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Here’s Why Astellas Is Paying A 90% Premium For Ocata

By
Roger Hannington
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astellas

Post market close on Monday, we learnt that Astellas Pharma, Inc. (OTCMKTS:ALPMY) had entered into a material definitive agreement with Ocata Therapeutics, Inc. (NASDAQ:OCAT) that will see the former acquire the latter at $8.50 a share – a more than 90% tender offer premium on Ocata’s last close. As far as tender offers go, this is a pretty substantial premium, and with unanimous board member agreement across both companies’ boards, Astellas should have no problem bringing Ocata’s shareholders on board within the tender period. Even at a time when we are breaking all sorts of takeover records in biotech, 90% looks like a high price to pay. This begs the question, why is Astellas willing to pay such a high premium for Ocata? Let’s have a look at Ocata and see if we can get to the bottom of it.

Ocata is a development stage biotech (market cap pre-announcement circa $190 million) with a pipeline that targets primarily ophthalmic indications. More specifically, it uses stem cells to regenerate certain elements of the human eye; the deterioration of which cause the indication each therapy targets. The company’s pipeline targets six separate conditions, but its two lead indication are Stargardt’s disease (SD) and dry age-related macular degeneration (AMD). Ocata is targeting these two conditions with the same therapy – what’s called retinal pigment epithelial (RPE) therapy. At least near term, this therapy is the asset that likely drove Astellas’ decision.

The RPE is a key layer at the back of the eye that performs a range of functions, but to simplify its necessity, it basically feeds the photoreceptors; photoreceptors have no blood supply, so the RPE is necessary to keep them nourished. Degeneration of the RPE is pretty common in old age, and as the RPE degenerates, photoreceptors die. This leads to sight deterioration and eventually, blindness. AMD is the deterioration of the RPE in the older population, while SD is a similar degeneration in younger patients.

Ocata harvests stem cells from what is called a pluripotent source (basically these are cells that can form into any type of cell on maturity – embryonic cells, in other words) and transplants them into the RPE of a patient. These cells then mature into RPE cells, and the RPE regenerates; or at least this is what Ocata is trying to prove in trials.

There are no approved, useful therapeutics available for either condition on the market at the moment, meaning if Ocata get can its therapy approved it could very quickly expose itself to a multi billion-dollar market in the US alone.

So on that note, where are we in trials? Well, we have seen promising results from a phase I in both indications, and the company is actively enrolling in a phase II as we speak. Ocata reported the first patient enrolled in its AMD indication in September this year, and a phase II in SD is due to start recruiting before the end of the year. This means we could have data from the first cohort of the AMD indication before the end of the second quarter of next year – a real potential upside catalyst for what will likely be than an Astellas run trial.

And there we have it. Astellas has paid a premium for a company that looks to be leading the way in stem cell therapy (something that many of the bigger players have been reluctant to get into by way of ethical uncertainty) for two indications that – if efficacy can be proven – could each be a blockbuster revenue generator in their own right. Yes, $379 million for a $190 million company looks expensive now, but if topline from the phase II AMD shows efficacy it might look cheap a year from now.

Of course, the deal remains open until closing. If Ocata shareholders don’t accept the tender premium during the offer period, or if antitrust gets in the way, then things may never come to fruition. From our perspective, we don’t see either the former or the latter being an issue, but you never know. The tender offer period is scheduled for on or around November 25th, so we’ve not got long to wait until we find out – watch this space.

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Here’s What The Insiders Are Buying In Biotech

By
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Insiders

Buy activity from insiders can be a great indication that a company is fundamentally strong. Here’s a look at some of the latest insider buys in biotech, alongside a discussion of what’s likely driving the insiders’ decision to ramp up their exposure.

