With few exceptions, the drug industry is divided into two factions: the haves and the have-nots.
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The haves are drug companies that have approved products and are generally profitable. Unfortunately, the haves are also usually slow-growing, especially those that would fall within the traditional definition of Big Pharma.
The have-nots are typically small- and mid-cap drug developers in the biotech realm that are trying to bring their first or second drug to market, and are aiming to turn recurring profits. From time to time, have-nots turn into haves, but it's not as common as you'd think.
What we appear to be witnessing as investors right now are a small handful of mid-cap biotech stocks taking steps that could make them healthfully profitable within a matter of months or a few years. This makes these companies a potentially red-hot commodity for Big Pharma and other drugmakers that have been hit hard by generic competition or other issues that have stunted growth. It's no secret that Big Pharma stocks, and even biotech blue chips, have plenty of cash on their balance sheets, and these three mid-cap stocks could be ripe for the picking.
Let's state right off the bat that cancer drug developer Exelixis (NASDAQ: EXEL) is a personal holding in my portfolio, but a buyout has been the furthest catalyst in my mind over the past three-plus years I've held the stock. Exelixis' biggest catalyst has been Cabometyx.
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Following the failure of Cabometyx in the COMET trials for advanced prostate cancer, my vision of success for Exelixis was shaken but not broken. The METEOR trial for second-line renal cell carcinoma (RCC) had a primary endpoint of a statistically significant improvement in progression-free survival (PFS), not median overall survival like COMET-1, and previous studies involving Cabometyx had always seemed to find the mark when it came to PFS. Sure enough, Cabometyx hit its primary endpoint in METEOR for second-line RCC, and the stock has been unstoppable since. Not only did Cabometyx meet its primary endpoint, but it hit the "trifecta" of also providing a statistically significant improvement in response rates over placebo and overall survival.
But that's not the end for Cabometyx. The phase 2 CABOSUN study in first-line RCC demonstrated statistical significance for Exelixis' drug over current standard-of-care Sutent, leading to the strong possibility of a label expansion. We'll also soon have top-line data from the company's phase 3 CELESTIAL study for advanced hepatocellular carcinoma where a statistically significant improvement in median overall survival is the primary endpoint.
Should Cabometyx gain its label expansion in first-line RCC, find the mark in HCC, and have success in any number of exploratory combinations with cancer immunotherapies, it's not out of the question that Exelixis could generate in the neighborhood of $1.5 billion annually in peak sales from its lead drug. Considering the bountiful margins that could be had from such a drug, even with Exelixis having a partnership with Ipsen in ex-U.S. countries (not including Japan), Exelixis could fetch perhaps six times peak sales or more, suggesting a sale price of between $9 billion and $10 billion. A lot still has to go right for Exelixis, but 25% to 40% upside in a buyout isn't out of the question.
Another biotech stock that's the epitome of red-hot right now is Portola Pharmaceuticals (NASDAQ: PTLA). On June 23, Portola announced that the Food and Drug Administration had approved Bevyxxa (previously betrixaban) for the treatment of venous thromboembolism (VTE) in patients with acute medical illness.
An approval for Bevyxxa wasn't a given considering that the drug narrowly missed out on hitting its primary endpoint in the phase 3 APEX study. Though the once-daily oral drug did exhibit significant health benefits compared to Lovenox in a subsequent study by reducing the overall rate of death and blood clots, the p-value, a measure of chance in clinical studies, was just nominally outside of the usually tolerable range of statistical significance. Thankfully for patients at risk of deep vein thrombosis and for investors, the FDA saw through the minor miss in APEX and gave Bevyxxa the green light.
What makes Bevyxxa such an exciting new therapy is that it's practically uncontested as an at-home therapy. There's plenty of competition for VTE prevention in the acute hospital setting, but deep vein thrombosis happens most often while patients are at home. This could make Portola Pharmaceuticals' lead drug the go-to anticoagulant in this instance. Portola anticipates launching Bevyxxa sometime between August and November of this year.
The big question is, how much can Portola really squeeze out of Bevyxxa. Some Wall Street pundits predict around $1 billion in peak annual sales, but it'll really depend on how well Portola launches its product, builds rapport with physicians, and gains insurance coverage. However, if it does gain every bit of at-home market share as expected, and its launch is successful, there's reason to believe that Portola could command even a higher premium than the roughly three times peak sales it's currently valued. If I were to venture a guess (key word there being "guess," because no one knows for sure if any of these biotech stocks is going to be acquired), Portola could have up to 50% upside still left via an acquisition.
Perhaps the biggest reach of all among the three mid-cap biotech stocks, but the one that could easily command the highest premium compared to its current valuation, is Intercept Pharmaceuticals (NASDAQ: ICPT).
Intercept currently has one FDA-approved therapy on pharmacy shelves, Ocaliva for the treatment of primary biliary cholangitis (PBC). The PBC approval was good news in that it provides Intercept with some recurring revenue, but it's not exactly worth breaking out the champagne over. Peak sales from PBC are only expected to total around $290 million. Instead, the bubbly will come out if Ocaliva meets its primary endpoint in the ongoing phase 3 REGENERATE trial for patients with nonalcoholic steatohepatitis (NASH).
NASH, which is also referred to as "fatty-liver disease," affects between 2% and 5% of all adults in the U.S., and it's expected to become the leading cause of liver transplants next decade. It can lead to liver fibrosis, liver cancer, and even death. Intercept's Ocaliva in the phase 2b FLINT trial demonstrated not only a two-point or greater NAFLD activity score reduction in 46% of patients compared to 21% for the placebo, but it also led to an encouraging 35% mean score benefit in liver fibrosis, compared to 19% for the placebo. A drug that provides a real shot at stopping fibrosis in its tracks could be a multibillion-dollar opportunity.
So, what's the timeline on REGENERATE? Right now, we're looking at a top-line reading expected in 2019, with perhaps the drug hitting the market by 2019 or 2020, depending on timing of the data release. If approved, and assuming Ocaliva beats any other competing NASH drugs to market, we could be looking at a drug capable of $6 billion to $7 billion in annual sales. The company is currently valued at only $3.1 billion. Any potential suitor for Intercept would likely have to pay a 100% premium, if not higher, for the company based on its encouraging phase 2b data.
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