Biotech Forum Daily Digest: Incyte A Buyout Target? Behind Cara Therapeutics Big Move; Spotlight On Aralez Pharmaceuticals

|
Includes: AGN, AMGN, ARLZ, AZN, CARA, GILD, INCY, LDL, MRK, POZN, REGN, TEVA
by: Bret Jensen

Summary

The biotech sector has seen some profit taking this week after a huge post election rally. M&A needs to pick up before the next leg higher in my opinion.

Cara Therapeutics continues its big move and Incyte is tagged as a possible buyout target .

All the notable news, events and analyst ratings across the sector as well as a Spotlight feature on Aralez Pharmaceuticals is below.

"The opposite for courage is not cowardice, it is conformity. Even a dead fish can go with the flow." - Jim Hightower

Biotech seems to be in a consolidation phase this week and has been subject to some profit taking. This is certainly understandable given last week's "Yuge" gains across the sector on the back of unexpected election results. Small caps continue to outperform their larger brethren on the hopes of a pick up in M&A now that the markets have political uncertainty. Any kind of effort to put in effect a "tax holiday" to allow firms to bring home some of the over $2 trillion they have stranded in overseas operations would also be a positive given the amounts of cash that drug & biotech giants hold in their operations outside the country.

We will see if we get an uptick in M&A before the end of the year or not. I personally believe we need to see this in order for biotech to take the next leg up. Otherwise, given earning season is over, we are likely to trade at the top end of a trading range that has been in place most of 2016.

Note: To get these Biotech Forum Daily Digests as soon as they are published, just click on my profile, hit the big, orange "Follow" button, and choose the real-time alerts option.

Teva Pharmaceuticals (NYSE:TEVA) was down more than eight percent in trading Tuesday as it reported results that slightly disappointed while lowering four quarter guidance somewhat. I added a few shares as revenues showed a 15% increase thanks to its purchase of Allergan's (NYSE:AGN) generic business and the stock sells for eight times operational cash flow and yields almost 3.5%. Will take that over the 20 times earnings some folks are paying for Utility stocks with similar yields these days. The drug giant has been hit a rash of downgrades after lowering guidance, which is pretty status quo but long term investors should be rewarded and get paid a nice dividend yield to wait. A half dozen analyst firms have also reiterated Buy ratings since quarterly results as company is currently a battleground stock.

Yesterday, Amgen (NASDAQ:AMGN) and development partner Allergan announced they have submitted a Biologics License Application {BLA} to the FDA seeking approval of a biosimilar to Roche's) cancer drug Avastin. Amgen is going to be a major player in the emerging biosimilar market that is projected to do over $30 billion in annual sales a decade out. If all goes to plan, Amgen should have five biosimilars on the market over the next few years and expects to see some $3 billion in annual sales by FY2020 from these products.

Regeneron (NASDAQ:REGN) recently posted positive mid-stage clinical trial date for evinacumab Tuesday. This compound is a lipid-lowering antibody that could slot into its portfolio alongside Sanofi-partnered Praluent (alirocumab). Evinacumab comes from the same R&D roots as alirocumab but is designed to work a little differently, targeting elevated triglycerides in the blood as well as other lipids such as low-density lipoprotein (NYSE:LDL) cholesterol. Like many biotech stocks, Regeneron has been on a huge run since the election.

Cara Therapeutics (NASDAQ:CARA) continued its recent roll that has seen the stock double in the month of November. This Biotech Forum selection moved up another 20% in trading Wednesday despite the downward trend in the sector yesterday. The surge was helped by Piper Jaffray which lifted its target on this small biopharma to $21 a share from $16 previously. Piper joins Needham, Cantor Fitzgerald, and H.C. Wainwright in the month of November in reiterated Buy ratings with price targets in the low $20s on this small cap with the "Big Mo".

The aforementioned Amgen also saw some positive analyst commentary yesterday. Credit Suisse reiterated their Buy rating on Amgen with a $200 price target, Piper Jaffray is slightly less optimistic with a $193 price target that accompanied its reissued Buy rating Wednesday. After the bell, the biotech pioneer reported that erenumab (AMG 334) for the prevention of migraine met its endpoint successfully in its second late stage trial of the compound.