United Therapeutics Corporation (NASDAQ:UTHR)

This one’s a busy one. In the last week alone, five of United’s board of directors have picked up a position in excess of $120,000 spread across between 3,000 and 7,500 shares each. The company reported better than expected earnings at the end of October, coming in at $5.02 per share versus estimates of $2.44, on revenues of $386.2 million. The company’s lead commercial drug, Remodulin, generated $150 million revenues, and its secondary therapy, Orenitram, brought in $34.4 million. It is this latter therapy that serves as the most likely driver behind the board of directors increasing their respective exposures. The drug is generating double digit growth quarter over quarter, and between second and third quarters this year United reported a 22% increase in new patient starts. Back at the beginning of commercialization, there was some concern that these new patients would simply be patients switching from two of United’s other pulmonary hypertension (Orenitram’s approved indication) therapies – however reportedly 70% of new starts are patients that have previously not undertaken therapy. This is good news for United, and in turn, its shareholders.

Varian Medical Systems, Inc. (NYSE:VAR)

On November 6, Dow Wilson, President and CEO of Varian Medical Systems placed two separate buy orders for his company’s stock. Both orders saw him pick up 9,000 shares at a price per share of a little over $50, and totaled a combined $911,880. For those not familiar with the company, Varian is a medical device company that develops, builds and markets surgical and other type therapy implements, primarily in the cancer space. It is one of the biggest companies in the medical device sector, with a market capitalization just shy of $8 billion at last close. So what was the likely driver behind Wilson’s decision to pick up nearly $1 million worth of stock on Friday? Well, Varian is down more than 22% from 2015 highs, and the company posted an earnings miss at the end of last week. The miss initially translated to some intraday weakness, but revenues are up and fundamentally Varian looks sound, both from a product and a pipeline perspective. In all likelihood, Wilson saw the earnings miss and the overarching decline (driven primarily by wider market selling pressure) as an opportunity to increase his holding at a discount. The company just launched a new range of cancer products to general acclaim from the medical community, and from preliminary data, looks as though it will bring in record financials when it reports full year 2015. In other words, there is likely plenty of strength ahead.

Myriad Genetics, Inc. (NASDAQ:MYGN)

Finally, Myriad. The company’s Executive Vice President, General Counsel and Secretary, Richard Marsh, picked up 35,000 shares for a total of $802,550 on Thursday, bringing his total holding to 103,384 shares. This one was a pretty clever play – he unloaded 35,000 shares in September for a total value somewhere in the region of $1.44 million; a move that drove speculation that Myriad might be in trouble. However, with his latest buy, it now looks like he was simply booking profits on a longer term position in his own company, while fully intending to maintain his presell holding by replenishing on the downswing. Executed perfectly, he generated circa $700,000 on the sell high buy low. The company presented data yesterday American College of Rheumatology 2015 annual meeting – data relating to its proprietary treatment response blood test, Vectra DA. The data showed what looks to be efficacy across three separate presentations, and could be a near term catalyst for Myriad once markets digest its implications.

So there we go. Three big companies with large scale insider buying from executive level leadership. Biotech has corrected over the last couple of months, but as we have mentioned a number of times in the past, the healthcare sector is relatively inelastic to wider market sentiment. This has translated to an opportunity to pick up stocks at a discount in anticipation of capital injection into the sector, and from the looks of the purchases discussed here, c-suite agrees.

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Neos Selloff Might Be An Opportunity For A Discount – Here’s Why

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neos

On October 19, 2015, Neos Therapeutics, Inc. (NASDAQ:NEOS) reported that it had received a notification from the FDA regarding its lead pipeline candidate Cotempla. The FDA said it had identified what it referred to as “deficiencies” in the Cotempla news drug application (NDA). We didn’t get any specifics as to the deficiencies (reportedly neither did Neos) but we did learn that the deficiencies precluded labelling and post marketing discussion; basically meaning they need to be resolved before the FDA will consider approving the treatment. As the announcement hit, Neos collapsed from a little over $18 a share to $12 a share – losing a third of its market capitalization in a single session. Its stock has recovered slightly since, closing out the last session just shy of $14, but it is still trading at a discount as investors price in the potential for a delayed review date.

The question now is, does this discount represent an opportunity to pick up an exposure to Neos at a discount? Let’s take a deeper look.

