Here's What's Behind Puma's Crash

Alan Auerbach, the former CEO of Cougar Biotechnology -- the company that developed Johnson & Johnson's widely successful Zytiga prostate cancer drug -- hopes he has another blockbuster potential drug on his hands at Puma Biotechnology (NYSE: PBYI  ) .

Auerbach, who sold Cougar to Johnson & Johnson in for $1 billion in 2009, is working on neratinib, a treatment for stage 2 and higher breast cancer. Neratinib's promise, and Auerbach's previous success at Cougar, launched shares of Puma to stratospheric highs last year. However, shares have fallen sharply in the past week, shaking investors' confidence. So, let's take a look and see what's behind the drop.

PBYI Chart

PBYI data. Source: YCharts.

First, a bit of background
Puma is essentially a one-drug company, which means its fate is tied to neratinib, a drug it licensed from Pfizer in 2011 when Pfizer was downsizing to blunt the patent loss of its top-selling cholesterol drug Lipitor.

A year ago, Puma kicked off a 600-patient phase 3 trial that pitted oral neratinib and Roche's  (NASDAQOTH: RHHBY  ) Xeloda head to head against GlaxoSmithKline's Tykerb and Xeloda. Early data from that trial isn't expected until 2015, and the studies estimated primary completion date isn't until May 2017. That long wait may have investors nervous that they've gotten a bit ahead of their valuation for Puma.

Arguably, that's true. After all, investors awarded Puma an eye-popping $3 billion market cap based solely on mid-stage results for one drug. That said, the mid-stage results appear solid.

A phase 2 trial combing neratinib with paclitaxel showed that patients treated with that combination outperformed patients treated with Roche's infused Herceptin and generic paclitaxel.

Those results, presented at the American Association for Cancer Research meeting on Monday, showed that nearly 56% of those treated with the neratinib regimen had no remaining evidence of the tumor in the breast or lymph nodes, versus 33% for those taking Herceptin. In HER2 positive patients, 39% of those in the neratinib arm showed no remaining evidence of the tumor, versus 23% for Herceptin.

Using Bayesian predictive probability to determine whether neratinib would outperform Herceptin in a 300-patient trial shows neratinib would have a 79% likelihood of besting Herceptin.

If that estimate proves true in phase 3 trials, it could suggest neratinib has big blockbuster potential given sales of Roche's Herceptin totaled more than $6 billion in 2013.

So, why did shares crash?
The data appears strong and suggests neratinib would probably outperform Herceptin in phase 3, but investors appear to have wanted a bigger confidence boost than a statistical likelihood in order to justify such a rich valuation.

Also, the drug showed a common adverse effect of moderate to severe diarrhea. Since nearly 40% of neratinib patients suffered from diarrhea, Puma has adjusted its treatment to include an anti-diarrhea medicine that appears to effectively reduce occurrences to manageable levels. However, the recognition of that side effect may be spooking investors given the risk of dehydration and patient dropouts.

Foolworthy final thoughts
There's little question this is a big and attractive market opportunity for Puma. In 2010, $16.5 billion was spent on breast cancer treatment in the U.S., and as much as $25 billion could be spent treating the disease by 2010, according to the National Cancer Institute.

Additionally, the World Health Organization reports that 1.4 million new cases are diagnosed each year, and that more than 450,000 die annually from the cancer. 

Since there's a big and growing unmet need for new therapies, it's certainly possible Puma will find a willing suitor. Conceivably, Johnson & Johnson's success with Zytiga could encourage it to work with Auerbach again. Or, Roche's desire to protect its Herceptin franchise might mean it would be interested. Either way, Pfizer will remain a beneficiary given it will collect royalties on sales tied to its license with Puma.

Of course, that leaves investors questioning how much that potential is worth. Today, they're thinking the answer is far less than it was at Puma's recent peak, but the reality could end up being somewhere in between, given that markets tend to overreact both on the way up and on the way down.

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