Biotech portfolio updates – Thoughts on ongoing correction and upcoming catalysts

The biotech sector is having a brutal summer, with major indices (IBB, FBT, XBI) down 15-20% from their July highs. Even after this decline, valuations for most biotech stocks are still rich and need to come down by an additional ~25% in order to become reasonably priced. As my working hypothesis includes a correction (with significant fluctuations) going into 2016, I still plan to have a significant cash position and complement it with leveraged short bio ETFs.

Although I am bearish on the sector as a whole, I intend to keep a significant (>50%) exposure to smid-cap biotechs that I find attractive, focusing on companies with near term fundamental milestones such as data readouts and partnering/acquisition announcements. Stocks that fit this description are Exelixis (EXEL), Trevena (TRVN), Esperion (ESPR) and Array (ARRY).

Exelixis – partnering discussions may turn into an acquisition

With what appears to be an impressive survival benefit (see my take here) in a pivotal trial in renal cancer (the METEOR trial), Exelixis’ cabozantinib has potential sales of $600M using conservative assumptions (limited penetration in RCC, no expansion to other indications). The company plans to present detailed results from the trial at ESMO/ECC 2015 (September 25-29). Based on last month’s press release the data should be outstanding with a significant PFS benefit over the market leader (Novartis’ [NVS] Afinitor) and an impressive survival trend that will have to be corroborated at a second analysis next year.

Cabozantinib’s safety profile is the drug’s main disadvantage so it will be important to see whether the safety profile will be deemed acceptable by physicians in light of the clinical benefit. Investors are also concerned about competition with BMS’ (BMY) Opdivo, which also demonstrated superiority over Afinitor in the same patient population.

Exelixis’ CEO indicated the company is in partnering discussions for ex-US rights for cabo. As Exelixis plans to submit U.S. and EU regulatory filings in early 2016 (the study was conducted in US and EU sites), the drug may receive approval in Q3 2016. By then, Exelixis must have a partner in place to launch cabo which will initially compete with Opdivo (expected to be launched on the same time frame).

The strength of the METEOR data (better PFS than the market leader, a strong survival trend) and the scarcity of novel oncology drugs should enable Exelixis to strike a lucrative licensing deal while retaining commercial rights in the US. The company’s modest market cap of ~$1.3B also makes it an attractive acquisition target, so partnering discussions may end up as an acquisition bid from a partner with an established oncology salesforce. Assuming peak sales of $600M in RCC for cabo, $50M in MTC (medullary thyroid cancer) for cabo and $100M for Exelixis’ stake in cobimetinib (MEK inhibitor partnered with Roche), Exelixis should generate $750M in annual revenues excluding any upside from other indications. Using a modest sales multiple of 4 results in a $3B acquisition price. Adding additional opportunities for both drugs may push the price tag to $3.5B.

Potential acquirers may be companies with a presence in GU cancers that do not compete directly with cabozantinib or companies with an interest to expand their oncology franchise. The prior group includes Bayer and J&J (JNJ), the latter group includes Gilead (GILD) and Celgene (CELG).

Trevena – Important readout in September

Next month, Trevena will report Phase 2b results for TRV130 in post-operative pain. The trial is comparing 2 doses of TRV130 to morphine and placebo. While TRV130 will likely be superior to placebo, superiority over morphine in terms of efficacy and/or safety is crucial for commercial success. In contrast to previous studies that evaluated fixed doses of TRV130, this trial uses patient-controlled analgesia (PCA) administration of TRV130 and morphine. This means that patients can control how much drug they receive up to a pre-defined limit.

On its recent earnings call the company disclosed a decision to increase the dose after an interim look at the data. This caught investors by surprise (although the company previously disclosed the trial has an adaptive design). Some interpret the company’s decision to dramatically increase the dose (from 0.1mg to 0.35mg every six minutes) as an attempt to improve efficacy (pain relief) after a disappointing efficacy interim readout.

The decision to escalate TRV130’s dose can stem from insufficient efficacy, good tolerability or both. My bet is on option #3 because management sounded upbeat at a recent investor conference (which means the trial is not a complete flop) but on the other hand if the low dose of TRV130 had been superior to morphine there would have been no need to dose-escalate. Next month’s results will have a dramatic impact on the stock as they will either validate or disprove Trevena’s bull case of a safer, more effective opioid.

Esperion – Regulatory clarity sets the stage for a deal

Esperion is down 55% from its 52-week high following what investors perceived as a restrictive label for Regeneron’s (REGN) Praluent, as Esperion is pursuing a similar strategy to that pursued by Praluent (patients who require additional LDL-C reduction because they cannot tolerate or do not respond to available options).

Praluent’s case has both positive and negative implications for Esperion’s ETC-1002 but the positive implications (approval based on LDL-C reduction prior to cardiovascular outcome data) trump the negative ones (Initial label is restrictive). The long term potential for these drugs remains huge as the label could get broader with outcomes data.

