Biotech Values

[DewDiligence]

Here’s today’s Barron’s HCV article with some
added hyperlinks. This is one of the very few HCV
write-ups in the financial press that has focused on
the colossal (and perhaps unjustified) valuation
disparity between VRTX and IDIX. (Please see
#msg-13214528 for related discussion.)

>>
Cocktail Party

By BILL ALPERT
November 26, 2006

If you have a liver to donate, press "1" when you call the Center for Liver Disease and Transplantation at Columbia University Medical Center in New York. The hepatitis C virus kills over 10,000 Americans a year of the three million who may be infected.

Most patients on the long liver-transplant waiting list can't endure currently approved drug treatments, so the liver center's chief, Robert S. Brown Jr., is eagerly testing experimental drugs. In a few years, he hopes to be able to cure most hepatitis C patients with a combination of pills -- similar to the drug "cocktail" taken today by people with HIV. "Any drug that's effective is going to have a place in the armamentarium," he says.

To the puzzlement of Brown and other leading researchers, Wall Street seems almost exclusively excited about a single investigational hepatitis drug: VX-950, from Vertex Pharmaceuticals. In several small studies, the Vertex drug has been dramatically effective at eliminating the virus. If Vertex succeeds with its aggressive program of clinical testing, VX-950 could be the first hepatitis C antiviral drug on the market.

In the past 18 months, Vertex shares (ticker: VRTX) have climbed from 10 to 45, giving the Cambridge, Mass., biotech firm a stock-market value of $5 billion. That's a richer valuation -- by a lot -- than sported by other biotechs testing hepatitis C antivirals, including Idenix Pharmaceuticals (IDIX), InterMune (ITMN), Achillion Pharmaceuticals (ACHN), ViroPharma (VPHM) and XTL Biopharmaceuticals (XTLB), not to mention big pharma outfits Roche Holding (RHHBY), Wyeth (WYE) and Schering-Plough (SGP).

The blood-borne HCV virus causes hepatitis C. Most HCV infections afflict intravenous drug users, but millions were infected by tainted transfusions before blood banks started testing for HCV in 1992. Twenty years can pass before noticeable symptoms appear in the form of liver inflammation, scarring and, in some cases, liver failure or cancer. That's why only about a million cases have been diagnosed, out of what the Centers for Disease Control estimates are more than 3.5 million infected people in the U.S. The numbers are similar in Europe and Japan. The World Health Organization says the global total of infections could surpass 170 million.

There's no vaccine against HCV. The standard treatment involves six to 12 months' dosing with long-acting interferon and ribavirin (supplied mainly by Roche and Schering-Plough). The treatment costs over $20,000 and its side effects are intolerable for many patients. Yet the arduous treatment cures less than half of those with the virus' most common variant. Because of those drawbacks, fewer than 90,000 people a year get HCV treatment. [I.e., among those in the U.S. with chronic HCV infection, only about 3% are cured. This astonishing factoid was the subject of an iHub quiz (#msg-11370130).]

That's why the medical and investment communities are buzzing over experimental drugs that could be more effective and tolerable. Most of the new antivirals gum up proteins essential to HCV's life cycle. Investigational drugs from Vertex, Schering-Plough, Achillion and InterMune all target an enzyme called a protease that makes components of the HCV virus; the drugs of Idenix, ViroPharma, Roche and XTL sabotage the polymerase protein that copies the viral genome [#msg-13214528].

Vertex hopes to submit its VX-950 protease inhibitor for approval by the Food and Drug Administration in 2008, after tests that will involve nearly 1,000 HCV patients. So far, researchers have reported data from several Phase I and II studies, each involving one- or two-dozen patients. The results have been impressive, with no detectable virus remaining in 75%-100% of the patients by the end of treatment with a combination of VX-950, interferon and ribavirin. Three months after treatment, five out of the six patients in one of the studies had no detectable HCV. Data on 60 patients exposed for three months to the triple therapy are expected before year end [#msg-12267294].

Contenders

In phase II testing of the polymerase inhibitor that's advanced furthest -- NM283 from Idenix -- the hepatitis virus was eliminated in about two-thirds of patients. Gastrointestinal side effects in patients on very high doses of NM283 [800mg daily] caused investors to ditch Idenix shares in the past year, dropping them from above 25 to a recent 8.70. That's a $500 million stock-market valuation for the Cambridge, Mass.-based Idenix, 56% owned by Switzerland's Novartis (NVS) -- less than one-tenth Vertex's valuation of over $5 billion. [Actually, IDIX’s current enterprise value (market cap net of cash on hand) is only $350M).]

Vertex CEO Joshua Boger doesn't endorse any particular price for the stock, but he suggests that VX-950's efficacy will merit premium pricing and a dominant share of anti-HCV prescriptions: "It is accurate to say the market opportunity here is almost unprecedented."

Bullish analysts at firms like Merrill Lynch and Deutsche Bank argue that Vertex stock is worth 50 to 60 bucks. According to their arithmetic, VX-950 could command $25,000 per treatment. Every 40,000 patients would mean $1 billion in revenue for Vertex. A couple of billion in annual revenue would yield profits in the hundreds of millions, or several bucks per share. And the company had about $6 a share in cash, as of Sept. 30.

But other analysts -- at firms like Susquehanna Financial Group and Wachovia Capital Markets -- warn that Vertex could drop to around $33 if it ends up sharing the HCV market with competing antiviral drugs, as well as interferon and ribavirin. That less monopolistic outlook is more commensurate with the expectations of hepatitis researchers like Douglas Dieterich of New York's Mt. Sinai School of Medicine. He consults for Idenix, but is also testing VX-950 and a half-dozen other new HCV drugs. He expects a cocktail of complementary antivirals to be used.

"One of the things that the business community is really not understanding," says Dieterich, "is that they think the first drug to market is going to dominate. That's not the case. This is not a zero-sum game."

Columbia liver expert Robert Brown Jr. concurs that Vertex's drug seems overvalued, given the competition he foresees. "Some of it may be more buzz than data," he says. "I think all the boats are going to float higher."
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