3 Been-There-Done-That Biotech CEOs Who Are Doing it Again

You might want to turn back the clock so that you can profit from Puma Biotechnology's (PBYI -0.41%) 212% return this year, but unfortunately, you can't. Instead, you'll just have to go out and find the next big biotech winner -- and to manage that, you're going to have to do your homework.

Fortunately, The Motley Fool's Kristine Harjes and Todd Campbell are here to help! In today's episode of The Motley Fool's Industry Focus: Healthcare podcast, the two discuss how Puma Biotechnology's experienced management team helped it deliver a big win, and why proven leaders at Aurinia Pharmaceuticals (AUPH -4.47%), Axovant Sciences (AXGT), and Esperion Therapeutics (ESPR -7.56%) might someday deliver similar success.

A full transcript follows the video.

This video was recorded on July 19, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your host, Kristine Harjes, and we'll be covering Healthcare today on this July 19 show. I'm joined via Skype by Todd Campbell, Fool.com healthcare specialist. Before we get to the meat of our show, Todd, I have to ask you a healthcare news question. Did you read about the woman who had 27 contact lenses removed from her eye?

Todd Campbell: [laughs] What?

Harjes: Yeah. This was a little news item that crossed my desk courtesy of Chris Hill, who is the host of Market Foolery and Motley Fool Money. He sends me this link, and he's like, "I know you want to cover this on your show." I was like, that's pretty disgusting, but after enough convincing, I did read through the article. Essentially, this older woman had this weird feeling in her eye that she just ignored because she figured it's all part of getting older. And she goes to have cataracts surgery, and the people who are going to operate on her are like, "Oh my gosh, you have 27 contacts in your one eye."

Campbell: That could not have felt good!

Harjes: Isn't that insane!

Campbell: No! No, oh my word! I mean, do you just wake up and put it in, wake up and put it in, wake up and put it in? Oh, boy.

Harjes: Yeah, as a contact wearer myself, I've put two in my eye before, I forgot that I hadn't taken the last pair out. But you realize pretty quickly what you've done.

Campbell: So, our public service announcement today is: make sure that you only have one contact lens in at a time.

Harjes: Yes. The Motley Fool, helping the world invest better and also not get a pileup of contact lenses in your eyeballs better.

Campbell: We love to help in any way we can.

Harjes: Yeah. I hope no one is squeamish. But Chris was like, you should totally cover this, so I figured he would be disappointed if I didn't.

Moving on to more investable matters, we are borrowing a concept today that we aired last summer about catching lightning in a bottle again. The premise of this is, there are companies out there whose CEOs have already been successful in other ventures. One of the companies that we covered on that episode, which I believe came out last June or around there, was a company called Puma Biotechnology. Their CEO is a man named Alan Auerbach, and he had some previous history with a company called Cougar Biotechnology. Puma, Cougar -- sense a trend? Johnson & Johnson ended up buying Cougar for $1 billion dollars to get its hands on a prostate cancer drug, and then Puma was trying to make their own cancer drug for breast cancer. Flash forward to recently, I believe this news just came out yesterday -- the FDA approved the drug.

Campbell: Yeah, Alan Auerbach does it again. Not only does he get one cancer drug across the finish line back in the late 2000s, but he's struck it rich again by getting through Nerlynx -- notice the lynx at the end of the name of this new drug?

Harjes: Oh my gosh. I did not notice that.

Campbell: Yeah, he definitely loves the big cats.

Harjes: Thank you for that one.

Campbell: Yeah, Auerbach's drug is for breast cancer. When he was with Cougar, he developed a prostate cancer drug. That prostate cancer drug now does $2 billion per year in sales for Johnson & Johnson.

Harjes: Can I put you on pause for one second? It's Zytiga, like, tiger.

Campbell: Oh my god, is it?

Harjes: [laughs] That's amazing, I didn't realize that until recording this show.

Campbell: Zytiga. Wow.

Harjes: So, Zytiga, $2 billion annual prostate cancer drug, and Puma is making its way with the drug that was neratinib, and I guess the commercial name is Nerlynx.

