Vivus gets EU approval as proxy fight continues, Prosensa breaks through ahead of IPO and Sarepta dips, Peregrine fails in lung cancer, Arena files in Canada, Isis jumps on trial data as Amarin swoons, Dendreon gets nod from EU, Onyx jumps on buyout rumors. Let's go over the stories we've been watching, commenting on, and trading this week.
Vivus Pharamaceitucals (NASDAQ:VVUS)
Vivus received approval to market SPEDRA (avanafil) in the European union (EU) this past Wednesday. Recall that, in April of this year, the EU's Committee for evaluation of Medical Products for Human use (CHMP) recommended that avanafil be granted approval, therefore this news is not surprising. the press release was issued (1 pm eastern time) VVUS jumped 2.3% from $12.68 to $12.98; however the gains were transient and VVUS closed the week at $12.58. No one is really paying much attention to Avanafil because, as we noted in our last weekly review, Avanafil has been approved in the united States for 14 months and Vivus has yet to commercialize the drug.
The EU approval does serve as great window dressing for an embattled VVUS management that is in a heated proxy fight with First Manhattan Corporation (FMC). This week alone VVUS mailed a letter to shareholders and issued press releases on Tuesday, Thursday, and Friday, suggesting that FMC = risk for shareholders, calling in to question some claims that FMC has made and of course, urging stockholders to vote for the present management and board.
On the flip side, FMC has been getting media attention and has issued press releases and letters to fellow shareholders as well as outlining their own strategic plan to fix VVUS. Recall that FMC is the largest shareholder of VVUS. This is one point that VVUS management cannot refute. FMC has much more at stake (financially) than the current VVUS management and board. In March of this year, FMC sent a letter to VVUS CEO Leeland Wilson where FMC expressed its concern and informed the company that it would be nominating an alternate board of directors. The March letter (pdf) is worth reading to gain some perspective. Here is the key sentence that caught our attention and prompted us to dig a little further:
Only Once in FMC's history of investing in thousands of companies have we felt compelled to nominate directors. That company's stock price more than doubled in approximately four months after three of our nominees were seated.
The other company referred to in the paragraph above is Aspect Medical Systems (formerly NASDAQ:ASPM). FMC put on a proxy fight for ASPM starting in March 2009 by electing 3 nominees to ASPM's board. At the ASPM 2009 annual shareholders' meeting, FMC's 3 nominees were successfully elected to the board. ASPM was subsequently acquired by Covidien (NYSE:COV) later that year. When the Covidien merger announcement was made on September 28th, 2009, ASPM stock was trading at $7.67. The deal priced at $12 per share. From January 1, 2009 through August 1, 2009 ASPM's share price ranged from $3.94 to $6.49. Thus, when the 3 FMC directors were elected ot the board, the share price must have been slightly below $6 in order for the statement above to be true.
We note that 2 of the FMC directors who served on the ASPM board, Jon Brio and Melvin Keating are also part of FMC's slate for VVUS. While the ASPM transaction ma suggest that FMC, if successful in gaining control of VVUs could deliver a sale of the company, there are some key differences between the ASPM situation and the VVUS situation. First, when ASPM was acquired, the total deal was $210 million (net of cash) while VVUS has a market cap of some $1.1 Billion net of cash. Second, once FMC announced their proxy fight for ASPM, the company reached an agreement with FMC where ASPM essentially backed the FMC nominees. In the present situation, VVUS is vehemently opposed to FMC's proposals, and FMC clearly wants to replace the entire board and executive management of VVUS.
As of the record date (May 31st) for the VVUS annual meeting, FMC and Sarissa Capital management collectively controlled 11.9% of VVUS stock.
VVUS management is rightfully worried about this proxy fight. Looking at the March 31 institutional investor filings (form 13Fs), large institutional holders of VVUS (including FMC and Sarissa) control about 50.1% of VVUS stock. Whether or not the other large holders of VVUS will side with FMC is an open question, but if all do side with FMC, the VVUS board could lose this proxy contest.
Our view is that, both sides in this fight are overstating their own past accomplishments to some extent. Nevertheless, activist shareholders can often unlock value because they force complacent management's to focus on executing better. In VVUS' case, other than an outright sale of the company or a partnership for either Qsymia or avanafil, it is unclear exactly how FMC would quickly unlock value. Market traction for Qsymia is primarily limited by payor coverage, a fact that will not change with a change in management. One final point for current VVUS investors to consider. Since Sarissa and FMC own 11.9% of VVUS stock, if they lose the proxy contest, there may be some selling pressure on VVUS should the firms decide to liquidate their positions.
We have no position in VVUS, but we note that the July $12.50 options straddle seems to be under-priced given that the result of the proxy fight will be known 5 days before options expire.
