2018 Biotech Investing Theme: Looking For Safety Plays

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Includes: AGRX, AMAG, BMY, CELG, JUNO, MRK, NKTR, SAGE
by: Biotech Phoenix

Summary

Biotech stocks did reasonably well in 2017, prompting some to be cautious heading into 2018.

Regardless of market outlook, I continue to see potential in names with meaningful advantages over the competition that are also potential acquisition candidates.

This article outlines four companies with potential to deliver meaningful safety advances and that could also attract interest from acquirers.

When I look for biotech stocks to invest in, I typically look for two things. First, does the company's products and/or technology provide a meaningful advantage or advance over the competition. Second, is this a company that might be attractive to others as a potential acquisition target. If someone else doesn't want to buy this company, why should I? In addition with tax reform coming into play, big pharma and big biotechs may put to use cash that has been parked overseas towards acquisitions in 2018.

As I look at my top holdings going into 2018, I see a common theme. Many of these names are developing products with potential for differentiation driven by a significant safety advantages over the competition. These names and the rationale behind each are as follows:

Nektar Therapeutics (NKTR):

Nektar is developing not one but two products with potential advances in safety. The first is NKTR-181 a novel opioid for managing chronic pain. NKTR-181 has been designed to minimize the amount of drug that is absorbed by the brain. This is a potential advance in safety because patients who use opioids for long-term pain management (typically 12 weeks or more) are at increased risk of becoming addicted. This should be minimized with NKTR-181 which has been shown to be less likeable among opioid abusers. Nektar reported a successful phase 3 trial in lower back pain and has filed for potential approval in 2018. While approval is likely, the wild card is if the Drug Enforcement Agency (DEA) will place schedule two restrictions on its use (similar to other opioids) or if it will get a more favorable schedule three restrictions that would greatly expand its market potential enabling use beyond pain specialists.

While NKTR-181 is a product most companies would love to have, the second drug NKTR-214 is, in my opinion, the real standout. NKTR-214 is an immuno-oncology product that is a prodrug of IL-2. IL-2 was approved decades ago as Proleukin for metastatic renal cell carcinoma. The benefit of Proleukin was its ability to induce complete responses (CR) in small number of patients which is quite rare in metastatic solid tumors. However, its downfall was a horrific side effect profile from the systemic immune reaction that was so severe it required extended hospitalization. NKTR-214 as a prodrug is designed so that it doesn't become active until it reaches the tumor to minimize the side effects. Early data released in combination with Merck & Co. (MRK) checkpoint inhibitor KEYTRUDA was able to achieve complete responses but with minimal added side effects. Studies are also ongoing with KEYTRUDA's key competitor Bristol-Myers' (BMY) checkpoint inhibitor OPDIVO. Although the data is early and in limited number of patients, if replicated, it has potential to be a major advance in the treatment of solid tumors.

Who would want to acquire Nektar?

Merck & Co. and Bristol-Myers have been duking it out for supremacy in immuno-oncology for solid tumors with their PD-1 checkpoint inhibitors KEYTRUDA and OPDIVO, respectively. Merck & Co.'s KEYTRUDA has taken leadership in this space with sales at $4.0 billion a year run-rate and still growing. If Bristol-Myers acquired Nektar and combined NKTR-218 with its check-point inhibitor, it could likely one up Merck & Co. and re-establish itself as the leader in the field. Given Merck & Co. has billions in annual sales at stake, I don't see them standing idle and letting billions in sales slip away. With so much at stake, continued positive data on NKTR-218 has potential to set off a bidding war for Nektar not seen since the battle for Warner-Lambert's mega blockbuster in the making LIPITOR.

Sage Therapeutics (SAGE):

Sage is developing two GABA modulators SAGE-547 (Brexanolone) an IV formulation for postpartum depression and oral follow-on SAGE-217 for the treatment of postpartum depression, major depression disorder and a range of other CNS disorders. SAGE-547 (Brexanolone) reported positive phase 3 data in postpartum depression with potential filing and FDA approval in 2018. SAGE-217 also recently reported positive phase 2 data in major depressive disorder. The current standard of care for these depressive conditions is a SSRI or SNRI anti-depressant (although use is off-label in postpartum setting). The key drawback to current therapies is they typically take 3-4 weeks to begin working and during that time the GI side effects (e.g. nausea and vomiting) are most pronounced. The need is for a "safer" alternative that works faster without side effects that can lead to early discontinuation. Both of SAGE's drugs appear to deliver on this showing rapid improvement in depression scores within 2-3 days and without the upfront GI side effects of SSRIs/SNRIs.

Who would want to acquire Sage?

