By:Rafi Farber and Samuel Rae
Weekly Biotech Report Part I Covering Novo Nordisk A/S (NYSE:NVO), Sanofi SA (NYSE:SNY), Sarepta Therapeutics (NASDAQ:SRPT), AstraZeneca PLC (NYSE:AZN), and Titan Pharmaceuticals, Inc. (NASDAQ:TTNP)
The final week of May saw a flurry of activity – and inactivity in one case – from the FDA for 7 different companies. Most of these companies have been covered in previous Market Exclusive Weekly Biotech Reports. Here we will review what happened last week, the market’s reactions and trading strategies from here in light of those reactions.
Novo Nordisk A/S (NYSE:NVO)
On May 24th, an FDA panel unanimously recommended iDegLira for approval, Novo Nordisk’s combination insulin degludec with liraglutide for the management of blood sugar levels in diabetics. Steve Jobs is surely rolling his eyes somewhere in iHeaven for Novo’s blatant rip-off of Apple’s signature marketing techniques. iDegLira until recently was called Xultophy until the marketing team figured that if it started with a lowercase i, it may get more attention. iDegLira was still a shoe-in for approval so there is no surprise here. In a previous report we went into detail about the science and data behind iDegLira.
Both drugs that comprise iDegLira are already approved in the United States. The combination is just a more convenient way of dosing.
As a refresher, liraglutide is a glucose-dependent stimulant for beta cells in the pancreas that produce insulin. It is not insulin itself but stimulates its production and also slows gastric emptying, making patients feel fuller for longer so they generally eat less. Insulin degludec is insulin with an acid chain link on the end that links it with other molecules and dissolves slowly. For some diabetics, liraglutide is enough. For others, both insulin and liraglutide are needed to control blood sugar.
On approval, Novo Nordisk jumped up a bit but the jump was not sustained. This is essentially what we said would happen in our previous report on the company:
Don’t expect too much reaction from a positive FDA panel review of Xultophy. It is pretty much expected, and there is little reason for the FDA to reject the drug…A positive review could give shares a small bump higher, but after that the market will continue doing what it was doing before.
The company will probably just continue to move along with the rest of the biotech sector. An approval will help with customer retention, but won’t add much to its top line on net if anything. If one of its competitors has a combination drug but Novo did not, it would have been a problem. Fortunately, Novo can now keep up with competition in the insulin space. The stock is a long term buy for a biotech portfolio at this point. Speaking of competition…
Sanofi SA (NYSE:SNY)
One day later on May 25, another FDA panel voted 12-2 in favor of approving iGlarLixi from Sanofi, again surely causing Steve Jobs to make another long iRoll of his iEyes in iHeaven. Up until a few days ago the combo was called LixiLan. Sanofi, like its competitor Novo, decided to Apple-ize its combination medication in the hopes that diabetes patients would associate it with their iPhones or some such thing. We wonder if Apple has a patent on the iPrefex. If it does, both Sanofi and Novo are in deep trouble.
iGlarLixi is the same concept as iDegLira, though approval (or the recommendation of it in this case) is actually pretty important for Sanofi because the combination drug will bring some sales back to its flagging flagship insulin product Lantus. If patients want the combination drug instead of taking both separately, they’ll have to use branded Lantus instead of generic competition. We said that the stock could jump 5-10% on the news. It did jump 2.5% so far and has stayed in that range since the panel recommendation. The fact that shares have stayed in that range indicates that the recommendation for approval here was more important for Sanofi than the approval of iDegLira was for Novo Nordisk.
The main difference between the two drugs is the way the insulin is dissolved. Novo’s uses acid chain links that slowly break down. Sanofi’s glargine comes in crystallized form that slowly dissolves in the blood. Whichever one patients use just depends on personal preference and what works best for them.
Sanofi happens to be in a hostile takeover battle with Medivation Inc. (NASDAQ:MDVN) right now, as they are trying to change its entire board in order to approve their offer for the company. In the short term this is going to have a greater effect on the share price than anything coming from the direction of iGlarLixi. Still though, shares are at 2012 levels and biotech looks like it is in recovery mode. A position in Sanofi can be taken and held for the long term, and added to on any dip resulting from the situation with Medivation.
