On the heels of such a miserable year, it may have seemed counterintuitive to provide a positive outlook for the speculative biotechnology industry in 2009, but that’s exactly what we did.  Our bullish thesis was reiterated for both 2010 and 2011.

The AMEX Biotechnology Index (BTK) ended 2008 at 647.17 and climbed to 1,091.42 by the end of 2011 for a gain of approximately 69% during this three-year period.  Comparing this performance with the general market, the NASDAQ Composite increased 65% from 1,577.03 to 2,605.15 during the same period.

Our favorable outlook for the biotechnology industry remains intact for 2012 and is based on the following key drivers, which build upon many of the catalysts we first proposed in 2009:

• Sector’s defensive characteristics and impact on future economic growth
• Improving number of annual new product approvals since the low set in 2007
• Record number of products in clinical trials and annual industry R&D investment
• Improving access to capital
• Brisk pace of industry consolidation and licensing transactions
• Many micro, small and mid-capitalization companies remain undervalued

Defensive Sector and Economic Driver

During periods of economic uncertainty, the biotechnology sector is often portrayed as defensive given that disease is relentless in both good economic times and bad.  Despite recent medical advances, there remains a need for quality, innovative products to diagnose and treat a broad variety of diseases such as cancer, central nervous system disorders, cardiovascular diseases, diabetes, respiratory and infectious diseases.

Beyond its defensive characteristics, the sector plays a critical role in the United States [US] economy.  Innovative new medicines developed by life science companies provide better patient outcomes, improved quality of care, increased life expectancy, and lead to economic gains and job creation.

While the strengths and weaknesses of the US healthcare system remain the subject of great debate, we believe new medicines should be viewed as investments in the future, not only in patient health – but also in economic recovery and growth.  For example, as indicated in our article “Innovative New Medicines are Key to Economic Growth,” a permanent 1% reduction in mortality from cancer alone has a present value to current and future generations of Americans of nearly $500 billion and a cure would be worth about $50 trillion.

New Drug Approvals

As we highlighted in recent years, legislation passed in 2008 gave the FDA more money and resources, but hiring and training hundreds of new employees takes time.  With that process well underway, combined with increased familiarity of the risk evaluation and mitigation strategies [REMS] program, we expected the drug approval process to gradually improve.

Encouragingly, the total number of approvals for new molecular entities and biologic license applications by the US Food and Drug Administration’s [FDA] Center for Drug Evaluation and Research [CDER] in fiscal year 2011 was 35.  This is an improvement from 21 approvals in 2010 and 25 approvals in 2009.  In fact, according to a press announcement by the FDA, this is among the highest number of approvals in the past decade, surpassed only by 37 approvals in 2009.

However, an article in Nature Reviews by Asher Mullard listing the annual number of drug approvals going back to 1996 shows that 36 approvals in 2004 [not 2009] was the record for the past decade.  The same article also shows that new drug approvals peaked at a high of 56 in 1996.

Notable new drug approvals in 2011 include Johnson & Johnson’s (JNJ) Zytiga® [abiraterone] for late-stage prostate cancer, Roche’s Zelboraf® [vemurafenib] and Bristol-Myers Squibb’s (BMY) Yervoy™ [ipilimumab] both for melanoma, Human Genome Sciences’ (HGSI) Benlysta® [belimumab] – the first new drug for lupus in 50 years, and Seattle Genetics’ Adcetris™ [brentuximab vedotin] for a rare lymphoma known as systemic anaplastic large cell lymphoma [ALCL].

Record Pipeline and Investment

According to the latest report by the Pharmaceutical Research and Manufacturers of America [PhRMA], there are a record number of biotechnology product candidates currently in development.  In the US alone, there are more than 900 biotechnology products in development, including 300 monoclonal antibodies, 298 vaccines, 78 recombinant proteins, 50 gene therapy products, 64 cell therapy products, and 23 antisense products.  More than one-third of these product candidates are targeting cancer and related conditions and more than 20% are targeting infectious diseases.

Annual research and development expenditures by PhRMA member companies for 2009 was an estimated $45.8 billion, more than tripling the $15.2 billion level of investment in 1995.  However, skeptics will point to the fact that despite growing R&D expenditures, the number of new drug approvals has declined since the mid-1990s [see chart below].

Access to Capital

During the second week of January, more than 8,000 registrants gathered in San Francisco, California for the 30^th Annual J.P. Morgan Healthcare Conference [JPMHC] to hear 25-minute presentations from 395 life science companies.  For industry executives and investors, the annual event typically serves as a good barometer for the rest of the year.

Between meetings, we roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored social media outlets throughout the event.  In general, the plane flights and networking receptions were crowded as usual, industry observers “Tweeted” a sense of optimism, and attendees appeared more upbeat than in 2011.

The recent closing of three new funds may support increased optimism as it relates to access to capital.  First, on January 3, 2012, Vivo Ventures announced the final closing of a $375 million fund targeting later development stage pharmaceutical and medical device companies in the US and in revenue stage healthcare companies in greater China.  Second, during the JPMHC Canaan Partners announced the closing of a $600 million fund, with one-third of the fund designated to healthcare investments in biopharmaceutical, medical device and healthcare infrastructure companies.  Also during the JPMHC, Flagship Ventures announced the closing of a $270 million life sciences fund, its largest fund to date.   According to Flagship’s press release, in addition to investing in early-stage companies, a portion of the new fund will be dedicated to “later-stage value investing opportunities resulting from the current capital-constrained environment.”  Finally, Luke Timmerman of Xconomy recently reported that Frazier Healthcare is also aiming for its first biotechnology fund since 2007.

Last year wasn’t too bad either.  In 2011, venture capitalists invested $28.4 billion in 3,673 deals, an increase of 22% in dollars and a 4% rise in deals over the prior year, according to the MoneyTree™ Report by PricewaterhouseCoopers LLP and the National Venture Capital Association [NVCA], based on data from Thomson Reuters.  In fact, venture capital investing in 2011 ranks in the top three years for venture capital investing in the past decade.  Biotechnology was the second largest investment sector, with $4.7 billion going into 446 deals.  This represents a 22% increase in investment dollars, but a 9% drop in terms of the number of deals.

2012 is also off to a solid start with regard to follow-on financings.  Synageva (GEVA), Arena Pharmaceuticals (ARNA), iBio (IBIO), Talon Therapeutics (TLON), ImmunoCelluar Therapeutics (IMUC), Vical (VICL), Synta Pharmaceuticals (SNTA), Chelsea Therapeutics (CHTP), Sequenom (SQNM), ZIOPHARM Oncology (ZIOP), Neurocrine Biosciences (NBIX), and NeuroMetrix (NURO) have each announced offerings since the start of the year.

Consolidation and Licensing

Adding to the optimism among industry executives and investors during the JPMHC, Bristol-Myers Squibb announced its $2.5 billion acquisition of Inhibitex, Inc. (INHX) on January 7, 2012.  In view of the fact that US pharmaceutical companies stand to lose billions of revenue due to patent expirations from 2010 to 2012, we expect merger and acquisition [M&A] activity to remain brisk.

In other M&A news, ISTA Pharmaceuticals (ISTA) is still being pursued by Valeant Pharmaceuticals (VRX), which recently increased its previously proposed price to acquire ISTA from $6.50 to $7.50 per share in cash. Valeant also communicated to ISTA that it could achieve a price of up to $8.50 per share following confirmatory due diligence.

Licensing deal activity is also off to a strong start in 2012, as evidence by Xenon Pharmaceuticals’ strategic alliance with Genentech, a member of the Roche Group (RHHBY), to discover and develop compounds and companion diagnostics for the potential treatment of pain.

According to the deal, which was announced during JPMHC, Xenon is eligible to receive research, development and commercialization milestone payments, totaling up to $646 million for multiple products and indications.  In addition, Xenon will receive royalties on sales of products resulting from the collaboration.

In other licensing news, BioDelivery Sciences (BDSI) recently signed a worldwide license and development agreement with Endo Pharmaceuticals (ENDP) for the exclusive rights to develop and commercialize BEMA Buprenorphine for the treatment of chronic pain.

Small Versus Large

Similar to recent years, we expect that small and mid-capitalization companies with late-stage programs and/or positive fundamental catalysts will continue to outperform their larger industry peers in 2012.

For example, after being the third worst performer in the prior year, Medivation (MDVN) became the largest percentage gainer within the NASDAQ Biotech Index during 2011 based on encouraging results with MDV3100, the company’s lead product candidate in Phase 3 development for the treatment of castration-resistant prostate cancer.

