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Big Biotech Stock Pops and Drops This Week

Todd Campbell, The Motley Fool

Investors cheered news that PTC Therapeutics' (NASDAQ: PTCT) clinical-stage drug for spinal muscular atrophy (SMA) is delivering impressive early-stage efficacy. However, those cheers turned to jeers after competitor Sarepta Therapeutics (NASDAQ: SRPT) reported promising data for its Duchenne muscular dystrophy (DMD) gene therapy. Could Sarepta Therapeutics' next-generation DMD treatment derail sales of PTC Therapeutics' existing DMD drugs? And how excited should investors be about PTC Therapeutics' opportunity to reshape SMA treatment anyway?

In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes and Todd Campbell explain how SMA and DMD treatment is evolving and what it could mean to investors. Also, the two analysts weigh in on news that Roche Holdings (NASDAQOTH: RHHBY) is acquiring Foundation Medicine (NASDAQ: FMI) for $137 per share, a 68% premium to Foundation Medicine's 90-day volume-weighted average share price.

A full transcript follows the video.

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This video was recorded on June 20, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is June 20th, and this is the wednesday Healthcare edition of the show. I'm your host, Kristine Harjes, and I'm joined by healthcare specialist Todd Campbell via Skype.

Today's going to be one of those news, news, news shows where we take you through some of the most exciting developments in the healthcare space from the last week or so. First up, Todd's going to take a victory lap for pitching Foundation Medicine, ticker FMI, as his top healthcare stock to buy last October. The stock is up 229% since then, a high-water mark it hit after the announcement on Tuesday of this week that Roche is buying the company -- or, rather, the part of the company that it doesn't already own. Todd, congratulations on a stellar pick! I hope you had put your money where your mouth was.

Todd Campbell: I did, Kristine! I did! So, of course I'm smiling. But for every victory, there's always going to be one that isn't a victory, right? You have to be humble when it comes to this kind of stuff. 

But, big news for investors and owners of this company, and potentially for people who are making bets in personalized medicine. I think that anybody who wants to learn more about Foundation Medicine and what it may mean to Roche over time could, obviously, go back to our show from last fall. Kristine, when was that?

Harjes: It aired on October 18th, if anyone wants to check it out. It was during our Pitch Week, where we had all of the fool.com writers in Fool HQ -- which is rare, it only happens once a year -- and we asked a bunch of them to pitch a stock from the sectors that they cover. Todd pitched Foundation.

Campbell: Right. If you want to go back and listen to that show, obviously, Foundation, there's no real reason to own it, and I'll tell you why in a second, from here. But there may be a reason to consider what the impact could be for Roche. So, it might be worth going back and just taking a listen, given the fact that it will become a part of Roche once this deal closes. That's expected to happen later this year. 

The nuts and the bolts, Kristine, investors are getting $137 per share. That's going to be paid out in cash, not stock. That's a 29% premium to what it was trading at late last week, and a 68% premium to the 90-day volume-weighted average, so it's a pretty healthy premium. It values the amount of the company that Roche didn't own at about $2.4 billion. If you include what Roche owned, then that would value the company at $5.3 billion. Maybe what's really interesting there for investors just thinking about this space more broadly is, that represents a fairly massive price to sales ratio for this company. They're obviously estimating that this is going to become a much bigger market over time.

Harjes: Right. Roche has not been shy previously about paying up to have a stake in this company. They previously had a majority stake, acquired back in January of 2015 at $50 a share, which was, at the time, even twice the price that the stock was trading at on the market. Now, they're taking up the rest of the stake in the company for, as you mentioned, $137, which is another pretty sizable premium to where the market had previously valued this company. So, Roche is very interested. 

This makes a lot of sense. What Foundation Medicine does really builds on Roche's prior efforts in personalized medicine. Foundation Medicine's goal is to make comprehensive genomic profiling, or CGP, the standard of care in cancer. They want to be able to look at solid tumors and actually figure out what the genetic profile that tumor is, and see whether or not there's a more targeted therapy that might be beneficial for that patient.

Campbell: Right. It's basically taking your information, your genetic code, taking that information and then matching you up with the most appropriate therapy. That may be a therapy that's already won approval, that may be a new therapy that's making its way through clinic. What it does is, it simplifies the whole process, both for the patient and for the physician or the oncologist who's coming up with the treatment plan. 

What's really interesting about this, and probably why Roche acted now, is that that deal where they took the over 50% stake in it previously, they had a standstill agreement. That standstill agreement expired earlier this year. That freed them to go out and make a bid to gather up the whole company. 

