With hundreds of billions at stake, it’s not surprising that there is often a tulipomania effect on companies that report significant scientific advances in the treatment of cancer.  Many investors recall the meteoric rise and subsequent plummet of EntreMed, Inc.’s (ENMD) stock following reports of the company’s breakthrough in disrupting the growth of blood vessels [angiogenesis] to kill cancer in mice back in 1998.

As spring is around the corner, it seemed an appropriate time to examine Wall Street’s latest tulip obsession, which relates to the potential of targeting cancer stem cells [CSCs] as a novel approach to eradicating the disease.  Stem cells are unique due to their ability to self-renew and/or mature into another type of cell with a more specialized function, such as a muscle cell, a red blood cell, or a brain cell[3].  Accordingly, stem cells hold great promise to potentially replace or repair damaged cells or tissues for a wide range of diseases.  Genetic mutations or other factors may give rise to CSCs that possess the same capacity for self-renewal and can mature into cancer cells that comprise the tumor.

For example, normal hematopoietic [blood-forming] stem cells have the potential for self-renewal, a property that enables life-long blood production.  These particular stem cells give rise to all of the types of red and white blood cells as well as some other types of cells[4].  Underscoring the importance of hematopoietic stem cells, red blood cells only have a lifespan of approximately 120 days and therefore must be completely replaced every four months[5].

Genetic mutations or other factors, however, may cause hematopoietic stem cells or their progeny to go awry.  In 1994, researchers identified a rare population of stem-like cells in the blood of patients with acute myeloid leukemia [AML][6].  These unique cells represented less than 1% of the total AML cell population found in the blood.  When transplanted into mice with impaired immune systems, these rare cells could recapitulate the entire cellular diversity of human AML in the animals.  This was the first time that researchers isolated CSCs.

Traditional cancer treatments, such as chemotherapy and radiation, have limited selectivity.  They exert their killing effect on rapidly dividing cells and do not discriminate between normal and cancerous targets.  In view of the fact that stem cells as a class tend to be relatively dormant[7], CSCs are unlikely to be destroyed by such therapeutic approaches.  In other words, the “seeds” of the tumor may remain intact – able to grow and spread.  Eradicating CSCs in addition to other cancerous cells may hold great promise for the treatment of cancer.

Enthusiasm for targeting CSC’s was recently bolstered by the March 1^st announcement that Dainippon Sumitomo Pharma Co., Ltd. would acquire privately-held Boston Biomedical, Inc. for up to $2.63 billion.  The deal included $200 million upfront, up to $540 million in development milestone payments, and up to $1.89 billion in sales milestone payments.  Boston Biomedical’s lead program for inhibiting CSCs in addition to other cancer cells, BBI608, is entering Phase 3 trials in patients with colorectal cancer.

In addition to Boston Biomedical and other programs currently in development by large pharmaceutical companies, the following is a partial list of emerging public companies with programs also targeting the destruction of CSCs for the treatment of cancer:

Geron Corporation (GERN)

After announcing that the company would discontinue development of its human embryonic stem cell programs, Geron is focusing on novel cancer programs, including lead program Imetelstat [GRN163L], a telomerase inhibitor that has been shown to effectively inhibit CSCs from a broad range of tumors.  Imetelstat is in Phase 2 trials for non-small cell lung cancer, metastatic breast cancer, essential thrombocythemia and multiple myeloma.

ImmunoCellular Therapeutics Ltd. (IMUC.OB)

ImmunoCellular is developing active immunotherapies that target not only regular tumor cells, but also CSCs.  The company’s most advanced product candidate, ICT-107, is a dendritic cell-based vaccine in Phase 2 development for the treatment of glioblastoma multiforme [GBM].  Underscoring interest in therapeutic approaches targeting CSCs, shares of ImmunoCellular are up more than 67% since the start of the year.

Verastem, Inc. (VSTM)

While unusual for a biotechnology company to pursue an initial public offering [IPO] without having a product candidate in human clinical trials, Verastem successfully priced its IPO at $10 in January 2012 and currently has a market capitalization greater than $236 million.  According to the prospectus, Verastem has identified a pipeline of small molecule compounds with the potential to target CSCs.  The company’s most advanced product candidates are VS-507, VS-4718 and VS-5095.  In late 2012, Verastem expect to file an investigational new drug application [IND] with the U.S. Food and Drug Administration [FDA] to initiate a Phase 1 clinical trial of VS-507.

Private companies also working in the area of CSCs include:

Eclipse Therapeutics, Inc.

Eclipse has developed a CSC discovery platform to identify antibody therapeutics that inhibit the growth of cancer stem cells.  Eclipse’s lead program is ET-101, a novel therapeutic antibody designed to target CSCs.  ET-101 is expected to advance towards human clinical trials by 2013.