First, what’s Cotempla? The drug is one of two XR-ODT (extended release, orally disintegrating) candidates for which Neos currently has a filed NDA with the FDA. Both treatments are targeting an indication of ADHD. As far as the active ingredient for Cotempla is concerned, there is no difference between it and some of the current standard of care therapies, Methylphenidate and Amphetamine. Cotempla contains the former, Neos’s second candidate contains the latter. What differentiates the two treatments from standard of care is the delivery system. As mentioned, both are XR-ODT. ADHD is primarily a pediatric condition, and there are a large number of the child patient population that have trouble swallowing pills – reportedly about 56%. Neos’s candidates are designed to disintegrate on the tongue, without the usual prohibitive taste and absorption issues that would come with applying a crushed pill to the tongue. This makes them far easier to administer and take.

So what might the FDA be concerned about? The active ingredients are already approved in the US, so the questions surrounding Cotempla become can the drug maintain equivalent levels of efficacy, safety and tolerability when compared to its counterpart delivery methods?

In a phase III, Neos’s Cotempla demonstrated a statistically significant improvement in ADHD symptom control across what the trial referred to as a “classroom day”, suggesting that efficacy should be no issue. This leaves safety and tolerability. This is a pediatric treatment, and the FDA often looks more harshly upon adverse events in Children than it does in adults – but in the same phase III discussed above the vast majority of adverse events were reportedly mild, and nothing out of the ordinary as far as the side effects from this sort of treatment go (nausea, decreased appetite, irritability etc.).

So what’s the issue? Well, of course, we don’t know exactly. What we do know, however, is that the drug is simply a redeveloped version of a formulation that has been standard of care for decades, and it has demonstrated efficacy with minimal adverse events in wide scale trials.

So does this mean there is an opportunity here? There is every chance it does – the initial market reaction looks to have translated to an oversell, and a 33% decline seems harsh for what essentially amounts to a delay. Of course, there may be deeper issues associated with Cotempla that we are not yet aware of, but the tone of the FDA notation suggests these are not issues that cannot be resolved. Even if Cotempla is thrown out, the company has its second XR-ODT candidate filed, with a PDUFA date of January 27. If either get approval, the revenues Neos stands to generate from either candidate greatly outweighs its current market cap (circa $220 million) – Shire plc (NASDAQ:SHPG) generates $1.3 billion annually from Vyvanse and Johnson & Johnson (NYSE:JNJ) $600 million from Concerta. Of course, all this becomes irrelevant if neither get approval – but that’s the nature of speculation.

All said, given the circumstances surrounding the FDA delay are not yet clear, it looks as though markets are erring on the side of caution. A time to be greedy when others are fearful? Perhaps, but tread carefully.

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Gold approaches low, but miners and silver hold up

By
Rafi Farber
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gold mountain

Gold (NYSEARCA:GLD) has been down for 14 of the last 16 trading days, and we are now knocking on the door of the previous low of September 30. Gold has never been down 14 times in 16 days since the mid 1970’s. We also have the very rare circumstance of gold trading below its lower Bollinger Band (the lower blue line) for 3 straight days.

Gold Bollinger BandGold’s uptrend since late July is now in danger of rolling over, and the most obvious catalyst for a turnaround is the jobs report, the Non Farm Payrolls scheduled to be out today. Most technical indicators point to a bounce on the report. The question is how much of one.

And a crucial question it is indeed. A weak bounce on the employment report could indicate a fizzling rally, and an eventual move below the previous low of $1080. This would indicate that the bear market has not bottomed yet and there is another leg down to go. A strong bounce, say $20 to $30 could set up another move higher to a top at around $1,210. The big movement should come at around 8:30am EST, when the report is released to the media.

Gold stocks (NYSEARCA:GDX) and the junior miners (NYSEARCA:GDXJ) have been hit significantly over the past two days. And yet, the silver lining, or shall I say gold lining is that the HUI Gold Bugs Index (^HUI) is still comfortably above its previous lows of 101.28. This means that despite the poor showing of late, gold stocks are still outperforming the metal since bottoming. Silver (NYSEARCA:SLV) is also holding comfortably above its previous low.