Last week, Esperion disclosed input from the FDA following an end of phase 2 meeting. FDA’s feedback was in line with expectations and therefore laid the basis for a registration program that mirrors that of PCSK9 inhibitors. ETC-1002’s LDL-C effect (25-30%)  is less robust compared to PCSK9 inhibitors (50-60%) but as an oral drug with a robust effect on hsCRP as well as other potential beneficial mechanisms it may take a significant market share.

Commercializing ETC-1002 will require a huge marketing footprint to support clinical trials in tens of thousands followed by marketing efforts covering tens of millions globally. Esperion can and intends to start a registration program for ETC-1002 but it is unlikely to complete it, making an acquisition likely already at this stage. Potential bidders include companies with a cardiovascular salesforce without a PCSK9 program like Merck (MRK) and AstraZeneca (AZN).

Array – ex-US partnership expected by year-end

Array is expected to announce an ex-US partner for its lead programs binimetinib (MEK) encorafenib (BRAF), which the company got from Novartis. In order to keep the two programs Array is obligated by anti-trust regulators to find a partner that can support a global development program. The company said it expects to have a partner by year-end.

Providing a time limit to partnering activities is somewhat unusual but this deadline is probably related to its agreement with Novartis. Binimetinib is in three phase 3 trials, the first of which (NRAS+ melanoma) is expected to readout in Q4 2015. This may make partnering discussions with a year-end timeline tricky although a potential partner will probably be interested in indications beyond NRAS+ melanoma that represents a modest commercial opportunity.

Array’s modest market cap of $773M may also turn partnering discussions into an acquisition although the company’s broad partnered pipeline may be viewed as a disadvantage. Potential partners/acquirers are global companies with an oncology franchise (and a focus on solid tumors) without MEK or BRAF programs. The list includes Pfizer (PFE), Merck and Lilly (LLY).

Portfolio updates

We are selling one of two positions in Seattle Genetics (SGEN). The company’s market cap ($5.16B) adequately captures the new label for Adcetris as a maintenance treatment and the company’s proprietary pipeline may take time to generate meaningful catalysts.

Portfolio holdings – August 23, 2015

Biotech portfolio - 23-8-2015biotech ETFS - 23-8-2015

78 thoughts on “Biotech portfolio updates – Thoughts on ongoing correction and upcoming catalysts

  1. Hi
    Youre input is always appreciated. Just wondering whether you think TNXP and SNGX are good buys at current prices with their short term catalysts near?


    Hard day for them. FLXN down -38%.
    Do you think a buyout is possible (TTPH) ? Currently traded at $9 (-80%).

    Ohad, I would like to hear something about XENE, as you know… 😉 Today the presentation will be interesting at the 10th Annual Wells Fargo Healthcare Conference. Still waiting for news about the Genentech collaboration on pain…

    When can we expect an update on your portfolio?

    Have a nice day, n0cturne


  3. Dave – Sorry, don’t have a strong opinion on them.

    n0cturne – Very disappointing news for TTPH and FLXN….
    But you were right on AKBA, data look very nice!

    Re: XENE – The drug started P1 a year go so Genentech must have a lot of data, potentially some biomarker or preliminary efficacy results.

    Not sure about my next portfolio update, busy times…



  4. AKBA

    Yes, very nice data indeed. Due to more catalysts (Q4 2015 Japan partnership), European Partnership 2016 i think AKBA is at the current valuation still a buy. What do you think?

    Compared to FGEN there is a huge valuation gap, which doesnt seem justified. FGEN is 12-18 Months ahead by bringing the drug to the market , but if you look at the drugs themselves they seem comparable imo. I think AKBA is still undervalued. Whats your take?

    Greetings, n0cturne


  5. Hi Ohad,

    I’m confused about GNCA’s Phase 1/2 data regarding the placebo group, which shows efficacy compared to baseline, although the lesion reduction is not primary endpoint.

    Also, it looks that 100 ug has worse results than 30 ug, which puzzles me as well.



  6. Hey Ohad

    what is going on with the biotech? up again? What to do with BIS?

    also, nice pop by CLVS, all-time high on news that AZN drug PFS is not superior to CLVS, and continued responses in negative patients.



  7. Ohad

    Any opinion on KPTI.Stock has come down quite a bit over the last several months.with ASH is about 3 months away.would think they will have some new data to present for selixenor.


  8. OMED

    You have a strong opinion there , ohad? Nice partnership , potential milestone payments $4b , attractive valuation. Do you like the drugs?



  9. Kenny (FGEN) – I like both of their programs but decided to wait for now.

    Chris (AXON/BLUE) – Both are expensive but if I had to choose I would go with BLUE without hesitations because in contrast to AXON which represents a marginal barely clinically meaningful benefit, BLUE has the potential to revolutionize many genetic diseases, not just blood disorders like SCD and beta-thal.

    n0cturne (AKBA) – I haven’t had time to delve into the data. I still “feel” that FGEN has a cleaner drug but that’s just a hypothesis.

    Cloud (GNCA) – I am new to the field so still doing my homework on that name. In general the P2 package for GEN-003 is not perfect but the viral shedding rate definitely looks superior. GEN-004 should have data next quarter, which is almost a free call.

    Dan (BIS) – I plan to hold it as a hedge as I think the correction has more legs.