Formula Pharmaceuticals

Formula’s lead product candidate, FPI-01, is an active immunotherapy in Phase 2 clinical development for the maintenance of first-remission in AML and other cancers that originated at Memorial-Sloan Kettering Cancer Center.  The vaccine targets Wilms Tumor 1 [WT1], an antigen ranked first in a list of 75 cancer vaccine target antigens by the National Cancer Institute [NCI] prioritization project.  Stem cell expression was among the criteria used to rank the antigens.

KaloBios Pharmaceuticals, Inc.

KaloBios has initiated a Phase 1 dose-escalating clinical trial for KB004, its first-in-class Humaneered™ monoclonal antibody, in EphA3-expressing hematologic malignancies, including chronic myelogenous leukemia, AML, acute lymphocytic leukemia, and myelodysplastic syndromes, who are refractory to, have failed, or have not received standard-of-care treatment. EphA3 is an onco-fetal protein that is expressed in a range of cancers, including hematologic malignancies and possibly on leukemic stem cells. Studies have shown that expression of EphA3, a receptor tyrosine kinase, is associated with B, T and myeloid neoplasms and certain solid tumors. EphA3 appears to be upregulated on tumor cells, including stem cells, tumor stromal cells, and tumor neovasculature. A biomarker assay is being developed to identify EphA3 expression.

OncoMed Pharmaceuticals

OncoMed’s lead CSC therapeutic, OMP-21M18, is a monoclonal antibody designed to block Delta-like ligand 4 [DLL4], an activator of Notch signaling, which is a pathway known to be important in CSCs and cancer.  OMP-21M18 has demonstrated single-agent activity in a Phase 1 study in heavily-pretreated solid tumor patients, and is currently advancing into combination studies with standard chemotherapy in advanced non-small cell lung and pancreatic cancers.

Stemica LLC

Stemica was founded in 2011 to focus on late-breaking cancer biology discoveries pinpointing cancer stem cells as the reason for not being able to currently cure cancer.  Stemica is currently developing novel molecules that inhibit these “cancer sleeper cells” in hopes of providing long-term survival for cancer patients.

Stemline Therapeutics

Lead programs SL-401, which targets IL-3R, and SL-701, which targets multiple defined epitopes, are in Phase 1 and Phase 2 development for the treatment of AML and glioma, respectively.  According to the company’s website, Stemline also possesses a landmark portfolio of intellectual property that includes the earliest filings in the CSC field covering CSC-directed therapeutics, diagnostics, and drug discovery.

In conclusion, targeting CSCs may hold great promise for the treatment of cancer following their initial discovery in 1994.  Enthusiasm for the approach has been bolstered by the recent $2.3 billion acquisition of Boston Biomedical, which may prove that targeting CSCs is more than a passing phase.  Using the breakthrough with anti-angiogenesis approaches to treat cancer as a model, however, it may be too early to determine which programs will ultimately succeed [e.g., Avastin®, bevacizumab] versus those that fail [e.g., endostatin and angiostatin].

References

Adding to an already hectic schedule of one-on-one meetings during the week, the success of JPMHC has spawned numerous satellite events, such as Biotech Showcase, OneMedForum, New Paradigms Conference, and China Forum.  The latter event provides further evidence that China is emerging as an important component of the international biotechnology landscape, as 16 China-based life science companies also presented during an inaugural China Track at JPMHC.

In between offsite meetings, we roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored online media commentaries 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 2010.  However, we once again sought to construct a less subjective assessment by analyzing year-over-year statistics from the conference.

Accordingly, we extensively reviewed press releases issued by biotechnology companies during JPMHC from 2009 to 2011, with a particular focus on identifying the number of merger & acquisitions [M&A], licensing & partnering transactions, and financing deals announced each year during the four-day event.

Merger and Acquisitions

Back in 2009, several large M&A transactions were announced during JPMHC.  That year, four M&A transactions with an aggregate value of $702 million were disclosed during the first two days of the event.  The largest deal went to Cephalon, Inc. (CEPH), which announced a $100 million option agreement providing the company with an opportunity to purchase all outstanding capital stock of Ception Therapeutics, Inc., a privately held biopharmaceutical company, for an additional $250 million.

Despite ongoing discussions between Sanofi-aventis (SNY) and Genzyme Corporation (GENZ), only one significant M&A transaction was announced during JPMHC in 2011, marking the second year in a row with a paucity of deals.  Finland-based Biotie Therapies Corp., a drug developer focused on central nervous system [CNS] and inflammatory diseases, announced that it is acquiring Synosia Therapeutics Holding AG in an all-share deal that values the private Swiss company at approximately $125 million.  Synosia Therapeutics Holding AG is a biopharmaceutical company focused on developing and commercializing a portfolio of CNS product candidates licensed from Roche Holding AG (RHHBY.PK), Novartis AG (NVS), and Syngenta AG (SYT).