Campbell: Again, loving those big cats. And it's working for him.

Harjes: Seriously, why disrupt a good thing?

Campbell: Absolutely. I can't wait to see what the next company's name will be. Well, we don't know what's going to happen with Puma, but what's really interesting to us is, it gave us an opportunity to say, there's a reason that we like been-there done-that proven leaders in biotech, because getting drugs through the FDA isn't easy. We've talked about this time and time again. The failure rate is high, there are all sorts of clinical trial and regulatory hurdles. So, getting people who are experienced, who can spearhead development, that can help sidestep a lot of these risks, and potentially increase the likelihood of yet another win for shareholders. And this is great, because now, Kristine, we get to talk about three other companies that, who knows, maybe they'll be able to catch lightning in a bottle again, too.

Harjes: Exactly. All three of these are pretty early-stage companies. We've heard from quite a few listeners that you guys have an appetite for these small-cap growth stocks. So get ready -- buckle your seat belts. Fortunately, there's a little bit of an advantage built into these because of everything we've been talking about with proven management. When you look at early stage biotechs, they're so risky, but this is hopefully one way that you can screen them to try to improve your odds of succeeding just a little bit.

Campbell: Yeah. And any little bit of an edge is valuable when it comes to clinical-stage biotech because, again, the failure rates are so high, and it can be such a hit-and-miss market. You can have stocks like Puma, that go up to $275 one year, fall to $25 the next year, and then are up 200% in 2017, and it's all because of the clinical trial data that's coming through. So, it's very important, I think, to have a watch list built up of some of these companies that are led by been-there, done-that leaders, and keep an eye on them, because they could be great sources of new investment ideas.

Harjes: First up, after much anticipation, is a company called Aurinia Pharmaceuticals, the ticker is AUPH.

Campbell: This one is not named after a big cat, so it wasn't founded by Auerbach.

Harjes: Unfortunately it was not.

Campbell: It was actually founded by a guy named Richard Glickman, who was formerly the CEO and founder of Aspreva Pharmaceuticals, a small-cap company that worked on a drug called CellCept, which has gone on to become very commonly used in treating patients with lupus who developed kidney disease.

Harjes: Yeah, this is an interesting drug, because it's actually meant to be an organ anti-rejection drug. It's approved for kidney, heart and liver transplants. But it's used off-label today in these LN -- lupus nephritis -- patients, as you mentioned. And it's come to become the standard of care for these patients. But there's actually not a drug out there yet that is specifically indicated for that indication.

Campbell: Right, and that's where Glickman and his team are at it again -- to come up with the first FDA-approved treatment for LN. Back in 2009, they sold Aspreva for $915 million, so shareholders got a nice reward out of betting on him the first time around. Who knows if things will play out similarly this time around with Aurinia. But, he's got a lot of the former slate of people working with him that helped develop CellCept for use in LN. And the drug they're developing now, Voclosporin, so far, when used with CellCept in mid-stage trials has proven to be very effective. We'll have to see how phase 3 trials pan out, but in phase 2, very effective, Kristine.

Harjes: Yeah, absolutely. And phase 3 should wrap up in 2020. As you mentioned, it's pretty promising so far. When you look at this market, about less than 10% of LN patients usually go into complete remission following the treatment. But using this drug that they're developing alongside CellCept has achieved a 49% complete remission rate, and that's compared to 25% complete remission rate in the CellCept-only control arm of the trial.

Campbell: That's really important, too, Kristine. If it's uncontrolled, if you don't go into remission, it's significantly increases the likelihood of advancing eventually to end-stage renal disease, where you require dialysis.

Harjes: Right. 30% of patients with severe LN end up in end-stage renal failure within 15 years of diagnosis.