Gold MinersIn the end, if gold and the rest of the metals complex aregoing to turn around, it will most likely be today. Watch out for a contract dump on the Comex this morning. As a bad jobs print is traditionally bullish for gold, large sell orders on the release of a bad jobs report should be met with skepticism, and could just be an attempt at a stop run that will be quickly reversed. A good jobs report is traditionally bearish for gold, but precious metals are so short term oversold that even a good jobs report may not be able to bring gold down much further.

Where the metals are headed over the next month or two should be determined today or Monday at the latest.

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Biotech 101: Phase 3 Successful, What’s Next?

By
Jennifer Aldershot
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NDA

Information on the clinical trial process in the biotech space is all too readily available. Indeed, we have our own educational material available here where you can read all about the various stages through which a company must carry its pipeline candidates before commercialization. What is less prevalent, however, is information on what happens once the trial process is complete. A company has demonstrated efficacy, safety and tolerability across a range of phase 1,2 and 3 trials – what happens next? Let’s take a look.

First, its important to say that a demonstration of efficacy is far from a guarantee that a drug will receive FDA approval. There are many things the FDA takes into consideration before accepting a drug, and efficacy is just one piece of the puzzle. Obviously, its an important piece, but a piece none the less.

New Drug Application (NDA)

So, let’s get to it. Lets say Pfizer Inc. (NYSE:PFE) announces the meeting of primary and secondary endpoints in a global phase 3 for one of its oncology candidates. Its stock jumps in anticipation of approval, but the work is far from complete for Pfizer. The company needs to put together what’s called a New Drug Application (NDA). You can think of this as an extension of the Investigational New Drug Application (IND) that the company submits before it kicks off trials – but don’t let just thinking of it as an extension fool you. An NDA is often far lengthier and more detailed than an IND, and can be thousands of pages long. It is designed to demonstrate all of the findings from each of the clinical trials the company in question conducted – finding related not just to efficacy but safety, tolerability, pharmacokinetics and much more. Essentially, an IND says to the FDA “look – this is what we think this drug can do and why”. An NDA says “there you go, we proved it – here’s how”.

An NDA also contains a detailed explanation of the commercialization strategy for the drug in question. There’s no point in the FDA approving Pfizer’s oncology candidate if the company is unable to manufacture it on the required scale, or if it is unable to get it to patient delivery sites when needed.

Advisory Panel and PDUFA

Once the FDA accepts an NDA, it will set one, and sometimes two dates of note. The first is a Prescription Drug User Fee Act (PDUFA) date. The Prescription Drug User Fee Act (PDUFA) was set up in 1992 in an attempt to speed up and standardize the FDA approval process. It basically states that the FDA must make up its mind on a particular drug within 10 months of accepting its NDA. Say Biogen Inc. (NASDAQ:BIIB) submits an NDA and the FDA approves it on January 10. The PDUFA date will automatically set as 10 months from the NDA approval, so October 10 in this situation. The FDA can report its decision before this date, and if it has good reasoning, push the date back, but in the majority of straightforward approvals the PDUFA date holds. An alternative to the 10 month timeframe exists if the drug in question has priority review. This allows for a 6 month timeframe from NDA acceptance to PDUFA.

An advisory panel date is also often released alongside the PDUFA date. This is a date set aside for an FDA advisory panel to research and report their opinion on whether or not a drug is suitable for approval. The panel size varies, but is generally somewhere in the region of 15 individuals, each of which votes yes, no or abstains. The FDA doesn’t always follow the advice of its advisory panel, but oftentimes it does, meaning the advisory panel vote can be a great indication of whether or not a drug will get the go ahead for commercialization from the FDA.

