In the previous article, I discussed the pharmaceutical industry’s race after approved drugs and late stage agents with proof of concept in humans. I mentioned Rigel’s (RIGL) lead drug, R788, as a likely target for collaboration due to its impressive activity, the huge addressable market and the fact it is an oral drug. For the past year, Rigel’s management has been consistently and rigorously claiming it will have a partnership in place during the first quarter of 2009. Although the company has had more than one opportunity to change this forecast, it stuck by its original statement. For example, when new safety data got published last year and worried investors sent the stock down 50% in two trading sessions, many believed that the imminent deal was not going to materialize. To their surprise, Rigel reassured investors the time frame for a partnership remains intact, explaining that none of the recently published data was actually new to potential partners. Then, Rigel appeared in countless investor conferences, the last of which was only last month, promising investors a licensing deal is forthcoming.
Last week, the company announced it no longer expects to have a deal by the end of March. Instead, it intends to wait until it has results from two ongoing trials, due this summer. Deciding to wait until more data is available makes a lot of sense, providing the data is good. Typically, the further a drug gets in clinical development, the higher its value in the eyes of potential partners. The problem is not the decision itself, but its timing, as this kind of decision could have been made long ago. So what led Rigel’s management to suddenly change its mind after a year of expectations build up?
During last week’s conference call, Rigel mentioned several factors that played a role in the decision. First was the opportunity to get a more lucrative deal, if the data from the larger trials is as good as that of the previous one. Another factor was the better than expected enrollment rate, resulting in earlier data read out from the trials. Lastly, Rigel claims that several potential partners had indicated they prefer to wait for the new data before signing a deal. Some of these partners were described as “very large pharmas” by the company’s CEO, Jim Gower, during the call.
When asked about the terms of the deal, Gower admitted that as they got closer to signing a deal, the deal terms became less attractive, because partners preferred waiting for the updated data this summer. To me, this looks like the only reasonable excuse, as Rigel and potential partners were always aware of the ongoing trials, and truthfully, having data a couple of months earlier does not seem that dramatic. Apparently, Rigel simply did not get the deal it was hoping for.
The field of drug development is anything but expected, and in many cases, things do not turn out as planned. Rigel’s decision is understandable, as it may eventually lead to a better deal for R788. Investors must also realize that with the higher reward comes a higher risk level, and if the data is not as good as expected, R788’s value may plunge.
Financially, the deal is not urgent, as the company has enough cash to support its activity through the second quarter if 2010, almost a year after expected data from the two ongoing trials. But even if Rigel made the right decision, it certainly made all the possible mistakes on the way with respect to managing investors’ expectations. In this area, Rigel’s management could learn something from Seattle Genetics’ (SGEN) management team.
Seattle Genetics has three clinically validated drug candidates: dacetuzumab (SGN-40), SGN-35 and lintuzumab (SGN-33). All three might produce “registrational-quality” data in 2010, so the company could have as much as three approved drugs by early 2012. Dacetuzumab, has already been licensed out to Genentech in 2007, leaving the two other drugs as potential targets for licensing activity. SGN-35, Seattle Genetics’ lead antibody-drug conjugate represents the smallest market opportunity among the three, however, it also represents the highest likelihood for approval.
SGN-35 demonstrated remarkable activity in heavily pretreated Hodgkin’s lymphoma patients. Last month at the ASH meeting, investigators presented positive data from a dose escalation phase I study. The data included 41 Hodgkin’s lymphoma patients, 15 (36.6%) of whom had an objective response, including 7 complete responses. In the three highest cohorts, SGN-35’s activity was even more impressive, with a response rate of 50%. This data is in line with data presented at previous conferences, as described in this article. Importantly, responses were quite durable and even patients who did not have an objective response derived great benefit from SGN-35. The median progression free survival was about 6 months for all patients, 83% of whom experienced tumor shrinkage.
Based on these promising results, Seattle Genetics decided to initiate a registrational trial in Hodgkin’s lymphoma patients who are refractory or relapsed to standard first line treatments. Since there are no approved therapies for this setting, this trial is SGN-35’s fastest route to market. Last month, Seattle Genetics announced it had received a SPA for a pivotal trial, in which SGN-35 will be evaluated in refractory or relapsed Hodgkin’s lymphoma patients. Due to the highly unmet medical need and the small patient population (3000 patients in the U.S. annually), the trial will be a small (100 patients) single arm study, with objective response rate as the primary endpoint. The design is typical for pivotal trials for niche indications, just like the study Allos (ALTH) conducted for its drug, PDX, in another rare form of blood cancer. Seattle Genetics plans to launch a trial in another rare lymphoma, ALCL.