Table 1. Select M&A Transactions Announced During JPMHC from 2009-2011 ($ in millions)

Licensing and Partnering

In 2009, ten strategic licensing and/or partnering transactions with an aggregate value exceeding $2.4 billion were announced during JPMHC. The transactions included a $1.1 billion deal between ZymoGenetics, Inc. and Bristol-Myers Squibb Company (BMY), a $500 million deal between Peptimmune, Inc. and Novartis AG (NVS), a $396 million deal between Micromet, Inc. (MITI) and Bayer AG (BAYZF.PK), and a $200 million deal between FORMA Therapeutics the Novartis Option Fund to develop inhibitors for an undisclosed protein-protein interaction target in the field of oncology, among others. Interesting to note, Bristol-Myers Squibb later acquired ZymoGenetics Inc. for $885 million in cash during September 2010.

In 2010, there were only six transactions totaling $314 million announced at JPMHC, driven primarily by a $290 million agreement between privately held KaloBios Pharmaceuticals, and Sanofi Pasteur, the vaccines division of the Sanofi-aventis, for the development and commercialization of KB001, an investigational new biologic for the treatment or prevention of Pseudomonas aeruginosa [Pa] infections.

In 2011, three major licensing and/or partnering transactions totaling more than $3 billion were announced during JPMHC, although three-quarters of the total value came from a single agreement:

• Eli Lilly and Company (LLY) and Boehringer Ingelheim announced a $2.4 billion global agreement to jointly develop and commercialize a pipeline of oral diabetes agents and basal insulin analogues.  The alliance also includes the option to co-develop and co-commercialize Eli Lilly’s anti-TGF-beta monoclonal antibody.
• Privately held Epizyme, Inc. announced a strategic alliance with GlaxoSmithKline plc (GSK) that could be worth over $650 million.  Epizyme is involved in the discovery and development of small molecule histone methyltransferase inhibitors, a new class of targeted therapeutics for the treatment of genetically-defined cancer patients, based on breakthroughs in the field of epigenetics.  Epigenetics refers to the regulation of genes with mechanisms other than changes to the underlying DNA sequence and such processes are widely believed to play a central role in the development and progression of almost all cancers.
• Takeda Pharmaceutical Company Limited and Zinfandel Pharmaceuticals, Inc. announced an exclusive, worldwide licensing agreement regarding Zinfandel’s TOMM40 assay as a biomarker for the risk of Alzheimer’s disease, including potential use of the assay in combination with pioglitazone in high-risk older adults with normal cognition.  Pioglitazone is the active ingredient currently marketed in Takeda’s ACTOS® (pioglitazone HCl). Under the terms of agreement, Zinfandel will receive an upfront payment of $9 million and subsequent payments of up to $78 million for development milestones from Takeda.

Table 2. Select Licensing and Partnering Deals Announced During JPMHC from 2009-2011 ($ in millions)

Financing

While the quantity of public and private financing transactions announced during JPMHC has remained essentially flat from 2009-2011, the aggregate dollar value increased more than 60% in 2011.  Note that we excluded the $500 million convertible senior note transaction announced by Dendreon Corporation (DNDN), as it occurred after the market closed last Thursday [the last day of JPMHC].

Table 3. Select Financing Transactions Announced During JPMHC from 2009-2011 ($ in millions)

Outlook

At the start of 2009, we provided a positive outlook for the biotechnology industry.  Most of the drivers supporting our favorable view remain intact for 2011, 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 we believe should continue to outperform their larger industry peers in 2011.

The +60% year-over-year increase in the aggregate value of financing transactions announced during JPMHC in 2011 supports our improving access to capital thesis, offset in part by the fact that both the quantity and value of M&A and licensing/partnering transactions during the period were below 2009 levels [excluding a single agreement for $2.4 billion in 2011].   Using 2010 as a guide, the mixed bag of activity emanating from JPMHC is simply the pause that refreshes and activity should accelerate throughout the year.

Looking beyond JPMHC, the key risk to our positive outlook in 2011 relates to the number of U.S. Food and Drug Administration [FDA] drug approvals, which declined in 2010 and is more than 50% below the high of 56 new approvals in 1996 despite the fact that legislation passed in 2008 gave the FDA more money and resources.  There is no discounting the negative impact of clinical and regulatory setbacks on the psyche of biotechnology investors, as evidenced by the greater than 10% decline in the NASDAQ Biotech Index in late February 2009 following a spate of high profile disappointments.

With few exceptions, companies with monoclonal antibody platforms have significantly outperformed the NASDAQ Biotechnology Index® (NBI) since the end of 2008 [see Table 1].  Accordingly, the purpose of this article is to offer several key factors that help explain the above average returns for monoclonal antibody companies during this +18-month period – a trend that we believe is likely to continue.

