This Small Company Is Winning the War Against Blood Cancer

About 15,680 Americans are diagnosed with chronic lymphocytic leukemia, or CLL, and approximately 5,000 new cases of mantle cell lymphoma, or MCL, occur in the U.S. each year. Most drugs are in different development stages, so limited or no medication is available as first line therapy for CLL and MCL. Pharmacyclics (NASDAQ: PCYC  ) recently submitted a New Drug Application for ibrutinib, requesting priority review based on positive clinical data for the treatment of MCL, CLL, and small lymphocytic lymphoma, or SLL. With this submission, the company expects positive outlook in terms of development and commercialization from its co-partners in coming years.

Ibrutinib
Ibrutinib basically blocks signals from the B-cell receptor by inhibiting the function of the BTK enzyme and kills the B-cell cancer. In 2011, Pharmacyclics and Janssen together agreed to co-develop and co-market ibrutinib. To date, seven phase 3 studies have been initiated with ibrutinib. The product is still going through additional studies to evaluate its efficacy against other B-cell cancers, including myeloma and lymphoma.

Target market
CLL: CLL is one type of blood cancer that often starts with white blood cells (called lymphocytes). The disease usually affects older adults, is rarely seen in people younger than 40 and is hardly seen in children. Men are more vulnerable to this deadly disease than women. As per a study, the average age at time of diagnosis is 72 years; therefore, death rate is high.

MCL: MCL is a B-cell cancer known as non-Hodgkin lymphoma, or NHL. It typically starts at lymph nodes and spreads across bone marrow, liver, and spleen. NHL usually occurs in older adults.

For these indications, GBI Research forecasted that the leukemia therapeutics market will reach $7.6 billion by 2018, growing at a compound annual growth rate of 9.5% during 2011-2018. The U.S. continues to lead the market and is likely to grow at a compound annual growth rate of 10% to reach $3.5 billion by 2018. Significant uptrend was due to increasing prevalence, rising prescription of new products such as Sprycel, Tasigna, Clolar, and Arranon for four indications. The market value includes four indications: CLL, acute lymphocytic leukemia (ALL), acute myelogenous leukemia (AML) and chronic myelogenous leukemia (CML). Of these, CLL represents about one third of all leukemias.

Company description
Pharmacyclics, a clinical-stage biopharmaceutical company, develops and markets novel small molecules drugs used for the treatment of cancer and immune mediated diseases. Presently, the company has three candidates in clinical stages and a few in preclinical stages for various indications. The company is developing some products in collaboration with Janssen and Novo Nordisk.

Strong collaboration
Pharmacyclics signed a deal amounting to $975 million with Janssen Biotech, a subsidiary of Johnson & Johnson, for the development and commercialization of ibrutinib to treat CLL. Per the agreement, the company has already received $150 as upfront payment and $200 million as milestone payment. An additional $625 million is likely to come based on trial results. In addition, Pharmacyclics may receive $55 million from Novo Nordisk for certain development, regulatory, and sales milestones for PCI-27483. Overall, Pharmacyclics expects to generate revenues from its co-partners in coming years.

Performance
The company's top line performance depends on clinical trial based milestones from co-partners. In the second quarter of 2013, it received $50 million as milestone payment from Janssen. So, revenue increased significantly to $54.7 million compared to $2.1 million in the same time a year ago, resulting in positive earnings. Adjusted net income was $19.2 million, or $0.25 per diluted share, compared to adjusted net loss of $15.1 million, or $0.22 per diluted share, in the second quarter of 2012.

The company is investing heavily in research and development as the products are in development stages, and it continues to enhance top line growth through milestones and royalties. During the second quarter, R&D expenses accounted for 82% of total revenues. Currently, the company has sufficient funds to carry out development activities. As of June 30, cash balances including investments was $505 million, compared to $317.1 million as of Dec. 31.

Comparison
As competition to ibrutinib, companies like Gilead Sciences (NASDAQ: GILD  ) and Celgene (NASDAQ: CELG  ) focus on developing products in the field of CLL therapies.

Idelalisib (GS-1101) from Gilead is currently in a phase 3 trial for CLL, and in phase 2 trials to treat indolent non-Hodgkin's lymphoma, or iNHL. The product is a PI3K inhibitor and blocks the PI3K pathway, which is responsible for the development of cancer cells. Gilead is focused on speeding up the development process for iNHL therapy. This will possibly make an opportunity for ibrutinib to target CLL.

By performance, in the recent quarter that ended June 30, Gilead reported total revenues of $2.77 billion, up by 15% over the $2.41 billion seen in the same period a year ago, resulting from a 14% year-over-year increase in product sales. In addition, adjusted income was $839.7 million, or $0.50 per diluted share, compared to $767.3 million, or $0.49 per diluted share, in same period last year.

Another well-known product, Revlimid from Celgene, is currently in phase 3 study for CLL therapy. The same product is approved for the treatment of multiple myeloma and has filed an NDA for lymphoma. It becomes easier for Celgene to promote the same product for additional indications, creating potential for higher prescription sales. In the recent quarter, Revlimid posted sales of $1 billion, up by 13% due to increased sales from both the U.S. and international markets.

Overall, Celgene's total revenues were up by 14% year over year to $1.6 billion, adjusted net income was up by 20% to $653 million, and adjusted diluted EPS was up by 25% to $1.52 from $1.22. The company has raised EPS guidance for the full year, backed by strong acquisitions and new positive reports on the Revlimid study.

Conclusion
Upon commercialization, Pharmacyclics will also receive royalties on sales of ibrutinib. If approved for additional indications, that too will boost the bottom line. In addition, its strong collaboration with Janssen and Novo Nordisk is very important for an investment thesis.

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