In another dramatic reversal of fortune, after declining 22% in 2009 shares of Akorn, Inc. (AKRX), a niche generic pharmaceutical company, made an impressive comeback by becoming the largest percentage gainer within the NASDAQ Biotech Index during 2010 and again making the list of top ten gainers in 2011 [see Table 1].

However, the prior year’s winners may not always stay hot.  Both Human Genome Sciences (HGSI) and Dendreon Corporation (DNDN) were among the top ten gainers from the NASDAQ Biotech Index in 2009 with dizzying returns of 1,342% and 474%, respectively.  In 2011, both names appear on the list of top ten decliners [see Table 2].

Table 1. Top ten gainers from NASDAQ Biotech Index (NBI) in 2011

Table 2. Top ten decliners from NASDAQ Biotech Index (NBI) in 2011

2012 Outlook

The drivers supporting our favorable outlook for the biotechnology industry remain intact for 2012, such as the record number of products in clinical trials and annual industry R&D investment, improving access to capital, brisk pace of industry consolidation and licensing transactions, and attractive valuations among many small- and mid-capitalization companies, which should continue to outperform their larger industry peers.  In particular, 2012 represents a period with particularly robust news flow for emerging immuno-oncology companies, as indicated in our article “2012 Preview: Cancer Immunotherapy Catalysts.”

One recent example of this inherent volatility and achieving a lofty valuation prior to commercialization is Dendreon Corporation (DNDN).  On April 29, 2010, the FDA approved the very first active immunotherapy for the treatment of cancer – Dendreon’s Provenge® [sipuleucel-T] for metastatic castrate-resistant prostate cancer [CRPC].  This event reignited enthusiasm for the field of active immunotherapy for cancer and shares of Dendreon, which traded below $5 in March 2009, subsequently reached an all-time high above $57 and a market capitalization of approximately $7.8 billion.

It has been said that a rising tide raises all boats and Dendreon’s success lifted shares of other companies working in the field of active immunotherapy for the treatment of cancer.  Table 1 below depicts the stock price performance of select cancer immunotherapy companies from April 1, 2010 to April 30, 2010, the month Provenge was approved by the FDA.

Table 1: High Tide for Cancer Immunotherapy Around Approval of Provenge

On August 3, 2011, however, Dendreon withdrew its previous guidance of $350-400 million in revenue for 2011, with modest quarter over quarter revenue growth expected for the remainder of the year.  The news not only caused a dramatic decline in Dendreon’s stock, but also cast a shadow on other companies working in the emerging field of active immunotherapy for cancer.  Table 2 below depicts the stock price performance of select cancer immunotherapy companies from August 1, 2011 to August 31, 2011, the month that Dendreon withdrew its revenue guidance.  Dendreon’s stock recently traded around $7 per share, down nearly $50 from its all-time high, and the company’s market capitalization is just over $1 billion.

Table 2: Low Tide for Cancer Immunotherapy Around Dendreon’s Withdrawal of Revenue Guidance

While FDA approval of the first active immunotherapy for cancer was a watershed event for the industry, the future for companies working in this emerging area should not be judged solely by the commercial success of this product.  Growing evidence indicates that the field of cancer immunotherapy, broadly defined as including passive immunization, active immunization, and immunostimulation, is undergoing a renaissance.

Beyond the approval of Provenge in 2010, the FDA approved Yervoy™ [ipilimumab] by Bristol-Myers Squibb (BMY) for the treatment of patients with unresectable or metastatic melanoma on March 25, 2011.  With the news, ipilimumab became the eleventh monoclonal antibody [mAb] approved for the treatment of cancer since 1997.  Ipilimumab is unique among other mAbs for cancer treatment, as it represents the first immune checkpoint modulator.

In addition, positive results from several randomized studies with active immunotherapies have recently been published in peer-reviewed journals.  The first study published in the March 1, 2010, edition of the Journal of Clinical Oncology was a Phase II randomized controlled trial of Bavarian Nordic’s (BAVA) poxviral-based, PSA-targeted immunotherapy [Prostvac®] in metastatic CRPC.  Patients receiving Prostvac had an 8.5-month improvement in median overall survival versus control. These provocative data supported initiation of a pivotal Phase 3 trial that began enrolling patients in November 2011.

Another study published in the June 2, 2011, edition of the New England Journal of Medicine, demonstrated that patients with metastatic melanoma receiving high-dose interleukin-2 (IL-2) plus a gp100 peptide vaccine had a significant improvement in centrally verified overall clinical response (16% vs. 6%; P=0.03), as well as longer progression-free survival (2.2 months versus 1.6 months; P=0.008).  There was a trend toward longer overall survival in the gp100 vaccine arm (17.8 months versus 11.1 months; P=0.06), although the results were not statistically significant.

As discussed in our report published in June 2011 titled “Cancer Immunotherapy: A Roundtable Discussion,” there are more than 40 unique active cancer immunotherapies currently being tested in over 60 clinical trials, including nearly a dozen that are in pivotal Phase 3 development.  With nearly a dozen readouts from randomized Phase 2 or Phase 3 trials expected during the next 12-months, 2012 could be a breakout year for the field [see Table 3 below].  While not all programs will be positive, success with even just one of these key trials could reignite investor interest in the field and demonstrate that the clinical success with Provenge was not a fluke.

Table 3. Expected Active Immunotherapy Catalysts for 2012

* Based on company reports, analyst reports, and/or MD Becker Partners’ projection

It is worth noting that mAbs were hailed as “magic bullets” when they were developed in the 1970s.   However, clinical results with these passive immunotherapies were largely disappointing for the first 10 years of development.  It wasn’t until November 1997 that the first mAb for cancer therapy, Rituxan® [rituximab], was approved by the FDA for the treatment of non-Hodgkin’s Lymphoma [NHL].  Today, mAbs represent one of the most successful therapeutic classes and eleven such products have been approved for cancer therapy.  Three blockbuster products sold by the Roche Group (RHHBY) – Avastin® [bevacizumab], Rituxan, and Herceptin® [trastuzumab] – collectively represented nearly $17 billion in revenue for 2009.

As stated in our firm’s April 2010 report titled “Cancer Vaccine Therapies: Failures and Future Opportunities,” using the history of mAb development as a guide, we expect to see five active cancer immunotherapies approved by 2015 [5x15] that will revolutionize the treatment of cancer owing to their potential to be more targeted, more effective, and less toxic.  2012 represents a period with robust news flow for emerging immuno-oncology companies and while volatility is expected, any good news could serve as a spark to reignite investor enthusiasm for companies working in the area and raise the tide once again.  In addition to clinical progress, major licensing and/or merger & acquisition transactions could also serve as catalysts for the sector.

Approval of ipilimumab is the second victory for the field of active immunotherapy in oncology within a year.   On April 29, 2010, the FDA approved the very first active immunotherapy for the treatment of cancer – Dendreon Corporation’s (DNDN) Provenge® [sipuleucel-T] for metastatic castrate-resistant prostate cancer [CRPC].  The fact that two active immunotherapies have demonstrated improved survival in randomized Phase 3 trials and subsequently been approved by the FDA has reignited enthusiasm for the field of active immunotherapy, which has experienced nearly a dozen failures in Phase 3 clinical trials.

A Long Time in the Making

The idea to stimulate one’s own immune system to treat cancer dates back to 1891 when William Coley, Professor of Clinical Surgery at Cornell University, noticed the curative effect of an accidental bacterial infection in a patient with inoperable sarcoma.  It would be 119 years since Dr. Coley’s discovery before the FDA approved the first active immunotherapy for the treatment of cancer.

As the scientific understanding of the immune system has significantly increased since Dr. Coley’s time, scientists and physicians developed successful immune system related strategies to fight cancer, viral infection and autoimmune diseases.  Today, mAbs are among the most successful modern immunotherapies and provide clinical benefit to a vast array of diseases – with three blockbuster mAbs generating approximately $17 billion in sales in 2009.

Melanoma Losing Streak

In addition to helping renew interest in the field of active immunotherapy, the FDA’s approval of ipilimumab provides a much-needed boost to companies developing product candidates for melanoma.  Among the eleven Phase 3 failures with active immunotherapies for the treatment of cancer, more than one-third of them have occurred in melanoma [see Table 1].

Table 1. Select Active Immunotherapy Failures in Phase 3 Trials

Crowded Market

While ipilimumab is the first new drug approved for the treatment of melanoma in 13 years, there are four competitive active immunotherapy programs in Phase 3 development [see Table 2].  In fact, melanoma is second only to prostate cancer as the most crowded clinical development segment within the active immunotherapy field.

