Innovation is the key to success in any sector, but it's the heartbeat of the biotechnology sector.
Most biotech companies aren't making any money (about nine out of 10), so it's imperative that they remain innovative and showcase their technology to Wall Street and investors so they can be valued somewhat appropriately based on their forward sales and profit potential.
But as something of an unwritten rule within the biotech sector, the big companies tend to rule the small. This isn't to say that it's impossible for a small biotech company to develop a transformative drug that could usurp a standard of care therapy found at a Big Pharma or large-cap biotech stock, but the chances of it happening are pretty rare.
However, we may soon witness one such instance of this David versus Goliath battle firsthand.
Is this biotech Goliath in trouble?
Meet Incyte (NASDAQ:INCY), your modern-day Goliath, with a market valuation of $21 billion. Currently, Incyte has just one product approved in its portfolio, Jakafi, a treatment for myelofibrosis. The product, known as Jakavi in overseas markets, is licensed to Novartis, with Incyte receiving a royalty on total net sales from Novartis. Through the first half of 2015, Incyte's net revenue from Jakafi totaled $257.7 million in the U.S., with the company netting another $33 million in royalty revenue from Novartis. Overall, U.S. sales of this key therapy rose 68% year-over-year, while product royalty revenue jumped almost 50%.
The reason Jakafi/Jakavi has performed so well is that myelofibrosis has no cure and no other specifically approved products on the market. Myelofibrosis is a rare type of bone marrow cancer that adversely effects a patient's production of blood cells and leaves them with extensive scarring in their bone marrow. It's also associated with a shorter life expectancy.
In the clinical trials that led to its approval, Jakafi, an oral JAK inhibitor, was shown to have reduced patients' spleen size by at least 35% in a greater number of instances than the placebo, while also providing a greater number of patients a 50% or greater reduction in myelofibrosis-related symptoms, including itching, bone and muscle pain, night sweats, and abdominal discomfort, relative to the placebo.
But there's one key factor that you need to be aware of when it comes to the rapidly-growing Jakafi: it merely treats the symptoms of the disease. In clinical studies it did not lead to any partial or complete responses (which are rare to begin with in blood-borne cancers).
Can this small-cap biotech take down this giant?
Now, let me introduce you to today's "David," Geron Corporation (NASDAQ:GERN). Geron weighs in with a market valuation that's just a nose over $500 million. It has but one product in clinical development, imetelstat, and it doesn't have any drugs approved by the Food and Drug Administration. You could say it's really all or nothing for Geron when it comes to developing imetelstat as a treatment for myelofibrosis and essential thrombocythemia, or ET.
But Geron has a few tricks up its sleeve.
To begin with, Geron has a substantial backer in Johnson & Johnson. The healthcare conglomerate has shown in the past that it's not afraid to partner with smaller companies, as it did when it forged a development deal with Pharmacyclics to bring blood cancer drug Imbruvica to market. Under the terms of J&J's deal with Geron, it provided Geron with $35 million in upfront cash, removing a huge near-term financing concern for the company, and it provided Geron with a dangling carrot worth as much as $900 million more if imetelstat meets certain development, regulatory, and sales goals.
However, it's more than a big development partner that could separate Geron. It's the efficacy demonstrated by imetelstat that's eye-popping.
In an investigator-sponsored early stage trial conducted by the Mayo Clinic, imetelstat led to a 41% overall response rate, including partial or complete remissions in five of 22 evaluable patients. To emphasize, no myelofibrosis drug previously tested had demonstrated a partial or complete clinical response before imetelstat.
Then just this past week Geron announced in The New England Journal of Medicine that early results from two phase 2 studies (one in ET and the other myelofibrosis) had demonstrated encouraging early efficacy. Specifically, Geron's press release notes the following:
"In the Phase 2 pilot study evaluating imetelstat in MF patients, unprecedented complete and partial remissions, including reversal of bone marrow fibrosis and molecular responses were observed."
You're reading that correctly: a reversal of bone marrow fibrosis, and a similar safety profile as noted in prior presentations at the American Society of Hematology's annual meeting.
Long story short, with a real chance to treat the disease rather than just the symptoms, Incyte's revenue stream could become Geron's lunch!
Two Geron concerns worth monitoring
It's certainly possible that imetelstat could lead to a much higher valuation for Geron over the long run. But the reason its stock price remains firmly entrenched around $3, with a market cap of just over $500 million, is for two primary concerns.
First, investors should consider that Geron has nothing going on beyond imetelstat. This is an all-or-nothing bet, and if it doesn't pay off, then Geron would be practically worthless save for its cash position, which would be expected to dwindle over time. Without diversification, Geron's investors are agreeing to take on more risk than normal when owning a clinical-stage biotech stock.
An even bigger concern could be imetelstat's safety profile. Although its press release suggests that its two phase 2 studies shared a similar safety profile as prior phase 1 work, we can't forget that the Food and Drug Administration placed a clinical hold on imetelstat due to safety concerns in March 2014. The hold was based on persistent low-grade liver function tests on patients taking imetelstat, and fears that any potential liver damage may not be reversible. The FDA has allowed Geron to continue developing imetelstat, but you have to wonder what the dropout rate for adverse events might be like in a larger study, or how patients will tolerate imetelstat use on a long-term basis.
If safety proves to be an issue, then Geron and its shareholders could find themselves in a world of pain. But, if safety is ultimately a moot point, then it's Incyte that could find itself and its revenue stream in big trouble.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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