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6 Oncology-Focused Biotech Growth Engines: Mara Goldstein
Source: George S. Mack of The Life Sciences Report (8/5/13)
For Cantor Fitzgerald Senior Biotechnology Analyst Mara Goldstein, the spotlight is always on oncology and the premium revenues commanded by new products in the space. That clarity brings the science, unmet needs and market opportunity into sharp focus for investors. In this interview with The Life Sciences Report, Goldstein makes a winning case for six cancer-focused companies that range from micro caps to genuine large-cap stocks, each with upside potential that could be stunning.
The Life Sciences Report: Mara, we’ve experienced outperformance in large-cap biotech, and I think this has been going on for about a year. Is that right?
Mara Goldstein: Let me break it out a bit. Year over year (YOY), the large-cap biotechs are up about 59%. In oncology, which is much of a focus for us, mid-caps have appreciated about 33%, while smaller-cap oncology-focused biotechs are up about 25%. Performance on a YOY basis is definitely skewed toward the broad group of large-cap names.
However, on a year-to-date (YTD) basis, performance has been roughly equivalent among the three groups. The group of large caps biotechs that we track—those with market capitalizations greater than $10 billion ($10B)—have risen about 36% YTD. The mid-cap oncology stocks that we track are up about 34%. The small-cap stocks that we track are up about 30%. We track performance on an absolute basis rather than share-weighted, so given merger-and-acquisition (M&A) activity in the sector, we may be underestimating performance. And while we look at universes of mid- and small-cap oncology-focused biotechs, we track all large caps, given that it is a fairly small group.
TLSR: The rally has been broad, but as you say there aren’t that many biotech large caps—not a lot ofCelgenes (CELG:NASDAQ) and Amgens (AMGN:NASDAQ) in biotech. Focusing for a moment on large-cap outperformance, was that a sign that investors were being conservative, or perhaps concerned about the market? A sign of an unhealthy market, where investors fled to quality? How do you read it?
MG: We don’t view it as a sign of conservatism, concern or an unhealthy market. Yes, it’s true that investors might view large caps as defensive names, but right now the large-cap biotechs have the drivers in place to experience high growth—those drivers being new product introductions. That is certainly the case for Celgene, a name we follow, which has experienced valuation expansion over the last year. We think the opportunity exists for continued multiple expansion.
On a YTD basis, as well as YOY, we see strong performance among the large-cap biotechs. New product cycles are widely prized among investors, and so it makes sense for companies at the initial stages of new product flow to experience valuation expansion ahead of peers that have more mature product portfolios. Again, we think Celgene is in that camp, but there are a number of other companies as well, such as Gilead Sciences Inc. (GILD:NASDAQ), Regeneron Pharmaceuticals Inc. (REGN:NASDAQ) and Biogen Idec Inc. (BIIB:NASDAQ).
TLSR: Amgen is now—and has been for quite some time—a fully integrated biopharma. It is in need of acquisitions to continue to grow, just like its big pharma brethren. At the very end of June, Onyx Pharmaceuticals Inc. (ONXX:NASDAQ) said that Amgen made an unsolicited bid for the company. You’ve been quite interested in that offer. Can you tell me why?
MG: First let me say that we do not cover Amgen or Onyx. But we do track this market. While Amgen may have had its reasons for making the bid for Onyx, there has been other M&A activity as well. Broadly speaking, the M&A activity reinforces our notion that access to new sources of product and revenue is of ultimate importance in maintaining growth in revenue and earnings, and can be a tremendous driver of valuation expansion. The fact that Amgen made an offer for Onyx that was just above the historical revenue takeout range usually seen for biotech valuations seems to make a statement that oncology assets are highly valued. The oncology market, broadly, has been a strong growth engine for the industry, as waves of innovation—monoclonal antibodies, personalized therapeutics are examples—change treatment paradigms and create value for companies and shareholders.
TLSR: You’ve used the bid and Amgen’s attributed value for Onyx as something of a proxy for a company that you follow and have a lot of interest in. Could you make that case for me?