Table 1: Select public companies with monoclonal antibody platforms

Higher rate of success

In order to determine the appropriate current value for a biotechnology company, an investor would normally consider projected future cash flows resulting from product sales, probability of success, and a discount rate to reflect the risks that the company faces.

With regard to probability of success, one of the greatest considerations for a biotechnology company is the fact that new drug candidates must receive approval from the Food and Drug Administration [FDA] before they can be marketed in the United States.  Receiving FDA approval is dependent, in part, on the drug candidate successfully passing a series of clinical trials that are generally conducted in three sequential phases.

Successfully transitioning from the early stages that establish safety [Phase I] to later phases where efficacy is demonstrated [Phase III] will improve the approval success rate [e.g., the odds that the drug will ultimately reach the market].  Interestingly, researchers from the Tufts Center for the Study of Drug Development at Tufts University recently analyzed the average approval success rates for investigational drugs first tested in humans from 1993 to 2004 [Ref 3] and found substantial differences between large molecules [32% success rate] and small molecules [13% success rate].  Monoclonal antibodies represented the largest group [47%] of the large molecules evaluated in the study.

In view of the fact that nearly one-third of large molecule product candidates entering the clinic ultimately receive FDA approval and that they are nearly 2.5-times more likely to ultimately receive approval than small molecule compounds, companies that are developing monoclonal antibodies should be awarded higher valuations due to the higher probability of success.

Reduced concerns from biosimilars

The Patient Protection and Affordable Care Act [PPACA], which was signed into law on March 23, 2010, included a provision amending the Public Health Service Act [PHSA] to permit approval of biosimilar biological products through an abbreviated biological license application [ABLA] submitted to the FDA.  Under the law, originators have a 12-year exclusivity period before a biosimilar is approved.

While many questions remain about the specifics of the ABLA process until the FDA releases its guidance, the PPACA does state that to support approval of a biosimilar, the sponsor must show that the product is “biosimilar to the reference product” based upon data derived from analytical, animal, and clinical studies.  As a result, it is unlikely that monoclonal antibody products will represent the first class of biosimilars on the market due to the fact that they have very specific binding properties and are typically larger and more complicated than other biologic drugs.

Regardless, according to a recent article by Ludwig Burger for Reuters, analysts expect price discounts of only 20 to 30 percent in markets affected by biosimilar competition, which compares with an average markdown of 90 percent for generic versions of small molecule drugs. This is likely due to the fact that development, production and marketing of a biosimilar costs more than making a generic copy of conventional chemical drugs.

Lastly, for those individuals that believe manufacturing biologic drugs is easy, a review of Genzyme Corporation’s (GENZ) recent challenges offers a different perspective.  See “Genzyme’s Manufacturing Disruption Highlights Investment Opportunities in Lysosomal Storage Disorders.”

Manufacturing processes have improved

In contrast to small molecule therapeutics that can be synthesized for $1 per gram and simple proteins like insulin that can be efficiently produced in bacterial hosts, monoclonal antibodies are normally produced in mammalian cells at a cost of $300-$5,000 per gram [Ref 4].

Fortunately, in parallel with the clinical and commercial success of monoclonal antibodies there have been major advances in cell line development, bioreactor construction and operation, purification strategies and analytics. For example, cell culture productivity has improved more than 100-fold in the last 15-years.  With these advances, global protein output using mammalian cell culture increased from under 500 kilograms in 2000 to 3,600 kilograms in 2005 and manufacturing costs have been reduced.

In addition to the aforementioned advances, new sources of inexpensive antibody production are being explored.  For example, antibodies have been expressed successfully in genetically modified plants and have been shown to retain their native functional forms.

Evolution from acute to chronic treatment

In the early 1980’s, most monoclonal antibodies were derived from mouse genes with major limitations such as inducing human anti-mouse antibody [HAMA] responses in patients, lack of effector functions and short plasma half-life [Ref 5].  Later that decade, genetic engineering techniques made chimeric and humanized versions available for study.  Until this point in time, most therapeutic monoclonal antibodies had been studied as acute treatments for cancer or immunological diseases [Ref 6].

By the late 1990’s, methods to produce human monoclonal antibodies were developed, including phage display and transgenic mice.  With the availability of human antibodies with reduced immunogenicity and increased efficacy, the biotechnology industry began studying monoclonal antibodies for the chronic treatment of non-life threatening diseases, which opened new market opportunities.

In this regard, KaloBios Pharmaceuticals, Inc. (private) is applying its proprietary Humaneering™ technology platform to produce antibodies that are close to human germ-line in sequence while retaining the specificity and improving the affinity of the reference antibody.  KaloBios is developing an anti-GM-CSF human monoclonal [KB003] for the treatment of patients with autoimmune and chronic inflammatory conditions, such as rheumatoid arthritis and asthma.  Sales of two marketed monoclonal antibodies indicated for the treatment of rheumatoid arthritis, Humira® [adalimumab] and Remicade® [infliximab], are projected to reach $15.8 billion in combined sales by 2016 according to Evaluate Pharma [Ref 2].