Table 2. Select Phase 3 Active Immunotherapy Product Candidates in Melanoma

Five by 2015

As highlighted in our firm’s April 2010 report titled “Cancer Vaccine Therapies: Failures and Future Opportunities,” there are a number of additional catalysts that could ignite further interest in the field of active immunotherapy for cancer.  Nearly 50 clinical programs are currently underway, including nearly a dozen that are in pivotal Phase 3 development.

Using the history of passive immunotherapy development as a guide, it would not be surprising to see five active cancer immunotherapies approved within five years, which leads to our “5 x 2015″ projection.  With the approvals of both sipuleucel-T and ipilimumab in hand, the next three may come from the following list of Phase 3 product candidates [in alphabetical order]:

• Amgen (AMGN), OncoVEX[GM-CSF], melanoma and head & neck
• AVAX Technologies (AVXT.PK), MVAX, melanoma
• Bavarian Nordic (BAVA.CO), Prostvac®, prostate cancer
• Biovest International (OTCQB: BVTI), BiovaxID®, NHL
• Cel-Sci (CVM), multikine, head & neck
• Celldex Therapeutics (CLDX), rindopepimut/CDX-110, glioblastoma
• GlaxoSmithKline (GSK), MAGE-A3 ASCI, NSCLC and melanoma
• Novarx (private), Lucanix™/belagenpumatucel-L, NSCLC
• Oncothyreon (ONTY)/Merck KGaA, Stimuvax®/BLP25 liposome vaccine, NSCLC
• Oxford BioMedica plc (OXB.L), Trovax®, renal cell
• Transgene (TNG.PA)/Novartis (NVS), TG4010/MVA-MUC1-IL2, NSCLC
• Vical (VICL)/AnGes, Allovectin-7®, melanoma

Table 1. Old Versus New Paradigm in Biotechnology Collaborations

In addition, the negative considerations from large pharmaceutical partnerships are often overlooked, which begs the question: is it better to partner, or go alone?  To help address the topic, this article focuses on the oncology segment of the life science industry – one of the most popular therapeutic areas for partnering and merger & acquisition [M&A] activity.

Luck Vs Skill

Prior to addressing the question of whether or not a small biotechnology company should collaborate with a larger pharmaceutical organization, we solicited investor views regarding the process of corporate partnering.  Some of the feedback indicates there is a lack of transparency.

“As an investor, partnering activity is the most opaque part of our companies’ business,” said David Sable, portfolio manager, Special Situations Life Sciences Fund.  “Every small biotech CEO tries to create an image of limitless interest on the part of big pharma in each of the company’s projects, a dynamic that will inevitably result in a value-maximizing transaction.  Many management teams deliver on these promises; in retrospect, however, at least as many seem to have parked their molecule in the front yard with a ‘For Sale’ sign and hoped for the best.  While we can validate the importance of a molecular pathway, double-check market size predictions, run our own statistics and reality-check pricing assumptions, we have no way to identify talent in business development.”

Left at the Altar

One of the most important negative considerations for biotechnology companies looking to partner is that large pharmaceutical companies often shift resources and the focus of their pipeline development candidates over time, which may put their collaborators at risk.  Although sometimes done for strategic reasons rather than due to new clinical insight, the sudden departure of a large pharmaceutical partner can reflect poorly on an otherwise promising product candidate.

For example, Celldex Therapeutics, Inc. (CLDX) announced in September 2010 that the company would regain full worldwide rights to develop and commercialize rindopepimut [CDX-110] from Pfizer, Inc. (PFE).  The companies had entered into a global development and commercialization agreement in April 2008 for rindopepimut, an experimental therapeutic cancer vaccine that targets the tumor-specific molecule epidermal growth factor receptor variant III in patients with glioblastoma multiforme.  Pfizer informed Celldex that the rindopepimut program was no longer a strategic priority of Pfizer and terminated the agreement despite the fact that the product candidate met or exceeded all pre-determined safety and efficacy objectives across three clinical studies.  Shares of Celldex, which traded as high as $9.49 during 2010, reached a 52-week low of $2.91 on the news.

More recently, Transgene (TNG.PA) announced on February 22, 2011, that Roche Holding (ROG.VX) terminated their 2007 agreement under which Roche had been granted exclusive global development and commercialization rights to TG4001/RG3484, a therapeutic vaccine candidate currently in a 200 patient Phase IIb study to treat notably high grade cervical intraepithelial neoplasia [CIN] lesions [CIN2/3] caused by human papilloma virus [HPV] infection.  While Transgene stated that Roche’s decision to terminate the license agreement was based on strategic reasons and wasn’t data driven, the company’s shares reached a 52-week low on the news.

Hopes and Dreams Vs Revenue Streams

Another potential negative is that by partnering a product candidate, the “hope and dream” multiple of a potential partnership or acquisition may be replaced by the realities of a “revenue stream,” such as milestone payments and future product royalties.  By discounting the economics of a partnership deal for certain risk factors, investors can assign a net present value to the company that may be quite different than the speculative valuation in the absence of a partnership.  Representing a unique opportunity to review the effect of partnering on market capitalization, three separate deals were announced for late-stage product candidates aimed at treating prostate cancer during 2009, while two companies have remained independent [see Table 2].

As the first transaction announced that year, Johnson & Johnson’s (JNJ) acquisition of Cougar Biotechnology for nearly $1 billion in cash in May 2009 initially looked attractive.  However, following approval of Provenge® [sipuleucel-T] in April 2010, the market capitalization of Dendreon Corporation (DNDN) exceeded $7 billion, which demonstrates the potential benefit of remaining independent or retaining worldwide rights.  In contrast, more than a year after partnering their late-stage programs, the market valuations of two other companies, Medivation, Inc. (MDVN) and OncoGenex Pharmaceuticals, Inc. (OGXI), are $605 million and $150 million, respectively.

Using Dendreon’s valuation as an example, it isn’t surprising that Bavarian Nordic A/S (BAVA.CO) announced earlier today that the company is reviewing alternate options to maximize value for shareholders and fund the pivotal Phase 3 trial of its “off-the-shelf” therapeutic vaccine product candidate Prostvac® on its own.  Keeping its options open, however, Bavarian Nordic is exploring opportunities to pursue independent development in parallel with continuing partnership discussions.

Table 2. Late-stage Prostate Cancer Programs

A Means to an End

The biggest argument against partnering is the fact that some of the most successful biotechnology companies to date are those that have commercialized their own products, such as Amgen, Inc. (AMGN), Celgene Corporation (CELG), and several others.

“Celgene is a unique example of success by taking a slightly different approach,” said Charles Duncan, managing director and senior biotech analyst at JMP Securities LLC.  “The company built a pipeline and worldwide infrastructure for Revlimid® [lenalidomide] that was funded and supported through its early sales of Thalomid® [thalidomide].”

“We viewed partnering our lead product as a critical strategic decision that would shape the company and significantly impact our vision,” said Sol J. Barer, Ph.D., Executive Chairman of Celgene Corporation.  “We felt that our pursuing the development of Revlimid worldwide alone was the best option consistent with our vision a of becoming a major global biopharmaceutical company over the next few years.  We clearly recognized the short versus long term trade-offs in the decision; nevertheless, our belief in the product and in our ability to manage the product globally was important in our decision not to partner.”

Some companies have also partnered a specific program in certain geographies or disease settings and use the validation and resulting economics to help advance their own pipeline – sometimes even in competitive areas.  For example, Amgen originally developed Epogen® [epoetin alfa], which the company commercialized as a treatment for anemia in dialysis patients and partnered non-dialysis rights with Johnson & Johnson [sold as Procrit®].  Amgen later developed and commercialized Aranesp® [darbepoetin alfa], an erythropoiesis stimulating protein with a longer half-life and increased biologic activity that was not partnered.

Similarly, Oncothyreon, Inc. (ONTY) has granted a license to Merck KGaA of Darmstadt, Germany for the clinical development, manufacturing, and marketing of Stimuvax®.  Oncothyreon is eligible for cash payments based on the achievement of certain process transfer events, regulatory submissions in first and second cancer indications, regulatory approval for first and second cancer indications, and for sales milestones.  Oncothyreon will also receive a royalty based on net sales.  If successful in the clinic, Stimuvax could also help validate another Oncothyreon product candidate, ONT-10, which is a completely synthetic MUC1-based liposomal glycolipopeptide cancer vaccine that could compete with Stimuvax.  Merck KGaA has a right of first negotiation with respect to ONT-10.

