[ This could be the biggest year ever for investing in biotech takeover targets—all due to the patent cliff.
Sanofi (NYSE ADR: SNY), Novartis AG (NYSE ADR: NVS), Roche Holding Ltd. (RHHBY), AstraZeneca PLC (NYSE ADR: AZN), and Eli Lilly & Co. (NYSE: LLY) will all be losing more than $6 billion each in annual revenue this year due to expiring patents.
The ideal candidates are small-cap biotech firms whose pipelines include late-stage drug candidates or other promising pharmaceuticals. ]
So what's a realistic takeover price?
Potential uses of Arikace -
30,000 with Cystic Fibrosis in the US
44,000 with Cystic Fibrosis in Europe
50,000 with NTM in the US
30,000 with NTM in Europe
30,000 with NTM in Japan
630,000 with MDR-TB Worldwide each year
4,000,000 die from pneumonia each year (1,100,000 under the age of five)
The implications of a report published two years ago are that Arikace could position itself as a first-line antibiotic for ALL life-threatening cases of pneumonia, due to the vastly superior speed of action -
[ However, recent studies found that influenza B virus infection accounts for substantial percentage of influenza associated hospitalizations and deaths for patients under the age of eighteen ]
[ During the 2010-2011 season influenza B comprising 26% of all circulating influenza viruses caused 38% of all influenza associated pediatric deaths in the United States ]
[ The authors concluded that bacterial pneumonia and cardiac injury contributed to death after infection with influenza B virus ]
Bristol-Myers Squibb and AstraZeneca jointly paid $7 billion to acquire Amylin in 2012 - twelve times annual revenue.
GlaxoSmithKline paid $3.6 billion to acquire HGSI that same year - nineteen times annual revenue.
30,000 Cystic Fibrosis patients using Arikace would generate annual revenue of about $1 billion.
If YOU were the CEO of Sanofi, and the news hit that Roche had offered $5 billion to buy Insmed - what would you do?
Thinkaboutit1120 - how likely is it realistically that the CEO of a big pharma who badly needs to replace revenue expected to be lost to cheaper generic versions of his company's drugs would just stand and watch as a competitor acquired Insmed's liposomal delivery platform for a fraction of its fair market value?
If a buyout offer is indeed made I'm pretty sure most of the big pharmas will be calculating our fair market value based upon anticipated peak revenue up to twenty years into the future.
I forgot to include in my February 19 post (below) the most important bit -
[ These data demonstrate that patients receiving ARIKACE for six cycles (12 months) in the extension study, showed mean increase in relative change in FEV1 which is sustained during both on-treatment and off-treatment months. ]
Only a half-wit could be incapable of appreciating the importance of this breakthrough to the Cystic Fibrosis community.
Imagine if YOU had a condition which caused your lung function to decrease relentlessly year after year, with no antibiotic available to you capable of halting the degeneration for any longer than a month or two. How interested would you be in a new antibiotic which has been preventing that degeneration for a year and counting?
With regard to the potential for accelerated approval by the FDA, this was surely the proof it needed that Arikace addresses a serious unmet medical need.
Note that the legislation enacted last July is targeted at "expedited development and review of innovative new medicines intended to address unmet medical needs ..." -
From Sec. 901 of S.3187 - ENHANCEMENT OF ACCELERATED PATIENT ACCESS TO NEW MEDICAL TREATMENTS -
[ ... the FDA should be encouraged to implement more broadly effective processes for the expedited development and review of innovative new medicines intended to address unmet medical needs for serious or life-threatening diseases or conditions, including those for rare diseases or conditions, using a broad range of surrogate or clinical endpoints and modern scientific tools earlier in the drug development cycle when appropriate. This may result in fewer, smaller, or shorter clinical trials for the intended patient population ... ]
[ For these reasons, the statutory authority in effect on the day before the date of enactment of this Act governing expedited approval of drugs for serious or life-threatening diseases or conditions should be amended in order to enhance the authority of the FDA to consider appropriate scientific data, methods, and tools, and to expedite development and access to novel treatments for patients with a broad range of serious or life-threatening diseases or conditions. ]
[ The Secretary may approve an application for approval of a product for a serious or life-threatening disease or condition, including a fast track product, under section 505(c) or section 351(a) of the Public Health Service Act upon a determination that the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit ... taking into account the severity, rarity, or prevalence of the condition and the availability or lack of alternative treatments. The approval described in the preceding sentence is referred to in this section as `accelerated approval'. ]
See the comment by Lewis in my February 28 post (below). One down, one to go ...
