Pfizer Partners With Young Little Known Biotech For Products With Huge Potential Value
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Since its lows in mid-October, biotech stocks have sparkled, particularly the Big four – Amgen (AMGN), Biogen Idec (BIIB), Celgene (CELG), and Gilead (GILD) – which have demonstrated sustainable growth pathways. With the market’s renewed volatility in recent days, they have pulled back some, which only made them much more reasonably priced.
But the more attractive buys in the sector, say some seasoned investors, are the less known and small-cap biotechs that already have products in the market as well as new drug candidates in the pipeline that have great promise of becoming blockbuster drugs.
One such company is OPKO Health (OPK), a New York Stock Exchange-listed biotech with a market cap of $3.7 billion that just signed a worldwide partnership deal with Pfizer (PFE) on one of its products that has the potential of enhancing the portfolio value of both companies. Shares of OPKO leaped some 8%, to $8.86 a share, after the company announced on Dec. 15 the development and commercialization agreement with Pfizer. Since then, the stock has jumped to more than $9 – and rising.
Compared with Pfizer, the largest U.S. pharmaceutical company and one of the world’s biggest with revenues last year of $51.5 billion, OPKO is tiny with 2013 sales of $96.5 million. But OPKO, a diversified biopharmaceutical and diagnostics company developing therapies in endocrinology and renal associated diseases, as well as molecular diagnostic tests in prostate and other cancers, is on the rise whose revenues has jumped from $13.15 million in 2009.
The agreement with Pfizer is centered on OPKO’s growth hormone product, Lagova hGH-CTP, aimed at treating growth hormone deficiency in adults and children, as well as for the treatment of growth failure in children born small for gestational age who fail to show catch-up growth by two years of age.
The present market for the treatment of human growth failure is about $3.5 billion worldwide, growing at 5% a year –and already dominated by Pfizer, says Dr. Phillip Frost, chairman and CEO of OPKO. Pfizer should be able to expand its share of that market to more than 50%, he adds.
Under the agreement, OPKO will retain much of the responsibilities for developing Lagova, and receive significant cash up front, and will have the ability to use Pfizer’s marketing muscle to help adoption of the product when it is approved.
“Overall, we view the partnership as positive,” says Rohit Vanjani, analyst at Oppenheimer, who rates OPKO as “outperform” with a 12-month price target of $12 a share. Pfizer’s involvement “will help de-risk the program as well as drive larger worldwide sales,” he adds.
OPKO will receive $295 million as an upfront payment, and $275 million more upon achieving regulatory milestones for the development and commercialization of Lagova. OPKO will also receive double-digit royalties on sales for the adult indication. Upon Pfizer’s commercialization of hGH-CTP, OPKO will be eligible to receive royalty and/or profit sharing payments as Pfizer will obtain exclusive license to commercialize the product globally.
OPKO expects commercialization in 2016 for Lagova in the adult indication and in 2018 for the pediatric treatment. “Management will likely have a better sense of clinical trial enrollment and overall timeline for hGH-CTP at the end of phase 2 pediatric meeting in mid-2015,” says Vanjani.
The analyst estimates Lagova’s market penetration at 1% at launch in 2016, growing to 25% by 2020. “We forecast total revenues to OPKO of $1 million in 2016, growing to $450 million by 2020, and further estimate full-year gross profit sharing (25%) of the hGH-CTP/Genotropin (Pfizer’s product) franchise in 2019,” says Vanjani.
While OPKO will lead clinical trials and will be responsible for funding the development programs for the key indications, Pfizer will be responsible for all development costs for additional indications as well as all post-marketing studies. Pfizer will also fund the commercialization activities for all indications and lead manufacturing activities covered by a global development plan.
But one important aspect of the deal is OPKO’s direct association with the acquisitive Pfizer, which faces strong competition from generics that has resulted in a sharp revenue decline in recent years.
“We believe that Pfizer is at the cusp of making a major strategic decision,” after failing in its bid to acquire AstraZeneca to revive growth,” says investment research firm Trefis in one of its recent reports. “Will the pharmaceutical giant attempt another big acquisition or will smaller acquisitions and collaborations suffice?”
Even as OPKO may be too small for Pfizer’s overall M&A plans, its new partnership agreement suggests OPKO and its focus on rare diseases has obviously attracted the pharmaceutical giant. “We believe this collaboration will help advance our commitments to patients with adult and pediatric growth hormone deficiency, and we believe Pfizer’s strengths, expertise and presence in the human growth hormone space makes it the ideal partner for our hGH-CTP program,” says OPKO’s CEO Dr. Frost.
He points out that the collaboration enables “full alignment between Pfizer and OPKO to optimize development and potentially bring an innovative treatment to patients.” Pfizer’s product for growth hormone deficiency requires a daily dose injection while OPKO’s treatment needs only a once-a-week injection, notes Dr. Frost. Pfizer will be able to potentially get half of the $3.5 billion market with both products, he adds.
“OPKO’s long-acting human growth hormone is our most advanced product candidate utilizing our CTP technology to extend the half-life of a broad range of therapeutic peptides and proteins,” says Dr. Frost.
The agreement strengthens Pfizer’s commitment to treating rare diseases, and we are pleased to work with OPKO to help provide a potential next-generation therapy for patients with adult and pediatric growth hormone deficiency,” said Geno Germano, group president of Pfizer’s Global Innovative Pharma group. “Long-acting growth hormone is the first innovation in the GHD space in 20 years, and hGH-CTP would be complementary to our existing Genotropin franchise and could potentially provide an option that could improve patients’ adherence to treatment with once weekly dosing,” says Germano.
OPKO has an ongoing pivotal Phase 3 clinical trial in adults for hGH-CTP and a Phase 2 trial in pediatric patients. OPKO’s hGH-CTP has been granted orphan drug designation in the U.S. and Europe for both adults and children with growth hormone deficiency.
Oppenheimer’s Vanjani says five key factors underlie his investment thesis for OPKO: the company’s 4Kscore algorithm for prostate cancer detection is expected to become a standard care test in risk stratifying patients for biopsy; the test will move outside of the one million biopsy procedure market and begin to take a share from total and free PSA testing; adoption of the Claros 1 point-of-care test will proceed, with significant value obtained in the vitamin D testing arena; in conjunction with increased point-of-care vitamin D testing by Claros 1, Rayaldee will penetrate and take share in the prescription vitamin D market; and the hGH-CTP profile of once-weekly dosing will resonate with physicians and patients, and the product will take share in the human growth hormone market.