So why is this important? Well, it offers us 3 very important catalysts ahead of which you can gain exposure to positive news. The NDA acceptance will often serve up some short term upside momentum, as it marks the point at which the clinical development process is complete. The advisory panel decision gives us insight into the final FDA decision, and so a positive nod from advisory can generate some upside volatility. The PDUFA date is important for more obvious reasons.

So there we go – that’s what happens after trials complete. Carry this into your biotech operations going forward to add to your chances of success in this great space!

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This Undervalued Company Has Huge Potential In The Bacterial Resistance Space

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cempra

Between July 28 and Oct 22, Cempra, Inc. (NASDAQ:CEMP) lost 66% of its market capitalization. Over the last couple of weeks, however, the company has gained 80% on its October lows, and looks to be set to continue these gains as we head into the middle of the week. Despite the last two week’s gains, however, the stock is still discounted on highs, and we believe this discount represents a great opportunity to get a cheap exposure to what could be a high growth biotech over the next 24 months. Here’s why.

Cempra’s Pipeline

First, the company. Cempra has two clinical stage candidates in its pipeline: Solithromycin and TAKSTA. The former is its primary and the latter its secondary focus. Both are antibiotics, and both have the potential to be real blockbusters in their respective indications. Solithromycin’s primary indication is community acquired bacterial pneumonia. (CABP). The drug is what’s called a macrolide – which is a gram positive therapy that physicians prescribe to treat respiratory tract and soft tissue infections (both of which are associated with CABP). There is a real problem with resistance in the antibacterial space. A pneumococcus is (essentially) just another word for a bacterium that causes pneumonia. Pathogenic pneumococci are the harmful type (most bacteria is harmless) and more than 40% of pneumococci are resistant to the currently available antibiotics. Cempra is hoping to fill this 60% differential with solithromycin.

The drug has already proven efficacy in two phase III trials, and a third is currently underway – data from which the company presented at the CHEST event at the end of October. Once again, the treatment has proven efficacy. We are now at the stage where the only real gating to an NDA submission for this indication is – as stated by the company in its latest earnings conference call – time. Cempra has priority review, meaning it can submit portions of its NDA as and when they complete, rather than having to wait for the full thing to complete before submission. As the company processes the data from its trials, it can submit it to the FDA for review. By the time the company completes the final elements of the submission, therefore, the FDA will already be well aware of the safety, tolerability, pharmacokinetics etc. of solithromycin, and we could get a quick approval.

The second pipeline treatment, TAKSTA, is just as promising. The drug is already approved across the majority of Asia, Europe, Canada, South Africa to name but a few (not as TAKSTA, but instead as various formulations of TAKSTA’s active compound fusidic acid). Cempra has exclusive rights to the drug in the US, and the company is currently preparing to kick of a US based double blind phase III for an acute bacterial skin and skin structure infections (ABSSSI) indication. The ABSSSI trial should start before the end of the year. In phase II for this indication we saw excellent efficacy and there were very limited adverse events – something we expected due to the nature of the already approved in any countries therapy.

Opportunity

Basically, we have a company here that has two products that have the potential to be billion dollar therapies; Cempra has stated it will price both in the hundreds of dollar range, which is lower than some recently approved antibiotics, but the market is so huge that the company doesn’t need to price high to generate big revenues. This is a space that a number of the big names – Pfizer Inc. (NYSE:PFE) and Baxalta Incorporated (NYSE:BXLT) to name two – have trued and failed in, so there may also be the potential for a partnership on the commercialization aspect of both drugs as big pharma has already expressed interest in exposure to the non-resistant antibiotics. Cempra has stated that it doesn’t require a partnership (i.e. it can fund and staff the commercialization itself) but if the terms are right, the backing of a big player won’t hurt its chances).

Catalysts

So what are we waiting on as near term catalysts? Well, we’d like to see the topline from the data presented at CHEST – when the company reports this formally we will likely see some upside momentum. Also, the kicking off of the aforementioned phase IIIs (one before the end of the year and one during 2016) should do similar. All said, definitely one to keep an eye on – especially at its current valuation of a little over $1.2 billion.