A exchange worth noting during a presentation a few months before confirmation that the Arikace European Phase III clinical trial was successful -
Moderator: "Will the FDA accept the European results to approve arikace for CF?"
Lewis: "The FDA will not approve arikace for CF based upon those results alone. However, if we have positive NTM results, along with positive results from the longer term CF study due later this year, the totality of those results will set up an interesting discussion with the FDA for the appropriate label for Arikace."
So ..... a label for Arikace based upon the "totality" of the Arikace data then available.
Around the same time Lewis mentioned that the original (Transave) plan was accelerated approval via the 505(b)(2) pathway, designed for new or improved use of a drug already approved by the FDA (the "reference drug").
The Arikace "reference drug" - amikacin (injection) - is approved for -
[ the treatment of serious infections due to susceptible strains of Gram-negative bacteria, including Pseudomonas species ... ]
So IV amikacin is already approved as a therapy for pulmonary Gram-negative infections. The most important unknown was whether or not the Arikace liposomes could deliver an effective concentration of amikacin with less systemic toxicity than is seen with IV amikacin.
Provided the NTM results confirm that Arikace treats pulmonary Mycobacterial infections as safely as it treats a pulmonary Gram-negative infection like Pseudomonas in Cystic Fibrosis, what reason could the FDA and EMA have to approve Arikace for anything less than this? -
[ the treatment of serious pulmonary infections due to susceptible strains of Gram-negative bacteria and Mycobacteria ]
Surely the FDA and EMA wouldn't issue labels which would encourage the continued use of IV amikacin for pulmonary infections?
Hence my confidence than ANY evidence of efficacy against NTM will put Arikace back on course for accelerated approval.
Blase, another "read between the lines" observation by Lewis -
"IV amikacin is used to treat this patient population right now. You can't get enough amikacin into the lung through IV to successfully address this disease."
If IV amikacin is falling short as a therapy for pulmonary NTM infections I fail to see how it could be any more effective against other Mycobacterial infections such as MDR-TB - for which IV amikacin is currently equal-first in order of preference on the list of recommended therapies for the approx 630,000 who develop MDR-TB each year.
There are simply too many obstacles between the injection site in the vein and the mycobacteria sheltering within the macrophages in the lungs.
And if IV amikacin isn't successfully addressing infections by pulmonary mycobacteria it surely must be allowing pulmonary mycobacteria the opportunity to evolve aminoglycoside-resistant strains.
I suspect this issue is the most powerful driver of them all - yet the one with the least visibility of them all.
Since there is not any great therapy for NTM, and if there is evidence of efficacy against NTM, it would be hard to imagine why the FDA would not approve since the FDA, NTM patients, physicians, and NIH would like to see another form of treatment for NTM that improves the conditions under which they live, and feel better.
I would suggest the number of patients who are prescribed Arikace will be at least as many as the number who are currently prescribed Pulmozyme.
The following information is around nine months old -
[ Pulmozyme is a recombinant version of an enzyme which makes it easier for an individual with CF to clear his/her lungs, by reducing viscosity.
A month's supply costs $2,524.53, equivalent to $30,294.36 a year.
Annual sales total $491,925,000 - suggesting that over 16,000 patients are being prescribed the therapy.
The suggestion of multi-billion dollar sales of a Vertex drug currently priced at $307,000 a year suggests healthcare providers will foot the bill for any other drug which delivers a significant improvement in quality or quantity of life. ]
One assumes the vast majority of patients who need Pulmozyme would also benefit from Arikace. How could the physicians treating these patients NOT prescribe the first ever antibiotic known to have halted deterioration in lung function for a year and counting?
15,000 CF patients on Arikace would mean annual revenue of about $500 million.
Even with zero revenue from NTM, MDR-TB, or pneumonia caused by other bacteria, just 15,000 CF patients would warrant a market valuation at that point somewhere north of $2 billion / $50 a share.
My personal expectation is that provided Insmed confirms it will file for accelerated approval on the strength of the NTM data, we'd be looking at a buyout valuation anywhere upwards of 2.5 times anticipated annual revenue three years from the date of the buyout offer.
Any other thoughts on a multiple guys?
