Three Outside the Box Biotechs

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By George S. Mack of The Life Sciences Report

I had a really nice chat with Griffin Securities analyst and scientific director Keith Markey about a wide-ranging group of topics. My goal is to always talk about individual biotech and sometimes medtech stocks, but we got started on another subject right away. Although he’s been an analyst for 25 years now, Markey started his career as a molecular biologist doing wet lab bench research. So, I thought my first and most natural question would be about how the biotech industry has changed from the drug discovery perspective. He says it hasn’t, at least in one sense. “It’s still about the biochemical pathways,” he says. “They still pave the way to new therapeutic approaches. It was basic research that led Genentech and Amgen to pursue their initial drugs, a tissue plasminogen activator (tPA) and erythropoietin,” he says. He’s talking about Genentech’s Activase (alteplase) for acute stroke and acute massive pulmonary embolism and Amgen’s Epogen (epoetin alfa) which was developed to stimulate production of new red blood cells. “That's still pretty much true for the industry today,” he says. These days Markey looks at every company from that same perspective. He wants to understand, first, the science then the unmet need next.

That’s how he’s arrived on his best idea, MannKind (NASDAQ: MNKD) with its inhalable insulin product called Afrezza (human insulin of recombinant DNA [rDNA] origin). The company has seen its share of controversy and debate by the investment community, and in its existence, the company has been issued two complete response letters (CRLs) by the FDA which amounted to big setbacks along the way. After developing the product with initial inhaling device, the company had to start over, this time with a smaller palm-sized inhaler that can be used discretely at the dinner table with a brief hand-over-mouth maneuver. Patient friendliness and expediency were a major part of the rationale for making the change, but FDA wanted to see this product work, not in a small trial, but in a great big one to see if data would yield the same bioequivalence as the original device. In short, it’s not only about top-line glucose control, but also about knowing that the insulin and the delivery device together will lower hemoglobin A1c (A1c) levels enough to satisfy regulators. A1c measurement is vital because it represents how well glucose levels have been maintained over prior weeks, not just today. Now we’re waiting results of two phase 3 clinical trials, the Affinity 1 for type 1 and Affinity 2 for type 2 diabetes. Both sets of data will be delivered in mid-summer and if the results are what Markey expects, the new drug application will be filed in early October.

MannKind founder and CEO Al Mann is passionate about diabetes. He told me back in 1998 when we were discussing his insulin pump company MiniMed which would later be acquired by Medtronic, “I don’t work for money anymore.” He continued, “I’m giving away my money.” Indeed, he gave $112.5 million to USC, and he was in process of giving a similar amount to UCLA to further diabetes research. Mann is obsessive about glycemic control because he has seen the cause-effect result of uncontrolled blood glucose on cardiovascular disease. The point is, Mann stands ready to fund MannKind’s Afrezza to completion, whatever its needs. He has said recently that the company plans to charge about $2,000 ($2K) per year per patient for Afrezza. There are 19 million (19M) diagnosed diabetics in the U.S. alone. Imagine better blood glucose management and no multiple daily needle sticks. You can do the fourth-grade math yourself to see the market opportunity.

Markey shared two more ideas with me, and one was decidedly un-biotech. Surprisingly he follows a syringe and needle product firm called Unilife (NASDAQ: UNIS). But after you get to know the company a bit, maybe it’s not so unexpected. Just follow his thinking a bit. “It's a company that has a novel platform of safety devices for delivering drugs,” he says. “Its main technology rests with a fully incorporated safety system that's built into a normal-looking syringe. It gives the user control over the rate of retraction of the needle once the drug has been administered.” Of course I want to know how a $216 million market value company can compete with the multibillion companies that have huge sales channels and extraordinary marketing experience. Certainly the big disposable supply manufacturers can come up with safety devices and prefilled and mixing syringes, can’t they?

Now we come to Markey’s growth thesis. “The difference between the major syringe manufacturers like Becton, Dickinson & Co. (NYSE: BDX) in particular, the largest (disposable syringe and needle company),” he says, “Is that Unilife is specifically targeting the pharmaceutical industry with its devices rather than going into the end-user market, which would be the hospitals, physicians' offices and that sort. As a result, it doesn't need as large a sales force, first of all. Secondly, if and when it gets contracts with a pharmaceutical drug company, those contracts will probably be in effect for several years, and they will not be really subject to the level of competition that would just be between two different syringes.” Markey then explains the value proposition. Why does this company have pricing power? “The Unifill syringe, which is the company’s basic safety syringe, looks exactly like a regular syringe, and it takes up only as much space as a regular syringe, which is very different than the other types of safety syringes that have sheaths that have to be deployed or other types of add-on devices that come with them.”

He’s last story, not unlike Unilife, is tied to the big pharma market. Ligand Pharmaceuticals (NASDAQ: LGND) is a producer of excipients, which are carriers that enhance the effect of drugs. An excipient is an inert ingredient that acts as a vehicle for an active ingredient. In early 2011 Ligand bought specialty pharma CyDex that had built its business model around a sugar ring-based compound called Capitisol (β-cyclodextrin or SBE-CD), which is presently formulated into five drugs approved by the FDA and marketed by large pharma partners. After the drug is ingested, the active ingredient dissociates from the Capitol ring. “We’re looking for a number of very good things to be occurring over the next two years with the company,” says Markey. “Most importantly, I believe we'll be seeing significant increases in royalties from a drug called Promacta (eltrombopag). It's a thrombolytic agent sold by GlaxoSmithKline and generates multitier royalties for Ligand,” he says.

“The other major contributor to revenue is going to be Onyx Pharmaceutical's (NASDAQ: ONXX) anticancer drug, Kyprolis (carfilzomib). Kyprolis was approved in July of last year for multiple myeloma. Ligand recognizes royalties on a one-period lagging basis, and therefore Kyprolis really didn't contribute much of anything to Ligand's 2012 results. The same kind of thing also applies to Promacta.” In November 2012 the FDA approved Promacta for thrombocytopenia resulting from hepatitis C (HCV). This was an expansion of the label, which is going to be significant because HCV is a much bigger indication than is the idiopathic thrombocytopenia that the drug was originally approved for. “So we're looking for a nice ramp in revenues from both of those products over the course of this year and the next,” he says.

To read the entire interview with Keith Markey, visit The Life Sciences Report.


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