Geographically Undesirable

Although selective encumbered assets can still attract buyers, partnering a product candidate in certain geographies with one large pharmaceutical company may preclude an acquisition by another that is only interested in worldwide rights or control of key markets.  On the other hand, some partnerships can later lead to an acquisition – a strategy employed by Bristol-Myers Squibb Company (BMY) on more than one occasion.

For example, Bristol-Myers Squibb and Medarex, Inc. formed a worldwide collaboration in 2004 valued at more than $530 million to develop and commercialize Yervoy® [ipilimumab, MDX-010], which was in Phase III clinical development at the time for the treatment of metastatic melanoma and multiple Phase II clinical trials in other oncology indications.  In 2009, Bristol-Myers Squibb acquired Medarex for $16.00 per share, a 90% premium over the prior day’s closing price of $8.40 per share, for an aggregate purchase price of approximately $2.4 billion.

What started as a lawsuit for infringement of its patents related to fusion protein technology in 2006, ZymoGenetics, Inc. signed a deal with Bristol-Myers Squibb in 2009 worth more than $1.1 billion for PEG-Interferon lambda, a novel type 3 interferon in Phase Ib development for the treatment of Hepatitis C, and its related development program.  The following year, Bristol-Myers Squibb acquired ZymoGenetics for $9.75 per share in cash [an 84% premium to the prior day close] in a transaction valued at approximately $885 million.

While ultimately thwarted by Eli Lilly & Co.’s (LLY) superior offer in October 2008, Bristol-Myers also attempted to acquire its partner ImClone Systems.  Back in September 2001, Bristol-Myers had entered into an agreement with ImClone to co-develop and co-promote Erbitux® [cetuximab, IMC-C225] in the United States, Canada and Japan.

All that Glitters is not Gold

Maintaining worldwide rights and commercializing a product without a partner doesn’t necessarily translate into a lofty market valuation.  Several companies have struggled to commercialize oncology products on their own.

Allos Therapeutics, Inc. (ALTH) developed Folotyn® [pralatrexate injection], a folate analogue metabolic inhibitor, and began commercializing the product in the U.S. for the treatment of patients with relapsed or refractory peripheral T-cell lymphoma [PTCL] in October 2009.  Since the product’s launch, Folotyn sales have been below Wall Street analyst’s expectations and shares of Allos recently reached a 52-week low of $2.64.

Despite an inauspicious launch in the U.S., some analysts believe that Allos may finally be executing on a regional strategy with the recent filing of a Marketing Authorisation Application for European approval and the potential for a partner in Asia as highlighted during the company’s recent quarterly teleconference with investors.

“If Allos gets traction with an ex-U.S. approval and partnership, investor sentiment will most certainly improve as this will provide some external validation on the viability of a regulatory path and market opportunity in PTCL, despite it being a rare disease and there being emerging potential competition from Celgene’s Istodax® [romidepsin],” said Charles Duncan.  “At this point, all but the most patient, value-oriented investors have extricated themselves from the Allos story due to what we believe to be a lack of confidence in senior management, and having another company to shoulder the risk ex-U.S. will provide a much-needed boost to the capabilities and capital needed to profitably market Folotyn.  Perhaps this too could be an example where a collaboration discussion turns into an acquisition, although we anticipate that should such a scenario materialize, it would likely involve contingent-value rights [CVR’s] given the uninspiring early revenue trajectory.”

Summary

Looking ahead, the trade-off between equity dilution and asset dilution represents an important crossroad that many late-stage biotechnology companies will face in the near future [see Table 3 for a select list].  While one size doesn’t fit all, the fact that Dendreon has achieved the largest market valuation of any company in the late-stage prostate cancer segment of the market by commercializing its product without a partner helps support the notion that going alone may provide the highest value to stakeholders.  Such a strategy requires that the company can access resources and capital to develop and launch its product globally.  If not, a selective or global partnership may be the next best options – provided the terms are attractive and that there is a remaining pipeline to be leveraged in the future.  In the end, whether a company proceeds alone or with a partner, there is an attractive landscape of motivated buyers for late-stage and marketed products that may ultimately lead to M&A.

NEW – Click here to view this article in PDF format.

Table 3. Select Companies with Phase III Oncology Programs Not Yet Partnered

For an industry segment known for both hope and hype, it is no surprise that stem cell therapies are once again making headlines.  On July 30, 2010, the U.S. Food and Drug Administration [FDA] lifted the clinical hold on Geron Corporation’s (GERN) Phase I trial using its embryonic stem cell-based therapy for the treatment of patients with acute spinal cord injury.  Within days of the news, shares of Geron increased more than 30%, going from $4.80 to $6.39.

More recently, StemCells, Inc. (STEM) announced the publication of preclinical data demonstrating that its non-embryonic stem cell therapy was able to restore lost motor function in mice with chronic spinal cord injury.  The August 19, 2010, news sent shares of StemCells as high as $1.19 compared to the prior day closing price of $0.87 with volume greater than 17 million shares.

While Geron is already in human trials for the acute phase and StemCells plans to initiate its clinical trial in the chronic setting next year, two competitors vying for the treatment of spinal cord injury using allogeneic approaches [“off-the-shelf,” like a traditional pharmaceutical product] highlights yet another risk for investors in the already complex stem cell sector: competition.

In fact, of the mere 15 publicly traded biotechnology companies currently developing stem cell therapies [see Table 1], more than half of them have competing programs in three major disease areas:

• Cardiovascular
• Gastrointestinal
• Central nervous system [CNS]

Accordingly, the purpose of this article is to review the key players in each of these segments and contrast their different approaches.

Cardiovascular – critical limb ischemia

Critical limb ischemia [CLI] is a severe obstruction of the arteries that seriously decreases blood flow to the extremities [hands, feet and legs] and is manifested by pain at rest, non-healing wounds, and tissue necrosis [gangrene].

Three stem cell developers are currently conducting clinical trials with competing approaches for the treatment of CLI:

Aastrom Biosciences, Inc. (ASTM)

Aastrom represents the most advanced clinical stage company that is developing a stem cell therapy for the treatment of CLI.  The company is completing a Phase IIb clinical trial in patients with CLI and interim data were presented at the Society for Vascular Surgery annual meeting.  Similar to Dendreon Corporation’s (DNDN) personalized vaccine for prostate cancer, Aastrom’s procedure is autologous – meaning that a small amount of bone marrow cells are taken from the patient and processed to expand the number of early stem and progenitor cells before being administered to the patient to promote healing of the affected tissues.  In July 2010, Aastrom announced plans to pursue a Phase III clinical program for CLI through the FDA’s special protocol assessment [SPA] process.

Aldagen, Inc. (private, S-1 filed)

Similar to Aastrom, Aldagen is also developing an autologous product [ALD-301] derived from a patient’s bone marrow for the treatment of CLI.  In a 21-patient Phase I/II clinical trial, ALD-301 was well tolerated – although four of the 11 patients in the ALD-301 treatment group and two of the 10 patients in the unsorted bone marrow treatment group experienced serious adverse events that investigators determined were related to the underlying disease [CLI].  Accordingly, the company expects to commence enrollment in a Phase II clinical trial in 2010.

Pluristem Therapeutics, Inc. (PSTI)

In contrast to the autologous approaches by both Aastrom and Aldagen, Pluristem is conducting a Phase I trial of an allogeneic stem cell therapy for the treatment of CLI.  Similar to Celgene Corporation (CELG), Pluristem obtains stem cells for its product from human placenta.  In April 2010, Pluristem reported interim top-line results from Phase I clinical trials of PLX-PAD that demonstrated the cell therapy is potentially safe, well tolerated and effective in patients with CLI.  The company is currently planning two Phase IIb trials in CLI.

Cardiovascular – myocardial infarction

Myocardial infarction [MI] or acute myocardial infarction [AMI], commonly known as a heart attack, is the interruption of blood supply to part of the heart, causing heart cells to die.  Cardiac muscle cells do not have the ability to regenerate, so if enough dead tissue forms, patients suffer heart failure and may eventually die.