Prior to being overtaken by generics, several key SSRI/SNRI anti-depressants were multi-billion dollar blockbusters for big pharmas like Lilly (LLY), Pfizer (PFE), and GlaxoSmithKline (GSK). Given the large potential opportunity should attract interest from theses as well as most big pharmaceutical companies with an interest in CNS disorders like AstraZeneca (AZN), Johnson & Johnson (JNJ), Otsuka (OTCPK:OTSKY), Novartis (NVS), UCB (OTCPK:UCBJY), as well as others. Of these, I see Pfizer as a top contender as it faces potential loss of exclusivity in 2018-2019 for its top selling $5.0 billion a year GABA analog LYRICA for a variety of neuropathic pain and CNS indications.

Juno Therapeutics (JUNO):

Juno Therapeutics is developing JCAR017 a CD19 CAR T-cell therapy for the treatment of relapsed-refractory diffuse large B-cell lymphoma (DLBCL) with potential expansion into a range of other B-cell lymphomas. As I outlined in a previous article, currently approved products YESCARTA from Gilead (GILD) and KYMRIAH from Novartis both require treatment in the hospital setting due to the risk of life threatening side effect cytokine release syndrome (CRS). Though the data is early, to date JCAR017 has seen very low rates of severe CRS which if maintained has the potential to gain a major advantage from moving treatment out of the hospital and into the outpatient setting.

Who would want to acquire Juno?

While Juno holds JCAR017 rights in the lucrative US market, Celgene (CELG) already holds ex-US commercial rights. Celgene is also in need of product that can drive meaningful sales growth and this would be a perfect fit with its existing hematology-oncology businesses. Although Celgene seems to be the logical front-runner, companies like Medivation (NASDAQ:MDVN) and Pharmacyclics (NASDAQ:PCYC) show that if the opportunity is compelling enough companies can be acquired by non-partner companies. Therefore, Juno could attract interest from other outside companies as well. This includes key players in oncology like Roche (OTCQX:RHHBY), Pfizer, BMS, Amgen (AMGN), AstraZeneca or AbbVie (ABBV).

Agile Therapeutics (AGRX):

Agile is developing TWIRLA, a hormonal contraceptive patch. The only other FDA approved contraceptive patch is the Evra patch originally developed by Johnson & Johnson and now sold as a generic XULANE by Mylan (MYL). The Evra patch was an instant commercial hit adopted by women who didn't want to worry about taking their pill every day. However, the Evra patch uses roughly twice the amount of estrogen hormone than comparable oral drugs. Higher estrogen levels are associated with increased side effects that result in life threatening like blood clots - VTE. Shortly after launch, Evra sales tumbled as these risks became apparent after several patients who developed blood clots became headline news. Despite the risks and addition of a black box warning, the product still sees reasonable use with ~$150 million in annual sales. The primary benefit of TWIRLA is a level of estrogen exposure that is lower than XULANE and more in line with that of oral products. This should improve the safety profile and lower the overall risk of use relative to XULANE. This is high-risk high-reward play as TWIRLA does have a troubled past. The efficacy in Phase 3 trials is less than that of other recently approved contraceptives and its filing for approval has been rejected twice by the FDA. According to the company, the most recent issue is related to the pre-approval inspection and questions about an adhesion test. Despite the troubles, I believe the FDA ultimately wants to get a "safer" patch product on the market and will work with the company to get approval.

Who would want to acquire Agile?

With likely modest peak sales expectation of $100-200 million a year, self commercializing TWIRLA will at best achieve modest profitability (if at all). Therefore, if approved, it makes more sense to sell to an existing player who can leverage the fixed costs of its existing commercial infrastructure. Over the years, many big pharmas have exited from women's health leaving a few current players including Pfizer, Merck & Co., Bayer (OTCPK:BAYZF), and Allergan (AGN). TWIRLA may not be big enough of an opportunity to attract interest from these big companies and smaller players like Teva (TEVA) and Mylan face financial troubles and are unlikely to be acquirers. That said, it could be of interest to a smaller women's health player like private Canadian company Duchesnay or AMAG Pharmaceuticals (AMAG) who has been an aggressive acquirer who is facing generic competition for its top selling drug for preventing preterm birth, MAKENA.

Conclusion:

As we head into 2018, these four companies merit watching as they all offer potential for meaningful advancements in product safety that if successful could attract interest from both investors and outside acquirers.

Disclosure: I am/we are long AGRX, JUNO, SAGE, NKTR.

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: Commentary presented is not individualized investment advice. Opinions offered here are not personalized recommendations. Readers are expected to do their own due diligence or consult an investment professional if needed prior to making investment decisions. Although I do my best to present factual research, I do not in any way guarantee the completeness or accuracy of the information I post. Investing in common stock can result in partial or total loss of capital.