    Re CLVS – The jump is justified as it positions CLVS in a better position with comparable PFS in predominantly western patients (which are tougher to treat) and a signal in T790M- patients even though it is still unclear to me how this will impact the label, at least initially.

    Dave (KPTI) – I still like their mechanism even though the therapeutic window is narrow (puts STML in an interesting position with their reversible XPO1 inhibitor). In contrast to other indications, selinexor has robust activity in myeloma so ASH is definitely something I look forward to. Thinking about adding prior to the meeting.

    Mike (AUPH, GNCA) – Both have important binary events in Q1 2016 and Q4 2015 respectively. Until then they are high risk stocks and I plan to have limited exposure to both.

    N0cturne (OMED) – Science and approach are inspiring but so far clinical data are underwhelming imo. P2 randomized trials for the DLL4 and Notch antibodies will take time to read out so I don’t see any rush to get in.

    robert goulet (EXEL) – I know many are concerned about Opdivo but I don’t view it as a competitor to cabo as I conservatively assume that Opdivo will become the dominant 2nd line treatment (may move to 1st line in down the road). Cabo’s market will be patients who fail Sutent and Opdivo (or other PD-1 antibodies). As RCC patients are rarely cured with Opdivo, 3rd line represents a significant unmet need.

    Chris (GNCA) – I don’t plan on adding at this point in time. Stock is still a high risk bet.



  10. Or AIMT vs. DBVT.
    I am getting more and more confused by ARRY. Shouldn’t they be announcing a partnership soon, and why the market is so negative about that?!?


  11. Ohad

    do you see CETP inhibitors as a threat to ESPR.Today amgen purchased a private company developing a cholesterol lowering drug and merck and others have similar in development.


  12. Immunogen put up a new presentation on their site:

    On page 24 it summarizes the results for Anetumab Ravtansine, partnered with Bayer. ORR is 31% for all patients and 50% for second line patients. An abstract is available here:

    “Anetumab at the MTD showed a PR in 6 pts (19%) and SD in 18 pts (47%) overall. Five of 16 (31%) mesothelioma pts at the MTD had durable PR (>600 days in 4 pts) and 7 (44%) had SD. Five PRs occurred in 11 mesothelioma pts who received anetumab as second line treatment (45% response rate).”

    Do you have any thoughts about this update and do you have an estimate for what the royalty rate on this drug might be if it reaches the market?


  13. cloudy (DBVT) – Sorry don’t know them well.

    andre (DBVT/AIMT) – Sorry, not familiar with the allergy space.

    Re ARRY – Yes they must announce a deal (imo an acquisition is more likely) within 2-3 months. I actually became more bullish on MEK as a class following updates from GSK’s trials in BRAF melanoma where Tafilnat+Mekinist (now the combo belongs to NVS) demonstrated a 7+ month benefit in overall survival. This is a strong validation for MEK in other indications.

    dave (ESPR) – Yes I do CETP inhibitors as a threat to ESPR as they are oral drugs with good LDL signal and they are already in outcomes trials. I just think that ETC-1002 works on a validated pathway with a validated clinical profile (LDL, hsCRP) whereas CETP has a checkered history. This doesn’t mean CETP couldn’t eventually succeed (Amgen obviously believes in the mechanism…).

    Cloud (AERI) – Impressive turnaround! I would wait to see actual data. What bothers me is the fact Rhopressa is not superior to Timolol, which has a modest IOP effect.

    Chris (LBIO) – Strong efficacy. Competition and scalability are two concerns. Don’t have a strong opinion there…

    Lgonber (TGTX) -Going after Roche’s dominant CD20 position is either gutsy or stupid… I don’t think TGTX has a superior combination vs. other regimens currently in development although both of their drugs are clearly active.



  14. Wildbiftek (IMGN) – Thanks for sharing, this is much better than I expected. The most impressive part is the multiple cases of very durable responses (almost 2 years). If this agent was an immune checkpoint, the company would be valued at $4B by now…

    I wonder if they could correlate responses with meso expression.



  15. Was wondering what your thoughts are on ARRY now. Are they still a potential buyout candidate. If so, what chance % do you give a deal happening and two, what would be a fair price per share. Thank you 9/02/2016


  16. John (ARRY) – I don’t think they are a likely buyout candidate unless a)they have a meaningful wholly-owned franchise or b) MEK becomes an important target, especially as PD-1 add on. The NRAS opportunity is limited and the BRAF market is highly competitive, even if bini/enco P3 is successful. There could be good news on the MEK front, especially for AZ’s selumetinib in KRAS+ NSCLC and Roche’s atezo+cobi studies. In that case, BMS


  17. John (ARRY) – I don’t think they are a likely buyout candidate unless a)they have a meaningful wholly-owned franchise or b) MEK becomes an important target, especially as PD-1 add on. The NRAS opportunity is limited and the BRAF market is highly competitive, even if bini/enco P3 is successful. There could be good news on the MEK front, especially for AZ’s selumetinib in KRAS+ NSCLC and Roche’s atezo+cobi studies. In that case, BMS is an obvious acquirer.



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