Biotech Buzz Post No. 9 - PCYC

“You cannot teach a person anything. You can only help him find it within himself” – Galileo (1564-1642)

Pharmacyclics (PCYC) – How biotech got its latest billionaire

If you want a good reason as to why it’s worthwhile learning about biotechnology investing, let me introduce you to five men who can make it very easy for you to see the Big Picture. The first is Dr Patrick Soon-Shiong from Los Angeles, a surgeon by background whose 2008 sale of American Pharmaceutical Partners to Germany’s Fresenius for US$5.6bn, followed by the sale of Abraxis to Celgene in 2010 for $2.9bn, have helped boost his estimated net worth to US$8bn as at March 2013. That makes Soon-Shiong the world’s 145th richest person according to the annual Forbes list. Then there’s Dr Phillip Frost, whose academic specialty is dermatology. Frost, who sold the generic drug maker Ivax to Teva in 2006, is now No. 554 on the Forbes list with an estimated US$2.6bn fortune, and he may be 76 and living in Miami Beach but he still has skin in the game thanks to OPKO Health (NYSE OPKO), of which he is the major shareholder. Randal Kirk, No. 613, sold New River Pharmaceutical to Shire for $2.6 billion in 2007 (the attraction being the ADHD drug Vyvanse) and then Clinical Data to Forest Laboratories for $1.2 billion in 2011 (for the antidepressant Viibryd). He’s now worth US$2.4bn. The New Yorker Michael Jaharis, No 792 and worth US$1.9bn, sold Kos Pharmaceuticals to Abbott in 2006 for US$4.2bn (Abbott wanted the cholesterol drugs Niaspan and Advicor). And then there’s Bob Duggan, No 1,175 of the world’s 1,400-or-so legitimate billionaires with a net worth back in March of US$1.2bn. Duggan had previously been associated with successes like Computer Motion, a pioneer in robotic surgery that Intuitive Surgical (Nasdaq ISRG) bought in 2003 for US$150m, but he only made it onto the Forbes list in 2013 because of the phenomenal market reception for the company of which he is currently CEO, the California cancer drug developer Pharmacyclics (Nasdaq: PCYC) from Sunnyvale in Silicon Valley. If anyone wants to buy Pharmacyclics right now they’re going to have to pay more than last night’s market capitalisation of US$8.16bn. You heard it right - over eight billion US dollars for a company that hasn’t even gained FDA approval of its first drug, and Bob Duggan, reportedly the Church of Scientology’s largest donor (and you thought it was Tom Cruise) holds 19% of it (Pharmacyclics, that is).

Bob Duggan’s ship has truly come in thanks to ibrutinib, a marvelous new small molecule drug for hematologic malignancies. People are talking about ibrutinib turning into another Rituxan, Herceptin or Avastin in terms of its future sales (ie US5-6bn pa globally), and if you look at some of the data you can see why. Take, for example Chronic Lymphocytic Leukaemia (CLL), the most common adult leukemia with around 16,000 new patients in America each year. Last December at ASH, the annual meeting of the American Society of Hematology in Atlanta, Pharmacyclics’s investigators were able to show a 96% Progression-Free Survival (PFS) rate at 26 months for elderly treatment-naïve patients, plus a remarkable 75% for released and refractory patients, many of whom were considered ‘high risk’, having failed their first line treatment within two years. Let me repeat that - 75% PFS for a condition where median overall survival if you fail fludarabine is more like ten months (click here for the relevant paper). When investigators added ibrutinib to another drug specific for B cell malignancies, Rituxan, in 40 high risk patients, the response rate was a massive 83%. That’s just one of many studies to show that this drug works very well in terms of more efficacy with less side effects in CLL, in Mantle Cell Lymphoma (MCL), Diffuse Large B-cell Lymphoma (“DLBCL”), ), follicular lymphoma, multiple myeloma and Waldenstrom's macroglobulinemia (WM). Indeed, the drug is so good that Pharmacyclics and its partner, J&J’s Janssen Biotech unit, have been granted three Breakthrough Designations for it by the FDA this year. In February they got them for relapsed or refractory MCL and for Waldenstrom's macroglobulinemia, while in April they got a third for ‘deletion17p’ CLL and SLL (small lymphocytic lymphoma) where a missing piece of chromosome 17 makes the conditions even worse.