The company estimates the immediate market opportunity of SGN-35 to be $300-$400 million in the United States and Europe. I find these estimates over-optimistic, based on durability of response and the prevalence of the diseases, but SGN-35 could easily reach peak sales of $250, if the phase I results are replicated in the registration trial. A potential partner might be interested in expanding SGN-35’s use into first line treatment in addition to its potential utility for autoimmune diseases, which could substantially increase the potential market for the drug.
Seattle Genetics’ second licensing candidate seems to be even more promising from a commercial point of view. Similarly to SGN-35, lintuzumab addresses an indication with very limited treatment options and consequently very high demand for new drugs – Acute myeloid leukemia (AML) in patients 60 years of age and older. SGN-33 is currently in a randomized phase II trial for the treatment of elderly AML patients. The study, which evaluates a common treatment for these patients (low dose cytarabine) with or without lintuzumab is expected to have final data in the first half of 2010.
In my opinion, the lintuzumab program is the most attractive opportunity for Seattle Genetics because it represents a very large untapped market with a very low entry bar and virtually no real competition. Elderly AML patients are in dire need of new treatments with a good safety profile since they often cannot tolerate standard chemotherapy regimens. In fact, in many cases these patients die of treatment side effects and not of the disease itself, which is typically characterized by a survival of 6-9 months. The company has not disclosed any new data for lintuzumab in the past 12 months, but the clinical data it presented at the 2007ASH annual meeting generated a great deal of enthusiasm in the industry. I discussed these data and lintuzumab’s explosive potential here, here and here.
The potential of the AML market made it an area of intense activity, with several agents in the clinic. Two of these agents, Sunesis’ (SNSS) voreloxin and Genzyme’s (GNZM) Clolar demonstrated even slightly higher response rates than that of lintuzumab in different trials, but neither seem to threat lintuzumab. As chemotherapy agents, these drugs are likely to lead to severe side effects and potentially death in such frail patients. Lintuzumab, on the other hand, seems to enjoy a very clean safety profile, similarly to other antibodies for the treatment of cancer, such as Rituxan. As a result, lintuzumab can be easily combined with other agents and can be given for very long periods of time (perhaps even as maintenance therapy). These properties render lintuzumab the safest bet among all investigational agents for elderly AML because even in a scenario where multiple agents are approved, these agents’ manufacturers would aspire to combine their chemo drugs with lintuzumab, in order to achieve a better response with little or no added toxicity.
Seattle Genetics believes that if lintuzumab manages to prolong survival by two months or more, it could file for approval with the FDA. This will surely lead to a very high adoption rate by physicians, who currently prefer putting elderly patients in clinical trials or even not treating them at all, due to lack of safe and effective treatments. More than 13,000 new cases of AML are expected in the U.S each year, two thirds of which will be diagnosed in elderly patients. Assuming a similar rate in Europe, the overall market potential in developed countries could reach 25,000 patients, which could translate into sales in the $700-900 million range, depending on durability of responses. Evidently, if lintuzumab proves active and safe in elderly AML patients, it will quickly find its way to younger patients as well. In addition, lintuzumab is currently being evaluated in MDS, an indication that is expected generate more than $500 million in sales in 2010 for Celgene’s (CELG) Vidaza.
On top of the registrational phase II study, lintuzumab is currently being evaluated as a single agent in elderly AML patients. The goal of this trial is to get a better sense of the single agent response rate of SGN-33 and more importantly, to address the issue of response durability, which is very short in patients who respond to chemotherapy. Because SGN-33 can be given for very long periods of time, it may do a better job maintaining responses, as opposed to chemotherapy which is given only for several weeks. In terms of response rate, it would be interesting to see if lintuzumab can achieve similar results to those reported at ASH 2007. There may even be a positive surprise with respect to the original 17 patients, as the lead investigator disclosed that one of the patients, who had been defined as a non-responder, was starting to respond after treatment discontinuation. The company is expected to publish data from this trial in the first half of 2009.