Prosensa (NASDAQ:RNA) and Sarepta (NASDAQ:SRPT)
Prosensa had it's debut as a public company on Friday. While the IPO priced at $13, the stock opened $7 above this price and closed the day at $19.25, or a 48% one-day gain. Prosensa together with their partner Glaxo Smith Kline (NYSE:GSK), are developing drisapersen to treat Duchenne Muscular Dystrophy (DMD). One day before the IPO, GSK discolsed that drisapersen received Breakthrough Therapy designation from the FDA. This news undoubtedly helped fuel the eager response to the Prosensa IPO.
Meanwhile shares of Sarepta Therapeutics swooned on Thursday, dropping from $39.50 to as low as $37.25 when the GSK/Prosensa news came out. Recall that SRPT's eteplirsen is a competing drug targeting DMD. While eteplirsen has shown promising results in phase 2 trials, SRPT is the most highly shorted stock in biotech as noted recently by Adam Feuerstein, Sr. Columnist for The Street.com. Having a competitor receive Breakthrough Therapy designation is naturally a development that both bulls and bears see as strengthening their own thesis. For the bulls, the fact that drisapersen received the designation implies that eteplirsen should receive it as well if/when SPRT applies for the designation. For Bears, since FDA has clearly recognized drisapersen as a potential breakthrough, implies that FDA is not giving SRPT special treatment and that the bull case of getting the FDA nod for filing for accelerated approval is very weak.
We have no view on whether or not SRPT will ultimately prevail in efforts to get the go-ahead for accelerated approval. At stake is a balance between a very small number of patients in the SRPT trials vs. the clear unmet medical need in DMD. However, with the Prosensa/GSK drug already well advanced in phase III trials (of much larger size), it is, in our view, not at all clear what FDA's stance will be with respect to eteplirsen filing for accelerated approval.
While availability of borrow for SRPT may be difficult, the fact that their chief competitor is now also publicly traded opens up new pair-trading opportunities for funds and investors looking to profit from the volatility in the DMD therapy space.
We have no position in SRPT or RNA.
Peregrine Pharmaceuticals (NASDAQ:PPHM)
Peregrine issued an oddly rambling press release this week whose title seemed to indicate "good news". In reality, in paragraph 5 of the press release the company disclosed that, in the ongoing phase 2 clinical trial in front-line non-small cell lung cancer, PPHM's Bavituximab in combination with carboplatin and paclitaxel failed to show a meaningful survival benefit over carboplatin and paclitaxel alone. In other words, the trial failed.
Nevertheless, the next paragraph in the press release suggests that, according to PPHM VP of clinical and regulatory affairs, Joseph Shan:
...recent data supporting an immunotherapy mechanism of action for bavituximab opens many new development opportunities including new combinations not previously planned and has created a lot of excitement around the potential of bavituximab in combination with other immunotherapeutic agents
PPHM has botched data analysis of recent bavituximab trials, and in general the management at Peregrine has little credibility amongst the buy side. A proper translation of the above quote is something along the lines of "immunotherapy was hot at ASCO this year so we're spinning Bavituximab as a possible immunotherapy to string retail investors along and keep our jobs."
We have no position in PPHM
Arena Pharmaceuticals (NASDAQ:ARNA)
Arena disclosed this week that its marketing partner Eisai has filed for regulatory approval in Canada. With a population of just under 35 million, Canada is a much smaller market than the US; nevertheless, ARNA and Eisai are making progress in filing for regulatory approval on a country-by-country basis. The Canada filing triggers a $500,000 milestone payment from Eisai to ARNA.
More importantly, another week of prescription data is now available for ARNA. This week IMS health reports 1829 scripts while Symphony reports 2162. Thus, according to IMS scripts grew by 68% while according to Symphony, scripts grew by 83%. Retail and buy side investors are likely to view this information in opposite ways. Let's try to understand how the buy side (who are mostly bearish on BELVIQ) look at things. Recall that, for the first week of sales, ARNA's script counts were 1087 and 1183 from IMS and Symphony respectively. However, BELVIQ did not become available at pharmacies until Tuesday June 11. Therefore, the first week only included 4 days of prescriptions while the current numbers include 5 days of numbers. Assuming that the first four days of scripts were evenly distributed (an admittedly questionable assumption), one would expect that had week one consisted of 5 full days, the script numbers would have been 1359 and 1479 for IMS and Symphony respectively. Comparing to those numbers, this weeks scripts indicate growth of 34% and 46% for IMS and Symphony respectively. This is much less than the 68% and 83% mentioned above.