Pharmacyclics is yet more proof that one of the main path to riches in this game in the future will be drugs that successfully tackle aberrant cellular signalling pathways. Ibrutinib works its magic by targeting BTK, that is, the enzyme Bruton’s tyrosine kinase, so called because the American immunologist Ogden Bruton (1908-2003) was the first to study an X-linked agammaglobulinemia called Bruton's syndrome that is caused by this kinase (I have been dying to find that out for a while now). The B cell malignancies like CLL and MCL are the result of the immune system’s B cells – where we get antibodies from – multiplying out of control. This in turn is the result of the B-cell receptor signalling pathway in B cells going awry, and one of the proteins in the pathway is BTK. Block it with a drug like ibrutinib and you can hit the bad B cells without affecting the T cells the patient needs for a functioning immune system. That efficient targeting makes ibrutinib a very safe and well tolerated drug as well as highly effective, and that’s why people are slating it for future super-blockbuster status even though the hematologic malignancies in question have relatively small patient populations.

Of course, the drugs have to get launched first, and to that end Pharmacyclics and Janssen filed ibrutinib’s first NDA in July using their Phase II data. It’s reasonable to say, given the Breakthrough status, that it won’t take many months for the drug to get its first approval so long as the FDA is satisfied with the data. It’s generally expected that the first approval will lead to widespread off-label use in other indications where ibrutinib has good data. Under the partnership with Janssen, which was inked in December 2011, Pharmacyclics will pioneer the US market for ibrutinib with Janssen working the global scene. Janssen paid Pharmacyclics US$150m upfront to get in and will pay up to US$825m in development and regulatory milestones. That wasn’t bad for a drug which Pharmacyclics picked up in 2006 from Celera – the company that six years earlier won the race to sequence the human genome – as part of a package in a deal worth US$3m in cash and shares.

Pharmacyclics and Janssen won’t have BTK themselves forever. Celgene bought Avila Therapeutics from Bedford, Ma., in January last year for US$350m cash and US$575m in milestones in part to get hold of AVL-292, a BTK inhibitor then in Phase I. However if ibrutinib becomes the new ‘standard of care’ drug for various B cell malignancies, which is a reasonable bet if clinicians like what they see, then new BTK inhibitors will have to be trialled against it, giving ibrutinib’s owners a potential monopoly over the BTK class for the duration of patent life. Which is another reason why Pharmacyclics has such a formidable market capitalisation.

There’s an interesting lesson from Pharmacyclics for the leadership of biotech companies that haven’t yet his the big time – focus. When Bob Duggan ousted his predecessor as CEO in 2008 and took direct control of the company, I understand he decreed that it would more or less focus on ibrutinib until that drug had hits its straps, after which some of its pipeline opportunities could be moved forward. That, my dear readers, is how you turn US$42m in stock acquired between 2004 and 2011 into US$1.2bn. If only more Australian bio-entrepreneurs could get that kind of focus.

Stuart Roberts, Australian Life Sciences consultant, with global focus
Nisi Dominus Frustra

+61 (0)447 247 909

sroberts2164@gmail.com

Twitter @Biotech_buzz

About Stuart Roberts. I started as an equities analyst at the Sydney-based Southern Cross Equities in April 2001, focused on the Life Sciences sector from February 2002. Southern Cross Equities was acquired by Bell Financial Group (ASX: BFG) in 2008 and I continued at Bell Potter Securities until June 2013. Over the twelve years to 2013 I built a reputation as one of Australia's leading biotech analysts. I am currently consulting to the Australian biotech industry. Before joining Southern Cross Equities I wrote for The Intelligent Investor, probably the most readable investment publication in Australia. I have a Masters Degree in Finance from Finsia. My hobbies are jazz, cinema, US politics and reading patent applications filed by biotechnology and medical device companies.

Previous Australian Biotechnology Buzz posts:
ImmunoCellular Therapeutics (NYSE MKT: IMUC), 27 August 013
Immunomedics (Nasdaq: IMMU), 21 August 2013
Inovio Pharmaceuticals (NYSE MKT: INO), 24 August 2013
Merrimack Pharmcaceuticals (Nasdaq: MACK), 26 August 2013
Oncolytics Biotech (Nasdaq: ONCY),  22 August 2013
Pharmacyclics (Nasdaq: PCYC), 2 September 2013
Regulus Therapeutics (Nasdaq: RGLS), 23 August 2013
Sunshine Heart (Nasdaq: SSH), 28 August 2013
Synta Pharmaceuticals (Nasdaq: SNTA), 1 September 2013.

Disclaimer. This is commentary, not investment research. If you buy the stock of any biotech company in Australia, the US or wherever you need to do your own homework, and I mean, do your own homework. I'm not responsible if you lose money.