Sarepta Therapeutics (NASDAQ:SRPT)
Once again, the battle with Sarepta Therapeutics (NASDAQ:SRPT) continues. Eteplirsen for Duchenne muscular dystrophy was supposed to be either approved or rejected for accelerated approval on May 26. Instead, the FDA said it needed more time to review the data. Who knows what they’re looking at, this is probably more of a political power struggle between FDA top dog Janet Woodcock and whoever is directly under her.
Given there is a delay, it does at least mean that somebody at the FDA is pulling for Eteplirsen. The discussion is probably centered around what happens to FDA’s reputation if Eteplirsen ends up costing hundreds of thousands of dollars for patients but doesn’t actually work, versus what happens if Eteplirsen is proven to work later while in the mean time all these other kids died waiting for a drug that the FDA wasn’t convinced actually worked at the time and was too worried about its reputation to care about the actual lives at stake.
A simple moral calculus dictates that the FDA approve the drug and if it’s a waste of money then so be it, but at least these kids get to try something they want desperately to try. Better waste money and approve something that doesn’t work then find out later that it does as some of the kids who wanted it in the first place died waiting. Some analysts are theorizing a possible compromise involving data from an ongoing phase 3 being included. The problem is that Sarepta is out of money and needs more in order to manufacture Eteplirsen in order to even test it.
Meanwhile, the clock continues to tick, waiting for who knows what. Sarepta jumped to $23 on the news, which should give an end target of something around $50 a share if approval is finally granted. For all we know though, there may be some backdoor deal here allowing these kids to be treated with Eteplirsen without an official approval so the FDA can save face and keep away from this thorny issue until more data comes in. That’s a bit of a stretch of a theory and probably illegal on the part of the FDA, but anything’s possible with this crazy story. Let’s chalk that one up to conspiracy theory entertainment, no accusations here.
Those who took our advice not to buy near-term calls or puts expiring one day after the PDUFA date, were saved. Since the decision was postponed, most out of the money options that would have been affected one way or the other all expired worthless. We recommended 2018 options as some strikes were strangely cheaper at the time than the May and June contracts of the same strike. We had said in a previous report:
Aggressive traders may want to go long here or buy call options if only for the approval jump. The options prices on Sarepta are extremely out of whack with near term options expiring in June more expensive than long dated calls expiring in 2018. This makes absolutely no sense and cannot last. A few out of the money 2018 calls should pay handsomely if Woodcock approves Eteplirsen on May 26. Our suggestion though is to sell them shortly after approval.
Lesson being, never rely on PDUFA dates when playing options. If you bought 2017 or 2018 calls, now would be a good time to hedge with a put as well since the shares have risen significantly since the postponement. This will protect you in the event that Woodcock shoots down Eteplirsen.
AstraZeneca PLC (NSYE:AZN)
In a big blow to British AstraZeneca, the FDA issued the dreaded Complete Response Letter, effectively rejecting potential blockbuster ZS-9 for hyperkalemia. There were no problems with safety or efficacy, but with the manufacturing process. Annoyingly, as the CRL is not public, we can only guess as to what it says. What we do know is that there was no problem with the safety or efficacy data itself as the company was not requested to do any additional trials. This itself is a big plus, because as we said previously:
…there is a potentially serious problem with the study. That is, it was not designed to detect serious adverse events. These include vital signs, electrocardiograms (EKGs) that can show evidence of disturbed potassium levels, or very low magnesium levels. There are analyses of these data, but they are descriptive only rather than conclusive. The FDA’s decision on ZS-9 will not come down to the efficacy results, which are definitely positive. It will come down to safety issues, because when you’re dealing with serum potassium, you’re talking life and death. If something goes wrong and potassium levels get too low, a patient can quickly die.
At least we know that the FDA has no problem with the safety and efficacy data, so whenever the manufacturing issues are cleared up, whatever they are, the path to approval will be cleared. This is the same thing that happened to Opko Health (NASDAQ:OPK) and its shares were not much affected either. The combination of a rejection with the relief of no new trials needed has been the tug of war for AstraZeneca shares that have essentially remained unchanged since the news.
At this point then, we do know that eventually ZS-9 will be approved. It will just take another year or so. Lightning quick, that FDA. In the meantime the stock is low, the dividend is as high as you’re ever going to get for a biotech stock, and approval will eventually happen, probably at some point next year. It’s easy to focus on the negative here, but the positive is equally important.