Further evidence that Arikace will position itself as the default antibiotic for Cystic Fibrosis -
[ Eligible patients from the open-label, multicenter, randomized Phase 3 CLEAR-108 trial (as described below) were given the option to participate in a two-year, open-label, multi-cycle extension study designed to evaluate the long-term safety and tolerability of ARIKACE in CF patients. 206 patients enrolled in this study, representing 77% of the patients that completed the randomized portion of the Phase 3 trial, and received at least one dose of study drug. The data presented in the attached charts and discussed below includes 98 patients who had completed one year in the CLEAR-110 study by December 31, 2013, the time of data cut-off for DSMB review. ]
No antibiotic currently available to this patient population halts deterioration in lung function for any longer than two or three cycles of therapy.
No antibiotic currently available to this patient population requires just once-daily dosing.
Hence the observation by Lewis last August (see the post later in this thread) that Arikace is "a pretty disruptive introduction into the CF treatment market".
Jad, I thought it better to err on the side of caution.
When I last checked, the top biotechs had valuations of 3x or 4x revenue, with multiples in other cases considerably higher if revenue is expected to dramatically increase in the near future.
The average biotech valuation was 6x revenue.
If Insmed's valuation three years from now can be expected to be at least 5x revenue at that point - using an annual discount of 20% (vs your 15%) the valuation today should be - anticipated revenue x 5 x 0.8 x 0.8 x 0.8, i.e.
2.56 times anticipated revenue three years from now.
With efficacy and safety data already in the bag, only a manufacturing issue could delay EMA approval.
With approval it's difficult to see how an aminoglycoside antibiotic with an unprecedented safety profile would not be used by considerably more than 30,000 patients when one considers the size of the patient populations currently treated with aminoglycoside injections.
For me, the stats on pneumonia are the most relevant. If four million people die from pneumonia each year, how many people are critically ill with pneumonia each year?
It's unlikely the duration of Arikace therapy in most cases of pneumonia will exceed a week or two. But a target population of five million using Arikace for a week is a far bigger opportunity than 200,000 CF patients using Arikace for a year.
Given no competition to cause price competition and the current tax loss carry forward I would estimate much higher. Biogen Idec now trades at 14.5 x sales - well above the 2.5 x sales you indicated. On this basis alone, even if sales were only $500 million and given likely higher gross margins, anything under a $7.25 billion value would be accretive to Biogen's valuation. Assuming a 15% annual discount over, say, four years Insm would be discounted by 48% for a net current value of about $93/share. At $1 billion in sales this rises to $186/share and if it occurs in a year make it a little over $220/share.
Lewis last August -
"Having said that - I believe this (NTM) study will stand on its own, and will be adequate for registration and approval".
"I think anything that shows promise by way of reduction in bacterial density will be enough".
Analyst - "Strategy in Europe ... do you have something in mind, or are you really waiting for NTM on this?"
Lewis - "No, we're charging full steam ahead. Again, I want to emphasise the data we got in phase III - we met the primary endpoint. We're going to be the first treatment for CF that's once a day. Compliance is a major issue in this space."
"You might throw in Arikace frankly more frequently because patients are more likely to take it. And if you're getting to the MIC with once-daily dosing then you might rotate in the other antibiotics less frequently."
"You know this is really a pretty disruptive introduction into the CF treatment market, to have a once a day portable therapy."
The rate of market penetration of Victoza demonstrates perfectly what Lewis means by "pretty disruptive" -
Week / Prescription numbers
1 .......... 49
2 .......... 411
3 .......... 1,057
4 .......... 1,465
5 .......... 2,164
6 .......... 2,703
7 .......... 3,268
8 .......... 3,599
9 .......... 3,911
10 ........ 4,801
11 ........ 5,330
12 ........ 6,043
13 ........ 6,616
14 ........ 7,505
15 ........ 8,090
16 ........ 8,925
17 ........ 8,551
18 ........ 9,814
19 ........ 10,355
20 ........ 10,719
21 ........ 11,728
22 ........ 10,577
23 ........ 12,163
24 ........ 13,021
25 ........ 13,475
26 ........ 14,501
27 ........ 14,340
28 ........ 14,793
29 ........ 15,282
30 ........ 16,231
31 ........ 14,636
32 ........ 17,000
33 ........ 16,908
Assuming by Week 30 patients were collecting a 30-day supply, by Week 33 the convenience of once-daily dosing instead of twice-daily had already attracted 64,775 patients. Thirty months after the launch roughly 160,000 patients were using the new drug.