3 Reasons to Watch Array Biopharma Inc.

Seldom are the risks or the profit potential higher than investing in small-cap biotech. Here we examine what Array Biopharma is doing that other biotech companies aren't that's getting the attention of the biggest analysts in the business.

Jun 12, 2014 at 10:40AM

It is no secret that the risks associated with pharmaceutical development are considerable. The cost to develop a novel drug often exceeds $1 billion.  Many smaller biotechs support these high development costs by by offering licensing options to larger pharmaceutical companies in return for cash at certain development milestones. There are three essential elements for the long term success of a small biotech negotiating this landscape: a deep portfolio of drug leads, diverse alliances, and favorable licensing contracts with big pharma. An example of a company that I believe satisfies these criteria is Array Biopharma (NASDAQ:ARRY), a small-cap biotech focused on the development of small-molecule anti-cancer drugs. Let's take a look at this company's opportunities.

A deep pipeline
Array's strength in development is their broad target screening methodology. Array has developed a proprietary kinase-inhibitor screening platform to generate new drug leads. Kinase inhibitors are a broad class of drugs implicated in a diverse range of diseases from cancer to metabolic disorders. Biogen (NASDAQ:BIIB) recently threw its weight behind this screening technology by licensing any potential immuno-modulatory drugs discovered on the platform. In other words, Biogen is licensing drugs that haven't been discovered yet. And only for one therapeutic area. This platform could provide significant development support for years to come.

Additionally this methodology has lead to 15 products in the pipeline staggered across the clinical development cycle. Its phase 1 and 2 trials are targeting against an array of different pathways implicated predominantly in cancer, but they also have drugs in trial for asthma, cardiomyopathy, and hepatitis C. Their cancer therapeutics target a wide range of diseases, and cancer drugs have been significant money makers across the industry, with 5 out of the top 15 drugs of 2013 treating cancer.  Array's two phase 3 drugs selumetinib and binimetinib are both MEK inhibitors and target lung cancer and melanoma respectively, and with potential broader applications. The market for MEK inhibitors is large as these cancers are common, and there is only one approved MEK inhibitor on the market, GlaxoSmithKlein's trametinib for melanoma approved earlier this year. The market is expected to be competitive, however, as there are several other drugs under investigation by other companies. 

Diversify, diversify, diversify
In case it wasn't clear, pharmaceutical development is inherently risky, and thus the old mantra of diversification is especially true in the biotech industry. From the perspective of a small biotech company, this means it must develop alliances with a range of big pharma companies with different corporate strategies. The pharmaceutical industry is currently rife with mergers and swaps, and you have to just hope that the company funding your development doesn't decide to stop focusing on your disease class, or acquires a competing asset from another big pharma company.

With these considerations in mind, Array is in remarkably good shape. Its clinical stage products are variously optioned by 11 different pharmaceutical companies, significantly reducing the chances the the constantly shifting strategies will leave them in the dust.

Having your cake and eating it too
So what happens when one of your partners decides not to exercise their option to license your drug? Well that depends on your contract with them. Typically these contracts cover a portion of the development costs as well as lump sum payments when certain clinical milestones are met. But the sad fact is that these drugs often don't get optioned, and you're left scrambling to either find a new partner or cut costs.

Array has certainly had its share of tragedy and shares have been steadily declining since a deal with Amgen fell apart last summer. And there is speculation that Novartis may pull out of its contract  to license melanoma drug binimetinib, perhaps because the recent asset swap with GlaxoSmithKline will include the direct competitor trametinib. Trametinib shares the same indication and method of action as binimetinib, so there is little benefit to Novartis in marketing two drugs that are effectively the same. However, binimetinib could be a very valuable asset to a competing drug company, and Novartis has committed to funding binimetinib through phase III trials,  so that removes a big potential cost issue for Array.

Final thoughts
I think these three attributes will help Array do well over the long haul. Stock prices have dropped 40% off their 52 week high when Amgen pulled out of its contract, but the majority of its profit potential is still intact with the current pipeline. The phase III studies are still in the recruiting phases, so it will be some time before Array will be able to seek FDA approval and generate sales. But their strength is in clinical asset generation, and I am confident that their kinase screening methodology with produce revenue generating partnerships. The release of binimetinib from its contract or additional preclinical contracts or the success of two clinical milestones coming up in August  could lead to a jump in stock price. That said, it's important to remember that this is a clinical stage biotech that's going through a lot of cash -- Array is sitting on about $110 million, but burned through $64 million over the trailing 12 months. So while the stock may have some exciting opportunities ahead, it's still speculative and very risky.

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Nathaniel Calloway has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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