Does This Speculative Biotech Still Have Room to Run?

These days, one question has fascinated biotech investors: Can Pharmacyclics (NASDAQ: PCYC), a clinical-stage biotech, launch a megablockbuster drug that will generate up to $9.2 billion in annual peak sales? The bulls certainly believe so, and shares have risen more than 100% over the past 12 months.

Yet after that kind of rally, is there still room for new investors to get on board? Let's take a look at the facts and figures behind the company's fascinating new treatment, ibrutinib.

An expensive new treatment for two rare diseases
Ibrutinib is a treatment for chronic lymphocytic leukemia, or CLL, and mantle cell lymphoma, or MCL, developed by Pharmacyclics and Johnson & Johnson (JNJ -0.69%). The two companies will share future sales of the potential blockbuster equally. Ibrutinib is a first-in-class BTK, or Bruton's tyrosine kinase inhibitor, which inhibits a cell signaling enzyme that cancer cells use to survive and spread.

CLL is a rare disease, with 15,680 new cases in the United States expected by the end of the year. MCL is a rare form of non-Hodgkin's lymphoma, or NHL, which affects 15,000 patients in the United States. Due to the rarity of both diseases, ibrutinib was granted orphan drug designation by the European Commission and the FDA last year. In February, ibrutinib became the first oncology drug to earn a breakthrough therapy designation for CLL and Waldenstrom's lymphoma from the FDA. That designation puts ibrutinib on track for an accelerated approval, which could bring it to the market a year earlier than expected.

Patients given ibrutinib showed 71% and 68% response rates, respectively, for CLL and MCL -- the highest rates ever recorded in clinical studies. Yet, just like other orphan drugs, ibrutinib will be an expensive treatment, costing $125,000 per patient per year.

Joining the five top drugs of all time
Based on those numbers, Deutsche Bank analyst Robyn Karnauskas recently stated that ibrutinib could reach peak sales of $9 billion, while analysts at William Blair announced an even higher estimate of $9.2 billion.

Both estimates are much higher than the $6 billion estimate from Goldman Sachs, because they also included ibrutinib's other two possible applications in diffuse large B-cell lymphoma and multiple myeloma.

To get an idea of how lofty those projections are, let's compare ibrutinib to the top five selling drugs of all time.

Source: Forbes.

If ibrutinib can hit those sales targets, it would become the fourth best-selling drug of all time, amounting to eventual annual revenue of $3.0 billion to $4.6 billion for Pharmacyclics and J&J.

Let's meet the competitors
All that excitement over ibrutinib hasn't gone unnoticed, however. Companies like AbbVie (ABBV -1.03%), Roche (RHHBY -2.24%), and Celgene (CELG) are all creating new targeted CLL and MCL treatments as well.

AbbVie and Roche's Genentech unit are working on a competing treatment, ABT-199, aimed at treating a variety of blood disorders, including CLL and NHL. However, a late-stage study of ABT-199 was suspended in February following the deaths of two patients. New trials are expected to resume with a modified dose, but the delay has given ibrutinib a considerable advantage.

Celgene's Revlimid, its top multiple myeloma drug, was approved as a treatment for MCL in June. Revlimid sales accounted for 66% of the company's top line last quarter, and climbed 13% year over year to $1.05 billion. Celgene is also developing a new BTK inhibitor that targets the same pathway as ibrutinib for the treatment of lymphoma. However, the treatment is still in phase 1 trials and will arrive much later than ibrutinib if approved.

Other competitors to keep an eye on include Gilead Sciences, which is working on a new treatment for CLL and indolent NHL, and Infinity Pharmaceuticals, which has several leukemia and lymphoma treatments in its pipeline.

The Foolish takeaway
There's a lot to love about Pharmacyclics, which has a lot more to gain than J&J if ibrutinib can hit those lofty peak sales estimates. The efficacy rates for ibrutinib are high, its market is narrow, and it should arrive long before its closest competitors can catch up.

However, all those factors are already baked into the stock, which means that until the drug is actually approved by the FDA and successfully launched, there could be more downside than upside from current prices, especially with a wobbly market teetering at all-time highs.