A Good Biotech Stock to Own for the Long Haul

Kanak is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Astex Pharmaceuticals (NASDAQ: ASTX) released its Q2 FY 2013 numbers, reporting a net loss of $4.18 million or $0.04 per share on revenue of $16.62 million. Astex is a small company involved in the discovery and development of small molecule therapeutics for treatment of cancer and blood disorders and derives all its revenue from a single drug, Dacogen.

Dacogen – down but not out

In the US, Dacogen is approved as a treatment of MDS or myelodysplastic syndromes, a condition where blood cells become dysfunctional. In Europe, it is used for treating AML or acute myeloid leukemia in elderly patients not suited for the standard induction treatment.

Approved since 2006, Dacogen went off-patent in March 2013 and lost its orphan drug exclusivity in May. With no generic version in the market as yet, revenue in second quarter FY 2013 was up 15% year-on-year. At $16.6 million it was $1 million more than what analysts were expecting. Net loss of $0.04 per share was also lower by 2 cents than the average estimate.

Dacogen’s main competition is with Celgene’s (NASDAQ: CELG) Vidaza, which is the second largest contributor to the company’s revenue. Approved in 2004, the patent on Vidaza expired in 2011 but until now no generic version has appeared in the U.S. However, going by the company’s plans for the future, competition from generics is likely by January 2014. Its patent in Europe expires in 2018 end.

Celgene sells much more of Vidaza than Astex manages to sell Dacogen. While sales of Dacogen in the U.S. amounted to $250 million in the last twelve months ended July, Vidaza contributed that much in the second quarter alone.

Developed by Astex, Dacogen, is licensed to Eisai Inc. and Johnson & Johnson. Dacogen still has patent protection in Europe as it was approved for treatment of AML in Europe only in September last year. Despite that, Astex expects royalties from Dacogen to drop in 2013.

That’s not the end of it

Knowing very well that Dacogen is its bread and butter, Astex is underway in the development of an improved version of Dacogen, which it has named SGI-110. Administered subcutaneously, it is currently in Phase 1 clinical trials with the primary objective of defining lowest dose that achieves maximum improvement in pharmacokinetic profile and maximum tolerated dose. Essentially, it is designed for Dacogen’s active ingredient, decitabine, to remain in the blood for a longer period so that it is more effective.

Keeping in mind that it can no longer depend solely on Dacogen, the company is evaluating AT13387 for refractory gastrointestinal stromal tumors (GIST), Castration Resistant Prostate Cancer (CRPC) and ALK positive Lung Cancer. It has recently moved on to mid-stage clinical trial after positive results from Phase I study.

Another pipeline product, ASTX727 is a combination product comprising of Dacogen’s active ingredient and E7727, licensed from Eisai. It is intended to be a fixed dose product for efficient absorption of Dacogen in lower doses. The company intends to file an investigational new drug application by the year end.

Companies such as Novartis (NYSE: NVS) and AstraZeneca that are using Astex’s Pyramid discovery platform for development of new products have also reported significant progress. Novartis has multiple studies in Phase I and II that focus on LEE011, a CDK 46 inhibitor, for treatment of breast cancer and melanoma. AstraZeneca has five studies in Phase I and Phase II for its candidate for advanced sold tumors, AZD5363.

Novartis reported an increase of 3% in net sales and 2% in operating profit for the second quarter 2013. Its investigative drug, RLX030 for treatment of acute heart failure (AHF), demonstrated a 37% decrease in mortality at six months after an episode as compared to traditional treatment. The drug was granted breakthrough status by the FDA in July this year. There is a lot riding on the success of this drug as there hasn’t been a treatment breakthrough for AHF in the last twenty years.

This is the second Novartis drug to be granted breakthrough status in two months. In June the company’s investigational drug, LDK378 was granted breakthrough status after it demonstrated a noticeable clinical response in patients with anaplastic lymphoma kinase positive (ALK+) metastatic non-small cell lung cancer (NSCLC).

The road ahead

Despite encouraging second quarter results, which led Astex to revise 2013 revenue projection to $63 million, up from the $55 million estimate announced earlier, revenue in 2014 can only drop due to Dacogen’s patent expiration in the U.S. Additionally, as the CEO said in the earnings report, R&D expenses are likely to go up due to drugs moving to late stage trials.

Of importance is the fact that despite going off patent, revenue from Celgene’s Vidaza increased in 2011 as well as 2012 –32% and 17% respectively – to reach $823 million. This was primarily due to non-appearance of generics, and a similar situation can be expected for Dacogen as well. Vidaza and Dacogen are the only two drugs in their class and difficult to copy/manufacture, making production of generics expensive.

In addition, being similar in structure as Dacogen, SGI-110 stands a good chance of getting FDA approval. If approved, it has the potential of becoming a blockbuster drug and turning the Astex story around.

My take

Astex is a small-cap company with a market cap of only $500 million. However, a lot of growth in biotech has been in oncology, and as discussed above, Dacogen may be down but is not out. From an investor’s point of view, I believe that Astex has a good potential for growth in the long run – say, two to three years.

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Dr. Kanak Kanti De has no position in any stocks mentioned. The Motley Fool recommends Celgene. 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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