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Nascent Gold Bull Still Intact

By
Rafi Farber
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Gold Bug

The gold market has been rough ever since the Federal Reserve for all intents and purposes forced itself to raise interest rates by 25 basis points come December. That was on October 28. The language of that meeting included the phrase “by next meeting,” when discussing raising rates, and the Fed is almost never that specific. That language caught gold bulls by surprise and tore the metal down.

Since then, gold (NYSEARCA:GLD) has fallen 4.2%, which by itself does not look good. However, two things indicate an imminent short term bottom. First, silver (NYSEARCA:SLV) is outperforming gold since the decline, only down 3.6%. In bear markets, silver typically doubles gold’s decline. Second, the gold mining stocks (NYSEARCA:GDX) are only down 6.9%. If the last rally were only a bear market rally and this decline a continuation of the bear market, then we’d see gold stocks getting hammered by much more than 10%. Less than 7% during a 4.2% decline for the metal itself is hardly a rout.

In fact, the last two trading days have been even more pronounced in terms of outperformance by the miners. While gold has fallen over 2% in the last two days, the miners remain unchanged. This indicates an imminent bottom for gold, and once that is reached, the miners should spring higher and top their recent high at $17 over the next run.

As for gold itself, holding above $1103 would be a good sign, as it would indicate the pattern of higher lows remains intact. Right now we are trading at $1120 an ounce. That gives us $17 of breathing space before gold needs to reverse to keep the pattern of higher lows intact.

Gold TechsUnless gold stocks are giving us false signals here, which is always possible, the next bottom should be in by the end of the week.

Disclosure: The author was long gold stocks at time of writing.

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Here’s Why These Three Biotech Giants Just Gained Strength

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AbbVie

Yesterday was a big day for a number of the big names in biotech. A host of announcements hit markets, and we got an influx of volatility, both bullish and bearish. Here’s a look at there of the biggest movers in big pharma, and the drivers behind the action.

AbbVie Inc. (NYSE:ABBV)

First up, AbbVie. AbbVie closed out last week at 59.55. By the time the session kicked off on Monday morning, the company was trading at 61.59, and closed on the day at 63.38 – a circa 6.5% gain across US trading. The driver behind this action? A revised guidance from Morgan Stanley. There has been a lot of concern as late as to the future of Humira – AbbVie’s runaway blockbuster that generates in the region of $10 billion a year for the company. Humira consistently ranks at the top of the biggest global sellers list, but AbbVie’s Humira patent (or at least some of the most important elements of it) expire at the end of next year. If the company cannot successfully mount protective cases to avoid generic competition, a large portion of its revenues (circa 50%) could be at risk. This concern has put pressure on AbbVie’s market capitalization over the last 12 months, but the company has consistently reiterated it believes its patent scope to be strong enough to mitigate any generic risk. Obviously, it is in AbbVie’s interests to maintain this position. The company surged yesterday as Morgan Stanley came out in support of the company’s opinion, and revised AbbVie to overweight, primarily based on Stanley’s in-house analysts’ opinions of its patent case.

Pfizer Inc. (NYSE:PFE)

Next we’ve got Pfizer. Pfizer gained close to 4% during Monday’s US session, and pre-session looks as though it is set to reiterate that strength today. There were some reports that suggested the driver behind these gains was a positive thesis outlined in an article on Barron’s, but in reality, the gains likely came as a result of trial data reported pre-session on Monday relating to the company’s rheumatoid arthritis treatment – Xeljanz. The drug is what’s called a JAK inhibitor, and is currently approved for treatment of rheumatoid arthritis. At the moment it only generates around $100 million a quarter for Pfizer (comparably small when considered against a number of the company’s other commercialized therapies) but the latest announcement suggests Pfizer is set to ramp up these revenues going forward. The company submitted an NDA for a psoriasis indication earlier this year, and yesterday announced it will present 20 abstracts relating to safety and efficacy in the RA indication, each of which could easily bolster its sales and marketing efforts when pitching to physicians. They will also likely highlight efficacy in combination therapies, which in turn could add to the approved indications of the drug going forward. You can check out the full list of abstracts here, but as far as we are concerned, the ones to watch are the post-hoc analyses of the drug in RA therapy. Pfizer expects to present data from six of these, and each could imply expanded Xeljanz revenues.