MG: We tend to view events and other activities, such as M&A, with a relative lens. That is, if a potential acquirer makes a bid for a target, that valuation can be used to benchmark valuations for other companies with similar attributes. For companies with product-related revenues, the historical takeout valuation range has been 3–9x forward revenue. We can make the case that the upper end of the range is for products experiencing either high rates of growth, or those that have commercial applications in more than one disease indication. We can apply that benchmark to the projected revenue stream of a company and discount it based on any number of risk factors, such as clinical or regulatory risk. Following the disclosure of Amgen’s interest in Onyx, we examined what a company like Celldex Therapeutics Inc. (CLDX:NASDAQ) could be w orth on a takeout basis using such a benchmark, because Celldex has a two clinical assets in phase 3 development.
TLSR: You were also using the Amgen bid for Onyx, an oncology-focused company, to justify your $142 target price for Celgene. Could you explain why?
MG: We didn’t use it to justify our target on Celgene because we think the company’s fundamentals—that is, revenue diversification driven by new products and expanding growth rates—are sufficient drivers of price-earnings (P/E) multiple expansion, and we do not view Celgene as expensive based on these fundamentals. But we did look at Amgen’s bid for Onyx in the context of how it could be applied to companies that we believe have strategic value.
Broadly speaking, we have viewed takeout valuation as the upper limit of what the current and near-term fundamentals of a company could support. A premium is typically paid because the target company has assets that are valuable to the acquiring company. The value could be driven by a need to protect profit and loss from a patent expiration, a buy versus build strategy in an important subsector or for other reasons. Onyx competes with Celgene in the multiple myeloma area, and we think Amgen’s bid for the company highlights the unique strategic assets in the Celgene portfolio.
TLSR: Let’s stay with Celgene. When we spoke last, for The Life Sciences Report Biotech Watchlist 2013, you liked the company. Its stock has more than doubled over the past 52 weeks. It’s up 110% during that time, and year to date it’s up 70%. Congratulations on this call. What is the growth story from here on?
MG: When we launched coverage of Celgene in April 2012, our thesis was that Revlimid (lenalidomide), the company’s flagship product for multiple myeloma, was a solid performer, but that revenue diversification away from Revlimid would occur, driven by new product launches. We are at the beginning of this dynamic, with the recent launch of Pomalyst (pomalidomide) for multiple myeloma, the pending approval of Abraxane (nab-paclitaxel) for pancreatic cancer and the regulatory filings for apremilast for psoriasis and psoriatic arthritis.
The question, as you rightly ask, is whether these other products are now fairly valued in the share price, given the valuation expansion over the past year. My argument for continued interest in Celgene is that I don’t think this has fully played out yet. I believe revenue and earnings growth still have an upward bias, and this is enhanced by the company’s cost structure and financial flexibility. There is also a big phase 2 pipeline that holds the potential to drive value into the shares.
TLSR: You’ve just mentioned a couple of molecules—Abraxane and apremilast—that offer opportunity for growth. I’m looking at Celgene’s total revenue for 2012 of $5.5B. Full-year sales of Revlimid were $3.8B, a 17% increase over 2011. Vidaza (azacytidine), a DNA methyltransferase inhibitor used in myelodysplastic syndromes, did $823 million ($823M) in 2012, and that’s with a direct competitor, Dacogen (decitabine, Eisai Inc. [ESALF:OTCPK]). You have two drugs combining for 84% of Celgene’s top line. Why is this still a compelling story with so much revenue coming from Revlimid?
MG: For us, it’s all about revenue diversification. Today, much of the company’s top line is concentrated in Revlimid sales. The product has a strong hold in the market and has yet to be fully launched in Europe, so we are looking for additional growth there.
However Revlimid, as a percent of sales, will decline because of new sources of revenue. And the new revenues from Pomalyst, Abraxane and apremilast should grow at a much higher rate than Revlimid. At the end of 2012, Revlimid accounted for about 70% of Celgene’s revenue, and we anticipate that will fall to about 50% in five years, but sales will still continue to grow. We think the transition is particularly compelling because it is driven by more than one product, and this diversifies risk.
Revlimid has essentially become a backbone treatment for multiple myeloma, and if you look across the broad spectrum of trials conducted in multiple myeloma, Revlimid is broadly incorporated into new combinations. We think this creates stability for the franchise. We want to see Revlimid’s predominance in Celgene’s top line lessen, but we don’t want it to be driven by declining sales. We’d rather see that movement driven by inclusion of new sources of revenue.