Three stem cell developers are conducting clinical trials with competing approaches for the treatment of AMI:

Osiris Therapeutics, Inc. (OSIR)

Osiris is developing Prochymal, one of the most advanced stem cell therapeutic product candidates for the treatment of AMI.  Prochymal is an allogeneic stem cell product derived from bone marrow that is currently being studied in a Phase II clinical trial for the treatment of AMI [ClinicalTrials.gov identifier NCT00877903].  Results from the two-year follow-up of the Phase I clinical trial demonstrated that a single dose of Prochymal administered within 10 days after the patient’s first AMI was safe and well tolerated.  Prochymal also showed significant improvements, including a reduction in chest pain events and cardiac arrhythmias and improvement in cardiac and lung function compared to placebo.  Osiris has partnered with Genzyme Corporation (GENZ) for the development and commercialization of Prochymal.

Athersys, Inc. (ATHX)

Similar to Osiris, Athersys is developing its allogeneic stem cell therapy product, MultiSem®, in collaboration with Angiotech Pharmaceuticals for the treatment of AMI.  MultiStem consists of a special class of stem cells obtained from adult bone marrow or other non-embryonic tissue sources.  In July 2010, Athersys announced positive results from an ongoing Phase I study of Multistem [ClinicalTrials.gov identifier NCT00677222] demonstrating that the product candidate was well-tolerated at all three dose levels studied and also suggested improvement in heart function in treated patients.  Athersys and Angiotech are working on plans for a Phase II trial.

Cytori Therapeutics (CYTX)

In May 2010, Cytori reported results from a European clinical study using its medical device, called the Celution® System, as an autologous treatment for AMI.  As part of the company’s procedure, small amounts of fat tissue are removed from a patient’s abdomen.  Stem and regenerative cells are then separated at the point-of-care and subsequently injected into the patient’s coronary artery.  The six-month results from the fourteen patient, double-blind, placebo controlled trial demonstrated an improvement in the infarct size, the amount of blood supply to the heart muscle, and functional improvement in the amount of blood supply to the heart muscle.  Cytori expects to initiate a 150-250 patient pivotal study for European approval in late 2010 or early 2011.

Gastrointestinal

Crohn’s disease is an inflammatory disease of the intestines that may affect any part of the gastrointestinal tract, mainly causing abdominal pain, diarrhea, vomiting, and weight loss.   There is no known pharmaceutical or surgical cure for Crohn’s disease and treatment options are restricted to controlling symptoms, maintaining remission, and preventing relapse.

Two stem cell developers are conducting clinical trials with competing approaches for the treatment of Crohn’s disease:

Celgene Corporation (CELG)

In April 2010, Celgene Corporation (CELG) reported positive results from a Phase I study of patients with Crohn’s disease receiving PDA-001, an allogeneic stem cell product candidate derived from human placental tissue.  The Phase I trial consisted of 12 patients with active moderate-to-severe Crohn’s who were unresponsive to at least one prior therapy.  Patients received two infusions of PDA-001, with six patients receiving a lower dose of the cells and the remaining six patients receiving a higher concentration.  According to the company, the study met its primary safety goal and demonstrated encouraging signs of clinical benefit, including clinical remission among four patients in the low dose group.  ClinicalTrials.gov currently lists a Phase IIa study with PDA-001 for the treatment of adults with moderate-to-severe Crohn’s disease that is not yet open for patient recruitment [identifier NCT01155362].

Osiris Therapeutics, Inc. (OSIR)

In May 2010, Osiris Therapeutics resumed enrollment in its Phase III trial of Prochymal for treatment-resistant Crohn’s disease [ClinicalTrials.gov identifier NCT00482092].  Enrollment was suspended in 2009 over concerns the trial design would make it difficult to detect a treatment effect with its allogeneic stem cell product derived from bone marrow.  According to the company, an interim analysis of 207 patients enrolled in the study revealed that the difference between the Prochymal and placebo response rates was consistent with the original statistical assumptions of the protocol in one active arm and is significantly outperforming placebo, although it is not clear whether this active arm is the low or high dose Prochymal group.  It is also worth noting that Prochymal previously failed to meet the primary endpoints of two Phase III studies for the treatment of graft-versus-host disease [GVHD].

Central nervous system

Beyond the aforementioned competition between Geron and StemCells in the area of spinal cord injury, two stem cell companies are pursuing treatments for amyotrophic lateral sclerosis [ALS], often referred to as “Lou Gehrig’s Disease.”  ALS is a progressive neurodegenerative disease that affects nerve cells in the brain and the spinal cord, resulting in the loss of muscle control and paralysis.

Neuralstem, Inc. (CUR)

In September 2009, Neuralstem received FDA approval to commence a Phase I trial to treat patients with ALS using its allogeneic stem cell therapy derived from human spinal cord stem cells.  The trial is designed to study the safety of Neuralstem’s cells and the surgical procedures and devices required for multiple injections directly into the grey matter of the spinal cord.

The FDA has approved the first stage of the trial, which consists of 12 patients who will receive five-to-ten stem cell injections in the lumbar area of the spinal cord.  The patients will be examined at regular intervals post-surgery, with final review of the data to come about 24 months later.

Preclinical work has shown that Neuralstem’s cells extended the life of rats with ALS and also reversed paralysis in rats with ischemic spastic paraplegia.

BrainStorm Cell Therapeutics, Inc. (BCLI.OB)

In February 2010, BrainStorm entered into a collaborative agreement with the Hadassah Medical Center to conduct a Phase I/II clinical trial in ALS patients at the Hadassah Ein Kerem Hospital.  BrainStorm’s NurOwn™ technology uses stem cells obtained from adult bone marrow and the company’s research team is among the first to have successfully achieved the in vitro differentiation of adult bone marrow cells into characteristic neuron-like cells capable of releasing dopamine as well as into astrocyte-like cells capable of releasing several neurotrophic factors, including glial-derived neurotrophic factor [GDNF].

Unlike the injections in the lumbar area of the spinal cord, BrainStorm expects that early ALS subjects will receive intramuscular injections into clinically unaffected [or only mildly affected] upper arm biceps and triceps muscles.  Progressive ALS subjects will receive intrathecal cell transplantation via a standard lumbar puncture.

According to the company, BrainStorm initiated manufacturing runs using its proprietary cell growth process in preparation of producing clinical trial materials under good manufacturing practice [GMP] standards at the Hadassah Medical Center GMP facility.  Upon completion of this process, the Phase I/II trial for patients with ALS is expected to begin pending approval from the Israeli Ministry of Health, which BrainStorm expects during the second half of 2010.

Summary

Given their unique regenerative abilities, stem cells offer new hope for treating cardiovascular, gastrointestinal, CNS, and other diseases.  However, with more than half of the 15 publicly traded biotechnology companies currently developing stem cell therapies in three major disease areas, competitive positioning will be an important additional consideration for prospective investors.

Table 1. Stem cell companies

Product pricing and reimbursement

The cost of Provenge has been set at $93,000 for a course of treatment, which consists of three infusions at approximately two-week intervals.  In view of the fact that Provenge has been demonstrated to extend survival by 4.1 months, this translates into an average cost of $23,000 per month of added survival.

In comparison, Taxotere® [docetaxel] by Sanofi-aventis (SNY) is indicated for the treatment of patients with androgen independent [hormone refractory] metastatic prostate cancer and administered every 3 weeks for 10 cycles.  Assuming an average monthly cost of $4,000 for Taxotere [source: Cancer Res 2009;69(24 Suppl):Abstract nr 1076], this is an approximate total cost of $40,000 per patient. In the pivotal TAX 327 study, median survival for prostate cancer patients receiving Taxotere was 18.9 months versus 16.5 months in the control arm, which results in an average cost of $16,666 per month of added survival.  Unlike Provenge, however, treating common adverse reactions with Taxotere, such as infections, neutropenia, anemia, nausea, diarrhea, and others, increases the total cost of therapy – so the pricing of Provenge doesn’t appear completely out of line. [note: updated survival analysis of the TAX 327 study demonstrates a 2.9 month survival advantage, which lowers the average cost to $13,793 per month of added survival with Taxotere.  Source: Journal of Clinical Oncology, Vol 26, No 2 (January 10), 2008: pp. 242-245.]

Nonetheless, the Centers for Medicare and Medicaid Services [CMS] has initiated a National Coverage Analysis [NCA] of Provenge. In CMS’s announcement of the NCA, CMS is requesting public comments on the effects of Provenge on health outcomes in patients with prostate cancer. While the news doesn’t reflect a change in Medicare coverage policy or impact existing coverage decisions and a decision isn’t expected for a year, it does highlight sensitivity on the part of payors over the pricing of certain cancer treatments.

