In the pharmaceutical industry, 2008 will probably be marked by the big pharmas’ insatiable appetite for new drugs. Threatened by fierce generic competition, the pharmaceutical giants were not only eager to pay generous acquisition premiums for marketed products, but were also willing to pay a lot of money for investigational drugs with an early proof of concept in the clinic. Two recent examples for this trend are Arqule (ARQL) and Exelixis (EXEL), which recently signed two lucrative deals with Daiichi-Sankyo and Bristol-Myers Squibb (BMY), respectively.
Assuming this trend continues in 2009, it is crucial to identify small and medium companies with candidates whose activity has already been proven in clinical trials. One of the most interesting companies that fall into this category is Rigel Pharmaceutical (RIGL). The company is currently developing a validated drug with blockbuster potential, and is expected to announce a major collaboration deal during the first quarter.
Despite the imminent nature of the deal, investors should be aware of the risk factors that naturally come along with negotiations of this type. In addition, there are specific issues with Rigel that might affect the exact terms of the deals, let alone the ability to finalize it. Nevertheless, when all aspects are taken into account, it seems that at current price levels, Rigel represents an attractive investment opportunity.
In contrast to other companies that try to be as vague as possible about the timing of future deals, Rigel is going out of its way to reassure investors that it will have a deal in place by the end of the first quarter. Rigel’s lead drug, R788, is currently being evaluated in two comparative trials in patients with rheumatoid arthritis (RA), a $14 billion indication. During most of 2008, R788 was considered to be one the most promising drugs in the biotech industry, but an update at last year’s ACR meeting raised doubts regarding the safety profile of R788, as reviewed in my recent article on Rigel. According to the company, the safety data from the ACR meeting did not affect its negotiation leverage, as the potential partners had access to the data before it was published, so nothing came as a surprise to them. Trying to be as explicit as possible, Rigel managers state that none of the companies with whom it was in advanced discussions dropped out of the race as a result of the safety issues.
The safety issue most investors are worried about is the increase in blood pressure R788 seems to induce. With current regulatory climate, and considering that RA patients are more prone to develop high blood pressure, this safety signal will probably be closely watched in future trials. Nevertheless, for the same reason, future trials will probably demonstrate that there is no material risk because in the vast majority of cases, the slight blood pressure increase will be manageable by hypertension drugs. Even in cases where the elevation in blood pressure is not manageable, the patient can be taken off the drug and the blood pressure returns to its normal levels. Evidently, if R788 gets approved, it is plausible that some patients will be more sensitive to this side effect and show a too steep of an increase in blood pressure. These patients will have to be taken of the drug but they still represent a small portion of the overall market.
In order to become a successful drug, R788 does not have to outperform the currently approved drugs for RA, instead, it should just offer patients a more convenient treatment with comparable efficacy. The mainstay treatment in RA is TNF-inhibitors, which are injectable biologics. As an oral agent, R788 could be preferred by patients who will have to pick between a monthly injection and a twice-a-day pill. Having an oral drug in the market will certainly help Rigel and its partner to squeeze R788 before the injectable agents, and become a standard first line treatment. This is in contrast to recently approved agents for RA such as Orencia and Rituxan, which are usually given to patients who do not derive sufficient benefit from TNF inhibitors.
According to Rigel, the deal will include a profit sharing arrangement in the U.S, royalties on sales outside of the U.S and a generous upfront payment. Therefore, Rigel will have to fund some of the development costs as well as establish a dedicated sales force in the U.S in return to the co-promotion rights. Building a sales infrastructure in some parts of the U.S typically requires substantial investment, but from Rigel’s perspective, this move makes a lot of sense given the unique nature of the RA market. In terms of incidence, RA occurs in a relatively small number of patients every year, however, because RA is an incurable chronic disease, patients receive treatment for years and decades. Therefore, this multi-billion market can be served by a relatively small sales force, one that can be built by a small company like Rigel.
Judging by the depressed share price, the market is skeptic with respect to the amount of money Rigel can get for R788. Ironically, the company’s current market cap is close to its market cap during 2007, before R788 demonstrated such a potent activity in RA. In my opinion, there are several factors including the impressive efficacy in a randomized trial, the blockbuster potential of R788, and the fact that it is an oral agent, which turn it into a very attractive drug for large pharmas, especially those who already have a RA franchise.
Did Pfizer Find Its Next Blockbuster?