Incyte (NASDAQ:INCY) getting some love today from analysts after Gilead Sciences' (NASDAQ:GILD) drug momelotinib failed to beat Incyte's Jakafi in a late-stage study for myelofibrosis. Leerink Swann believes company should be on the "short list" of possible acquisition targets in the sector perhaps even by Gilead who is looking for new source of growth outside its core HIV & HCV franchises. RBC Capital and BMO capital also reissue Buy ratings this morning on Incyte.

Note: New analyst ratings are a great place to begin your due diligence, but nothing substitutes for deeper individual research in this very volatile sector of the market. Many of the small-cap names highlighted in the "Analyst Insight" will eventually appear in the "Spotlight" section, where we do deeper dives on this type of promising but speculative small-cap concern.

Today's Spotlight feature is on a small specialty drug company called Aralez Pharmaceuticals (NASDAQ:ARLZ)

Company Overview:

Aralez is a specialty based biopharma concern based just outside of Toronto. It engages in acquiring, and commercializing products primarily in cardiovascular disease, pain, and other specialty areas. The company hit the public market early in 2016 and currently has a market capitalization of approximately $350 million. The company was a spinoff from Pozen (NASDAQ:POZN).

Product Portfolio:

The company has several products on the market and has made a couple of key product acquisitions since coming public. Aralez recently completed the acquisition of the U.S. rights to Toprol-XL® from AstraZeneca (NYSE:AZN). Toprol-XL recorded net revenues of $89 million in 2015. The company also recently completed the acquisition of U.S. and Canadian rights ZONTIVITY from Merck (NYSE:MRK). This compound is the first and only approved therapy shown to inhibit the protease-activated receptor-1 (PAR-1), the primary receptor for thrombin, which is considered to be the most potent activator of platelets.

The FDA also recently approved Aralez's compound YOSPRALA for patients who require aspirin for the secondary prevention of cardiovascular and cerebrovascular events and who are at risk of developing aspirin associated gastric ulcers.

Recent Results:

Although not yet profitable, the company is showing good sales growth primarily through acquisition. In the third quarter, revenues jumped to $13.6 million from $5.8 million in the same period a year ago. $8.1 million of those sales came from its recent Tribute acquisition. Other revenues for the quarter were $5.5 million, primarily comprised of VIMOVO® royalties, compared to $5.8 million for the prior year comparable period.

The GAAP net loss for the quarter was $20.6 million, or $0.32 per share on a fully diluted basis, compared to a net loss of $8.1 million, or $0.25 loss per share on a fully diluted basis during the same period a year ago. The company did provide favorable forward guidance.

Measure

Original 2016 Guidance

Updated 2016 Guidance

Net Revenues

$48 million to $58 million

$54 million to $62 million

Non-GAAP SG&A Expenses

$85 million to $100 million

$78 million to $86 million

Non-GAAP R&D Expenses

$8 million to $12 million

$8 million to $10 million

Analyst Commentary & Balance Sheet:

Analyst commentary on Aralez has been pretty sparse since earlier this year, but has started to pick up over the past month or so. On October 10th, Guggenheim reissued its Buy rating and $12 price target on the stock. Guggenheim's analyst noted that "We updated our financial model to include sales for Zontivity and Toprol XL, two acquired drugs that will enhance ARZL's cardiovascular drug franchise, which currently includes Yosprala and Fibricor. We believe the Street still underestimates the earnings potential of ARLZ's CV franchise, and we believe Yosprala peak sales of $200MM+ by '22 are not fully reflected in consensus expectations yet. Additionally, we think ARLZ will be a successful consolidator of assets with its strong balance sheet, experienced management team, and low tax rate". Last week, Chardan Capital reiterated its Buy rating and $10 price target on Aralez. The current median analyst price target is currently right in the middle of these price targets or $11.

The company has been financing acquisitions via debt and has another $250 million of buying power available through a credit agreement.

Outlook:

Revenues thanks to acquisitions should jump more than 150% in FY2016. The consensus has another approximate 150% jump in sales projected for FY2017. The company should cut its losses significantly in the next fiscal year but will still be in the red.

Aralez has a great growth trajectory and solid analyst support. However, I am going to pass on this one. I am not comfortable with the company's debt fueled acquisition strategy which has gotten other similar firms in trouble over the past year or two. In addition, I have not done well with Canadian based firms in this sector historically and the company's parent has not rewarded its shareholders over the past decade. Other contributors (I, II) have recently published more favorable views on the company and its prospects.

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long AGN, AMGN, CARA, GILD, TEVA.

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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Problem with this article? Please tell us. Disagree with this article? .