarin and Incyte have stronger pipelines or revenue growth prospects for the therapies already commercialized.
Market capitalizations that are not supported by current net income represent the assumed future value of the respective company pipelines. Table 2 fails to take into account that pipeline candidates can fail to achieve commercialization. They vary greatly in how much revenue they could generate, which depends on pricing, the size of the patient population treated, and competition. In addition, some products are approved for or will seek approval for multiple indications. For instance, Pharmacyclics' Imbruvica is already approved in 3 indications, is in Phase 3 trials for 3 more, and is in Phase 2 trials for 4 indications. In Table 2, a product is counted only once, in the most-advanced box it has achieved.
The spread in R&D budgets is surprising. At the low end, Pharmacyclics may be able to spend less because it is focused on expanding the label and number of indications for Imbruvica, which is less expensive than developing novel therapies. As an investor, I tend to prefer high R&D budgets, provided I feel management is not wasting the money on long-shots or on indications that may not generate profits. Also note that partnerships may reduce R&D spend, but also future revenue from a therapy.
Commercial Product Revenue and Prospects
Pharmacyclics' therapy Imbruvica is a BTK (Bruton's tyrosine kinase) inhibitor that is approved for CLL (chronic lymphocytic leukemia), MCL (mantle cell lymphoma), and Waldenstrom's macroglobulinemia. Given the success with those blood cancers, it is in trials for several others, including MM (multiple myeloma) and AML (acute myeloid leukemia). These are typically difficult-to-treat diseases that are seldom cured; patients typically eventually "progress" from first-line therapies to second, third, or even later lines of therapy. Drug approvals tend to go in the opposite direction: they often start with third-line approval, then (if efficacy and safety warrant it) they may progress to getting regulator permission to becoming second or even first-line therapies. Currently, Imbruvica patients must have received at least one prior treatment. The net result is that revenues are highly likely to expand as the years go by, especially if more indications are approved. Revenue for Imbruvica in Q4 was $285 million, up 132% from $123 million in Q4 2013. However, this included milestone payments from partners of $100 million. The international partner for Imbruvica is Janssen.
BioMarin has 5 approved commercial therapies, shown in Table 3:
|therapy||indication||Q4 revenue||Q4 2013 rev.||% y/y|
|Vimizim||MPS IVA||$36.9 M||$0.1 M||NA|
|Naglazyme||MPS VI||$88.5 M||$68.7 M||29%|
|Kuvan||PKU||$57.4 M||$45.3 M||27%|
|Aldurazyme||MPS I||$40.9 M||$25.9 M||58%|
|Firdapse||LEMS||$4.1 M||$4.3 M||-5%|
BioMarin's total product revenue grew 57% y/y. Firdapse's lack of revenue is not from newness; it was approved for LEMS (Lambert-Eaton myasthenic syndrome), a very rare disease, in Europe in 2009. The revenue leader, Naglazyme as well as Aldurazyme are enzyme replacement therapies for rare inherited lysomal disorders. Kuvan for PKU (Phenylketonuria) is a natural cofactor for an enzyme. The newest therapy, Vimizim, is also an enzyme replacement therapy for people born with a defective gene, leading to Morquio A. All these products are designated orphan drugs and all are expensive on a per-patient basis.
Incyte sells Jakafi, a JAK1/JAK2 inhibitor, for myelofibrosis, a rare cancer and polycythemia vera, which is cancer-like in that the bone marrow makes too many red blood cells. Jakafi had Q4 revenue of $106 million, up 46% y/y. Rather than expanding the Jakafi label to more indications, three other JAK inhibitors are under development, as will be discussed below in the pipeline section. It should be noted that competing JAK inhibitors are being developed by several companies, with targets including immunological diseases, as well as cancers.
The Pharmacyclics pipeline is dominated by Imbruvica trials. It is in Phase 3 trials for Diffuse large B-cell lymphoma; Follicular lymphoma, and Marginal zone lymphoma. Phase 2 trials are underway for MM, graft versus host disease, AML, and ALL (acute lymphoblastic leukemia). Clearly, PCYC will be focused on Imbruvica for the next few years.
