YM BioSciences Inc. (YMI)

[Harleyman]

YM BiOSciences' Cheap Valuation Doesn't Make Sense

March 22, 2012

by: Stephen Simpson

Having spent the better part of two decades investing in biotechs, I know better than to take any "it seems too good to be true" story at face value. And yet, when I dig into YM Biosciences (YMI) I'm legitimately puzzled at the skepticism, lack of support, and low valuation of this biotech. While one-drug stories are indeed risky and YMI has a formidable competitor to deal with, the current valuation on this stock seems more like a worst-case scenario in a biotech market that generally leans toward being much too optimistic.

CYT387 And Anemia - The Axis Around Which The Story Revolves

Right now it seems like all of the bear-vs-bull debate essentially boils down to whether or not YMI's lead compound CYT387 can demonstrate the ability to reverse/reduce anemia in myelofibrosis patients. If it can, the drug is underestimated and the stock is too cheap; if it cannot, fair value may not be all that much higher (but more on that later).

YM Biosciences is developing CYT387 as an oral JAK 1/2 inhibitor to treat myelofibrosis - a rare but serious hematological disorder where abnormal bone marrow stem cells produce scar tissue instead of healthy bone marrow. Patients with advanced myelofibrosis (MF) often experience anemia and a significantly enlarged spleen. While there are some therapies available (including the relatively recently-approved drug Jakafi from Incyte (INCY)), traditional therapies don't often control the disease very effectively.

So far, CYT387 has shown very encouraging data from a Phase 1/2 study that produced 142 evaluable patients. This study has shown that 33% of patients showed a "response" (35% or better reduction in spleen size) at six months, a median change of 35%, and better than 50% reductions in more than 49% of patients.

On its own, that's pretty good. What makes the data even more impressive is that almost half (46%) of evaluable patients went from being transfusion-dependent at the start of the study (because of the anemia) to transfusion-independent for more than three months. That's potentially incredibly powerful data, as anemia reduction has been very difficult to achieve with other therapies.

And Here's The "Buts"

Ok, so why aren't institutional investors singing hosannas over this drug and the stock?

For starters, this strong trial data came from a non-randomized study. Biotech history is littered with stories of drugs that showed great results in single-arm studies or other non-randomized trials, only to fail miserably in full-scale randomized studies. As a result, skeptics keep claiming (hoping?) that the company will not be able to replicate that data in a randomized study, even though the mechanism of action of CYT387 would seem to support the anti-anemia activity.

It's also worth noting that the splenomegaly reductions shown by CYT387 in this study aren't all that much better than what Incyte showed in its pivotal studies COMFORT-1 and COMFORT-2. Though the median changes from baseline were broadly similar at six months, the six-month response rate was inferior to COMFORT-1 (but superior to '-2). What's more, CYT387 has shown side-effects like dizziness and peripheral neuropathy, not to mention GI issues like diarrhea and nausea, that Jakafi has not. On top of that, Incyte will have had a multi-year headstart by the time CYT387 hits the market, suggesting that it can only be an also-ran me-too product.

I'm not buying that. I completely acknowledge the risk of non-randomized studies and I also acknowledge that comparing studies on a head-to-head basis when they weren't designed or conducted that way can be misleading. That said, I think there are at least two significant rebuttals - YMI's study enrolled sicker patients (including those who had failed Jakafi therapy), and those patients started with substantially larger spleens (about 40% larger median baseline volume). Second, that anemia response is no throw-away detail and if it proves durable, will substantially differentiate this drug from its competitors.

There are other issues with this stock. For starters, the timeline on the pivotal Phase 3 study has been slipping a bit. YM Biosciences has also thus far not partnered the drug for marketing in Europe or the US, even though discussions have apparently been going on for some time now. That has led some institutional investors to grouse about management and the supposedly "unnecessarily dilutive" financings that management has done to support pivotal development of CYT387.

Since this is the bad news portion of the column, it's also probably relevant to discuss the competitive environment. There's the aforementioned Jakafi from Incyte (marketed in Europe by Novartis (NVS)) and it too is an oral JAK1/2 inhibitor, and one that happens to have a pretty clean side-effect profile. In the clinic, there's a compound that Sanofi (SNY) acquired when it bought TargeGen, as well as a compound at S*Bio.

