Regeneron (NASDAQ:REGN), which I view as fundamentally the strongest biotech company, with the larger and older Genentech always in the running, has given bulls a reason to cheer after a dismal stretch of trading in the stock and then a big loss in Amgen's (NASDAQ:AMGN) suit against it for infringing Repatha's patents.
Today's news looks like a solid home run, possibly with runners on base. As reported by the company:
TARRYTOWN, N.Y and PARIS, April 1, 2016 /PRNewswire/ - Regeneron Pharmaceuticals, Inc. and Sanofi (NYSE:SNY) today announced that two placebo-controlled Phase 3 studies evaluating investigational dupilumab in adult patients with inadequately controlled moderate-to-severe atopic dermatitis (AD) met their primary endpoints. In the studies, known as LIBERTY AD SOLO 1 and SOLO 2, treatment with dupilumab as monotherapy significantly improved measures of overall disease severity, skin clearing, itching, quality of life, and mental health.
"These are the first Phase 3 studies of a systemic therapy to demonstrate a significant improvement in moderate-to-severe atopic dermatitis, a chronic, debilitating inflammatory disease that impacts over one million Americans," said George D. Yancopoulos, M.D., Ph.D., Chief Scientific Officer of Regeneron and President of Regeneron Laboratories. "These data provide strong evidence that the IL-4 and IL-13 signaling pathway is a fundamental driver of inflammation in atopic dermatitis. Dupilumab is the first in a new class of immunotherapies - in these 16 week trials, dupilumab blocked the aberrant activation of this pathway, resulting in significant efficacy without evidence of immune-suppressing side effects.
Let me interrupt here. If an immune problem can be treated in almost 1,000 patients with no immune-related side effects, then we may have a real winner. The press release goes on with other impressive numbers:
For the 16-week treatment period, the overall rate of adverse events (65-73 percent dupilumab and 65-72 percent placebo) was comparable between the dupilumab groups and the placebo groups. The proportion of patients who completed the treatment period was 88-94 percent for dupilumab and 80.5-82 percent for placebo. The rate of serious adverse events was 1-3 percent for dupilumab and 5-6 percent for placebo. Serious and severe infections were also numerically higher in the placebo groups in both studies (0.5-1 percent dupilumab and 2-3 percent placebo).
This is impressive and exciting for patients and their physicians.
While we use the term "eczema" for this condition at times, Forbes is running an article which demonstrates how serious this condition can be:
Austin Jacobson, a 54-year-old trial attorney, had had rashes since he was a baby. At first they occurred in the warm weather when he played, and would go away with calamine lotion. But after he got married, and then had a child, they got worse. For twenty years, he endured itching that he says was like having poison ivy all over his body all the time.
"It was on every surface of my body with the exception of the palms of my hands and the soles of my feet and, in truth, I looked like a monster," says Jacobson. "My skin was red, raised, and scaly and I would just literally drop pieces of skin everywhere I went."
He couldn't sleep, and would wake up with bloody sheets. Sometime, he says, he thought about killing himself...
Jacobson... started taking dupilumab in a clinical trial in October 2014. He has been asymptomatic ever since.
This is a condition that requires treatment.
Now, not everyone is helped that much, but some of the most important data are quite impressive, with substantial separation from placebo and such low p values that it would appear certain that dupilumab is having a positive therapeutic effect. Also from the press release:
- For SOLO 1 and SOLO 2, respectively, 37 and 36 percent of patients who received dupilumab 300 mg weekly, and 38 and 36 percent of patients who received dupilumab 300 mg every two weeks, achieved clearing or near-clearing of skin lesions (IGA 0 or 1), compared to 10 and 8.5 percent with placebo (p less than 0.0001). This was the primary endpoint of the study in the U.S...
- For SOLO 1 and SOLO 2, respectively, 52.5 and 48 percent of patients who received dupilumab 300 mg weekly, and 51 and 44 percent of patients who received dupilumab 300 mg every two weeks, achieved EASI-75 compared to 15 and 12 percent with placebo (p less than 0.0001). This was the key secondary endpoint in the US and one of the primary endpoints in the EU.
With an FDA submission planned for Q3 and with Breakthrough Therapy granted, I'm anticipating marketing approval in Q2 next year in the US.
How large is the market opportunity in AD?
IBD reports on this as follows:
Evercore ISI analyst Mark Schoenebaum wrote that analysts' consensus peak annual sales estimate for dupilumab is $4 billion, but there's quite a bit of variation between individual analysts.
Based on the above results, I'm now much more optimistic assuming that the analysts are indeed talking about peak sales of dupilumab for all indications.
This is a very common condition. Per American Family Physician:
A 2007 U.S. population-based survey suggested an estimated 17.8 million persons are living with atopic dermatitis, and most cases have not been diagnosed. Early diagnosis and treatment may prevent significant morbidity from sleep disturbances, chronic postinflammatory skin changes, scarring from picking and scratching, and the development of secondary skin infections with Staphylococcus, Streptococcus, and herpes species.
This is a common condition in children, many of whom outgrow the condition. Perhaps 10% of cases begin after age five. Worldwide, prevalence varies widely, between 1-20%.
I believe the key here is safety and efficacy. It's not difficult for me to think that 100,000+ patients are going to end up on this drug in the US, perhaps much more assuming that the pediatric indication is also granted. Note the FDA wanted the initial studies to be in adults only, likely I assume for safety reasons. The pediatric studies are in Phase 2.
What's the competition for dupilumab?