Supply constraints

Dendreon is making Provenge available through approximately 50 centers, all of which were approved Provenge clinical trial sites, and expects to increase capacity over the next year.  The increased capacity will be a result of the anticipated licensure of its expanded New Jersey, Georgia and California facilities in mid-2011.

In the short term, however, Dendreon officials have indicated that the company will only be able to supply 2,000 treatments to patients.  At a cost of $93,000 per treatment, this limits potential sales to approximately $186 million.

According to a June 28 article by Bloomberg reporter Tom Randall, Dendreon’s Chief Operating Officer Hans Bishop indicated that facilities will be able to churn out medicine each year valued at between $1.25 billion and $2.5 billion by the end of 2011.

Competitive landscape

In early April 2010, we published a 150-page industry report titled “Cancer Vaccine Therapies: Failures and Future Opportunities,” which included an overview of the cancer immunotherapy market, interviews with several key opinion leaders, profiles of nearly 40 companies, and a discussion of the scientific, clinical, and commercial considerations for the major industry participants.

In the report, we highlighted the fact that numerous active immunotherapies are in late-stage clinical development for prostate cancer.  In fact, nine product candidates are in clinical trials for the treatment of prostate cancer, representing the largest therapeutic area within the active immunotherapy market.  Beyond competition from other active immunotherapies, however, Provenge could also face competition from small molecule products.

For example, Johnson & Johnson (JNJ) acquired Cougar Biotechnology, Inc. for approximately $1.0 billion in cash in 2009.  Cougar Biotechnology’s oncology portfolio included abiraterone acetate [CB7630], an orally active acetate salt of the steroidal compound abiraterone.  Abiraterone acetate, which can suppress testosterone production by both the testes and the adrenals to castrate-range levels, is currently in two Phase III clinical trials for the treatment of prostate cancer according to ClinicalTrials.gov [Trial identifier numbers NCT00638690 and NCT00887198].  Both studies list a primary completion date of mid-2011.

Insider sales

Trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the Securities and Exchange Commission [SEC], usually within a few business days of the trade.  Some investors follow the activity of insiders, believing that they might have better insights into the health of a corporation and that their trades convey important information – although this isn’t always the case.

In this regard, according to a Form 4 filed with the SEC, Dendreon’s Chief Executive Officer [CEO] beneficially owned 555,211 shares of the company’s common stock as of April 29, 2010 – the day Provenge was approved by the FDA.  The CEO sold more than half of those shares at prices ranging from $51 to $54.70, reducing his beneficial holdings to 224,359 the next day.  Other insiders also sold during the period.

Priced for perfection

Recall that Eli Lilly & Co. (LLY) purchased ImClone Systems for $6.5 billion back in 2008.  ImClone’s only product – Erbitux® [cetuximab] – had generated annual sales of approximately $1.3 billion in 2007.  Therefore, ImClone was valued at a 5x multiple to prior year sales.

At its 52-week high, Dendreon had a market capitalization of approximately $7.8 billion.  At a 5x multiple, this would imply an annual revenue run rate of $1.56 billion, which is consistent with the company’s planned manufacturing capacity by the end of 2011 and many analyst projections over the coming years.

But Dendreon isn’t generating $1.56 billion in annual sales yet and concerns over pricing, reimbursement, and competition, combined with insider selling, help explain the decrease in market valuation since the approval of Provenge.

Since the early 1990s, cancer immunotherapy has provided hope to patients, physicians, and investors as a new treatment modality with limited side effects and superior efficacy.  Cancer immunotherapy broadly includes passive immunization, active immunization, and immunostimulation [1]. 

Passive immunotherapy is the transfer of an exogenous therapeutic agent to a patient where the therapy has a direct pharmacological action on the desired target.  The best examples of passive immunotherapy are monoclonal antibodies [mAbs], which were hailed as “magic bullets” when they were developed in the 1970s.  

Clinical results with mAbs were largely disappointing for the first 10 years of development[2].  In fact, it wasn’t until November 1997 that the first mAb for cancer therapy, Rituxan® [rituximab], was approved by the U.S. Food and Drug Administration [FDA].  Developed by IDEC Pharmaceuticals, Rituxan® is a chimeric monoclonal antibody against the protein CD20 that is currently approved for the treatment of chronic lymphocytic leukemia [CLL], non-Hodgkin’s Lymphoma [NHL], and rheumatoid arthritis [RA][3].  

After reporting its first year of profitability in 1998, shares of IDEC Pharmaceuticals traded at a new all-time high of $140 with a market capitalization above $3.3 billion. Worldwide net sales of Rituxan® reached $1.5 billion in 2002 and the following summer IDEC Pharmaceuticals acquired Biogen, Inc. in a stock transaction valued at approximately $6.65 billion to create Biogen Idec, Inc. (BIIB). 

While the success of Rituxan® spurred the development of other anti-CD20 mAbs, it wasn’t until October 2009 that Arzerra® [ofatumumab] was approved by the FDA for the treatment of CLL.  Ofatumumab, which was developed by Genmab A/S (GNMSF.PK) and GlaxoSmithKline plc (GSK), is a human mAb that targets an epitope different from Rituxan® and other anti-CD20 mAbs[4]. 

Today, passive immunotherapies represent one of the most successful therapeutic classes and there are currently ten mAbs approved for cancer therapy [see Figure 1: FDA Approval of cancer mAbs from 1997-2010].  Three blockbuster products sold by the Roche Group (RHHBY) – Avastin® [bevacizumab], Rituxan®, and Herceptin® [trastuzumab] – collectively represented nearly US$17 billion in revenue for 2009[5].  As useful as many of these mAbs have become in cancer therapy, they often have the greatest efficacy impact when used in combination with other therapeutic modalities, particularly cytotoxic agents[6]. 

Figure 1: FDA Approval of cancer mAbs from 1997-2010

Similar to passive immunotherapy with mAbs, the early development of active immunotherapies has proven to be an enormous challenge[7].  In fact, we identified nearly a dozen product candidates that failed in Phase III trials.  Active immunotherapies are therapies that contain a specific antigen or set of antigens that are designed to activate the patient’s own immune system to seek out and destroy cells that carry the same antigen.  They have no direct therapeutic action, but rather rely on the patient’s immune system to recognize and destroy the intended target. 

While no active immunotherapeutics are currently approved for the treatment of cancer, the FDA has assigned a Prescription Drug User Fee Act [PDUFA]) date of May 1, 2010, by which time it will respond to Dendreon Corporation’s (DNDN) amended Biologics License Application [BLA] for Provenge® [sipuleucel-T].  Dendreon is seeking licensure for Provenge® for men with metastatic castrate-resistant prostate cancer [CRPC].  This event has reignited enthusiasm for the field of active immunotherapy and shares of Dendreon, which traded below $5 in March 2009, recently hit all-time highs above $40 and a market capitalization greater than $5 billion. 

As with any first-in-class product, regulatory delays are possible.  For example, the BLA for Rituxan® was originally submitted on February 28, 1997, and the FDA requested additional data on certain aspects of the production process related to the bulk drug manufacture on August 29, 1997, which delayed approval until later that year [November 26, 1997].  In view of the complexities of manufacturing and distributing an autologous cancer therapy, a similar request by FDA for Provenge® would not be unexpected and would likely occur around the PDUFA date using Rituxan®’s history as a guide. 

If approved by the FDA, Provenge® would represent the first active immunotherapy for the treatment of cancer.  However, unlike Rituxan®’s market monopoly that lasted for nearly 12-years, Provenge® could face competition in a relatively short period of time.  Numerous active immunotherapies are in late-stage clinical development for prostate cancer – including a promising off-the-shelf vaccine set to begin a pivotal Phase III trial in 2010.  In fact, nine product candidates are in clinical trials for the treatment of prostate cancer, representing the largest therapeutic area within the active immunotherapy market 

Beyond Provenge®, there are a number of additional catalysts in 2010 that could ignite further interest in the field of cancer immunotherapy.  Nearly 50 clinical programs involving active cancer immunotherapies are currently underway, including nearly a dozen that are in pivotal Phase III development with several BLAs planned in 2010. 

For example, Bristol-Myers Squibb Company (BMY) has announced its intent to potentially file for regulatory approval for ipilimumab [with or without vaccine therapy] in metastatic melanoma in 2010 and has submitted Phase III data for presentation at the American Society for Clinical Oncology [ASCO] annual meeting held June 4-8, 2010.  In addition, GlaxoSmithKline plc (GSK) is conducting the largest ever Phase III clinical trial in lung cancer treatment with its investigational MAGE-A3 ASCI immunotherapy, with the possibility for data presentation at ASCO 2010.  Lastly, following the presentation of positive Phase III trial results at ASCO 2009, Biovest International, Inc. (BVTI.PK) expects to file a BLA for BiovaxID in NHL in 2010. 