Thus far, none of these drugs (apart from Jakafi) has shown a clinical profile that suggests a real commercial threat to CYT387, assuming that drug gets approval.

The Potential For YM Biosciences

What's the fair value for YM Biosciences shares today?

Right now, the company is focusing all of its efforts on CYT387, but the company does have two other drugs in human studies. YM Biosciences has hoped to develop nimotuzumab as a safer type of epidermal growth factor receptor (EGFR) inhibitor. EGFR inhibitors like Erbitux (marketed by Lilly (LLY) and Bristol-Myers Squibb (BMY) and Vectibix (marketed by Amgen (AMGN)) are effective cancer-fighting drugs, but they can cause side-effects like rashs, diarrhea, and photosensitivity that can be quite severe in some patients.

While nimotuzumab has shown encouraging potential in glioma, head/neck cancer, pancreatic cancer, and other hard-to-treat cancer types, YM is currently not funding studies and ongoing development is being conducted by partners like Daiichi-Sankyo (which holds rights to the drug in Japan).

YM Biosciences also has CYT997 in the pipeline, another potential oncology drug where YMI has run studies in glioblastoma and multiple myeloma. Although there were good efficacy signals in the myeloma indication, and data should be coming from glioblastoma, it seems unlikely that the company will be committing resources to this program in the near future, though eventual development of an oral formulation could be in the cards down the road.

For now, YM Biosciences is pretty much all about CYT387. If those anemia results hold up in a pivotal trial and the company can get that on the label, this drug could be the head of the class despite the incremental side-effects. On the other hand, the surprising disappearance of those anemia benefits would likely relegate the drug to a less-favorable market standing behind Jakafi.

There are about 45,000 myelofibrosis patients in the U.S. and Europe, but I will go conservative and estimate that 40% of these patients won't be accessible; they'll get stem cell transplants or other first-line therapies. Of what remains, I'll estimate that CYT387 gets 25% market share and the same ASP as Jakafi ($84,000/year). I'll go ahead and assign a conservative revenue multiple of 6x and a discount rate of 30%. Add that all up, and the worst-case scenario that I see as being credible (apart from total failure) is a fair value of $2.15.

Now, let's change things up a bit. Let's say that CYT387 does improve anemia, as I see nothing untoward in that Phase 1/2 study that suggests it's not a real impact (it's not like they data-mined the study to find some tiny subset of patients that responded). With that kind of label, I think CYT387 should get 60% of that same eligible population and an 8x multiple. That boosts the revenue potential to more than $1 billion and the fair value to about $6.25, and that's assuming no premium in drug pricing.

It's also worth noting that CYT387 could see expanded use beyond myelofibrosis if the anemia benefit holds up. Thrombocytopenia, polycythemia vera, multiple myeloma, and myelodysplastic syndrome (MDS) would all be logical follow-on indications. Given that there are probably close to 100,000 polycythemia vera patients worldwide alone, that could represent major upside if the drug happens to work there. Given the utter absence of data in these indications, though, as well as the long development timelines, I'm not including any of this in my estimates.

The Bottom Line

I don't own YM Biosciences, I don't work for the company, and I have no reason to sing its praises other than that I think it's an interesting biotech stock and I make a living writing about potentially interesting stocks. All in all, I find the skepticism on this company and CYT387 to be puzzling. I get the risk that the anemia benefit disappears and it may just be a me-too drug that is two years behind the market leader, but it seems like today's price gives no credit at all to the chance that the drug actually does reduce anemia in myelofibrosis patients.

Unfortunately for longs in this name, it could be a long wait for the value of CYT387 to be seen in the market. Outside of a partnering announcement (for Europe or worldwide), it's going to take a couple years to enroll a pivotal Phase 3 study and see any data from it, and biotech stocks often wilt in the absence of new data.

All of that said, you don't find potential multi-baggers all that often, so it's worth paying attention to those that show up. I find it baffling that the market gives Arena Pharmaceuticals a $400 million enterprise value for its barely-effective experimental weight loss drug, but only a $150 million value for YMI's potentially game-changing myelofibrosis drug. The lack of enthusiasm for these shares leads me to double-check, triple-check, and quadruple-check my theses, but YMI just may be a seriously under-appreciated biotech today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

http://seekingalpha.com/article/451971-ym-biosciences-cheap-valuation-doesn-t-make-sense?source=yahoo