TLSR: You mentioned apremilast for psoriatic arthritis. In a research note you said, “Ironically, one of apremilast’s most compelling features may be is that it is not a traditional biologic.” Certainly, if I were taking any of the anti-TNF (tumor necrosis factor) biologics, such as Enbrel (etanercept; Amgen), Humira (adalimumab; AbbVie Inc. [ABBV:NYSE]) or Remicade (infliximab; Johnson & Johnson [JNJ:NYSE])?, I would love to be able to wind down to a pill. Is that going to be the big selling point for apremilast?
MG: In the spectrum of indications such as psoriatic arthritis and psoriasis, there are several small molecular agents that are widely used. These include methotrexate, cyclosporine and retinoids. But these carry a high side-effect burden, particularly when used for long periods of time, including birth defects, liver damage, kidney problems, anemia and hypertension. For patients with disease unresponsive to currently used topical medications, oral medications and phototherapy, biological agents such as Enbrel and Humira are the next treatment option.
Thoughout its clinical trial program, apremilast was thought to be seated behind the biological agents, but data generated in the phase 3 program suggests a rationale for apremilast to be seated in front of biologicals—and maybe even as a replacement, in the case of psoriasis, for methotrexate or cyclosporine. That, to us, is very compelling because that is a huge market.
TLSR: What are the catalysts for Celgene?
MG: The company has a couple of catalysts ahead. For Revlimid, the European submission for newly diagnosed disease should occur by year-end, based on the recent positive readout of a study known as MM-020. We also think that approval of Abraxane in pancreatic cancer, with a late-September PDUFA (Prescription Drug User Fee Act) date, is a catalyst.
Apremilast regulatory actions will also be a catalyst. A new drug application (NDA) for psoriatic arthritis was filed in the U.S. earlier this year, and a separate NDA will be filed for psoriasis this year, as well as a combined psoriasis/psoriatic arthritis filing in Europe. We look forward to more data coming out of the apremilast clinical trial programs, as well as product approval. And a regulatory decision in Europe for Pomalyst, for relapsed or refractory multiple myeloma, is expected this year. The company has a big, earlier-stage pipeline that doesn’t have a lot of visibility, so there’s opportunity from that as well.
TLSR: What is the attraction of Abraxane? This is an old cytotoxic agent, paclitaxel, reformulated.
MG: Abraxane’s initial launches were based on clinical results that did not provide signficant overall differentiation versus taxol, with the exception of in certain subpopulations of non-small cell lung cancer (NSCLC) patients. But with the release of positive data from the MPACT study, Abraxane now has a role in the pancreatic cancer market, where there has been little advance and uniformly poor patient outcomes. This is the core driver behind our enthusiasm for the drug.
The MPACT trial evaluated Abraxane combined with standard-of-care therapy (gemcitabine) and showed an overall survival benefit that approached six weeks. Given limited treatment options and overall poor outcomes for the disease, there is strong rationale to use Abraxane in combination with gemcitabine. MPACT was conducted in patients with metastatic disease, and the company has yet to fully test Abraxane in earlier stages of pancreatic cancer, so there may be additional upside.
In addition to pancreatic cancer, Abraxane has shown compelling phase 2 data in malignant melanoma, and mature phase 3 overall survival data is expected this year. We think of Abraxane as an older product with a new lease on growth. And because the manufacturing infrastructure is already in place, we expect this drug to generate beneficial economy of scale for Celgene.
TLSR: Pomalyst is a second-line therapy being labeled for refractory multiple myeloma. When and if Revlimid quits working, patients go to Pomalyst. How is physician uptake?
MG: We have only had one quarter’s worth of sales so far for Pomalyst, which was about $29M. We think the numbers are pretty good. Pomalyst would also be a second-line to Velcade (bortezomib; Millennium Pharmaceuticals Inc./Takeda Pharmaceutical Co. Ltd. [TKPYY:OTCPK]). Patients tend to be retreated with different cocktails of the same drugs, and this allows Celgene to get a bigger piece of the market that it is already in. There’s a lot of leverage in that.
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