In making Receptos (RCPT) an Alpha-Rich pick on August 13, I certainly had bullish expectations for the company and the stock. I was attracted by the company's S1P1 modulator technology and the prospects of the lead drug RPC1063 in both multiple sclerosis and ulcerative colitis. Combined with an earlier-stage drug for eosinophilic esophagitis (for which there are no pharmaceutical treatments) and a preclinical oral GLP-1 program, I thought it likely that Receptos would see a higher share price as the MS program matured and the probability of partnership or acquisition grew.
I didn't expect the pace or magnitude of the move that was to come. Receptos shot up almost 100% in just two months. While at least some of that action was likely due to rumors of multiple bidders for the company and the shares did ease off, Receptos still stands about 60% higher today than it did when I first wrote about it. What's more, incremental data from the RADIANCE multiple sclerosis trial will be pushing the drug forward into a Phase III study. Expectations are definitely higher for these shares now, but given the revenue potential of Receptos' pipeline and the possibility of incremental data points over the next year or two, I can see these shares continuing to move higher.
The Go/No-Go On RPC1063 Is A Go
Receptos announced earlier this month that the data monitoring committee for its RADIANCE clinical trial of RPC1063 in relapsing multiple sclerosis had reviewed the interim data from the Phase II study and given the go-ahead for the initiation of the Phase III part of the study. Although this was an expected part of the bullish thesis on Receptos, there was nevertheless some chance that this interim analysis would have gone against the company.
As is normally the case in interim analyses, there was very little new information offered to investors about the performance of the drug. Management indicated that the results "support the RPC1063 differentiation profile" and "are consistent" with earlier studies. Likewise, management mentioned that the safety data continued to develop as expected - a key detail given that avoiding the nasty side effects of Novartis's (NVS) Gilenya (a first-gen S1P1 modulator) is a prime feature of this drug.
I don't want to make a mountain out of a molehill, but I did note that the company's press release stated that the reduction in lymphocyte count appeared to be "consistent with data from other S1P receptor modulators..." Earlier studies of RPC1063 had shown a more rapid lymphocyte recovery than Gilyena, so this might be something to monitor. I mention this primarily as meaningful differentiation from other drugs is likely to be key to the commercial success of this drug.
Will The Multiple Sclerosis Market Resemble The Depression Market?
One of the biggest challenges yet to be resolved for Receptos is the ultimate layout of the market by the time RPC1063 reaches the market (possibly a 2018 event). As I have written before, I do expect the MS drug market to be worth more than $18 billion in 2018, with neuroimmunomodulating (NIMO) drugs still playing a major role.
The question is how much room there will be for a new, and hopefully improved, version of an S1P1 drug. I expect Biogen Idec (BIIB) to have the largest share in the market by then, with other large pharmaceutical companies like Sanofi (SNY), Teva (TEVA), and AbbVie (ABBV) fighting for share as well. I also expect further development and competition in the S1P1 space - Novartis has their own new-and-improved S1P drug in development (siponimod), and Actelion and Ono Pharmaceuticals / Merck Serono are working on drugs in this class as well.
What could happen in MS may be similar to what has happened in the depression space. Several blockbuster depression drugs have seen their patent protection come and go, and only Forest (FRX) and Lundbeck (OTCPK:HLUYY) have managed to come to market recently with newly approved branded drugs (and Lundbeck won't be launching in the U.S. until 2014). The problem is that the efficacy of past drugs has significantly raised the bar for new compounds and new drugs not only have to be good enough to get the FDA to grant approval, they must be good enough to stand apart from the considerably cheaper blockbusters-turned-generics available now.
Gilenya will be just one of the MS drugs to be generic by 2018, and that raises the bar for what Receptos must accomplish. "Just as good" may be sufficient to get FDA approval - though I question that, given the FDA's increased insistence that new drugs must offer a compelling benefit over existing drugs if there are any safety concerns - but it's going to take a meaningful difference in efficacy and/or safety and tolerability to make this a clinical success. That raises the bar on what Receptos must prove in its clinical studies; that there is a real difference with RC1063 and a reason to pay up for it.
Are Buyout Rumors More Bark Than Bite?
Buyout rumors are a great thing when you own the stock in question, and I was not surprised to read speculations that Receptos had buyers circulating. Word in mid-October was that several companies were looking closely at Receptos - Lilly (LLY), Teva, and Celgene (CELG) - and that Teva and/or Celgene were close to making a bid.
Given that a bid has yet to be announced, I'd say "close" may have been at least an exaggeration. Nevertheless, the only thing about that speculation that really surprises me is that AbbVie isn't included. Receptos management has a history with AbbVie, not to mention an existing collaboration deal for RPC4046 in eosinophilic esophagitis. Given AbbVie's demonstrated interest in MS, I'd be surprised if there was a sale process for Receptos and they weren't involved.
I do expect that Recptos will be acquired at some point, and this may be a logical time to think about deals. There will be Phase II data coming out in 2014 for RPC1063 in both MS and ulcerative colitis, and though waiting for those readouts may de-risk an acquisition, successful outcomes will significantly raise the pricetag.
The Bottom Line
In fighting the urge to play the "the stock is at my price target, so I have to raise the price target" game, I will point to the fact that my prior valuation on Receptos was pretty much predicated on what has happened in the meantime - namely, the decision to move ahead with the Phase III portion of the RADIANCE study in MS. Even so, it does slightly improve my odds of eventual RPC1063 approval, and the passage of a little time adds some value to the RPC4046 program as well. I would like to add in some value for the oral GLP-1 program, as I do believe this could be a very significant compound, but assigning real value to a preclinical candidate is too bullish even for me.
With all of this, my base case fair value moves to $28.50, which is pretty much right in line with where the stock trades today. That doesn't mean that I believe the shares are now doomed to lag the market or go to sleep, it's just that I don't see any "extra" undervaluation in them. I would note, though, that further clinical data on RPC1063 could upgrade my revenue assumptions - I currently expect the drug to garner $1 billion in sales in 10 years' time, and if you double that the price target for Receptos would jump to about $42 today. Much of the Street is already there, but I'm in no hurry to catch up to sell-side biotech analysts during a biotech boom that's already long in the tooth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
Additional disclosure: The author owns the Danish shares of Lundbeck (LUN.CO).
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