Valeant Pharmaceuticals International, Inc. (NYSE:VRX)

Finally, Valeant. Again, Monday’s session proved a winner for Valeant, with the company gaining more than 7% on the session open to close at 100.47, then gain a further 4% after hours to bring today’s open price to a minimum of 104.5. This one is an interesting one. Basically, there has been a considerable short interest for Valeant over the past year or so – primarily driven by the hypotheses of short seller Andrew Left – head of short selling firm Citron Research. The hypothesis revolves around so called “improprieties” in Valeant’s accounting – improprieties that Valeant has strongly denied. Markets expected Left to elaborate on the nature of the improprieties yesterday, in support of its short side bias. Instead, Citron released a statement that implied it would not be elaborating on the situation – something that markets look to have interpreted as suggesting there is nothing to worry about. Citron did state they would continue to investigate Valeant, but as yet they have not come up with any clear cut evidence to back their claims. It will be interesting to see how this plays out. If Citron reports something damaging, we could see a collapse in Valeant’s market capitalization in a very short period of time. If the whole thing dies down, we may see a steady upside revaluation for the company before the year draws to a close. Definitely one to watch going forward.

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Here’s What Dyax Means For Shire

By
Roger Hannington
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Shire Hemophilia

Premarket on Monday, we got word that Shire plc (NASDAQ:SHPG) is set to buy US biotech Dyax Corp. (NASDAQ:DYAX). The news comes as a bit of a surprise to markets, as the former is currently locked in an aggressive buyout tussle with Baxalta Incorporated (NYSE:BXLT), and the $5.9 billion it is coughing up for Dyax could hinder its capacity to fund the deal, despite management suggesting otherwise. Dyax is up more than 30% ahead of the US session bell, whereas Shire is down a little over 1% on the London session. Here’s a look at exactly what Shire is getting for its money, and a discussion of the implications of the asset acquisition for Shire’s financials going forward.

First then. Lets outline the terms of the merger agreement. As mentioned, Shire will pay $5.9 billion for Dyax at a per share rate of $37.30 – a circa 35% premium on the company’s Friday close. There is also an additional $646 million earmarked for issue on the approval of Dyax’s lead pipeline candidate, DX2930, which we will take a closer look at shortly. If everything runs according to plan, the two companies expect to close out the deal during the first quarter of next year, though there may be some delays rooted in Shire’s portfolio of drugs that already treat hereditary angioedema (HAE) – targeted indication of DX2390.

So – what is Shire getting for its money? Dyax has a few drugs in its trial pipeline, and a number of licensing deals that generate small number revenues, but the two primary assets Shire looks set to acquire are the aforementioned DX2930 and an already commercialized drug called Kalbitor (again, this one is an HAE therapy). As a quick note, for those not familiar with HAE, it is a blood disorder that causes rapid swelling of extremities and the face (and genitals, in rare instances). It’s very rare – affecting as few as 1 in 50,000 in the US. Looking at the science, it is caused by excessive levels of what’s called bradykinin, a peptide that is generally responsible for vasodilation and blood pressure reduction. Excessive bradykinin creates leakages in blood vessels, translating to swelling. Kalbitor inhibits the process that produces bradykinin. From a financial perspective, Dyaz reported Q3 2015 revenues for Kalbitor of $17.8 million – down from $20.3 million during the same period a year earlier.

The second asset is DX2930, which is also a therapy that inhibits the the production of excessive bradykinin. The key difference between the two drugs are Kalbitor is on-demand, it is taken as a response to an attack. DX2930 is a biweekly ongoing treatment targeted at preventing attacks from happening (the active ingredient is the same in both treatments, but the latter has a half life twice that of the former, allowing for it to be an ongoing preventative). The only other drug available as a preventative for HAE currently is Cinruyze, marketed by (you guessed it) Shire. This is the root of the antitrust issues we alluded to earlier that the companies may run into before the deal closes. The company reported promising data from a phase Ib earlier this year, and has just closed on the final protocol for a pivotal phase III with the FDA. If successful, we should see an NDA filed late 2016, early 2017.

