Stockwatch: Over-reaction Reigns At Rigel And Biogen
Executive Summary
Rigel and Biogen both released data last week that prompted over-reactions and sensationalism, respectively from analysts, the print media and even the BBC. When something sounds too good to be true, is probably is.
The announcement of Rigel Pharmaceuticals Inc.'s first positive Phase III study for its oral spleen tyrosine kinase inhibitor fostamatinib in refractory immune thrombocytopenia (ITP) was initially greeted with a share price drop in pre-market trading. Fostamatinib's first Phase III success has come at the end of a long line of failures that culminated in the Phase III failure in rheumatoid arthritis and the end of its collaboration with AstraZeneca PLC.
Up until these results, and after the termination of AstraZeneca's 2010 collaboration with Rigel, fostamatinib illustrated one of my warning signs for biotechnology investments: the absence of a big pharmaceutical partner. In the same way as the recent clinical failure at Circa Pharmaceuticals Inc. was prefaced by the same indicator of future clinical or commercial failure – the absence of a big pharmaceutical partner – fostamatinib is unpartnered. I have asked many management teams why their lead asset remains without big pharmaceutical validation and the typical distracting answer is that an orphan-like indication is much better marketed by a small specialist company. What they typically don't say is that the CEO and business development director have probably spent years visiting every pharmaceutical company multiple times in search of a partnership and have been rebuffed on every occasion. Years ago I once rescued a senior AstraZeneca executive at an industry dinner from a pitch from "that tiresome man" after she had heard and rejected the full presentation from the gene therapy company on a number of previous occasions.
While the market makers who looked at Rigel's announcement and initially marked the shares down because of the similar efficacy compared with the two already approved drugs for the treatment of ITP were almost certainly right on one score, once the sell-side analysts got to work and published their notes, the share price of Rigel finished the week up 29% against about a 2% drop for the NASDAQ Biotech Index. The analysts from Jefferies initially cautioned on the low effect size with an 18% response rate, but their 90% probability-adjusted peak sales of $306m in distant 2027 ultimately helped stoke the stock price. The analysts from Piper Jaffray declared that the fostamatinib benefit was "clinically significant" although the analysts from JP Morgan concluded that the early share price drop reflected investors' expectations of at least a 20% response rate.
The real criticism of fostamatinib in ITP is less the clinical results presented last week – whose efficacy was on a par with the two agents that have already been approved for patients at an earlier stage of ITP (i.e. bigger markets) than that for which fostamatinib is being studied – but the sales of those agents. The sales of Promacta/Revolade (eltrombopag) from Novartis AG and Nplate (romiplostim) from Amgen Inc. were $158m and $142m, respectively, in the second quarter of 2016. A probable negative net present value of launching fostamatinib into a low total market size with entrenched competition is almost certainly the reason why fostamatinib remains unpartnered. If Rigel's shareholders – who should soon be expecting a secondary stock offering in order to commercialize fostamatinib – needed another indication of how a minor pharmaceutical product with larger costs than sales can relegate a biotech company to permanent losses, they only need to look at Merrimack Pharmaceuticals Inc.
Merrimack's first product Onivyde (liposomal irinotecan) missed analysts' consensus $16.3m second-quarter sales estimates by 21%; and according to IMS Health, July's sales were 14% lower than June's. Unlike fostamatinib, Onivyde is partnered – with Baxalta Inc., which was recently acquired by Shire PLC. No guesses for the "product most likely to be returned" award when Shire completes its post-acquisition portfolio review.
Biogen Inc.'s 1.7% share price rise on the week was in part due the publication of the preclinical and Phase Ib results of its monoclonal antibody aducanumab (formerly BIIB037) in early Alzheimer's Disease (AD), and was probably, like the response to Rigel's announcement, an over-reaction. While the popular press and even the BBC reported the "breakthrough," they conveniently omitted to mention the controversy generated by the fact that the reduction in amyloid was numerical rather than statistically significant when the preliminary results were announced in 2014 and the disappointment seven months later when an intermediate dose did not show a dose-dependent reduction in toxicity or a dose response in efficacy. (Also see "Stockwatch: Biogen's belligerent repetition" - Scrip, 8 Dec, 2014.) (Also see "Stockwatch: Oscillating fortunes" - Scrip, 28 Jul, 2015.)
The analysts from Jefferies helped to stoke the hype in a note entitled Aducanumab Looks To Now Be Further Derisked.
In 1938 a French satirical newspaper reported that there were 27 patients called Adolf Hitler residing in the asylums of Berlin. In retrospect, the problem was the one left roaming free and last week's build-up to the traditional end of summer Labor Day weekend saw over-reaction, hype and wild imagination roaming the internet rather than being secured away from the gullible investing public.
The Magna Biopharma Income fund holdings include Amgen.
Andy Smith is chief investment officer of Mann Bioinvest. Mann Bioinvest is the investment adviser for the Magna BioPharma Income fund which has no position in the stocks mentioned, unless stated above. Dr Smith gives an investment fund manager's view on life science companies. He has been lead fund manager for four life science–specific funds, including International Biotechnology Trust and the AXA Framlington Biotech Fund, and was awarded the Technology Fund Manager of the year for 2007.