Concert Pharmaceuticals Is In A Major Jam: Where To Next?

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About: Concert Pharmaceuticals, Inc. (CNCE)
by: Terry Chrisomalis
Summary

Concert falls after losing an initial patent battle in court for its CTP-543 drug candidate, but it creates a nice buying opportunity.

A prior deal with Vertex Pharmaceuticals proves that there are other avenues to obtaining profit for a clinical candidate despite a patent issue.

Concert has enough cash until 2021, which means there is no near-term risk of dilution.

Recently, Concert Pharmaceuticals (CNCE) announced that it might have some potential problems with respect to its drug CTP-543. That's because the Patent Trial and Appeal Board (PTAB) of the U.S. Patent and Trademark Office did not want to give a review of Concert's petition to challenge the validity of the patent given to Incyte Pharmaceuticals (INCY). That's because CTP-543 is a deuterated ruxolitinib analog like Incyte's Jakafi.

CTP-543

Currently, Concert Pharmaceuticals is working on treating patients with alopecia areata using CTP-543. Alopecia areata is an autoimmune disease where hair loss occurs over time with bald patches. The good news is that the company can continue with this lead indication. It is currently in a phase 2 clinical trial for alopecia areata, and the results are not yet known. Still, because the company gave its guidance that it can still work on this indication using CTP-543 without infringing on Incyte's patents it is good news. Why is this drug important for the company? That's because the alopecia areata market is expected to be a $11.8 billion market by 2024. It is imperative that Concert can at least advance this drug to completion. The patent news unfortunately overshadowed the fact that CTP-543 was given fast track designation by the FDA. The reason why this drug received this designation is because alopecia areata is a huge unmet need. The benefit of a fast track designation is the ability to speed up the review process for the drug.

Big Decision

The company is moving on with the alopecia areata indication, but targeting any other indication using CTP-543 remains a huge unknown. Concert has two options. It can either go to Federal Court to contest Incyte's patents or it could make a deal with Incyte that would be far more beneficial. In terms of going to Federal Court it is highly risky. That's because the court is likely to side more with those who have already filed a patent for a deuterated ruxolitinib analog drug. There might be a small chance the Federal Court could rule in favor for Concert, but that is a huge long shot. The second option would be to garner a deal like Concert did with Vertex Pharmaceuticals (VRTX). What Concert did with CTP-656 is that it sold the drug to Vertex in order to make a deal with it. The deal was that Concert would get up to $250 million per the deal. That was broken down into $160 million upfront, and then $90 million in milestone payments. The good thing about this route is that it avoids a legal battle which could take years and cost a lot of money. The downside is that Concert lost out on any potential royalties on future sales for CTP-656. What I believe that Concert should do is garner a deal with Incyte for CTP-543. Although, I think that it should attempt to not only get an upfront payment, but at least obtain some kind of a royalty deal. The argument can be made that it would be win-win situation for both companies. Of course, the deal involved could be one where Concert could obtain rights for CTP-543 in alopecia areata without any dispute. In my opinion, this would be the best course of action. This is especially true considering that Concert already has other compounds in the pipeline that are partnered out with other pharmaceutical companies. For instance, Concert has already partnered with Jazz Pharmaceuticals (JAZZ), Celgene (CELG), and Avanir Pharmaceuticals. In either case, Concert still has a good pipeline of drugs.

Financials

According to the 10-Q SEC filing Concert Pharmaceuticals has cash and cash equivalents of $207.1 million as of September 30, 2017. That may not seem like a lot of cash, but truth be told the company is set for many years from now. That's because Concert expects to have enough cash until 2021. That's around 4 years worth of cash, and that means that investors won't be put at risk for any type of dilution. Even better, Concert has already repaid its loan to Hercules Capital. The venture debt of $30.8 million was repaid to Hercules Capital in September of 2017. That means that agreement has now been completed, and Concert doesn't owe money to Hercules Capital.

Risks

One of the biggest risks is if Concert Pharmaceuticals completely loses the next patent battle in Federal court. Then it might have to attempt to make a deal with Incyte for the patent issues. The final risk would involve some of the partnered programs. The drugs that were partnered with Celgene and Jazz have been stuck in limbo in a phase 1 trial for many years. These are risky assets, because there is no guarantee that they will be advanced into phase 2 trials.

Conclusion

The drop in Concert Pharmaceuticals due to the patent issue might be highly overblown. As I have outlined there are other ways the company can still profit from the asset despite losing the patent battle in Federal court. That was evidenced by the deal that Concert made with Vertex Pharmaceuticals for CTP-656. Although, it is my hope that should another situation arise like that, Concert would at least attempt to obtain some type of royalties on net sales.


Disclosure: I/we 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.