Campbell: Right, and that's not something, obviously, that anybody wants. The payers don't want that, the patient certainly doesn't want that. So, if you can come up with a better mousetrap than CellCept, and they very well may have done that by combining these two drugs together to improve complete remission rates. The other thing that was interesting, too, Kristine, was that they achieved those complete remission rates more quickly, which is also important because you want to reduce the amount of time that damage is being done to the kidneys, because that will help keep them healthier, as well. If this drug puts up similar kind of data in phase 3, it could be definitely a nine-figure run, and potentially higher than that.

Harjes: Right. They're looking at pricing anywhere between $50,000 to $100,000 per year from what we've heard about it so far. To give you a little bit more of an idea of the scale of this market, there are 500,000 lupus patients in the United States, and 60% of those will develop LN, and for 40% of those LN patients, the disease is considered poorly controlled. So, this was actually a fairly large market, and it's going to be an expensive drug should it be approved. So, pretty big opportunity here. We could even potentially see peak sales of $1 billion just within the U.S.

Campbell: Right. If you dig into their SEC filings, they give you all this information, they tell you about the market size, the competition that's out there, how they think they can disrupt it, and what the market opportunity could be. Like you said, this is not going to be a cheap drug. Not going to be dollars per pill, if you will. This is going to be a relatively costly drug because, in the end, it could save payers a lot of money by helping patients avoid having to go onto dialysis. They think that if they can get that pricing in the U.S., the U.S. market could be worth $1 billion, the E.U. market could be worth $300 million, Japan could be worth another $80 million. So, you have a drug that conceivably -- conceivably, if approved -- could be worth $1.4 billion someday. You never know.

Harjes: Indeed. Let's move on to talk about a company that's working in a space that's larger by multiples than this LN space. This is a company that's working in Alzheimer's disease research. The company name is Axovant Sciences, and their ticker is AXON.

Campbell: Recommending anything that we're talking about, any kind of clinical trials that have to do with Alzheimer's disease, it's not even a coin flip. If you look at the historical success rate of clinical trials in Alzheimer's disease, it's been horrible: 99% of drugs that have gone into the clinic for Alzheimer's disease have come up short. And that's very sad, obviously, because this affects over 5 million people here in the United States alone, and that's climbing every year. I think every 66 seconds, another person is being diagnosed with Alzheimer's disease. So, there's a massive unmet need for new drugs. It's also a very, very difficult indication to develop new drugs for. However, all that being said, Axovant is interesting, because their chief development officer is one of the only people who have had success in developing an Alzheimer's disease drug.

Harjes: Right. This is a guy named Lawrence Friedhoff who, while he was at a company called Eisai, was responsible for the development of Aricept.

Campbell: Aricept is one of the most commonly used Alzheimer's disease drugs. Actually, in terms of commercial sales, it's the biggest drug that's ever been developed for Alzheimer's disease. Friedhoff now is at Axovant Sciences working on a new drug, Intepirdine, that can be used alongside Aricept to hopefully delay disease progression in Alzheimer's disease patients. phase 3 results are coming up later this year -- actually, potentially this quarter.

Harjes: Yeah, I believe results are due in September.

Campbell: Yeah. That's exciting. Obviously, there's a huge catalyst here. Shares could go to the moon or they could crash right through the floor depending on how this trial pans out, because this is the one drug that could move the stock up or down. But it's very intriguing to me that you have the same guy behind Aricept working now at Axovant on this new drug. Both of these drugs have a slightly different mechanism of action. One boosts the presence of a neurotransmitter that's important to memory, the other reduces the ability for the body to break down that same neurotransmitter. So, conceivably, using them in combination with one another would make sense to improve Aricept's efficacy that you've seen so far, just using it as a monotherapy. In phase 2 trials, again, pretty solid results in improving outcomes for patients. However, again, this is Alzheimer's disease, and we've seen plenty of phase 2 trials come up short in phase 3. So, this is probably a pretty risky bet, one way or the other.