In January 2010, KaloBios partnered with Sanofi Pasteur, the vaccines division of sanofi-aventis Group (SNY), to develop the company’s Humaneered™ antibody fragment KB001 for the prevention and treatment of Pseudomonas aeruginosa (Pa) infections. KaloBios received an upfront payment of $35 million and is eligible for development, regulatory and commercial milestones totaling $255 million in addition to royalties on eventual product sales.

In addition, MacroGenics, Inc. (private) entered into a global strategic alliance with Eli Lilly & Co. (LLY) in October 2007 valued at approximately $500 million for teplizumab, a humanized anti-CD3 monoclonal antibody currently being studied in a global pivotal Phase II/III clinical trial for individuals with recent-onset type 1 diabetes.

Licensing, merger, and acquisition dynamics

The higher average approval success rates with large molecules compared with small molecules appears to be partially reflected in the economics of some recent licensing and M&A transactions.

For example, in June 2010 OncoMed Pharmaceuticals, Inc. (private) partnered with Bayer Schering Pharma AG (BAYRY.PK) to discover, develop and commercialize novel anti-cancer stem cell therapies including multiple antibody, protein therapeutics and small molecules targeting the Wnt signaling pathway.  For each drug candidate successfully developed through Phase III clinical trials and regulatory approval, OncoMed’s payments from Bayer could total up to $387.5 million for each biotherapeutic drug compared with $112 million for small molecule drugs.  Accordingly, potential payments for large molecules are 3.5 times greater than for the small molecules.

As another example, Eli Lilly & Co. (LLY) acquired ImClone Systems, Inc. for $6.5 billion [5x sales of $1.3 billion], while Astellas Pharma, Inc. paid $4 billion for OSI Pharmaceuticals, Inc. [3.3x sales of $1.2 billion].  Both ImClone and OSI received royalties on product sales from corporate partners.

ImClone’s marketed product Erbitux® [cetuximab] is a monoclonal antibody that inhibits the epidermal growth factor receptor [EGFR] and is indicated for the treatment of certain types of colorectal cancer and as a single agent or in combination with radiation therapy for head and neck cancer.  OSI’s comparable product Tarceva® [erlotinib] is a small molecule antagonist of EGFR and is indicated for the treatment of non-small cell lung cancer and pancreatic cancer.  While this is not an apples-to-apples comparison, it does help support the fact that premiums are being paid for monoclonal antibodies versus small molecules.

Investors are also likely placing M&A premiums on monoclonal antibody companies due to robust activity during the past five years [see Table 2].  In fact, there has been at least one deal announced each year during this period.

Table 2: Select M&A among monoclonal antibody companies

Access to capital

Despite a challenging financing climate, many public monoclonal antibody developers referenced in Table 1 have been able to raise capital through public offerings.  For example, ImmunoGen, Inc. (IMGN) raised $77.6 million at $8.00 per share in May 2010, Micromet, Inc. (MITI) raised $80.5 million at $7.00 per share in March 2010, and Seattle Genetics, Inc. (SGEN) raised $136 million at $10.75 per share in August 2009.  This demonstrates strong investor appetite for monoclonal antibody companies, which could bode well for future initial public offerings [IPOs] given the paucity of public options in the sector due to M&A activity over the past few years.

Summary

Biotechnology companies developing monoclonal antibodies have been outperforming the broader sector for the past 18-months, a trend that is likely to continue based on higher average approval success rates, reduced concerns from biosimilars, improvements in manufacturing and resulting impact on margins, broadening utility beyond treating cancer and inflammation, robust partnering and M&A activity, and access to capital.

References

1. Roche Annual Report 2009 (www.roche.com/gb09e.pdf)
2. Evaluate Pharma World Preview 2016 Report
3. DiMasi, JA. Et al. Clin Pharmacol Ther. 2010 Mar;87(3):272-7. Epub 2010 Feb 3.
4. Chen, C. Trends in Bio/Pharmaceutical Industry. 2009 5(3).
5. Chan, A. Et al. Nat Rev Immun. 2010 May;10.
6. Reichert JM. Curr Pharm Biotechnol. 2008 Dec;9(6):423-30.

* MD Becker Partners reporting live from the JP Morgan Healthcare Conference

This week, nearly 6,500 registrants gathered in San Francisco, California for the JP Morgan Healthcare Conference to hear 25-minute presentations from 338 life science companies.  For industry executives and investors, the annual event serves as a good barometer for the rest of the year.

We roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored online media commentaries throughout the event.  In general, there was a flurry of activity, the plane flights and networking receptions were crowded as usual, and several industry observers “Tweeted” a sense of optimism for 2010.  However, we sought to construct a less subjective assessment by analyzing year-over-year statistics from the conference.

