This Biotech May Well Buck the Trend

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For quite some time now the biotech industry has been demonstrating a perceptible inclination towards discovery of drugs for ultra-orphan diseases. Understandably so because orphan drugs demand a high price in the market. In such a scene, Alkermes plc (NASDAQ: ALKS) has adopted a counter-cyclical strategy and chosen to target chronic diseases.

Alkermes focuses on unmet medical needs in specific patient segments. In simple language, the company is using its capabilities in drug delivery and formulation technology for developing new and improved therapeutics that can outperform existing top selling drugs for chronic diseases.

ALKS 3831 – a new therapeutic for schizophrenia

Alkermes has announced commencement of Phase II study of ALKS 3831 for treating schizophrenia. This is basically a combination of samidorphan (ALKS 33) and Zyprexa (olanzapine), Eli Lilly’s approved drug for treatment of schizophrenia and bipolar disorder. Samidorphan is a selective opioid antagonist being investigated for treatment of patients addicted to alcohol and cocaine. The double-blind, active-controlled, dose-ranging study in approximately 400 patients with schizophrenia will study the safety and tolerability of ALKS 3831.

Earlier, Phase I results of ALKS 3831 demonstrated that weight gain in patients on ALKS-3831 was significantly lower (average 2.5 kg) as compared to average 3.4 kg gained by patients taking Zyprexa. Phase II now investigates the safety and utility of the candidate for patients diagnosed with schizophrenia as well as substance abuse disorder – nearly 50% of schizophrenia patients also have substance abuse disorder.

ALKS 33 is also being studied by Alkermes as a combination product (ALKS 5461) as an antidepressant, where it is mixed with buprenorphine. Whereas buprenorphine demonstrates antidepressant effects, it is not being studied any longer as a standalone anti-depressant because of its mu opioid-agonist effect that leads to substance abuse. ALKS 5461 is in advanced stage Phase II clinical trials after having demonstrated promising results in mid-stage results.

A safer MS drug than Tecfidera

During clinical trials Tecfidera, from Biogen Idec (NASDAQ: BIIB), a dimethyl fumarate prodrug, demonstrated that it was not only more effective, but also safer than existing MS drugs. Approved as a first line treatment for relapsing MS in March 2013, the commercial launch of Tecfidera was a huge success and exceeded street expectations. Analysts expect sales to cross $70 million in Q2 2013 and $400 million in FY 2013. Although actual sales figure for the drug will be known only by Thursday, when the company reports its quarterly figures, with expectations of sales exceeding $1 billion in 2014, it may well become a blockbuster drug for Biogen.

Biogen reported a net income of $426.75 million or $1.96 per share on revenue of $1.42 billion. Analysts expect the company to report EPS of $1.83 for Q2 and $2.07 for Q3 2013. The company beat street expectations three times out of the last four quarters. It would not be unreasonable to expect a significant surprise this quarter too.

Alkermes’ multiple sclerosis program (two candidates) attempts to evaluate an enhanced prodrug of the active ingredient in Tecfidera that can be taken once a day. Early stage trials demonstrated that it may be safer than even Tecfidera. The company hopes to apply for FDA permission for testing on humans in 2014, with the goal of starting Phase I study by mid-year.

Taking the pain away from painkillers

ALKS 7106, Alkermes’ candidate for pain management attempts to take away the stigma of substance abuse from pain killer drugs. ALKS 7106 is an opioid-based analgesic designed for pain relief with low risk of substance abuse. The company will soon present pre-clinical data showing that ALKS 7106 was more potent as an analgesic than morphine and was well tolerated even in doses higher than required for analgesic action. If successful, it has all the making of becoming a key theme in the pain killer drug space after Oxycontin. 

However, abuse resistant drugs have not been very successful in the past and it will be interesting to see how things unfold for Alkermes’ candidate. In addition, the FDA comes down pretty hard on potential addictiveness of a drug.

Orphan drugs versus drugs for chronic diseases

Orphan drugs present a huge potential for profit provided the company has the wherewithal to spend huge amounts on research and development. For example, Alexion Pharmaceuticals (NASDAQ: ALXN) has only a single drug, but the stock is still valued above $21 billion just because it offers Soliris, the world’s most expensive drug . Approved for treatment of a rare blood disorder – paroxysmal nocturnal hemoglobinuria, it costs $409,500 per year per person.

Alexion reported EPS of $0.58 (net income of $82.22 million) for Q1 FY 2013 on revenue of $338.94 million. Analysts expect the EPS to grow at a healthy rate of 43% in 2013 and average rate of 25% over the next five years. Those are very good figures for a single drug for a rare disease, which goes to prove how profitable the orphan drug market has become.

However, the potential of improvement in existing drugs cannot be denied. If successful, an enhanced version of a blockbuster drug can eat into its market in a big way. Moreover, in most cases the cost of developing a drug for treatment of a rare disease is beyond a small biotech’s resources and sometimes more than what the company can recover.

Investor’s viewpoint

Alkermes has chosen to go against the trend of targeting orphan diseases. Besides the three candidates discussed above, Alkermes will also be presenting preclinical data for RDB-1419, a novel cancer immunotherapy based on Interleukin-2 and its receptors, to show that it “preferentially expanded the number of tumor-killing cells involved in immunotherapeutic effects on cancer”.

For investors however it presents a difficult situation. On one side is the fact that its revenue surged 48% in 2013 and cash flow, crucial for funding research activities, improved seven fold. On the other side, the company’s share price has also appreciated nearly 70% since January this year.

Considering everything, I hold the opinion that Alkermes presents a reasonably good opportunity for long term profit. At this point in time I would ignore the high valuation and buy the stock for a long haul.

Dr. Kanak Kanti De has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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