Harjes: Also, another point to remember here is, this drug that they're developing was purchased from GlaxoSmithKline after GSK abandoned the program. So, this was back in around 2011. GlaxoSmithKline decided that this drug had missed its primary endpoints of significant improvement of cognition, and they decided to scrap it. Axovant came along, this was pre-IPO, and bought the drug for $5 million, which sounds like a lot to you and me when we think about our own wallets, but that's actually really not a lot at all. It turned into $10 million last year when the FDA OK'd a phase 3 trial, so it was two payments of $5 million. Then Axovant IPOs in June 2015. It was at the time, the largest biotech IPO, and after day one it had a $3 billion valuation. So, for $10 million, they bought this drug that then landed them a $3 billion valuation. So, to me, this is like, that's an incredible difference. And when you look at the guy behind all this, he used to be a former hedge-fund manager. His name is Vivek Ramaswamy, and he basically had no drug development experience. He was behind not just this big biotech IPO, but the one that was also the biggest biotech IPO in 2016. So, this guy is a businessman. You get this drug, and now it's being developed further as opposed to being in GSK's dustbin, and it's being developed alongside Aricept. So, bringing on Lawrence Friedhoff, who was responsible for Aricept's development, that's awesome, that's a really good sign. I'll also add that back in April, a guy named David Hung took over as CEO. This guy was the former president and CEO of Medivation, which, if you've been following along with that story, was acquired for $14 billion last year from Pfizer mostly because of their prostate cancer drug, Xtandi. So, now you have people who really do have experience in this type of market leading this company.

Campbell: With what Hung did at Medivation with Xtandi and prostate cancer, I have a hard time believing that he didn't do a whole heck of a lot of due diligence, sitting down and considering whether or not to take the top seat here at Axovant. Now, who knows what that means. But, again, you have a proven team. Could they catch lightning in a bottle again? Maybe. We should, at least, find out again soon in this case, because like you said, that data is expected to come up in September. If it's good, and this drug enters the market, I think Axovant's market cap right now is $2.5 billion, that's probably not high enough given the commercial opportunity that could be ahead of it with this drug, if it's successful.

Harjes: But, as you mentioned, this is a high-risk play. So that $2.57 billion market cap could easily disappear if the drug flops.

Campbell: Yeah, buyer beware. Very small percentage of your portfolio, any money that you're willing to lose, you have to be willing to lose to invest in this company.

Harjes: Yeah. Personally, I'm a little bit hesitant with this one because there's so much over-enthusiasm about the Alzheimer's developers as a whole. I tend to think that the reward is not quite worth the risk with a lot of these, Axovant included.

Anyway, let's move on to our last company of the day. This is Esperion Therapeutics, their ticker is ESPR. They have a $1 billion market cap, and it's already up 276% year to date.

Campbell: Wow. These stocks have moved a lot, and that's because they're getting toward the finish line. All these companies are moving their drugs into phase 3, so we're not talking about phase 1 drugs. This is a very interesting stock to me, because it's run by a guy named Roger Newton. Roger Netwon, back in the olden days, he worked at Parke-Davis as one of the scientists who developed a drug that many people are aware of and many of our listeners may even be taking. It's called Lipitor.

Harjes: Yeah. Lipitor is the most commonly prescribed statin. It's off patent by now, but generic Lipitor is still very commonly used, and statins themselves are the most prescribed medicines on the planet.

Campbell: Tens of millions of patients take statins every year. I think over 40 million people in the U.S. are prescribed statins. Lipitor was a behemoth before losing patent expiration. That drug was hauling in about $13 billion a year in sales. It just goes to show you how big the market opportunity is in lowering bad cholesterol as a way to reduce the likelihood, hopefully, of major cardiac events, stroke, heart attack, and death.

Harjes: Right. Statins aren't perfect. We've talked a little bit on the show before about PCSK9 inhibitors, which are a different approach to lowering cholesterol levels. Now Esperion is looking at taking a different approach entirely. They're developing something called bempedoic acid to use alongside statins in order to reduce these levels of bad cholesterol. They had very positive phase 2 data, showed a 20% reduction in bad cholesterol levels when used alongside statins, and we should be getting phase 3 data out in the second quarter of 2018, which could potentially mean approval as early as the first half of 2019.