Accordingly, we extensively reviewed company press releases issued during the JP Morgan Healthcare Conference in both 2009 and 2010, with a particular focus on identifying the number of merger & acquisitions, licensing & partnering transactions, and financing deals announced each year during the four day event.

Merger and Acquisitions

In contrast to the absence of any significant M&A deals announced during the JP Morgan Healthcare Conference in 2010, several large M&A transactions with an aggregate value of $702 million were disclosed during the first two days of the event in 2009 [January 12-15, 2009].  The largest deal went to Cephalon, Inc. (CEPH), which announced an agreement providing the company with an option to purchase all outstanding capital stock of Ception Therapeutics, Inc., a privately held biopharmaceutical company.  Under the terms of the option agreement, Cephalon paid Ception $100 million upfront for the option.  If Cephalon exercises its option, the company will purchase all of the outstanding capital stock of Ception for $250 million along with additional payments related to clinical and regulatory milestones.  Other transactions announced that year included:

• Medtronic, Inc.’s (MDT) acquisition of privately held Ablation Frontiers, Inc. for an initial payment of $225 million plus potential additional payments contingent upon achievement of certain clinical milestones
• The Medicines Company’s (MDCO) merger agreement with Targanta Therapeutics Corporation for $42 million in cash and additional regulatory and commercial milestone payments
• NuVasive, Inc.’s (NUVA) option to acquire Progentix Orthobiology BV, a Netherlands based company focused on developing novel orthobiologics, consisting of an upfront investment of $15 million along with the obligation to purchase the remaining equity of Progentix for $45 million upon accomplishment of certain development milestones [with additional potential payments of up to $25 million upon the achievement of additional milestones and based upon NuVasive's sales success]

Licensing and Partnering

Kicking off the JP Morgan Healthcare Conference in 2010, privately held KaloBios Pharmaceuticals, Inc. announced a $290 million agreement with Sanofi Pasteur, the vaccines division of the sanofi-aventis Group (SNY), for the development and commercialization of KB001, an investigational new biologic for the treatment or prevention of Pseudomonas aeruginosa [Pa] infections.  KaloBios, which is developing first-in-class human antibody therapeutics that offer advantages over other methods of human antibody creation in terms of immunogenicity, potency, and manufacturing yields, will receive an upfront payment of $35 million, plus development, regulatory and commercial milestones for a potential further $255 million, as well as royalties on eventual product sales.

While other licensing and partnering transactions were announced during the JP Morgan Healthcare Conference in 2010, they were substantially smaller or specific financial terms were not disclosed.  These include:

• Proteus Biomedical Inc. announced an exclusive worldwide license and collaboration agreement with Novartis AG (NVS) to develop and commercialize pharmaceutical products that incorporate Proteus’ novel sensor-based technologies in the field of organ transplantation along with certain option rights in cardiovascular and oncology product applications.  Under the terms of the agreement, Novartis will make upfront cash and equity investments in Proteus totaling $24 million and Proteus will also receive royalties on worldwide net sales of any Novartis products incorporating its sensor-based technology.
• Trillium Therapeutics, Inc., a biopharmaceutical company developing innovative immune-based biologics, announced that it has entered into a definitive license agreement with Biogen Idec, Inc. (BIIB), granting the latter exclusive worldwide rights to one of Trillium’s development programs.  Under the terms of the agreement, Trillium will receive an upfront payment and is eligible to receive milestone payments based on achievements of specified clinical, regulatory and commercial accomplishments.  Trillium will also receive royalties on global product sales.  Biogen Idec will be solely responsible for clinical development, regulatory approvals, manufacturing and commercialization.
• MedGenesis Therapeutix Inc., a biopharmaceutical company developing and commercializing innovative treatments for patients with serious central nervous system [CNS] diseases, announced an agreement with Amgen, Inc. (AMGN) that provides MedGenesis with an exclusive, worldwide license for glial cell line-derived neurotrophic factor [GDNF] protein in CNS and non-CNS indications.  As part of the license agreement, Amgen now holds a small equity stake in MedGenesis.  In parallel, Biovail Corporation (BVF) and MedGenesis concluded an agreement to collaborate on the development of GDNF in Parkinson’s disease and potentially other CNS indications.  GDNF is a naturally-occurring growth factor capable of protecting and promoting the survival of dopamine producing nerve cells.
• AstraZeneca Plc (AZN) and CrystalGenomics announced a research collaboration to discover and develop a novel anti-infective for use as a potential antibacterial agent.  Under the terms of this agreement, Korea-based CrystalGenomics will receive research funding from AstraZeneca for two years.  CrystalGenomics will also be eligible to receive future milestones and royalty payments associated with development and commercialisation of a drug candidate.
• AnaptysBio, Inc., a privately-held therapeutic antibody platform and product company, announced it has signed an agreement with Roche (RHHBY) for the development of novel antibody therapeutics.  Under the terms of the agreement, AnaptysBio will be responsible for generating novel antibodies using its proprietary somatic hypermutation platform and Roche will receive a worldwide license to develop and commercialize antibodies optimized by AnaptysBio.  In addition to a signing fee paid by Roche, AnaptysBio will be eligible to receive milestone payments and royalties upon product sales.