This all happens at the same time that's Foundation Medicine just won approval for a pretty comprehensive screening test, its latest product, which is the FoundationOne CDx. They've just achieved winning a reimbursement from Medicare for the use of this screening tool in people with advanced cancer. Advanced cancer, they estimate there are about a million people out there who could be tested for this using this screening system. To put that in perspective, only about 150,00 patients are currently being tested, so there's a pretty large market opportunity here, especially when you consider that over time, regardless of if it's advanced cancer or early stage cancer, this kind of screening could become standard.

Harjes: Yeah, absolutely. In the past, drug makers have had to come up with a separate diagnostic tool to be used with the personalized medicines that they're developing. The cool thing about FoundationOne is that it has this vocabulary that you can add to over time. The drug makers can team up directly with Foundation Medicine to use this already-approved tool in their FDA applications for their personalized therapies. Even the Medicare reimbursement itself, the way that that's structured with the national coverage determination, or the NCD, is such that it can readily expand as more tumor types that need this companion diagnostic tool come into play, so you can add and expand the use case for FoundationOne.

For now, what this means for the company is that Foundation Medicine will operate under Roche as a separate and autonomous unit, which is reminiscent of Roche's strategy with a bunch of different acquisitions. The biggest one that people will recognize is that of Genentech, which was an enormous acquisition. It was a $47 billion purchase, and it was left largely alone. Actually, the Genentech acquisition followed a similar structure, as well, where Roche had a 56% stake in Genentech before it bought the entire thing. They did a similar acquisition with a company called Flatiron, where they had a small stake and then came back to acquire all of it. This is very typical of Roche. I do trust them to integrate the company appropriately. 

I think it's a very exciting development for the field of personalized medicine. If a giant company like Roche is so clearly willing to invest in personalized treatments, that really points toward this being the future of cancer care.

It's been a wild week for PTC Therapeutics, ticker PTCT. Let's talk first about why the stock jumped 28% from $27 per share to $47 per share on Monday. [Editor's note: The stock jumped from $37 to $47 per share.]

Campbell: What a roller coaster ride for this company and its investors this week, right, Kristine?

Harjes: Absolutely. So, the Monday news, they announced that their SMA, spinal muscular atrophy, drug risdiplam had some data to be shared from a study called the FIREFISH -- I'm sure it's an acronym, although I couldn't tell you what it stands for. They released some data from 11 babies that were taking their experimental treatment, and it showed a pretty meaningful improvement on a point score that measures neuromuscular disorders, which is what SMA is. Almost all had some improvement. Even though this is a pretty early investigation into the drug, and so safety is the primary thing you're looking for, the efficacy had people pretty excited.

Campbell: Roche has been working with PTC on this drug since 2011. We're now starting to get some data that has people excited that there's potential here for these two to make the treatment of SMA one step better. 

To give people a little bit of an understanding of what this disease is, it's rare, but it's life-threatening. Essentially, what ends up happening is that patients are unable to produce a particular protein called SMN -- that's easier, so we'll call it SMN. That's crucial to the survival of motor neurons. If you're not able to produce that protein, over time, those neurons that control muscles within your spinal column will die. That can cause loss of the ability to walk, failure to be able to eat, and eventually it can make it so you can't breathe. 

There are essentially three types that they break it out into, depending on when you're diagnosed. This is usually diagnosed in infancy. There's type 1 SMA. That accounts for about 60% of all SMA cases. That's diagnosed within the first six months, typically. This is probably the toughest one to get a diagnosis in because about 90% of type 1 patients either die or require permanent ventilation by the time they reach age two. It's a devastating disease. Type 2 SMA is diagnosed typically between six months and 18 months of age. That accounts for about 27% of cases. Slightly better prognosis here, but still, 30% of type 2 patients succumb to their disease by the time they reach age 25. Then, there's type 3, which accounts for about 13% of cases. That has the best prognosis, but still, again, big, big impact, negative quality of life, because of the loss of mobility, the ability to walk, etc.

Previously, there really wasn't a lot of treatment options that were available to patients, until late 2016, when Spinraza won approval. We've talked on the show about that in the past, Kristine. That's a drug from Biogen and Ionis Pharmaceuticals. It's extremely high-priced. It's used to treat a small proportion of people. But it's already become a blockbuster drug. 

PTC is hoping to improve upon this therapy. It's going to do that in a couple of ways, right, Kristine? It's oral dosing instead of being injected, which could be an advantage. And, if you look at the trial data that PTC released, it matches up pretty favorably to what we saw in Spinraza's trials.

Harjes: Of course, those weren't head-to-head trials, so it's not exactly fair to say, "Oh, this drug is definitely more effective." But they were measuring things on the same scale, and it does look like this drug from PTC had some strong efficacy, potentially even stronger than what we saw with Spinraza. 

