Portfolio updates – Biotech M&A valuations and ADCs

It was nice to see M&A picking up in the 2nd half of 2019, with multiple high profile acquisitions. Two sectors of interest were kinase inhibitors for oncology (Array Biopharma, Loxo, ArQule) and Gene therapy for rare diseases (Spark, Audentes). siRNA came back to the limelight with Novartis’ $9.7B bid for MDCO for its twice-yearly PCSK9 treatment, marking a radical change in sentiment towards siRNA.

This uptick is great news for investors in small/mid-cap biotechs for which acquisitions are the primary exit route. Looking at some of the deals, I am having a hard time justifying valuations or seeing the acquirers making a decent ROI in the long run. What bothers me is not the fact that many acquired assets eventually fail but the amount some biopharmas are willing to spend for high risk assets, sometimes even preclinical ones.

To me, Dec 9 provided a good example with two acquisitions (ArQule and Synthorx) similar in size but very different in risk profile. I realize there might be some personal bias here as Pontifax is one of the largest shareholders in ArQule, but the fact that both companies were acquired with similar valuations is a real head-scratcher to me.

I try not to discuss ArQule (ARQL) for obvious reasons but suffice it to say that their lead drug has solid efficacy in humans with a clear route to market. Opportunity size is always debatable, ranging from hunderds of millions to several billions, but the drug has a high likelihood of reaching the market and generate revenues based on a straightforward clinical program. In other words, Merck is likely to see more than $2.5B in sales from this acquisition.

Synthorx’s (THOR) is on the other end of the spectrum as its lead agent (THOR707) just entered P1 with very limited visibility towards the market. THOR707 is an engineered IL2 designed to retain the cytokine’s beneficial effect on T cell activation while sparing side effects and undesirable activity (Treg activation and vascular leak syndrome). The drug’s potential is significant, of course, as with any IO (immuno-oncology) agent that is heralded as the “next PD1” but given the lack of clinical validation, the poor translation from animals to humans in IO and recent experience with other IO agents (Nektar’s next-gen IL2 in particular) one has to admit technical risk is high.

I like the drug and Synthorx’s platform and completely understand why it is an attractive acquisition target. Nevertheless, I am struggling to understand how someone can pay $2.5B for an asset that just started P1, knowing that most drugs fail and that success rate in IO is one of the worst in the industry. I realize Sanofi’s management was under a lot of pressure to unveil something new at its R&D event but if I were a Sanofi shareholder I would expect the company to treat shareholders’ money with a little more respect.

In general, I never understood lucrative preclinical deals where a pharma pays hundreds of millions upfront for something that hasn’t been proven in humans. These deals typically don’t age well, especially in areas of low technical success like IO.

A recent example can be seen with Novartis’ decision to terminate its STING program it had licensed from Aduro at the preclinical stage for an upfront of $225M (and they didn’t even get full commercialization rights). Just like engineered cytokines today, STING was a super-hot space in 2015, but that doesn’t necessarily change drug development statistics. Another notorious preclinical IO deal was the BMS/Flexus acquisition,  in which BMS paid 800M upfront for a preclinical IDO inhibitor.

The trend seems to continue as earlier this year, Novartis acquired another company with no clinical data (lead program just started P1 in healthy volunteers) and paid $310M upfront. Novartis will probably write off these $310M, which still looks like an excessive amount for an asset with no clinical data but at least they didn’t pay $2.5B…

2019 as a turnaround year for ADCs

After years of stagnation, antibody-drug conjugates are finally gaining momentum.

Seattle Gentics (SGEN) and its partners won FDA approvals for Polivy (Anti CD79b for lymphoma) and Padcev (Anti-nectin4 for bladder cancer). Despite relying on legacy ADC technology used for Adcetris, both agents demonstrated unequivocal efficacy with a reasonable safety profile, and are likely to become commercially successful products.

On the next-gen ADC front, Daiichi presented updated results for its two lead programs (Enhertu targeting HER2 and DS1062 targeting TROP2). Despite demonstrating unprecedented efficacy in breast and lung cancer, respectively, safety profile remains challenging (especially lung toxicity). Enhertu just received FDA approval in last line HER2 breast cancer, implying the risk/benfit is still attractive (the waterfall chart below from SABCS 2019 is truly impressive).

