Mehta Biotech Capital: Week 10 Update

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Depending how you were positioned, this last week was one of the most entertaining, educational, and wild of the year. And the sell the news phenomenon that we wrote about previously was in full force yet again.

Valeant Pharmaceuticals’ (VRX) sales process –fulfilled through a series of interconnected specialty pharmacies – has come under major scrutiny. Exposed initially by the Southern Investigative Reporting Foundation, Citron Research took the curiosities mainstream on Wednesday likening the company to Enron; the stock fell 40%. Citron posits that Valeant’s ties to Philidor Rx Services, and a web of similar pharmacies, scratch the surface of more sinister and possibly fraudulent behavior – channel stuffing, phantom revenues, etc. And where there’s one cockroach, there are usually a whole lot more.

Wall Street adored VRX for the last 4 years, taking the stock from $50 to $260 as the company pursued an aggressive roll-up of increasingly larger pharmaceutical companies. Valeant even made a grab for Allergan (AGN) in 2014 with the support of Pershing Square’s Bill Ackman. That takeover was vehemently rebuffed, with Allergan calling Valeant’s acquisition-fueled growth a “house of cards.”

Now, Valeant sits on ~$20 billion in debt – no small feat for a company with a market cap of $40B as of the end of this week. The company has also received a subpoena from state/federal investigators seeking more information on how the company distributes its drugs, and legislators (Senator Bernie Sanders and Representative Elijah Cummings) have requested information as well.

Valeant has been silent since the Citron report, save for a single press release on Wednesday. But on Thursday the company said they’ll host a conference call to address the issues. Our suspicion is that Philidor, the apparent linchpin to this story, may actually be the one with major problems, and that Valeant may have been duped here, in which case Valeant needs to distance itself entirely in order to restore investor’s faith.

Even if that is the case — and that’s a big ‘if’ — it may be too little too late. The specialty pharmacy model, fervently embraced by Wall Street for the last few years, seems to be losing its sheen. Horizon Pharma (HZNP), also known for buying and increasing the price of undifferentiated products, is down 50% in two months. Depomed (DEPO), Pernix (PTX), and Retrophin (RTRX) have been similarly struck down.

Bluebird Bio (BLUE) had its own freefall moment this week when an investigator from one of its earliest trials said that a patient treated with a predecessor version of Lentiglobin, BLUE’s lead gene therapy candidate, had essentially relapsed.

Patient 1003 from the LG001 study suffers from the rare blood disorder beta thalassemia, but had not required typical blood transfusions since receiving the gene therapy 7 years ago. Bluebird said this week that the patient experienced clinical symptoms of anemia, requiring two blood transfusions, though the patient’s HbAT87Q and vector count number “remained largely unchanged.” The older product utilized a HPV569 vector to deliver the corrective gene, and we have previously explained why the “relapse” should not be viewed as a game-changer for the current version of Lentiglobin, which is enabled by BB305.

On Wednesday, Relypsa Inc (RLYP) received FDA approval for Veltassa (patiromer), an oral suspension product for the treatment of hyperkalemia, or high potassium. Veltassa is non-absorbable and moves through the gut unchanged, absorbing potassium along the way for excretion.

But RLYP was punished with the approval. Investors take issue with Veltassa’s label, which prohibits use within 6 hours of other oral drugs due to the potential for unintended binding, reducing the effectiveness of either. We note that Relypsa DID receive the once-daily dosing they had hoped for in the Veltassa label.

The dosing issue is likely addressable. The company will run drug-drug interaction studies over the coming months to confirm that Veltassa does not interact deleteriously. And the market for hyperkalemia products is large, though a competitor, ZS Pharma, is right on Relypsa’s heels. In this market, though, investors aren’t taking anything for granted.

Merrimack Pharmaceuticals (MACK) is a perfect example. The stock was crushed intraday when the FDA approved ONIVYDE (irinotecan liposome injection) in combination with fluorouracil (5-FU) and leucovorin for 2nd-line pancreatic cancer. The stock pared most of its losses by the close of the week. Biotech investors still have itchy trigger fingers.

While negative headlines abound, it’s worth noting that the biotech sector has continued to hold above its recent lows over the last few weeks. We’ve explained before why this is the first step towards a rebound, and this week we again explained to Mehta Biotech Capital subscribers exactly what to look for before getting more involved on the long side.

You can learn more about Mehta Biotech Capital here: