Mehta Biotech Capital: Week 2 Update

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Bloomberg reported at noon on Friday that Baxalta Inc (BXLT), the recent Baxter (BAX) spin-off, was in talks to buy a hematology and oncology specialist valued at about $2 billion. That was enough to get ARIA moving considering the company’s $1.4 billion market cap, evaluation of strategic alternatives, and activist involvement this year seeking a replacement CEO. Within two hours Bloomberg said that sources confirmed Ariad as the target, and the stock legged up yet again into the close.

Baxalta is in the middle of its own takeover defense, since Shire plc (SHPG) went public with an all-stock takeover proposal earlier this month. Baxalta rejected the initial offer and has discussed its own interest in acquiring hematology products since. Ariad does, in fact, fit the bill considering the company’s existing hemophilia franchise and a somewhat lackluster oncology pipeline [our view, not Baxalta’s].

Since being hit with a more restrictive label late in 2013, less than a year after its initial approval, sales - and expectations - for Ariad’s only marketed product Iclusig (ponatinib), have waned. Iclusig sales were $27.8 million in the second quarter, up 16% from the first quarter. The company expects sales of $130-140 million in 2015. Three large studies will begin yet this year in hopes of moving the drug further upstream in the Chronic Myeloid Leukemia treatment paradigm. Currently, the drug is restricted to T315I-positive patients or those for whom no other tyrosine kinase inhibitor is indicated. Label expansion and two earlier TKIs in development are where investors see value to be had in what’s been a divisive name for years.

Ariad has been the subject of takeout rumors in the past, reported twice by the Daily Mail in 2014. Whether this time is any different remains to be seen, but the news sets the sector up for yet another “M&A Week” which will be well-received by most biotech investors.

The floated rumor on Friday helped lift some biotech stocks into the green, and some M&A in the sector would undoubtedly renew optimism about the sector. Even before the broad market flush on Monday, the iShares NASDAQ Biotech Index Fund (IBB) was down 15% from July highs, and was off 28% at its lows on Monday.

We wrote about the current state of the markets in a note to Mehta Biotech Capital subscribers on Friday. Currently, it’s China’s slowing economy and concerns about U.S. inflation and policy easing weighing on U.S. markets. The question is whether there’s good reason for continued weakness - or downside. We explained our thinking and highlighted one stock that’s down 50% in the last few months that - in our view - is absolutely worth owning for the astute biotech trader.

Also this week, Sarepta Therapeutics (SRPT) announced a February 26, 2016 PDUFA date along with the filing of its New Drug Application for eteplirsen in Duchenne Muscular Dystrophy. That puts eteplirsen’s approval decision just two months after a competing drug from Biomarin Pharmaceuticals (BMRN), drisapersen. The two are expected to face back-to-back meetings with an expert FDA advisory panel this November. On Wednesday, we briefly outlined the Street’s expectations.

Finally, Sunday morning was big for The Medicines Company (MDCO), which offered up a first look at its cholesterol-lowering ALN-PCS at a medical conference in Europe. ALN-PCS is an RNAi therapeutic targeting PCSK9, which differs from Regeneron (REGN) and Amgen’s (AMGN) recently approved PCSK9-inhibiting monoclonal antibodies in that it affects PCSK9 synthesis in the liver, whereas the approved injectables work in the blood. The drug was licensed from Alnylam (ALNY) two years ago.

In the phase I study, ALN-PCS reduced LDL by as much as 83%, though perhaps most interesting is the drug’s 39-44% average LDL-C reduction (across a number of doses) at 140 days after a single injection. That opens the door to once-quarterly dosing, compared to PCSK9 antibodies that require dosing twice monthly, and MDCO thinks twice-yearly might be a possibility. The drug is still 4-5 years from the market and this is a small dataset from which to draw hard conclusions, but the results are certainly ahead of expectations. Expect MDCO to trade up in the short-term.

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