Enhertu - waterfall

Enhertu was the subject of a huge deal between Daiichi and AstraZeneca, which paid $1.35B upfront (out of a total of $6.9B) for co-promotion rights. It is too early to assess this deal but given the strong clinical data, the multibillion opportunity in HER2 breast cancer and the potential to expand to other HER2+ tumors (gastric cancer), this deal looks like a calculated risk from Astra’s point of view. This is in contrast to their 2015 decision to buy 55% of Acerta for $4B. Enhertu’s clinical profile and mechanism are radically different from approved HER2 agents, as can be seen in the cross-trial comparison below from Daiichi’s recent R&D event.


The same could not be said about Acerta’s Btk inhibitor (Calquence), which was another covalent inhibitor like Imbruvica with slightly better selectivity and overlapping resistance mechanisms. Reversible Btk inhibitors like ARQ531 and LOXO305 are mechanistically different from Imbruvica, which is why they (in contrast to Calquence) actually work in Imbruvica failures.

The Astrazeneca/Daiichi deal also compares favorably to the Abbvie/Stemcentrx acquisition, where Abbvie bought an ADC with dubious efficacy (22% response rate, median PFS of 3.8 months) and a problematic safety profile for $5.8B.

Beyond Enhertu, I am still excited about Daiichi’s TROP2 program, DS-1062. Despite seeing significant lung toxicity, it still looks like a viable product with potential utility in multiple solid tumors. A recent update from the company continues to show clear efficacy. Although the spider plot chart at the 8 mg/kg cohort is not as clean and striking as the initial one from WCLC2019, most patients experience tumor shrinkage already at the first scan so a 50% response rate is still realistic.


Other ADC programs to watch are Zymeworks’ (ZYME) bispecific HER2 ADC and Sutro’s (STRO) FRa ADC, both expect to have readouts in 2020. I like both programs as they utilize new technologies that might solve issues with current ADC technologies.

Zymeworks’ ZW49 binds two different sites on HER2 which may make it more potent to target cells, potentially expanding the therapeutic window. Sutro is using site specific conjugation to generate a more homogeneous ADC product (so far, approved ADCs are a mixture of several entities with different drug-antibody ratios). The company’s CD74 program (STRO-001) appears to have a narrow therapeutic window, which may be related to the payload it employs. The FRa ADC (STRO-002) utilizes a different payload and appears much better tolerated but efficacy is still too early to assess.

Portfolio holdings – Dec 22, 2019

portfolio - 22-12-2019biotech etfs - 22-12-2019

72 thoughts on “Portfolio updates – Biotech M&A valuations and ADCs

  1. hi Ohad,

    MIRM is an interesting company, and it resembles a bit AUPH for some reasons:
    – large n safety datatbase (maralixibat was tested in > 1500 persons whereof > 100 children)
    – high unmet need for the pediatric indications they are targeting, e.g. in ALGS, Maralixibat would be the first approved drug. It is an orphan pediatric indication with small population size, but premium pricing should be possible, and a pediatric disease voucher is in place. Maralixibat has breakthrough designation for puritus in ALGS. Breakthrough designation also for PFIC2.
    We talk about serious illnesses, because the only alternative is often a liver transplant, or external biliary diversion surgery (PEBD).
    – they don’t have to make a lengthy phase 3 for ALGS indication and will start rolling submission in Q3 2020
    – also the phase 3 trial readout in PFIC2 is not too far away

    Market cap some 500 mio. after the recent run which seems not very cheap but also not expensive imo.

    What do you think about the company?


  2. AGTC positive results for P2 efficacy and durability.
    It’s moving up now keeping up with ZYME,XENE,NERV,TGTX, AUPH
    small bets.

    Thanks again Ohad.


  3. Ohad
    it looks that the AGTC data are better than NITE’s. They reported improvement of visual activity, not observed before. +5 letters looks significant!
    Once you said that you wanted to see the XLRP data before adding to AGTC.
    Is the data good enough to add to the position?
    Or you would wait for the ACHM trials to fail. The data are due also in January.
    I guess they will raise cash soon, definitively before the ACHM data.


  4. Ohad or anyone have an opinion on BPMC?

    $AGTC Reports Positive Six-Month Data from its Ongoing Phase 1/2 Clinical Trial in X-Linked Retinitis Pigmentosa

    a got a small position at $5=/share.