There are two other phase 2 candidates. Abexinostat for blood cancers has a very different mechanism of action than Imbruvica (See HDAC inhibitors). Factor VIIa inhibitor helps blood coagulation and could help cancer patients whose blood is deficient in clotting ability. Finally, Pharmacyclics has a Phase I candidate, BTK inhibitor, for autoimmune diseases.
Note that Imbruvica was approved by the FDA for WM (Waldenstrom's macroglobulinemia) on January 29. While this is an uncommon disease, Imbruvica is the only approved treatment, and there are about 12,000 patients in the U.S. with this disease.
The BioMarin pipeline, like its commercial products, leans to orphan drugs for rare diseases. Because such drugs are so targeted, it seldom has the potential to go after multiple indications like Imbruvica or Incyte's JAK inhibitors. Again, a table helps:
Table 4: BioMarin Pipeline
|Candidate||Indication||Clinical Trial Phase|
|Talazoparib||PARP breast cancer||3|
|BMN 701||Pompe Disease||3|
|BMN 190||Batten Disease||1/2|
|BMN 270||Hemophilia A||1|
|BMN 250||MPS IIIB||1|
Although hemophilia A can be classified as rare, it is a sufficiently large market to stand out from the other indications. Biogen recently brought a long-lasting therapy to market, and there are several other rivals in development, so to value BMN 270, we would need to know how it would complement or improve upon the other therapies.
The key to BioMarin pipeline valuation is pricing: how much can you charge each patient for a rare disorder? It looks like regulators in Europe want to find a way to encourage orphan drug development without paying quite so much for the success companies like BioMarin have been having.
The Incyte pipeline is the most diverse of the three companies, but the bulk of the therapies are in early stages of clinical trials, mostly Phase 1. The following table compresses the trials by molecular target type to keep it manageable:
Table 5: Incyte candidates
|Ruxolitinib||JAK1/JAK2||cancers||2 & 3|
|INCB39110 & 52793||JAK1||cancers||1, 2 & 3|
|Baricitinib||JAK1/JAK2||inflammation||2 & 3|
This is the sort of broad-based pipeline that is usually seen only in larger pharmaceutical companies. Given the number of targets and indications, there are likely to be failures along with the successes.
All three companies expect to grow revenue significantly in 2015.
Pharmacyclics is guiding to Imbruvica net product revenue of about $1 billion in 2015. Any milestone payments would be on top of that.
BioMarin expects revenue between $840 and $870 million, but a non-GAAP net loss for 2015 of $130 to $170 million.
Incyte expects product revenues between $525 and $565 million, plus any royalty revenues from international sales by Novartis (NYSE:NVS).
Value investors would mostly be appalled that anyone read past Table 1, where past profits seem totally out of line with market capitalizations for all three companies. Biotechnology investors are used to the idea of paying for the pipeline, but that does not answer the question of how much to pay.
Before buying stock in any of these companies, I would: (1) read the latest 10-K or 10-Q, (2) listen to the latest analyst conference call, (3) model the pipelines, using data from the trials to estimate the likelihood of regulatory approvals and epidemiological data to estimate potential revenue. I would compare my independent estimates with any available from the companies or other analysts.
Here, I am just screening. My impression is that none of the companies are cheap, even by biotechnology standards, but each has a model to ramp revenue and profits that is likely to make the current market capitalization seem reasonable in 3 to 5 years, if not sooner.
I continue to be leery of orphan drug specialists, though clearly BioMarin excels at that business, and I like its heavy R&D spend plan. Pharmacyclics and Incyte are competing in the very crowded but very large oncology space. If I had to lay a bet today, I would bet on Incyte's diverse product approach rather than PCYC's one-product approach, but that is intuition, not based on a statistical study. In the short run, Pharmacyclics is much safer, with far more revenue expected in 2015 and plenty of growth opportunity.
I will add all three companies to my watch list, but I am hoping to find some companies where the value I see in a pipeline is more discounted by other investors. So onto the next screening batch.
Disclosure: The author is long BIIB, CELG, AMGN,AGEN,GILD,REGN,MYL, ALXN.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.