And what about revenues? Well, Shire believes it can ramp up the Kalbitor revenues based on its ability to leverage its already successful dealings in the HAE space. If DX2930 is approved, analyst expects annual global sales of circa $2 billion. Taking into account the $646 million owed to Dyax on approval of DX2930, if Shire can meet its projections it should make back the debt financed total cost of the acquisition before the decade is out. This, of course, is an optimistic projection. The antitrust issues alone are enough to set back development if they come into play, so we must consider these before picking up an exposure to Shire based on its Dyax acquisition.

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Gilead’s Expansion Treatment Could Open Up A Billion Dollar European Market

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gilead

Presession on Friday, we got the news that Gilead Sciences Inc. (NASDAQ:GILD) had submitted an NDA to the FDA seeking approval of a fresh combo therapy that incorporates one of its currently approved treatments, Sovaldi, and a nucleotide called velpatasvir. The company is targeting an indication of Hepatitis C – an indication for which Gilead already has two approved treatments. So why this extended indication? Well, for exactly that reason. Its currently approved therapies only treat a narrow spectrum of Hepatitis C patients, whereas this refreshed combination (if approved) will treat a much wider scope of sufferers. With this said, let’s take a look at the drug itself, try and figure out how it differs from the currently available therapies (and in turn why it can treat all patients rather than a limited scope) and consider what it might mean for Gilead from a revenues perspective going forward.

First, its important to address what is meant by hep C genotypes. Because hep c is a virus, it is able to mutate into numerous different forms – similar to subspecies of a particular species of animal (think lions and tigers). Each of these forms is a genotype, and there are currently eleven identified genotypes. Most available treatments target a specific genotype (1,2 etc). The therapy Gilead is proposing will target 1 thought 6. The vast majority of sufferers in the US are hep C genotype 1, but in Asia, Europe and Africa the majority of patients are 2 through 6. The company’s current treatment, Sovaldi, inhibits the RNA polymerase of the hep C virus in genotype 1 – basically meaning it cannot replicate and, in turn, the infection subsides. Velpatasvir is what’s called a NS5A inhibitor, which means it inhibits the structural form of a replicated virus – again, inhibiting its reproduction. The difference between the two is substantial from a scientific perspective, but from a non-scientific viewpoint, all we really need to know is that they both stop hep C virus replication, the former in hep 1 genotype patients and the latter (in combination with the former) in hep 1-6.

So what are the chances of approval? Well, Gilead has conducted four phase III trials across patients in the 1-6 genotype, and the combo therapy met its primary endpoint across all four trials. Hep C drug efficacy id measured by what’s called an SVR12 rate – basically a measurement of the infection prevalence at 12 weeks post treatment (this used to be 24 weeks – SVR24 – but has recently reduced to 12). An average SVR12 rate of 95% across the four arms of the trial proved efficacy, and with no higher rate of adverse events seen between a double blinded placebo arm and the treatment arm, there looks to be no reason why the FDA wont approve the combo.

And what would approval mean for Gilead? The company generates between $2-3 billion a quarter from Sovaldi, at a price point of between $84-95,000. If the FDA approves the treatment, it will target about 10% of US sufferers, but it is the wider global market that will be the real money maker for the company. An FDA approval would pave the way for an EMA approval, which if Gilead achieves, could open up a similar size market as that of Sovaldi in the US for the new combo therapy in Europe – circa $2 billion. Gilead has stated that it intends to submit an NDA to the EMA before the end of 2015.

Near term catalysts? Look for an advisory panel recommendation from the FDA as a near term upside catalyst out of the US, and a confirmation of the NDA, EMA submission as an upside driver out of Europe.

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