There was a lot of activity in my coverage universe in the last two weeks, including positive data readouts for three companies and an acquisition announcement. However, of the four cases, only two resulted in share appreciation.
Ambit – To keep or not to keep (the CVR)
Two weeks ago, Ambit (AMBI) agreed to be acquired by Daiichi Sankyo in a deal that included a $15 upfront payment and $4.5 in Contingent Value Right (CVR) per share. The CVR represents a milestone-like mechanism in which Ambit’s shareholders may eventually get additional payments equal to 30% of the initial purchase price.
Based on the current share price ($15.38), the market assigns each CVR a price of $0.38, which may turn to $4.5 if all milestones are achieved (a ~11X return). According to Ambit’s SEC filing, half ($2.25) of the amount is payable at FDA approval for relapsed/refractory AML while the remaining half ($2.25) will be paid after approval in first line AML.
In contrast to other cases where the CVR was registered and traded on a stock exchange, Ambit’s CVR is “not transferable, will not be certificated or evidenced by any instrument and will not be registered or listed for trading.” In other words, the only way to receive the CVR is owning the stock at the day of transaction. This led many to ask whether they should hold the stock and get the CVR or sell it prior to the deal and get a small premium in cash instantly.
I plan on keeping my shares in order to receive the CVRs, which represent favorable risk/reward ratio and timelines. The first milestone may arrive in 2016 based on results from Ambit’s ongoing phase III (QUANTUM-R). First line approval may come 1-2 years later, assuming Daiichi initiates a 1st-line study in 2015. The likelihood of success in at least one of these settings is ~ 50% in my opinion while the market appears to ascribe significantly less value to this option.
Seattle Genetics – Positive Top-Line AETHERA Data but (still?) no survival benefit
Seattle Genetics (SGEN) announced the highly anticipated results of the AETHERA study, which evaluated Adcetris as maintenance therapy after transplant in Hodgkin’s Lymphoma. Despite concerns about the trial’s powering (due to the lower than expected rate of progression events), Adcetris led to a meaningful increase in median PFS with a hazard ratio of 0.57. Further details were not disclosed and are expected to be presented at ASH in December.
Surprisingly, the stock is down 14% since the announcement primarily due to the lack of a statistically significant survival benefit at the time of analysis. Although this can be easily explained by the short follow up (fortunately, HL has a relatively good prognosis and is potentially curable) and the cross-over trial design, it is impossible to rule out the possibility that Adcetris maintenance does not result in prolonged survival relatively to the current treatment modality (after relapse). This led some to suggest that without a clear survival benefit, Adcteris will not be approved as maintenance therapy nor will it be adopted by hematologists who will prefer to expose patients to the drug only upon relapse.
I view the AETHERA data as highly positive and believe concerns over the interim OS data are overblown. At ASH, there is a good probability to see an OS trend in favor of maintenance Adcetris that will mature to a statistically significant benefit with time (next OS analysis is expected in 2016). Even in the absence of a clear statistically significant survival benefit, Maintenance with Adcetris may demonstrate a higher number of potential “cures” (patients who are in long term remission), which should encourage physicians and patients to use the drug as early as possible for longer treatment periods.
Also at ASH, Seattle Genetics is expected to present initial results for its anti-CD33 ADC (SGN-33A) in AML. As I previously discussed, expectations around this program are high given the fact that CD33 is considered a validated target in AML (Mylotarg) and the new potent payload SGN-33A employs. This is further enhanced by recent remarks by the company’s CEO, Clay Siegall, who stated they are “very excited” and “looking forward” to presenting results at ASH.
Esperion – Homerun data but regulatory uncertainty remains
It appears that the market is finally discovering Esperion (ESPR) following a successful phase IIb of its lipid-lowering drug ETC-1002. The study was a clear success, demonstrating superiority over Zetia (the approved 2nd line drug after statins) in LDL-C and also in hsCRP. ETC-1002 led to a reduction of 27%-30% in LDL which was significantly better than 21% achieved with Zetia. The company also presented preliminary data that showed the two drugs can be given together and have an additive effect. The safety profile appears clear with a notable absence of muscle-related side effects that are associated with statins.
If confirmed by larger studies, ETC-1002’s lipid lowering effect should make it an important option in patients who are either intolerant or not controlled with statins. Being an oral agent with the potential to be combined with approved agents should allow ETC-1002 to be used before PCSK9 antibodies which are highly effective but require monthly or twice-a- month injections. The strong effect on hsCRP could be an important differentiator, as this inflammatory marker is not affected by PCSK9 antibodies.
The only overhang for Esperion is the approvability of LDL-C reduction, as some expect the FDA to require outcome studies to prove a true clinical benefit. This is relevant to all lipid lowering drugs in development (especially PCSK9 antibodies). Amgen (AMGN) already filed its PCSK9 antibody (evolocumab) for approval and Sanofi/Regeron (REGN) are expected to file alirocumab this year, so a definitive answer should be given in 2015. Even if outcome studies are required for approval, ETC-1002’S clinical profile bodes well for achieving this goal.
To my knowledge, ETC-1002 is the only agent in development with a clear effect on LDL (30%) and hsCRP (40%) in statin failures, clean safety profile and oral bioavailability. The scarcity value coupled with the multi-billion potential for lipid lowering drugs make it an obvious acquisition target.
Exelixis – Robust efficacy for cobi but differentiation remains unclear
At ESMO, Roche and Exelixis (EXEL) presented positive results for cobimetinib in combination with Zelboraf in melanoma. Results were robust with a 3.6-month PFS benefit (9.9 vs. 6.2 months, HR=0.51) and a positive OS trend (HR=0.65) that will likely become statistically significant with additional follow up.
The data were clearly positive and should lead to approval of cobimetinib, but the drug does not appear differentiated from GSK’s (GSK) MEK inhibitor, which led to a similar PFS benefit (11.4 vs. 7.3 months, HR=0.56) when combined with GSK’s BRAF inhibitor (Tafinlar). GSK’s combination also led to a statistically significant improvement in OS (HR=0.69). The only clear difference was in the side effect profiles, as Roche’s combination led to more photosensitivity whereas GSK’s combination led to a higher rate of fever.
Without a clear winner, it remains to be seen which combination will be more commercially successful. On the one hand, Roche is the global leader in oncology and BRAF+ melanoma in particular. On the other, GSK’s combination is already approved in the US. Assuming a 50-50 split and a global opportunity of $600M for MEK inhibitors in BRAF+ melanoma, Exelixis should generate ~$100M in annual revenue. (30-50% profit split in the US plus 10-15% royalties ex-US).
Exelixis shares continued to slide despite the positive results and the imminent revenue stream expected to begin next year. This can be explained in part by the lack of clear differentiation from GSK’s Mekinist, but the most serious overhang for Exelixis is its significant debt ($380M). Until this is resolved, it will be challenging for investors to attribute real value to its pipeline.
We are selling our position in Exelixis given the lack of clear differentiation for cobimetinib in melanoma. We intend to consider getting in again once the debt issue is resolved (expected to occur in the coming months). We are selling our position in Celldex (CLDX) as well as Synta (SNTA), and a portion of our Incyte (INCY) position. With 40% of the portfolio in cash, we intend to selectively add positions in the coming months while maintaining a significant cash position in light of the rich valuations out there.
Portfolio holdings – Oct 5th 2014