The six transactions announced during the JP Morgan Healthcare Conference in 2010 with reported financial terms totaling $314 million pale in comparison to the ten deals reported at the meeting during 2009 worth more than $2.4 billion in aggregate value.  These included a $1.1 billion deal between ZymoGenetics, Inc. (ZGEN) and Bristol-Myers Squibb Company (BMY), a $500 million deal between Peptimmune, Inc. and Novartis AG, a $396 million deal between Micromet, Inc. (MITI) and Bayer AG (BAYZF.PK), and a $200 million deal between FORMA Therapeutics the Novartis Option Fund to develop inhibitors for an undisclosed protein-protein interaction target in the field of oncology, among others.

Financing

The quantity and aggregate dollar value of public and private financing transactions announced during the JP Morgan Healthcare Conference were essentially flat in 2010 compared with the prior year as reflected in the table below.

Outlook

At the start of 2009, we provided a positive outlook for biotechnology, citing the sector’s defensive characteristics, favorable technical aspects, and improving fundamentals, such as the number of new product approvals, products in clinical trials and the brisk pace of industry consolidation and licensing transactions.  The latter was quickly reinforced by M&A transactions with an aggregate value of $702 million and licensing & partnering deals worth more than $2.4 billion in aggregate value announced January 12-15, 2009, during the JP Morgan Healthcare Conference. 

While we believe that a positive outlook for 2010 is once again warranted, and the first two weeks of the year don’t necessary indicate a trend, hopefully the paucity of M&A activity coupled with the decline in both the quantity and value of licensing & partnering transactions announced during the JP Morgan Healthcare Conference in 2010 is simply the pause that refreshes and the action improves throughout the year.

In this regard, Celgene Corporation (CELG) recently announced that data from more than 200 clinical trials involving the company’s products will be presented at the ASH annual meeting.  After reaching a 52-week low of $36.90 in April 2009, shares of Celgene have rebounded nearly 50% to close at $54.97.  As a result, investors may gravitate to other biotechnology companies specializing in the area of hematology to uncover similar investment opportunities.

Accordingly, we recently reviewed press releases from a baker’s dozen of public biotechnology companies also announcing upcoming clinical data presentations at ASH [as of November 27, 2009].  Further, to determine which topics are likely to generate significant visibility and investor interest, we tallied the number of abstracts accepted for each company, identified the product development stage(s), and consolidated the therapeutic classes into the following four general categories:

1. Kinase inhibitors
2. Biologic agents [monoclonal antibodies and small modular immunopharmaceuticals]
3. Chemotherapeutics [antimetabolites, nucleoside analogues topoisomerase inhibitors, and HDAC inhibitors]
4. Others [proteasome inhibitors and anticoagulants]

 See Table 1 below for the results from the 32 abstracts referenced in the press releases.

 Table 1. Baker’s dozen of public biotechnology companies issuing press releases regarding clinical data presentations at ASH

Note: One abstract is listed under both Keryx Biopharmaceuticals and AEterna Zentaris, as perifosine rights have been licensed to Keryx Biopharmaceuticals for North America, while AEterna Zentaris has the rest of world rights.  Two abstracts are listed under both Trubion Pharmaceuticals, Inc. and Facet Biotech Corporation, as the companies entered into a worldwide development and commercialization agreement for TRU-016.

Kinase Inhibitors

Inhibitors of intracellular kinases have the potential to be synergistic with several classes of chemotherapeutic and immunotherapeutic agents.  For example, different cancers have mutations on a few key kinases [such as PI3K], many of which lead to increased cellular growth, proliferation, angiogenesis, and survival.  In addition, many kinases have elevated expression levels or increased activity with several cancers.  Also, while antibodies may target one specific receptor, often multiple receptors are overactive in cancer cells; however, the different receptor signals may converge upon a central nodal signaling point making pharmacological intervention possible. 

Intracellular kinase inhibitors vary not only by their target [and isoform selectivity] but also by their inhibition mechanism.  For example, some small molecule inhibitors are ATP analogs, catalytic domain inhibitors, non-catalytic domain inhibitors, or target ligand inhibitors.  Some of the most studied intracellular kinases include PI3K, mTOR, AKT, SRC, JNK, and others.

One of the major drug development problems to date is that inhibition of one pathway leads to upregulation of a parallel signaling pathway.  It will be important for researchers to decipher the roles of redundant parallel pathways and feedback loops. Together, inhibition of the necessary intracellular signals needed for a cell to respond to external growth and survival factors have the potential to prevent further cancer growth. 

