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Hepatitis C and Orphan Diseases Driving Big Biotech Potential: Geoff Meacham

By Mike Volkin

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Published: 25Feb2012
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It may seem counterintuitive that rare diseases might actually be biotech growth drivers, but Senior Analyst and Managing Director Geoff Meacham of JPMorgan Chase makes just that case. In this exclusive interview with The Life Sciences Report, Meacham lays out his premise that hepatitis C and orphan disease drugs can cure the woes of growth-starved investors.

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The Life Sciences Report: Geoff, what is your current theme?

Geoff Meacham: We were very bullish on the biotech group in 2010 and 2011. Fundamentals are still very good, but I would say we're more cautious on the performance of the group for all of 2012. One of the things we pointed out in our 2012 Global Biotech Outlook is that the tone of the group before 2012, literally last fall, was very negative. We offered a couple of ideas of what could change the sentiment very positively. It turns out that a lot of that stuff actually happened. Deals happened like the Bristol-Myers Squibb (BMY:NYSE) $2.5 billion (B) acquisition of Inhibitex Inc. (INHX:NASDAQ). That caused a lot of buzz at our J.P. Morgan Healthcare Conference that we just had in San Francisco.

The second thing that happened is that a lot of drug launches that previously were thought to be left for dead, for example, Dendreon Corp.'s (DNDN:NASDAQ) Provenge (sipuleucel-T) for prostate cancer and Human Genome Sciences' (HGSI:NASDAQ) Benlysta (belimumab) for systemic lupus, have actually rekindled and we have seen an uptick. Dendreon's most recent quarter was good as was Human Genome's. The U.S. launch of Regeneron Pharmaceuticals Inc.'s (REGN:NASDAQ) Eylea (aflibercept) straight out of the gates following FDA approval in November was good. I wouldn't say that the attitude or tone toward drug launches is strong right now, but it's not nearly as negative as before.

The combination of those things has really set the group on fire to start the year. Our message to institutional clients is that we would not broadly chase the group, however. We still feel like the European economic uncertainty is likely to be a little bit of a headwind. The upside potential to revenue estimates is really what drives a lot of these stocks, and it looks more limited this year than in prior years. That's our sector tone. It's good, but not very bullish for this year.

TLSR: Geoff, is there a sweet spot in the market currently as far as therapeutic focus?

GM: Yes, it is hepatitis C virus (HCV). We've been talking about that for about two years, and it is still going to be a tremendous source of interest and innovation, no doubt about it. I think what's attracted a lot of people is that you can derisk a hepatitis C asset relatively early. A phase 2 study with a few hundred patients, or maybe even fewer than 100, can inform the design and likely outcome of a larger phase 3 study. We've seen Pharmasset Inc. [acquired by Gilead Sciences Inc. (GILD:NASDAQ) for $11B on Jan. 17, 2012] and its robust opportunity with PSI-7977 in hepatitis C. Then in relatively small groups of patients, we've seen Inhibitex with its INX-189 in phase 2. My suspicion is that Idenix Pharmaceuticals Inc. (IDIX:NASDAQ) is probably another [acquisition] candidate, given that it is in hepatitis C and is in the so-called nuc (nucleotide or nucleoside analog) class space with IDX-184 in phase 2b. This nuc space is really hot right now. So hepatitis C is a sweet spot.

I also feel like orphan diseases are a sweet spot. In this case, ViroPharma Inc. (VPHM:NASDAQ) with its Cinryze (complement C1 esterase inhibitor) for hereditary angioedema (HAE) has had a huge run of late. I think it probably still has some upside although more limited than a name like an Alexion Pharmaceuticals Inc. (ALXN:NASDAQ) which had a big, big move last year. Alexion has its orphan disease drug Soliris (eculizumab) for paroxysmal nocturnal hemoglobulinuria (PNH), and it was also approved for its second indication atypical hemolytic uremic syndrome (aHUS). We also like the potential of Alexion's new asset ENB-0040 (asfotase alfa) for the very rare disease hypophosphatasia (HPP) that came with the acquisition of Enobia Pharma Corp. That looks pretty robust.

Then on the smaller-cap side in orphan diseases, InterMune Inc. (ITMN:NASDAQ) is a stock that we've liked a lot. It has really been decimated. The performance this year is okay, but last year it dramatically underperformed on fears of a weak launch in Europe for its drug Esbriet (pirfenidone) for idiopathic pulmonary fibrosis (IPF). But it does look like the patient demand is there.

Hepatitis C and these orphan indications are two therapeutic categories I would point to that could continue to do well in 2012.

TLSR: What about the sweet spot in market cap?

GM: In large cap, and by large cap I really mean the biggest ones, there is Celgene Corp. (CELG:NASDAQ), Amgen Inc. (AMGN:NASDAQ), Biogen Idec Inc. (BIIB:NASDAQ) and Gilead Sciences. We also like Vertex Pharmaceuticals Inc. (VRTX:NASDAQ).

TLSR: Going back to HCV for just a moment, what is it about the disease that allows you to derisk a proposed drug so early in a phase 2 trial powered with as few as 100-200 patients, say compared to an oncology candidate?

GM: When you have an oncology asset, most companies will look at a drug in a variety of tumor types. So they will do a phase 1 all-comers' trial that could include breast cancer, colon cancer and lung cancer, and these are going to be very, very refractory patients. Usually, you'll see the drug have some activity, and that guides you for the next trial, which would be a dose-finding study. Then you try to figure out if there's a subset within a certain tumor type that looks good. Then your larger phase 3 trial is oftentimes based on tenuous assumptions when it comes to either overall survival (OS) or progression-free survival (PFS). A lot of companies will go into a phase 3, having very good response rate data, but not really knowing whether that is going to lead to PFS or OS net benefit.

With hepatitis C in a phase 1 or phase 2 trial you gain experience in a much more finite number of variables, and so you can figure out who your best and worst responders are. Oftentimes, if you have data in 100 patients, that actually turns out to be very predictive of something in a much larger phase 3 setting of 500 or 800 patients. Although the rate of clinical trial failures is probably higher due to unforeseen toxicities, you can derisk on the efficacy side, in other words, whether your drug works or not. You can determine that very early in hepatitis C. That's a lot different than, say, oncology or multiple sclerosis or other biotech markets.

TLSR: Alexion's Soliris has received approval for a new indication, aHUS, as you've mentioned. You indicated this stock has done quite well, and indeed it is up 72% over the past 52 weeks. Can this orphan disease drug be a growth product?

GM: What I think is fascinating with the Alexion story is simply the mechanism of complement inhibition. It's very clear that it's not just PNH and aHUS, it's an entire alphabet soup of other indications that could include optical disease neuromyelitis optica (NMO) and myasthenia gravis. Other diseases talked about include cold agglutinin disease (CAD), dense deposit disease or even kidney transplant. A lot of them are ultra-orphan, meaning fewer than 5,000 patients in the world, but there are a number of them.

But the mechanism is crystal clear. Its complement is driving the pathology. So there is a blueprint. But what the Street has to get comfortable with is that the drug will work in these other indications, which is why we like the stock this year. NMO is often associated with a central nervous system disorder, but it is complement-mediated. By mid-year, I think we'll have some visibility on whether it will work with myasthenia gravis or kidney transplant.

The Life Sciences Report http://www.TheLifeSciencesReport.com DISCLOSURE: 1) George Mack of the LSR conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None. 2) SWR does not accept stock in exchange for services. 3) Geoff Meacham: I was not paid by SWR for participating in this story.

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