Seattle Genetics’ management has never hidden its intentions to become a fully commercial company, with an independent sales force which will market its oncology products. The poster child of a small biotech that becomes a global company with worldwide sales infrastructure is Celgene, who leveraged the success of Revlimid and Thalomid to build one of the biggest hematology sales forces in the industry. Celgene’s approach resulted in huge financial gains in the long run, but also required a large amount of resources, both financial and managerial. Under current market conditions, with limited access to capital, it would be unrealistic for a company the size of Seattle Genetics to become a global company, so the next best thing it can do is retaining rights for its drugs in North America and license the non-U.S rights to a large partner. Therefore, it is likely that SGN-35 and perhaps lintuzumab will be licensed out during 2009.
Partnership discussions for SGN-35 started last year, with the goal of retaining all U.S. rights and licensing international rights for the drug. This is an unusual deal structure for a candidate with phase I data, but Seattle Genetics repeatedly stated that it would not have it any other way. In contrast to Rigel, Seattle Genetics was very vague regarding the timing of any potential deal and cautioned investors that it would not do a deal unless the terms are attractive enough. Theoretically, this implies that Seattle Genetics may go all the way without a strategic partner, but the cost will be immense.
The company ended 2008 with $161 million in cash, which could support operations until the third quarter of 2010, barely enough for obtaining registration quality data for both SGN-35 and lintuzumab. Last month, Seattle Genetics stunned the market by announcing a $53 million secondary public offering, thus securing another two quarters of activity. This is the first public offering for a biotech company in six months, but even more impressive than the timing was the high pricing of the offering, 9.72$ per share. Amazingly, investors received this unexpected dilution well, sending shares higher following the announcement.
To me, the exact timing of the transaction implies that Seattle Genetics felt it did not have sufficient leverage at the negotiation table. Allegedly, Seattle Genetics could have waited for at least 9 months before going back to the equity markets, potentially benefiting from a recovery or positive company announcements. The ability to raise capital in such an environment is impressive, particularly at a price hardly representing any discount, but current price levels are far from ideal for dilution. Therefore, there was something urgent in Seattle Genetics’ decision, which can only be explained by the need to ink a licensing deal in the near term.
Rigel and Seattle Genetics have a lot in common. Both have mid stage clinical drugs that demonstrated impressive activity in relatively small trials, both are involved in ongoing discussions with potential partners, not willing to compromise. Of course, there are also differences between the two. Seattle Genetics’ SGN-35 addresses an orphan indication that requires a small and inexpensive clinical program, while Rigel’s R788 targets a multi-billion dollar indication, requiring an expensive clinical program (several hundred millions of dollars). Thus, Seattle Genetics is under less pressure to find a partner, but although it could eventually support a worldwide global sales force, based on the recent investment round and active discussions the company is involved in, I find this scenario unlikely.
Both Rigel and Seattle Genetics hit unexpected bumps along the road to the ideal partnership, and preferred to take unpopular steps over compromising on the deal terms: Rigel broke its promise in order to get more clinical data, while Seattle Genetics chose to dilute its existing shareholders to improve its financial position. In retrospect, both companies did the right thing. The difference was in the way each company managed investors’ expectations. In Seattle Genetics’ case, investors cheered its decision whereas Rigel got a cold shoulder and a couple of potential lawsuits.
Due to the push out of the licensing deal, we are selling our position in Rigel at a loss of 34%. We still view R788 as a very promising drug and will probably consider buying the stock during the summer. We are also initiating a position in Pfizer (PFE), which, despite any criticism we may have on the Wyeth acquisition, still looks undervalued. Lastly, we decided to sell CV Therapeutics (CVTX) for a gain of 83%, following the bid from Astellas. As we previously wrote, we expected the company to announce a lucrative partnership deal for the angina drug, Ranexa, but the Astellas’ offer may be too good to dismiss.
Performance Follow Up
Four months after inception, our biotech portfolio achieved a return of 22.5%, beating not only general indices but also every healthcare related fund or index we are aware of. The table below shows the biotech portfolio’s performance compared to other major biotech and healthcare indices and ETFs. It is easy to see that all the indices and ETFs below outperformed general market indices. In particular, the top 6 positions are held by biotech oriented funds, with the pharmaceutical oriented funds lagging behind.
In the next article I will present and discuss several promising high-risk microcap companies with a market cap lower than $100 million.
Portfolio holdings as of February 8th 2009