Going back to the dosing and the convenience factor, I'm not sure where I fall on this one. You're talking about infants, right? There's no good option. Spinraza is injected into the spine four times a year, which sounds pretty terrible. But, is that better or worse than having an infant taking a daily pill? That doesn't sound so good, either. I mean, it's a devastating disease, so having a multitude of treatments is definitively a good thing. But the convenience factor, I don't think it's a clear win for either drug.

But, what I will say is that both of these are threatened by something going on with Novartis. Novartis, earlier this year, acquired a company called AveXis for $8.7 billion. It gave it this drug called AVXS-101, which is a now late-stage gene therapy, meaning one-and-done cure, for the disease that could be available as early as next year, which is super exciting in general, although quite the threat to both of the other companies working in this space.

Campbell: It's a big-time threat. That's why, I think, if you're an investor and you're trying to digest all of the information that's come out in the last couple days in this indication, you might want to just press the pause button and not necessarily rush out and buy PTC, assuming that they're just going to be able to grab $1 billion or so in sales away from Spinraza -- assuming, obviously, that everything pans out and it wins FDA approval, right, which is far from a guarantee. 

If this AVXS-101 -- which is in Phase III trials already, it's already dosed in patients, and it's being evaluated in type 1, type 2, and type 3 -- if it puts up the same kind of data that we've seen so far in previous trials, the previous studies, then I have a hard time believing that it's not going to be the standard. I mean, why wouldn't you do a one-and-done that has such a high likelihood of changing the game? To put this in perspective, they recently, I think it was in April, updated information from 15 patients. 15 out of 15 of those patients were alive and without the need for permanent ventilation at the 24-month mark. Historically, only about 8% of patients could make that claim. So, this is a potentially remarkable, revolutionary, game-changing therapy, if the Phase III trials pan out.

Harjes: Yep, absolutely. We started the segment by talking about PTC Therapeutics' investors enjoying their start to the week after a nice pop. But that celebration was short-lived. The very next day, Tuesday, PTC fell 31% back to $33 per share, after Sarepta announced data for its gene therapy for a different indication called Duchenne muscular dystrophy, or DMD.

Campbell: Right. One of the things we really didn't really talk about before when we were talking about PTC was that they already have a couple drugs on the market. Both of those drugs, though, are used in DMD. So, when Sarepta came out with their interesting news -- which we're going to tell you in a minute; again, this is pretty revolutionary and crazy science, too -- people started to think, "Well, maybe all of the revenue that we're currently getting right now from PTC could disappear in a few years if it moves over to Sarepta because of what Sarepta is doing now in terms of gene therapy."

The data that was released at Sarepta's investor day, their research day -- it was from a very limited group of people. I'm just going to say that straight out. There were only three people that we got information on. But, what they were able to show us was pretty remarkable, especially when you consider -- I mean, I don't want to say it's a very low bar for approval, but Duchenne muscular dystrophy, there really are not a lot of good treatment options out there. There really aren't any. There's Translarna, which is approved in Europe. That's the PTC drug. There's Exondys 51, which is the drug that Sarepta already has on the market. But in both of those cases, that only addresses about 10-13% of patients with this muscle-wasting disease. That's a big problem, because most of these patients tend to succumb to their disease by the time they're in their 30s.

Harjes: Yes. So, investors went pretty wild on Tuesday when this news came out. At its peak, the stock was up 68%. It simmered down to a gain of around 37% for Sarepta by the end of the day. 

Like you said, Todd, this is pretty early stage. It was a Phase I/IIa trial, and it read out only about three patients. But, with those three patients, the drug -- which, I know we say all the time on this show that we can't pronounce these names, but this one is actually probably the most absurd name I've ever seen.

Campbell: [laughs] I'll give you an extra bonus if you tell everybody what it is.

Harjes: Sure. I'm just going to spell it -- AAVrh74.MHCK7.micro-Dystrophin. You can't even pronounce that! So, we're just going to call it "the Sarepta drug." Bear with me, apologies. Don't blame me, blame whoever decided on that. 

Anyway, it significantly increased the level of the missing structural protein in those first three patients that were involved in the study. They also noted that the same patients all exhibited significantly lower serum creatine kinase levels following the treatment, which is pretty important because that enzyme is very strongly associated with the muscular damage that results from the progression of the disease. 

It's early goings. From here, the study will eventually involve 12 total boys. It still won't have a control. Again, because it's early stage, the No. 1 thing we're looking for here is safety. But, as usual in early stages, when you see a great amount of efficacy, investors tend to get pretty excited. 