  5. Sorry for the AGTC mix up.

    $BPMC Avapritinib Approved PDGFRA mutant GIST – Label Dispels Bear thesis FDA approved avapritinib (Ayvakit) for treatment of adults with unresectable or metastatic GIST harboring a PDGFRA exon 18 mutation (including D842V). approval comes ahead of the Feb 14, 2020, PDUFA date


  6. the NDA for MYCAPSSA has been accepted by the FDA and the PDUFA target action date has been set to June 26, 2020; CHMA share price should increase – whats your opinion Ohad?


  7. Ohad

    ZYME. The stock has appreciated over 300% since your purchase in your model portfolio. Can you speak about the potential for ZW49 as it gets advanced thru its multiple clinical trials and the data they released today?

    Also, in looking at the CEO-CFO ownership of stock, I was surprised to see such small holdings as only 70,000 shares combined. On the surface doesn’t appear to show a lot of confidence. What are your thoughts on this?


  8. STML – Stemline Therapeutics Announces Preliminary 2019 Net Revenues for ELZONRIS
    $43.2 million in estimated ELZONRIS net revenues for the year-ended December 31, 2019
    $11.8 million in estimated ELZONRIS net revenues for the fourth quarter of 2019

    The stock fell more than 20 percent after hours
    would you add at this point if its less then 8$?


  9. Hey all re: STML
    Stock falling like a rock all the way to low $6s
    market cap at just over $300M
    I have added, but too early. 😦
    commercial execution is key, but hopefully they can expand indications by next year and grow sales? European approval could happen this year, but that will require investing in sales operations, unless they outlicense ti someone? so that may be a non-event.

    Ohad, what is our take on STML? Thanks as always for your insight!



  10. Alex, Dan & Ohad,
    Stemline’s Sept “19 cash was at about 180 million. I’m not sure if ELZONRIS net out, after marketing and Manufacturing to a +.
    Still, with that one marketed product, the company is selling for about 8x earnings (40 million x 8 = 320 million; 50 million outstanding shares).
    So it may represent a buying opportunity, especially if the rest of STML products/platform has any value here (Ohad…your thoughts here).
    The other thing it highlights is the markets desire to see M & A . Biotech down significantly yesterday after JPM ‘20 opened without any M&A news.
    Stemline might have been viewed as a takeout candidate if sales were more robust.
    Again, Ohad…..time to take profits in general in the space, add to BIS and wait for a pullback?


  11. Frank, at al.
    STML problem is the sequential Q/Q growth. In fact there is a decline from 13.3M to 11.8M. I would be cautious until the revenue changes the trend

    BDTX files for IPO. According to the S-1 the technology looks pretty cool- personalized precision small molecule. They think they can “out-smart” the cancer mutations and solve the durability problems of many targeted therapies. Unfortunately only pre-clinic.
    Is it worth watching or the approach is hopeless?


  12. hi Ohad, AZ out of the race with Epanova (Strength trial failure), ACST also gone as potential future competitor. AMRN really the only one with CVOT!

    I know, $7b market cap is quite something, and patent cases still ongoing, but this will be a huge drug! CEO preparing suppliers for $5b peak sales.

    I think there is some room to go, no?


  13. Andre,
    Re: STML.
    Thanks. True the Q/Q sequential revenue numbers are not inspiring. It’s still pretty early in its evolution as a marketed drug and they all undergo Vetting and price adjustments through Insurers, PBM, CMS etc and often show seasonal Q/Q Adjustments.
    The Q: for Ohad remains whether the current valuation at 8x current sales of ELZONRIS has significant upside based on the drugs current indications and STML’s ongoing attempts to expand its reach + gain Europe / Asia exposure.
    The value of the rest remainder of their programs or their platform as a whole ( as an M&A) is an unknown that Ohad can shed some light on.


  14. Hello Ohad,

    BioNTech bought Neon Therapeutics. They like their neoantigen T Cell therapy.

    Genocea has also a neoantigen T cell therapy.

    Is this a new interesting field?



  15. Frank –
    BCYC – Valuation is low but for ADCs I prefer large targeting moieties which seem to confer a better product profile as opposed to radioTx where small moieties are superior.
    SGEN – It’s a fair question… I don’t see them getting bought for 20B without another wholly owned success story but plan to keep it for now as part of my exposure to ADCs.