Accordingly, in our latest industry report titled “Cancer Vaccine Therapies: Failures and Future Opportunities,” we provide an overview of the cancer immunotherapy market, feature profiles of nearly 40 companies, include interviews with several key opinion leaders, and review some of the scientific, medical, clinical, and financial aspects of the major industry participants.  For more information regarding the report, please click here or send an email to: info@mdbpartners.com

Objectives of the Report

Some of the objectives of this report are to:

• Provide an overview of the cancer immunotherapy market
• Identify disease indications currently being studied with cancer immunotherapy
• Identify the companies currently involved in cancer immunotherapy development
• Identify specific product candidates that offer the greatest market opportunities
• Assess the risks of cancer immunotherapy development and commercialization

Research Methodology

MD Becker Partners adopted a three-fold approach for this study:

• Primary research focused on interviews with key opinion leaders involved in the field of cancer immunotherapy
• Secondary research focusing on utilizing information from peer-reviewed journal articles and reports on cancer immunotherapy
• Quantitative and qualitative analysis of the primary and secondary data using our industry experience and knowledge of the marketplace 

References:  

1. Rüttinger, D. et al. Oncologist. 15(1): 112-8 (2010). 
2. Ritz, J. et al. Blood. 59:1-11 (1982). 
3. Rituxan® (rituximab) prescribing information (www.rituxan.com) 
4. Teeling, JL. et al. J Immunol. 177(1): 362-71 (2006). 
5. Roche Annual Report 2009 (www.roche.com/gb09e.pdf) 
6. Goldenberg, DM. Cancer. 116(4): 1011-2 (2010). 
7. Rescigno, M. et al. Biochim Biophys Acta. 1776(1): 108-23 (2007).

With Opening Day less than a month away, it seems only fitting to reference one of the most quoted personalities of our time to describe our analysis of the biotechnology sector in 2010.  In this article, we review our favorable outlook for the industry, draw comparisons with the prior year, and introduce the results of our recent “Life Sciences Industry Outlook” survey that targeted industry executives, investors, analysts, and members of the media.

Bullish Outlook

Our favorable outlook for the biotechnology industry in 2010, which builds upon many of the same catalysts we proposed for 2009, is based on the following key drivers:

• Sector’s defensive characteristics and impact on future economic growth
• Highest number of annual new product approvals since 2004
• Record number of products in clinical trials and annual industry R&D investment
• Improving access to capital
• Brisk pace of industry consolidation and licensing transactions
• Many small and mid-capitalization companies remain undervalued

In fact, several of these themes were reinforced by the results of our industry survey.

Defensive Sector and Economic Driver

During periods of economic uncertainty, the biotechnology sector is often portrayed as defensive given that disease is relentless in both good economic times and bad.  Despite recent medical advances, there remains a need for quality, innovative products to diagnose and treat a broad variety of diseases such as cancer, central nervous system disorders, cardiovascular diseases, diabetes and infectious diseases.

Beyond its defensive characteristics, the sector plays a critical role in the United States [US] economy.  Innovative new medicines developed by life science companies provide better patient outcomes, improved quality of care, increased life expectancy, and lead to economic gains.

While the strengths and weaknesses of the US healthcare system remain the subject of great debate, we believe new medicines should be viewed as investments in the future, not only in patient health – but also in economic recovery and growth.  For example, as indicated in our October 2009 article “Innovative New Medicines are Key to Economic Growth,” a permanent one percent reduction in mortality from cancer alone has a present value to current and future generations of Americans of nearly $500 billion and a cure would be worth about $50 trillion.

New Drug Approvals

In a repeat of last year, the total number of approvals for new molecular entities and biologic license applications by the US Food and Drug Administration’s [FDA] Center for Drug Evaluation and Research [CDER] in 2009 was the highest since 2004.  Of course, cynics will rightfully call attention to the modest year-over-year increase [25 in 2009 versus 24 in 2008] and that recent performance is still more than 50% below the high of 56 new approvals in 1996.

However, we believe that viewing the number of FDA approvals in the context of new risk evaluation and mitigation strategies [REMS] that were introduced in 2008 and internal resource constraints that have plagued the agency provides optimism going forward.  While legislation passed in 2008 gave the FDA more money and resources, hiring and training hundreds of new employees takes time.  With that process well underway, combined with increased familiarity of the REMS program, we believe the drug approval process should improve going forward.

In terms of therapeutic areas, oncology represented one out of five [20%] approvals by CDER in 2009 according to a recent publication [Nature Reviews Drug Discovery 9, 89-92, February 2010].  Not surprisingly, oncology was our highest ranked survey response with regard to attracting investment and/or business development activity in 2010.  See Table 1 below.

Table 1. In terms of raising capital and/or business development activity, which key therapeutic area do you expect to attract the most interest/visibility during 2010?

* Numbers may not add up to 100% due to rounding

Record Pipeline and Investment

According to the latest report by the Pharmaceutical Research and Manufacturers of America [PhRMA], there are a record number of biotechnology drugs currently in development.  In the US alone, there are 633 biotechnology medicines being developed, including 254 medicines for cancer, 162 for infectious diseases, 59 for autoimmune diseases, 34 for HIV/AIDS and related conditions, 25 for cardiovascular disease, and 19 for diabetes and related conditions.

Annual research and development expenditures by PhRMA member companies also reached a record $50.3 billion in 2008, more than tripling the $15.2 billion level of investment in 1995.

Access to Capital

In 2010, companies at all stages of development will try to attract investors and the competition will be fierce.  However, in terms of access to capital for life sciences companies, our survey indicated that more than 46% of respondents expect favorable conditions in 2010, with modest improvement over 2009.  Another 46% of respondents indicated that they expect access to capital to be about the same as 2009.  Only 4% of respondents expected access to capital to improve markedly with initial public offerings [IPO] possible.

In 2009, venture capital investment in biotechnology declined by 19%, both in dollars and deals, from the prior year according to the MoneyTree™ Report by PriceWaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.  However, biotechnology was the single largest investment sector for 2009 with $3.5 billion going into 406 deals.

In terms of initial public offerings [IPOs], only three biotechnology companies successfully tested the public markets in 2009.  In 2010, two IPO’s have already been completed, albeit both below the expected offering price, and several others are in queue, including Prometheus Laboratories, Aveo Pharmaceuticals, Trius Therapeutics, Aldagen, Alimera Science, and Tengion.  See Table 2 for recent biotechnology IPO performance.

Table 2. Recent Biotechnology IPO Performance

In terms of public financings, several companies have already completed offerings in 2010, including Amicus Therapeutics, Inc. (FOLD), BioSante Pharmaceuticals, Inc. (BPAX), Cell Therapeutics, Inc. (CTIC), Chelsea Therapeutics International, Inc. (CHTP), Cleveland Biolabs, Inc. (CBLI), Cyclacel Pharmaceuticals, Inc. (CYCC), Derma Sciences, Inc. (DSCI), EntreMed, Inc. (ENMD), InterMune, Inc. (ITMN), Palatin Technologies, Inc. (PTN),and XOMA Ltd. (XOMA).

Improving access to capital could lead to an acceleration of merger and acquisition activity and licensing deals, as large pharmaceutical companies begin to lose their leverage and company valuations start increasing.

Consolidation

More than 82% of survey responders expected merger and acquisition activity to accelerate in 2010 compared with 2009.  In view of two recent deals, the paucity of merger and acquisition activity and decline in both the quantity and value of licensing & partnering transactions announced during the JP Morgan Healthcare Conference in 2010 appears to have been the pause that refreshes [see “Biotech Deal Activity Declines…The Pause that Refreshes?”].

For example, on February 23, 2010, Cephalon, Inc. (CEPH) exercised its option to acquire Ception Therapeutics, Inc. for $250 million in view of positive Phase 2 data from a clinical study in adults with eosinophilic asthma.  In January 2009, Cephalon paid Ception $100 million upfront for the option.

On March 1, 2010, Astellas Pharma, Inc. offered to acquire all outstanding shares of common stock of OSI Pharmaceuticals, Inc. (OSIP) for $52.00 per share in cash, or an aggregate of approximately $3.5 billion on a fully diluted basis.  The offer represented more than a 40% premium on the closing price of OSI Pharmaceuticals’ common stock of $37.02 per share on February 26, 2010, and shares have subsequently traded above $57 on expectations for a higher bid.