If all goes extremely well -- and by that, I do mean flawlessly -- this therapy could hit the market within two years, which is pretty amazing. You can see just by the reaction of the scientists, too, that were working on this -- the guy that's leading the project, his name is Jerry Mendell, he noted, "If you were me, looking under the microscope, you would be so amazed you wouldn't sleep at night," which are pretty strong words. It really does show that there's a huge amount of potential for this drug in a disease that's very devastating.

Campbell: One of his comments was, "I've been waiting my entire 49-year career to find a therapy that dramatically reduces CK levels and creates significant levels of dystrophin." Here, he was able to work on this drug -- we'll call it the micro-dystrophin drug -- that does that. And, I think we need to see more data for durability and all this other stuff that goes into figuring out whether or not a drug can win approval. But, what's interesting about this is, remember that dystrophin itself -- which isn't produced in these patients, and that's why the muscles waste away, because you're not producing the dystrophin -- is too large to be able to deliver that gene into a patient's body using the technology that we have today, which are basically viral vectors or viruses that are turned off so that they can't infect you, but they can be used to deliver a new gene into the body. It's too big. So, what they had to do is, they had to take a look at the dystrophin gene and break it up into little chunks, and then pair up those or glue those chunks together again into a much smaller framework, which gives you the micro-dystrophin. 

So, the question that I would have, then, is, we're seeing an increase in micro-dystrophin production. Would that result in the same kind of clinical benefit or clinical outcome as dystrophin itself? Maybe. Sure, right? Why not? The other part could be, what kind of a benchmark will the FDA want to see? Will they want to see that it's safe? So far, it looks like it's safe, that's great. When they looked at approving Exondys 51, they basically said, "Well, there's some improvement, even though it's very small, in dystrophin production." Will they also only need to have a small amount of improvement in micro-dystrophin production? Maybe, maybe not. 

There could also be some issues tied to antibodies because of the viral vector that's used. They'll have to keep an eye on that. And, at this point, it doesn't look like you can have multiple doses of this. So, your question is going to be, after one dose, do you get the durability of effect out six months, 12 months, 18 months? What ends up happening? 

Still, that being said, this is a pretty remarkable advance, and it certainly points you in the direction of thinking that other things that Sarepta is working on -- including things like CRISPR/Cas9, gene editing-type things -- could really reshape outcomes for these patients within the next five to ten years.

Harjes: And it's important to note, too, the historical context surrounding Exondys 51. There was quite a controversy about this drug getting approved. The expert panel that makes recommendations to the FDA recommended that the drug not be approved. And yet, there was one champion at the FDA that said, "I really do want to approve this drug." It was basically her pushing -- her name is Janet Woodcock -- it was her championing this drug that ended up getting the drug approved. Meanwhile, it wasn't approved in the E.U. It's only approved in the U.S. 

It's ramped up pretty quickly. Sales in 2017 were $155 million, which isn't really a ton, but when you look at Q1 of 2018, sales were up 300% year over year. The drug is out there, and it's starting to gain market share. I think many people would probably look at that and assume that Sarepta has a fairly low bar to clear when it comes to proving the efficacy of these drugs. Again, that relates to just how devastating this disease is. 

If you look at the story of Exondys 51's approval, a lot of it had to do with the patient population and the families of the people with the disease, they really rallied around somewhat anecdotal evidence that the drug was changing their lives. This could be something that you see play out again. I'll definitely be interested to watch it. 

In the meantime, I have to imagine that the stock's going to continue to be incredibly volatile. As fool.com writer Brian Orelli put it in his article on PTC Therapeutics' pop and subsequent drop on Monday and Tuesday of this week, welcome to biotech investing. Buckle up. [laughs] 

Campbell: [laughs] Absolutely! [...] are back. One of the things that's interesting, too, about Sarepta, and investors should bear this in mind -- I think the market cap is like $10 billion now, which is pretty crazy. I mean, that's 65X trailing 12-month sales. You're really banking on these next generation DMD therapies succeeding, getting approved, and not only that, but also racking up billions of dollars in sales. 

A lot of things can and often do go wrong in biotech investing, so just make sure that, if this is something that's interesting to you, like anything else that we talk about on the show: diversify, diversify, diversify. Make sure it's part of a diversified portfolio. That way, if something does go wrong, you're not left with one stock that declines significantly in your portfolio.

Harjes: Yes, great advice. As always, people on the program may have interests in the stocks that they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Today's show is produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes, thanks for listening and Fool on!

Kristine Harjes has no position in any of the stocks mentioned. Todd Campbell owns shares of Foundation Medicine. The Motley Fool owns shares of and recommends Biogen. The Motley Fool has a disclosure policy.