Relypsa Inc. (NASDAQ:RLYP) jumped 8.8% on the news knowing that its own hyperkalemia drug will not have to compete with ZS-9 for another year. That jump will likely not be sustained for long, because eventually investors will figure out that ZS-9 will make it to market, and when it does Relypsa will be in the same disadvantaged position as before.
The situation with Titan Pharmaceuticals, Inc. (NASDAQ:TTNP) developed similarly to what we predicted, so far. On May 27, the FDA approved Titan’s Probuphine, an implant of buprenorphine for opiate addicts. In our previous report on Titan, we had said:
If it is approved, look for the stock to go near previous highs, but not for long as marketing realities will quickly set in. That said, the trading strategy for this one is to stay away if you are risk averse. If you have extra pocket cash hanging around your account though, a very small position could get you some significant short term gains, but don’t hold it long after approval at all, because it will probably fall back down within months or maybe even weeks, certainly after the first sales report is released post approval.
Well, Titan did reach a new 52-week high on the news, not quite to previous highs around $12.50 but a commanding 24% jump to $8.74. And then almost immediately the stock faded. We thought it would take weeks but it took less than a day, and shares ended 3% lower than when they started post approval. The market may be having similar thoughts as more seasoned traders realize that it’s not going to be easy convincing addicts to have themselves surgically implanted with an insert just so they don’t have to take a pill.
Yes, Probuphine has dosing advantages over oral administration as we covered earlier, but they may not be enough to command a sales lead. While novice traders cheered over approval, smart money appeared to sell the really immediately. Our recommendation is to stay away from Titan and let other people risk money on Probuphine’s success in the market, which is far from assured.
Weekly Biotech Report Part II: The Week Ahead Covering Advanced Accelerator Application SA (NASDAQ:AAAP), Adamis Pharmaceuticals Corp (NASDAQ:ADMP)
Advanced Accelerator Application SA (ADR) (NASDAQ:AAAP)
June 1, 2016
FDA decision on Somakit-TATE to help diagnose somatostatin-receptor-positive NET lesions
First up this week is Advanced Accelerator Application. This company has two separate products with the FDA, both with a target indication of neuroendocrine cancers. The one we are looking at – the one with an upcoming PDUFA on June 1 – is called Somakit-TATE. It’s a diagnostics product, designed to radiolabel the other product the company has filed for approval – Lutathera.
Lutathera is a somatostatin analogue peptide. It works to reduce the growth and symptoms of endocrine tumors by inhibiting the production and secretion of a whole bunch of hormones, including serotonin, gastrin, vasoactive intestinal peptide, secretin, motilin and pancreatic polypeptide. This isn’t the drug we are going to discuss today, but it’s worth touching on quickly for background. In studies completed to date, the drug has shown a significant improvement in progression free survival over the current SOC somatostatin, or Octreotide, which was developed and is now marketed and sold by Novartis AG (NYSE:NVS).
Getting back to TATE, this diagnostics product works to label and identify tumors that could benefit from treatment with somatostatins such as Octreotide and, if approved, Lutathera. Of course, AAAP is hoping that the FDA will approve both products – the drug and the diagnostics tool – so as to allow sale and promote use in tandem.
This one is a bit of an anomaly when it comes to data. Because it is a diagnostics preparation tool, and further, because the product in question is the kit that is used to create the product, not the product itself. The FDA is assessing TATE based on similar products. Specifically, if the kit is able to produce 68Ga-DOTATATE, which is the diagnostics product, and this product is equivalent to the current diagnostics version, then it should be approved. The FDA granted priority review for TATE last year, and the initial PDUFA was slated for March 31, 2016. Just before this date, however, the agency reported that it was issuing a three-month extension. The extension is the standard issue, so we can’t use it as any sort of indication as to TATE’s chances of approval. That is, we can’t look at the three month time frame and think, ah, three months, this is more (or less) than another extension and so it suggests that TATE has something seriously wrong with it.
To date, data has demonstrated that the tool is effective, and works well when combined with Lutathera. We also know that it’s safe at least as suggested by the trials to date. What we don’t know is why the FDA extended the initial PDUFA, and this is going to be what adds a little uncertainty to the situation come June 1.