Campbell: What's interesting to me, too, about this story, Kristine, is not only that Newton successfully developed Lipitor, but he actually started a company also named Esperion Therapeutics in the late '90s to work on cholesterol-lowering medications.

Harjes: Yeah, this is Esperion part two.

Campbell: Yeah. So, we'll call this version 1.0, and the version he's doing right now is 2.0. Version 1.0, he sold that company to Pfizer for over $1 billion, $1.3 billion back in 2004. So, Newton and his team, they know a lot about lowering cholesterol. They have a lot of experience, decades of it, and two prior successes to their name. Bempedoic acid has a different mechanism of action than statins, it works upstream of statins. People think it might produce a better side-effect profile -- less impact on muscle weakness and some of the things that make many people intolerant of being able to take statins. Initially, the phase 3 trial that's being conducted now could clear the way for its use in people with high cholesterol levels caused by genetic mutations, so really tough-to-treat patients. Over time, however, their trial is ongoing and they could expand that population. Obviously, this drug may not be right for everybody, but you can draw and connect the dots that would make you think that if, eventually, approved, it could treat between 1 million and 10 million patients, depending on how the label reads over time. And if that's true, then yeah, you have a nine-figure drug, maybe a ten-figure drug, in the making. It won't be Lipitor-sized, but it can still be a very successful drug, and I think that more and more people are warming up to the concept that Newton might be able to succeed yet again in this indication.

Harjes: Absolutely. The size of the addressable population here will matter quite a bit, because pricing matters a lot when it comes to cholesterol medications. Because the statins are generic at this point, generic Lipitor is like $10 a month. It's super cheap. You look at newer drugs like PCSK9 inhibitors, they cost $14,000 a year. So, that's a very big range, and it seems like Esperion is planning to target volume over price. If you look at the way the pressure on the drug market is trending, that's probably a smart move, to try to get a little bit lower of cost, lower margins, but get them approved and out there to the widest number of people possible.

Campbell: Right, you could argue that the pricing of the PCSK9 inhibitors jumped the shark, they went too high, and as a result there was so much pushback and it's really crimped their use. I had an opportunity earlier this year to talk to management of Esperion, and have them walk me through what they thought the commercial opportunity could be for this drug, and what the pathway they would take to try to get this thing to market. I couldn't help but come away impressed. I think they have a very good strategy to file in 2019; data will come in 2018 from this first trial. They're also conducting a phase 3 trial that begins later this year that should have data at the end of next year that combines this drug, bempedoic acid, with Zetia. Zetia was another anti-cholesterol drug that, at its peak, was bringing in $4 billion a year in sales. So, a one-drug combination tablet that pairs up Zetia, which is still very widely used today, with bempedoic acid, could also be a needle-mover for this company. I like what's going on here. Again, you also have to throw that caveat in, that past performance does not guarantee future success. Anything can and does happen in phase 3 trials. But I kind of like the odds on this one.

Harjes: Very nice. Last time we did a "lightning in a bottle again" show, I closed off by asking you which of the companies we discussed you would be most likely to buy. So, I'm going to put you on the spot with that same question again. You have Aurinia, Axovant, and Esperion. Which is your favorite?

Campbell: I'm going to rank them. I own Esperion, full disclosure, so I guess that would have to be No. 1. I'm very intrigued by these other two companies, though.

Harjes: Do you have a ranking of them?

Campbell: I'm going to go Esperion No. 1, Aurinia No. 2, and Axovant No. 3, only because Alzheimer's disease is just so hard to tackle.

Harjes: Yeah, absolutely. Another final question for you, what do you think will be the next big cat-themed company name from Alan Auerbach, if there is a next?

Campbell: Oh, I don't know, something involving panthers.

Harjes: OK. I was thinking lions, maybe, he hasn't hit those yet.

Campbell: Stay tuned, I have a feeling he'll be back with another one.

Harjes: Absolutely. And when he does, we'll be sure to cover it on the show. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Shout out to our man behind the glass, Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!