The company that will get hold of R788 will have the second most advanced oral RA agent in the clinic, approximately one year behind Pfizer’s (PFE) Jak3 inhibitor, CP-690550, which also demonstrated impressive activity at the latest ACR meeting. Pfizer has been suffering from a negative sentiment due to the patent expiration of Lipitor, but it seems that the company is moving in the right direction. Since the beginning of 2007, Pfizer’s new management is transforming the company from an archaic pharmaceutical giant into an innovative company, by cutting costs and shifting its focus to the right segments in the industry.
No one expects that a single drug could make up for the loss of Lipitor, the world’s best selling drug, but looking at the company’s pipeline, there are definitely several potential blockbusters that could hit the market soon after Lipitor’s patent expiration. One of these agents is CP-690550, which is as promising as Rigel’s RA compound but in this case, Pfizer will own all the upside potential of the drug since it does not need a partner.
Another Pfizer agent I consider to be one of the most interesting drugs in the pharmaceutical industry is tanezumab, a promising investigational agent for the treatment of chronic pain. Tanezumab is an antibody that binds NGF (nerve growth factor), a protein believed to be involved in a myriad of chronic pain conditions, including arthritic pain, chronic low back pain and cancer pain. Each of these conditions represents a huge market with a multi-billion dollar potential and a desperate need of more effective drugs.
At last year’s ACR meeting, Pfizer presented data from a large randomized phase II study in osteoarthritis of the knee. Although the efficacy data set included only short term follow up (3 months), it was nothing short of spectacular. Regarding safety, tanezumab showed a good safety profile, with a very low incidence of severe adverse events, most of which were transient and reversible. This is possibly due to the fact that as an antibody, tanezumab cannot penetrate the brain, a huge advantage given NGF’s established role in brain function and development. Pfizer launched an aggressive development program for tanezumab, including a phase II study in patients with chronic low back pain, which has been recently completed. At the ACR meeting, Ken Verburg, Pfizer’s development head for pain therapeutics, said the company is “very encouraged by the results” and intends to publish them in 2009, thus tanezumab seems to have a broad spectrum of activity.
The broad potential utility of NGF targeting agents potentially puts NGF in the same league of high profile targets such as TNF, the target of Humira, Enbrel and Remicade, and VEGF, the target of Genentech’s (DNA) Avastin. TNF is involved in many inflammatory diseases, whereas VEGF is involved in many types of cancers. In a way, tanezumab enjoys the advantages of both classes. Like TNF inhibitors, tanezumab would probably be given for very long periods of times, due to the chronic nature of the diseases it addresses. Unlike the situation with the TNF agents that were developed in parallel by different companies, tanezumab is the only anti-NGF antibody in advanced clinical trials (as far as I am aware), so it should enjoy a significant first-in-class advantage, similar to Avastin, which is still the only anti-VEGF antibody in the oncology space. The only threat to tanezumab at the moment is from AMG 403, a phase I antibody which was recently licensed by Amgen to J&J and PanGenetics’ PG110, an antibody that is expected to enter the clinic this year.
Despite all the promising signs, it is important to remember that tanezumab still has not been tested in a pivotal phase III study, where results are typically less attractive than phase II trials. In addition, there is still not enough data that could imply that tanezumab is safe for chronic use. Still, it seems that the market is overlooking the great potential in Pfizer’s pain and inflammatory pipeline.
Since inception 14 weeks ago, the biotech portfolio, which is managed by Ran Nussbaum and me, achieved a return of 14.1%. This compares favorably not only to general indices like The NASDAQ (-2.8%) and S&P (-0.3%), but also to healthcare and biotechnology-oriented indices and ETFs (see table below).
Anticipating a lucrative deal for Rigel, we decided to increase our holdings in the company. In addition, we are selling a third of our Synta (SNTA) position ahead of the data release from the phase III trial of elesclomol for the treatment metastatic melanoma. We still view elesclomol data from the randomized phase II trial as very positive, nevertheless, we must acknowledge that no drug has ever shown a significant benefit in metastatic melanoma, making it an extremely high risk field. If results are positive, Synta should triple its market cap in one day, but if elesclomol fails to show a statistically significant difference in progression free survival, the stock will probably lose 80-90% of its value, due to its early pipeline and market conditions.
We intend to initiate a position in Pfizer in the coming weeks.
The Biotech Portfolio as of Jan. 7th 2009