In view of the fact that US pharmaceutical companies stand to lose billions of revenue due to patent expirations from 2010 to 2012, we expect merger and acquisition activity to remain brisk.

Small Versus Large

As highlighted in our “Biotech’s 2009 Stealth Small Cap Rally” article, small capitalization biotechnology companies were among the best performers of 2009.  The relative underperformance of many large capitalization biotechnology companies in 2009 masked the fact that many smaller, innovative companies performed well, with 20 of the 125 companies comprising the NASDAQ Biotech Index producing triple-digit returns during the period.  Vanda Pharmaceuticals (VNDA), Human Genome Sciences (HGIS), and Targacept, Inc. (TRGT) led the way, with stock prices up 2,150%, 1,342%, and 487%, respectively.

Similar to 2009, we expect that small and mid-capitalization companies with positive clinical or regulatory catalysts will continue to outperform their larger industry peers in 2010.

Beware the Ides of March

In our February 2009 article “Chink in the Biotechnology Armor,” we cited the spate of high profile clinical setbacks and regulatory delays during the month as the reason for the sector’s precipitous decline.  The NASDAQ Biotech Index, which traded as high as 772 during the first week of February, traded as low as 605 by the first week of March – losing more than 21% of its value during the 30-day period.

In February and March 2010, there have also been a significant number of clinical and regulatory setbacks.  Consider the following:

• AMAG Pharmaceuticals, Inc. (AMAG) – Purported safety concerns regarding Feraheme® [ferumoxytol], the company’s marketed product for the treatment of iron deficiency anemia in adult patients with chronic kidney disease, kicked off a 27% decline in shares of AMAG Pharmaceuticals, Inc.  The stock, which traded as high as $45.61 on February 3, 2010, subsequently traded as low as $33.29 despite assurances from the company that the rate of serious hypersensitivity reactions related to Feraheme are consistent with the product’s label.
• Cell Therapeutics, Inc. (CTIC) – On February 8, 2010, the FDA released its briefing documents for the company’s lymphoma drug, pixantrone, in advance of an Oncologic Drugs Advisory Committee [ODAC] meeting originally scheduled for February 10, 2010.  Shares of Cell Therapeutics, Inc., which closed at $1.06 the prior week, traded as low as $0.53 that day.  Among other issues, the FDA raised concerns about pixantrone’s efficacy in view of the fact that the randomized study was stopped at less than 50% of its planned patient target because of poor accrual.  The ODAC meeting was subsequently rescheduled for March 22, 2010.
• Isis Pharmaceuticals, Inc. (ISIS) – On February 10, 2010, the company and its partner, Genzyme Corporation (GENZ), announced results from a Phase 3 study of mipomersen in patients with heterozygous familial hypercholesterolemia [heFH].  While the trial met its primary endpoint with a highly statistically significant 28 percent reduction in LDL-cholesterol after 26 weeks of treatment, the results raised safety concerns and apparently fell short of Wall Street’s expectations.  Shares of Isis Pharmaceuticals, which closed above $11 the day before the results were released, traded as low as $8.85 the next day.
• XenoPort, Inc. (XNPT) – On February 17, 2010, XenoPort, Inc. and its partner GlaxoSmithKline plc (GSK) received a Complete Response letter from the FDA, delaying approval for Horizant™ [gabapentin enacarbil] Extended-Release Tablets, an investigational non-dopaminergic treatment for moderate-to-severe primary Restless Legs Syndrome.   Shares of XenoPort, Inc., which closed at $19.60 the day before the news, hit an all-time low of $6.39 the next day.
• Novelos Therapeutics, Inc. (NVLT.OB) – On February 24, 2010, the company announced that the primary endpoint of improvement in overall survival was not met in a pivotal Phase 3 trial for advanced non-small cell lung cancer [NSCLC] with its lead product, NOV-002, in combination with first-line chemotherapy.  Shares of Novelos Therapeutics, Inc., which closed at $1.65 the day before the results were released, traded as low as $0.28 the next day.
• Adventrix Pharmaceuticals, Inc. (ANX) – On March 1, 2010, the company announced that it received a refuse to file letter from the FDA regarding its New Drug Application for ANX-530 [vinorelbine injectable emulsion].  In the letter, the FDA indicated that the data included in the initial submission from the intended commercial manufacturing site was insufficient to support a commercially-viable expiration dating period.  Shares of Adventrix Pharmaceuticals, Inc. which closed at $0.29 the prior week, traded as low as $0.16 that day.
• Medivation, Inc. (MDVN) – On March 3, 2010, the company and its partner, Pfizer, Inc. (PFE), announced that the investigational drug dimebon [latrepirdine] unexpectedly failed in a Phase 3 trial in patients with Alzheimer’s disease.  Shares of Medivation, Inc., which closed above $40 the day before the results were released, traded as low as $12.55 the next day.

Helping to offset the negative impact of these setbacks, the NASDAQ Biotech Index is market value-weighted, taking into account the total market capitalization of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalizations, or the greatest values, will have the highest impact on the index.  Further, several companies experiencing clinical or regulatory setbacks were not included in the NASDAQ Biotech Index.

In addition, recent merger and acquisition activity may also help mask the effects of the aforementioned clinical and regulatory setbacks.  For example, the NASDAQ Biotech Index closed up 2.7% the day that Astellas Pharma, Inc. offered to acquire OSI Pharmaceuticals, Inc.

Upcoming Catalysts

When it comes to raising visibility and capital, 40% of survey respondents cited general risk aversion in the financial markets as the single greatest challenge facing most life sciences companies in 2010.   Another 28.8% of respondents cited the average market capitalization of life sciences companies being too small and/or lack of liquidity as the single greatest challenge.

In view of the aforementioned clinical and regulatory setbacks, investors will be closely monitoring the following events, as there is no discounting the negative impact of continued clinical and regulatory setbacks on biotechnology investor’s appetite for risk:

• MannKind Corporation (MKND) – In January 2010, the company announced that the FDA would be unable to complete its review of Afrezza™ before the mid-January Prescription Drug User Fee Act [PDUFA] date in order to complete an inspection of a manufacturing-related facility belonging to one of the company’s suppliers.  Alfrezza is a novel, ultra rapid acting mealtime insulin therapy under review for use in adult patients with type 1 and type 2 diabetes mellitus for the treatment of hyperglycemia.  The company has not been given a new PDUFA date by the FDA.
• InterMune, Inc. (ITMN) – A Pulmonary-Allergy Drugs Advisory Committee [PADAC] meeting is scheduled for March 9, 2010, to review the NDA for pirfenidone, the company’s investigational drug candidate for the treatment of patients with idiopathic pulmonary fibrosis [IPF] to reduce decline in lung function.
• Amylin Pharmaceuticals, Inc. (AMLN), Eli Lilly and Company (LLY), and Alkermes, Inc. (ALKS) – Following a weather delay, the FDA has set a new PDUFA action date of March 12, 2010, for its review of the NDA for exenatide once weekly.  Exenatide is being developed in collaboration with Eli Lilly and based on technology from Alkermes, Inc.
•  Cell Therapeutics, Inc. – The rescheduled ODAC meeting for pixantrone takes place on March 22, 2010.
• Delcath Systems, Inc. (DCTH) – On February 4, 2010, the company announced that sufficient events have been reached to allow data analysis to begin on its Phase 3 trial for a novel drug delivery platform to deliver ultra-high doses of anti-cancer drugs to the liver while preventing these high doses of drug from entering the patient’s bloodstream.  The 92 patient, randomized, multi-center, Phase 3 trial used the drug melphalan to treat patients with metastatic melanoma in the liver.  Assuming a successful trial endpoint, the company expects to file a new drug application [NDA] with the FDA in April 2010.
• Dendreon Corporation (DNDN) – A Biologics License Application for Provenge® [sipuleucel-T] for the treatment of men with metastatic, androgen-independent prostate cancer, has been assigned a PDUFA date of May 1, 2010.

Conclusion

While the capital markets remain turbulent, many of the biotechnology industry’s fundamentals, such as the number of products in clinical trials, new product approvals, profitable biotech companies and industry mergers & acquisitions remain favorable.   Combine these positive attributes with yet to be seen benefits from decoding the human genome, an improvement or stabilization in the capital markets, greater resources for the FDA and a novel blending of technology, chemistry and biology and many of the necessary ingredients for The Biotechnology Revolution remain intact.  Or, as Yogi Berra simply said, “You can observe a lot by watching.”