Due to significant interest in PI3K inhibitors, such as Keryx Biopharmaceuticals’ perifosine, we have also listed two private companies presenting Phase I clinical data at ASH.

Table 2. Kinase Inhibitor Presentations

Biologic Agents

Therapeutic applications of monoclonal antibodies [MAbs] are the most widely used form of immunotherapy for cancer at this time.  Examples of MAb mechanisms include prevention of ligand-receptor interaction, antibody dependent cellular cytotoxicity, complement mediated cytotoxicity, and immune modulation.  Most MAbs target cellular receptors that are overexpressed or specific to certain cancers.  New technology in MAbs has allowed for improved conjugations and increased penetration.

In view of significant interest in the area of MAbs, we have also included a private company presenting preclinical data demonstrating proof-of-concept at ASH with an IND planned for Q1 2010.

Table 3. Biologic Agent Presentations

Chemotherapeutics

Antimetabolites have well established anti-cancer profiles with actions on intermediary metabolism of proliferating cells.  The mechanism of action of antimetabolites is through the inhibition of nucleotide and nucleic acid synthesis.  Many of these drugs have delayed toxicity and are subject to drug resistance.  Examples of approved therapies include methotrexate, 5-FU, and more recently Allos Therapeutics’ Folotyn™ [pralatrexate injection]. 

Nucleoside analogues are similar in mechanism to alkylating agents.  Many nucleoside analogues kill cells by binding to DNA and forming strand breaks leading to an inhibition of DNA synthesis and function.  Nucleoside analogues are associated with nephrotoxicity but have shown to be synergistic with other therapies such as vinblastine.  Examples of approved nucleoside analogues include cisplatin and carboplatin.   In terms of development candidates, Cyclacel recently reported topline survival data from a Phase II study of its oral nucleoside analog, sapacitabine, in elderly patients aged 70 or older with either newly diagnosed acute myeloid leukemia [AML] or AML in first relapse.  The study was a three-arm, randomized trial evaluating three dosing schedules of sapacitabine.  The primary endpoint of one-year survival was approximately 30% in two out of the three schedules tested and further details of the study will be presented at ASH.

Histone deacetylase enzymes [HDACs] are a group of proteins that deacetylate lysine residues on core histones resulting in chromatin condensation and gene repression.  In addition, HDACs have been shown to inhibit transcription factors and interact with other proteins including p53 and c-myc.  There are three classes of HDACs each with unique domains and cellular expression profiles [and cancer expression profiles].  Thus, HDACs have a diverse and complex role in cellular activity.  HDAC inhibitors have shown to induce apoptosis, while it is not clear if HDAC specific or pan-HDAC inhibitors, such as Pharmacyclics’ PCI-24781, will have the best clinical outcome.   An example of an FDA approved HDAC inhibitor is Merck & Co.’s (MRK) Zolinza® [vorinostat].

Table 3. Chemotherapeutic Presentations

Others

In 2003, Velcade® [bortezomib] by Millennium Pharmaceuticals, Inc., a wholly-owned subsidiary of Takeda Pharmaceutical Company Limited, became the first proteasome inhibitor to be approved for use in the U.S.  Bortezomib disrupts normal protein homeostasis by targeting the proteasome, the final enzyme in the proteolysis cycle that is critical for normal protein turnover and homeostasis.  Proteasome inhibitors are linked with decreased NF-kappaB [NFkB] activity, which has been shown to be a central transcription factor involved with this disease.  In addition to NFkB, proteasome inhibition has other antitumor activity such as p53 stabilization.  Because the proteasome has been validated as a target for myeloma, other drugs, such as Onyx Pharmaceuticals’ carfilzomib, are in development with novel features such as decreased toxicity and increased potency.

In August 2009, Gentium S.p.A. announced top-line results from a Phase III trial designed to evaluate the safety and efficacy of 25 mg/kg/day of defibrotide, a deoxyribonucleic acid derivative derived from cow lung or porcine mucosa, for the treatment of severe veno-occlusive disease in hematopoietic stem cell transplant patients.  The results did not reach the protocol-specified levels of significance for the primary and secondary endpoints at 100 days.  The Company plans to present full results from the trial at ASH.

Table 4. Other Presentations

Summary

Stocks to watch at ASH by conference/presentation date:

Saturday, December 5, 2009: IMGN, FACT, CYCC, SNSS, TRBN, KERX, AEZS, ALTH

Sunday, December 6, 2009: IMGN, PCYC, SGEN

Monday, December 7, 2009: FACT, IMGN, ARIA*, TRBN, SNSS, GENT, PCYC, ONXX*, ALTH, SGEN

Tuesday, December 8, 2009: ALTH

* Company has announced plans to host an investor teleconference in connection with the ASH presentation(s)