Betting on Blockbusters

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

Global biotechnology industry revenue is expected to reach $262 billion this year showing growth of around 12.7% year over year. This industry has witnessed a rally in the stock price in the last year. This optimism around pharma and biotech companies will continue because of innovative drugs for unmet needs. Companies in this industry are focusing on R&D, which will help these companies create new drugs in the near future.

In this article, three biotech companies that are comparatively smaller in terms of market cap are analyzed. These companies are worth knowing about with some innovative products in the pipeline that have potential to become blockbusters. Let’s see if these products will result in the improved earnings.

Xyrem and Erwinaze growth

Jazz Pharmaceuticals (NASDAQ: JAZZ) has better growth prospects supported by its major revenue contributor drug ‘Xyrem.’ Xyrem is an oral solution for the treatment of cataplexy and excessive daytime sleepiness, or EDA, in patients with narcolepsy, a serious neurological disorder. It is the only drug approved by FDA for the treatment of cataplexy and EDS in narcolepsy.

Xyrem treated 19.7% of the total patient prevalence in 2012, is expected to treat 22.4% in 2013, and 23.2% in 2014. This will result in higher sales for this drug in the future. The Xyrem sales in the U.S are expected to rise to $546.9 million this year and $613.8 million next year from $378.6 million last year.

Jazz started the clinical trial on ‘Erwinaze’ in 2012 for treatment of patients suffering from acute lymphoblastic leukemia, or ALL. ALL is a type of cancer of the white blood cells characterized by excess lymphoblasts. The drug is used to treat patients with hypersensitivity to Oncaspar. Oncaspar is an enzyme used as an antineoplastic agent in chemotherapy for first line treatment of patients with ALL.

Jazz’s team is educating physicians and nurses to recognize hypersensitivity to Oncaspar correctly. It is not easily identifiable and can limit continued use of Oncaspar. Early identification will help patients while providing 20% more patients for Erwinaze.

It is expected that a new version of Erwinaze, named Asparec, will also be introduced this year, pending FDA approval. The new version will have the advantage of lower cost and a shorter production cycle. With the increase in patients, the sales of Erwinaze will rise to $163.7 million this year and $176.1 million next year compared to $72.1 million last year.

Stivarga approval in Japan and Kyprolis sales growth 

Onyx Pharmaceuticals (NASDAQ: ONXX) receives 20% of global sales as royalties from ‘Stivarga’ in oncology under its agreement with Bayer. Stivarga is developed by Bayer and promoted jointly by Onyx and Bayer in the U.S. It received FDA approval in September for the treatment of patients with metastatic colorectal cancer, or mCRC . The company also received approval of Stivarga for treatment of gastrointestinal stromal tumor, or GIST, in February.

Additionally, Onyx received approval of Stivarga in Japan for treatment of mCRC in March. Colorectal cancer is the third most common cause of cancer deaths in Japan with around 40,000 people dying every year from this disease. With its potential to become a blockbuster drug, Onyx’s 20% share will increase its revenue. Overall, this drug is expected to reach annual sales of $3 billion by 2020.

In July, the FDA granted approval of ‘Kyprolis’ for the treatment of patients with multiple myeloma. Kyprolis will remain the key driver of growth for the company.

Onyx presented data at American Society of Clinical Oncology, or AGCO, on Phase 1 and 2 studies on June 5. In these phases 68 elder patients with multiple myeloma were treated with Kyprolis in combination with melphalan and prednisone. Out of the 68 patients from both phases, 91% of patients responded to treatment with 6% complete response and 50% good partial response.

The median progression free survival, or PFS, was 22 months. PFS is the length of time during and after medication which a disease, like cancer, is being treated and the person lives with the disease, but it does not get worse. It is used as a metric to determine how well a new treatment is working.

The company is working on new combinations to treat patients with multiple myeloma to drive sales of Kyprolis. It is expected that Kyprolis sales will reach $64.1 million in the fourth-quarter with year-over-year growth of 41.4%.

New ADC collaboration and pancreatitis issue

On June 25, Seattle Genetics (NASDAQ: SGEN) announced a new antibody drug conjugate collaboration, or ADC, with Bayer Healthcare. ADC’s are a new class of biopharmaceutical drugs used as therapy for treatment of cancer. This collaboration will give Bayer the right to sell Seattle Genetics’ auristatin based ADC technology with antibodies to oncology targets worldwide.

For this right, Bayer will pay $20 million upfront and option exercise fees. The company will further receive a $500 million milestone payment and royalties on worldwide net sales products under collaboration in the long run. It is expected that total royalty income will rise to $10.39 million this year and $11.70 million next year compared from $5.06 million last year.

Seattle Genetics has more than 15 ADCs in clinical development using its technology. It is expected that in the long term, once these drugs reach to their peak sales, Seattle can receive around $3.5 billion as milestones and royalties payments from these collaborations.

‘Adcetris’ was approved by the FDA for treatment of Hodgkin lymphoma, or HL, and systemic anaplastic large cell lymphoma, or ALCL, in 2011. HL and ALCL are types of blood cancer. Recently, the clinical trial of Adcetris was halted due to safety issues related to pancreatitis. However, it is too early to draw any conclusion until additional details of pancreatitis in other clinical trials are available.

This drug is also being tested for use against other diseases, which will enhance its total addressable market. It is expected that this product will generate total sales in terms of product sales and royalties of $143.3 million in fiscal year 2013 and will reach to $260.9 million in fiscal year 2014. However, negative data about its safety could reduce its growth prospects.

Conclusion

Onyx Pharmaceuticals’ Stivarga approval in Japan in addition to Kyprolis sales growth provides strong prospects for the future. Jazz Pharmaceuticals increased use of Xyrem in treatment and Erwinaze’s new version will boost its sales. These two stocks are a Buy.

Seattle Genetics' collaboration with Bayer bodes well for the future, but the recent Adcetris trial was halted due to pancreatitis issues. Hence, I recommend holding this stock and waiting for the news related to its safety profile before taking any new position.

The Motley Fool's chief investment officer has selected his No. 1 stock for this year. Find out which stock it is in the special free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.


Madhukar Dubey has no position in any stocks mentioned. The Motley Fool recommends Seattle Genetics. 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!

blog comments powered by Disqus