    Elementsofz (ZYME) – I have high hopes for bispecific ADCs. In a nutshell, they increase potency due to enhanced on target internalization without affecting off target tox.

    Richard Baker/ Alex (CHMA) – Don’t know, people are waiting for FDA decision and launch. They re-submitted their NDA on Dec 26.

    IDYA – Biology looks excellent but still early stage, definitely one to watch.
    MGTA – I like them and following them, new conditioning regimens are definitely needed.

    Gene H (MGTA) – Yes, prefer to see more data but love the approach.
    Still no plans to start a fund but thanks for the kind words !

    Neil M (ONVO) – Sorry, not following them closely.

    Rüdi (TRVN) – I haven’t been following the story for a while but I recall this program looked attractive at the time. Seizures overhang is still there t some extent despite moving to P2.

    Sam (CTMX) – I think their technology is more pertinent to bsAbs as masking hte binding arm might not impact off target tox with ADCs, but that’s just a hypothesis.

    Sam (XNCR) – Yes, clearly a set of validated technologies (less confident about 208 in the absence of randomized data). Not sure whether this justifies market cap but definitely a productive engine.

    Lawrence (SGMO) – Agree, they are no longer a ZFN pure play. Hem A program is already partnered and field is very competitive so prefer to watch from outside for now.

    Daniel (MOR) – I am not as excited as others about 208 given the lack of randomized data. DLBCL is becoming very competitive and two-drug combo without randomized data is too risky for me. Beyond that they have a broad partnered pipeline but need to re-visit and check if they have any wholly owned advanced assets with clinical poc.



  16. James (AXSM) – Sorry, hard for me to judge.

    Marc (BNTX) – Agree about strength of technology and platform but for a company with no clinical validation, valuation looks outrageous to me. Similar to MRNA…

    Richard Baker (PRVB) – Sorry, don’t know them well.

    John (CHMA) – Since the active drug is the same or similar to the injectable patients were on, absorption with the oral drug could explain the fact “only” 58% responded. I still think that for these patients, Mycapssa will become the preferred option in order to avoid painful injections.

    andre (APLS) – I also thought so initially but looks like there are still open questions the market would like to resolve. Not too familiar with their programs, a lot of activity with anti-complement drugs…

    Martin (ABEO) – Nope…

    Christian (MIRM) – Need to take a look, not sure how robust their biology is.

    andre (AGTC/NITE) – I still didn’t have a chance to review the data thoroughly, it was a little challenging to understand what the effect is based on the deck but the fact two different programs have a signal in the same disease is encouraging by itself.

    RAM (BPMC) – Tempting to own following LOXO, ARRY, RXDX but at the end of the day market caps for BPMC and DCPH are quite generous and factor in strong GIST and SM launches

    Rüdi (CHMA) – I plan to keep my shares but it’s a binary high risk event.

    Jinyu (ADAP) – That was a very pleasant surprise but I prefer to wait for more data, these studies are notorious for generating initial efficact signals with “index patients” that are not corroborated further on.

    Dave (ZYME) – I admit I was surprised by the strength of the stock, I personally have high hopes for ’49 but it’s hard to predict. Based on the update at JPM it looks like there are no show stoppers but efficacy is still an open question.

    Alex (STML) – No plans to add for now, numbers were indeed disappointing and we need to see if this is part of a trend or not.

    Frank (BIS) – I thought the sector and broad markets are expensive 2 years ago and still think a correction is likely but so far the markets proved me wrong. I plan to keep a significant cash reserve + BIS position.

    andre (BDTX) – Agree technology looks cool with teh potential to overcome resistance to existing drugs and mutations not amenable to standard inhibitors. Prefer to wait for clinical data.

    Christian (AMRN) – Agree. Prefer to wait for more clarity on the IP.

    Les (SNGX) – Not familiar with them, sorry.

    Richard Baker (KURA) – Yes, I think they are approaching attractive valuations.

    Duane (NK) – Didn’t havea chance to see their data, inherently skeptic about this company but hard to ignore two CRs. I prefer to wait for full data resentation as I am nervous about these out of context reports.

    Toby (BNTX/GNCA) – Yes, the field is interesting but IMO not via vaccines.



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