Two weeks into a drug launch is too early make any sort of conclusion at all. The only thing one should intuit from these numbers is that ARNA's share price is likely to remain volatile on a weekly basis as the script numbers come in until a clear trend one way or another is established. Coincidentally, ARNA has weekly options available and these weeklies may provide the easiest way to play the weekly script numbers for those who have strong opinions about how the launch will go. As we disclosed several weeks ago, after ARNA pulled it's EU application, we sold our position since the commercial launch is not a binary event. We have no position in ARNA.
ISIS Pharmaceutical (NASDAQ:ISIS) and Amarin Corporation (NASDAQ:AMRN)
ISIS pharmaceuticals reported top-line results from a phase 2 trial of their APO-CIII drug candidate. What was compelling about this news is that, for diabetics with high triglycerides (200 mg/dl to 500 mg/dl), APO-CIII showed significant reductions of 88% for APO-CIII and 72% in fasting plasma triglycerides. Additionally, all patients treated achieved triglycerides below 100 mg/dl, and increases in HDL (good cholesterol) of 40%. These are fantastic results. Here's the catch, this study enrolled only 11 patients.
ISIS's share price jumped from $21.99 to as high as $28.54 on Monday when this data was revealed. Investors are excited both because of the clear efficacy demonstrated in this small sample set and because ISIS intends to take APO-CIII to market themselves. Recall that, a few months back, just before their Q1 earnings call, ISIS did a secondary financing and announced a change in strategy wherein the company planned to keep certain drug in-house though phase 3. Apparently APO-CIII is the first such drug.
Shares of Amarin dropped below $6 when the ISIS news came out, dropping as low as $5.36, in to the gap on the AMRN chart from 2010. The data ISIS report was in the same patient population (high triglycerides) that AMRN has applied for a supplemental NDA for their fish-oil drug Vascepa (the so-called ANCHOR population). Some writers were quick to suggest that the ISIS data means bad news for AMRN; however, a more careful observation tells a slightly different story. ISIS has clearly indicated that their strategy is to apply for FDA approval for APO-CII initially for patients with severely high triglycerides (>880 mg/dl). There are approximately 50,000 such patients in the US according to ISIS' market research. In other words, while APO-CIII may prove effective in the high triglyceride population, competition from this drug would be at least several years away as ISIS does phase III trials,gets initial approval in the severe triglyceride market, and eventually pursues label expansions. Just as AMRN is currently conducting a cardio-vascular outcomes trial (called REDUCE-IT) for the high triglyceride population, ISIS will have to do the same.
Our view is that the current investor pessimism regarding AMRN may be an attractive entry point ahead of the October Advisory committee meeting. We have no position in AMRN but we will be watching the chart closely to see if investor frustration leads to AMRN breaking down further into the gap in the chart which extends down to $3.55.
Dendreon (NASDAQ:DNDN)
Dendreon received a positive opinion from the EU CHMP recommending approval of Provenge for treatment of prostate cancer. Recall that DNDN was approved in the US in 2010. At that time, the company's market cap was a lofty $5 billion. Since then, the commercial launch has been fraught with delays, difficulties, and slow uptake due to early reimbursement challenges. When the CHMP opinion news came out, DNDN (which now sports a market cap of just $627 million) spiked up to $4.79. There was a gap in the DNDN chart from May. The spike on Friday filler that gap, but DND went on to close the day at $4.12, essentially unchanged from the previous day. Clearly the market does not expect the addition of the EU market to cause a significant enough inflection in Dendreons' sales trajectory to award the stock with a large increase in market cap. File this market reaction under "fool me once shame on you - fool me twice, shame on me".
Onyx Pharmaceuticals (NASDAQ:ONXX)
On Friday after the market closed, the financial post, a newspaper in Canada ran a story indicating that Amgen (NASDAQ:AMGN) had allegedly offered $120 per share to acquire Onyx. The story included quotes from a letter allegedly written by AMGN management to ONXX. Immediately in after hours trading, ONXX spiked to $109 per share. On Sunday, June 30th, Onyx issued a press release confirm the receipt of an unsolicited offer from Amgen. The Onyx board rejected AMGN's offer as too low, and has engaged financial advisors and instructed them to contact potential acquirers. In other words, ONXX is in play. A fair value for ONXX may be around $140 per share according to analysts at Deutsche Bank .
Onyx' board provides an example of a bona-fide interest in putting the company up for sale, in sharp contrast to the circus at Elan which we've been covering for several weeks. (NYSE:ELN). As soon as ONXX received an unsolicited offer, the board analyzed it, decided to reject, and decided to put the company up for sale. This establishes a floor for any transaction at $120 per share, while telegraphing to the market that ONYX will sell at the right price.
We expect ONXX to trade well above $120 on Monday. Furthermore, other mid-cap biotechs with promising pipelines may also see an uptick as the market anticipates that unsuccessful bidders for ONYX may look for other companies to buy. We have no position in ONXX.
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