It’s tough to come up with a specific number, purely based on the fact that the drug is a diagnostic, not a drug itself. We know that the SOC that Lutathera is targeting the replacement of (Octreotide) generated $1.63 billion for Novartis in 2015, and so we can use this to form a general opinion as to the potential implications of an approval. To do so, we need to make a couple of assumptions. The first, that an approval in the TATE product will indicate a likely approval in the Lutathera product. The second, that Lutathera can demonstrate enough of an improvement over the Novartis drug to pick up a decent share of the market. If both of these assumptions are valid, then we are looking at 45-55% market share of the current $1.63 billion revenues for Lutathera, and probably another 10-20% of these revenues on top if we assume TATE is used as a diagnostic prior to Lutathera administration. Given these numbers, an $800 million to -$1.1 billion market potential is not unreasonable.
Reaction and Trading Strategy
The implications of an approval for TATE on the resulting approval for Lutathera are really what matters here, and in turn, the reaction to an approval come June 1 will reflect both scenarios. As such, if the agency gives TATE the green light, there’s plenty of potential upside on AAAP’s current market capitalization. The company is currently valued at a little over $1.1 billion. With an FDA approval for the diagnostics kit, there’s a potential for 25-35% upside on the current $1.1 billion. A subsequent approval for Lutathera adds another 40% on to this potential upside. An FDA decline will likely serve up a 10-20% downside.
Adamis Pharmaceuticals Corp (NASDAQ:ADMP)
June 4, 2016
FDA decision on Epinephrine Pre-filled Syringe for the emergency treatment of anaphylaxis (NDA resubmission)
This one is an already established scientific. It’s a reformulation of epinephrine (adrenaline), which is the hormone administered when individuals suffer from anaphylaxis, as an immediate response therapy. Anaphylaxis is an allergic reaction that comes about as the immediate response to a substance deemed by the body as foreign and harmful – peanuts, fish or whatever it may be. When the body responds to these substances, it releases inflammatory mediators (cytokines, etc.) to counter what it deems an invasion. This leads to inflammation in the skin, throat, etc., and in turn can lead to suffocation among a host of other things. Epinephrine counters the release of the inflammatory cytokines, and very quickly reduces the inflammation associated with the latter’s release. It is a quick and effective first line treatment for patients that suffer anaphylaxis.
Adamis has not really developed anything new here. It has simply taken the current formulation, and the technology behind its administration – essentially, a needle – and prepackaged the two as a low cost alternative to the current version.
The data on which the initial NDA was based suggested that Adamis’ epinephrine PFS (pre filled syringe) could deliver an effective and rapid onset dose of epinephrine in patients that go into anaphylactic shock. This was back in 2014, however, when the company first submitted its NDA. On March 27, 2015, the FDA issued a complete response letter (CRL) to Adamis, citing concerns over whether the drug could actually deliver the stated and required dose of epinephrine in its NDA backed form. Of course, this CRL hit Adamis hard, but the company has since recovered and had its resubmission accepted by the agency in January this year. The assumption here is that the agency’s concerns were valid (hence the extended period of time between CRL issue and NDA resubmission acceptance) but that Adamis has now addressed the concerns and fixed the issue.
The market potential for this one is very large. Mylan NV(NASDAQ:MYL) currently produces the Epipen, which is the product that Adamis is trying to undercut with its low cost alternative. Epipen generates a little over $300 million quarterly for Mylan, with the company selling its product for a little over $380 per pack of two. We don’t yet know the price Adamis intends to market its PFS at, but we know it’s a low cost alternative, so it’s reasonable to assume it will be looking at a price point somewhere in the region of 40-70% of the above mentioned $380. This, in turn, gives the market potential (assuming a 100% market penetration, which is very unlikely, but let’s use it for illustrative purposes) of between $120 million (40%) and $210 million (70%).
Reaction and Trading Strategy
With this one having been drawn out for so long, Adamis has been a volatile stock to hold over the last few years. The company is down more than 53% on highs registered just before it submitted its initial NDA, and the market currently values the company at a little over $132 million. This seems low, given its lead candidate’s market potential, and offers up the chance for plenty of potential upside if the agency gives the Epinephrine PFS a green light. It’s not often we say this, but a triple digit upside is possible. At the low end, look for a 70% gain on a positive outcome. Of course, the downside is equally severe. Adamis is heavily reliant on the outcome, and as such, could quickly lose 50% of its market capitalization if the FDA says no. In many ways, a classic biotech development space play. The date to watch is June 4.