REGN lays this out in the 10-K on page 21:
Dupilumab (Phase 2/Phase 3)
GlaxoSmithKline (NYSE:GSK) Nucala® (mepolizumab) Approved Antibody against IL-5 Teva (NYSE:TEVA) Reslizumab Submitted for regulatory approval Antibody against IL-5 Roche (OTCQX:RHHBY) Lebrikizumab In development (Phase 3) Antibody against IL-13 AstraZeneca (NYSE:AZN) Benralizumab
In development (Phase 3)
Antibody against IL-5R AstraZeneca Tralokinumab In development (Phase 3) Antibody against IL-13 Novartis (NYSE:NVS) QBX258 In development (Phase 2) Fixed dose combination of antibodies against IL-4 and IL-13
At least for all the above except perhaps the Novartis QBX258 product, I believe all the others are for asthma (see comments below).
Basically, I expect dupilumab for AD to set a new standard of care.
What annual revenues should we model per patient?
It's always difficult to say, but we have precedent. Otezla for psoriasis and psoriatic arthritis came out not long ago and was priced above $20,000 per year in the US by Celgene (NASDAQ:CELG). It is now reportedly priced close to $30,000 year - and it's just a small molecule and therefore very low cost to produce.
What CELG actually receives in the US and ex-US is not known, but we also know that the TNF inhibitors such as Humira are now priced near $40,000 per year in the US.
So just for sake of discussion, I'll assume average realized pricing is around $20,000 per year per patient for dupilumab for AD.
If 100,000 patients from the US and 100,000 from the EU and Japan end up going and staying on dupilumab for AD, that would translate to $4 B in annual revenues. That in turn would translate into something a little less than half of that in annual revenues to REGN, assuming its sales and profit split for this drug is similar to that for Praluent.
My sense is that given the need in other countries and the very large patient population, then if in the real world usage, safety parameters remain very high, the above patient numbers would prove conservative. There are only so many dermatologists and immunologists who will prescribe dupilumab, though, so ramp-up will have some limitations.
How the payors will react is also to be determined, but first-in-class/best-in-breed treatments in areas of real unmet need have to be handled reasonably, or the political and PR fallout can be severe against the insurers.
Dupilumab may also be a breakthrough in asthma
There are two classifications of asthma, though it's not clear that in REGN's heart of hearts, it believes this. But the FDA approvals go by this classification, so here goes.
Xolair and the newer Nucala are two humanized monoclonal antibodies that are aimed at allergic, or "eosinophilic phenotype" per Nucala's label, asthma that is severe enough to require this sort of heavy duty treatment. Xolair has been hampered by a black box warning that it can cause anaphylaxis. Nucala can cause allergic reactions but has no black box on its label.
Perhaps half of asthma cases do not fall into the "high eosinophil" category. Phase 2 data to date indicate that dupilumab is the only antibody that is effective in the "low eo" category.
If this holds up in Phase 3 and the FDA has accepted a Phase 2 dupilumab asthma study as a pivotal one (due to very strong data), then this drug should have a powerful advantage over Xolair, Nucala, and the other late-stage drugs identified above.
The moderate-to-severe asthma market is large, growing and underserved.
As with dupilumab for AD, it looks to me as though REGN and SNY are poised to bring a game-changer for many patients. If that proves out, then as long as safety parameters are at least as good as those of competitors, why should the doctor not use dupilumab for all asthma cases, not just the low eo ones? I expect that's how doctors will think.
So I expect multi-billion-dollar annual sales potential for this drug for asthma.
REGN has disclosed positive Phase 2 data for dupilumab in a complication of allergic rhinitis, namely nasal polyposis with sinusitis. It's not clear to me, last I looked, that SNY wants to advance this to Phase 3, so we shall see on that one. There is a lot of overlap between people with this condition and those with asthma.
An orphan indication, eosinophilic esophagitis, is being studied for responsiveness to dupilumab in Phase 2a.
REGN has also indicated that the drug is being considered for other indications. Of note is that Xolair is indicated for urticaria (hives), so maybe that is on SNY/REGN's to-do list.
As we know from Praluent, Eylea and many other products, patent issues can pop up and be significant. While REGN has brought some real discovery to the table here, I cannot predict whether dupilumab will have patent controversies.
Other risks include everything from competition to smaller market sizes than thought to pricing stringencies. Please see REGN's 10-K and other documents for a fuller list of risk factors to dupilumab and REGN's shares.
All these matters take time, but my take on matters is that dupilumab is looking to be a safe and effective treatment for conditions that in their more severe form have little or no effective treatment. It is difficult for any drug to attain that status. Doing so often opens up larger markets than the analysts publicly predict - think how restrained the early predictions for Sovaldi and Harvoni sales were.
In addition, such a situation makes it difficult for payors to push back hard on price, and that limits these often-greedy semi-monopolists (US) and single-payor monopolists (rest of world) into restricting care for financial reasons.
The rapid growth and high level of Otezla sales gives me a positive view of dupilumab's financial prospects.
Given the above considerations, I take the "over" in betting that over time, the Street will be positively surprised by dupilumab's actual sales and profitability. If so, that would tend to provide a welcome tailwind to REGN's stock price.
With a strong pipeline and heavy investments in growth, I do not pay much attention to REGN's high P/E. I do pay attention to the possibility of a permanent injunction against Praluent being marketed in the US, though; that may not be "in" the stock.
I remain overweight REGN and added shares on the news this morning.
Disclosure: I am/we are long REGN,AMGN.
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.
Additional disclosure: Not investment advice. I am not an investment adviser.