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Biotech Roundup: Vertex, Dynavax, Schering-Plough

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A deeper look inside this week in biotech...

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Vertex Pharma

The primary topic of conversation in biotech circles this Friday morning is likely the hepatitis C data from Vertex Pharma (VRTX). Those who follow this column know I'm not exactly a fan of this company, believing the whole story will end badly. Today's data, on its face, seems pretty good. However, until we see the performance in the control arm I wouldn't call it a complete victory for the drug. There are also significant, longer-term concerns about the drug's side effects.

The company's press release breaks down the telaprevir data with sustained virologic response (absence of measurable levels of virus in the blood, or 'SVR') of 61% in one study and 65% in another. That compares with historic controls around 40-50%. Management was on TV earlier touting its results as an "around 50%" improvement, but that claim can't be made until we see the control arm data from these trials.

Don't get me wrong. If these data hold up in large pivotal trials, this will be an important advance in the treatment of hepatitis C. I'll be happy to eat crow then. Taking an oral pill instead of shots, combined with the apparent increased speed to SVR, will help the increasing numbers of people infected by this virus.

There is a lead lining to this silver cloud, however. 13% of patients in one study and 10% in another stopped telaprevir treatment because of side effects. 7% of patients stopped telaprevir treatment specifically for rash. This compares to 2-3% of patients who stopped the standard treatment due to side effects.

A long-held belief of Vertex bulls is the shorter treatment regimen involved with telaprevir treatment will compensate for the rash. This theory holds that 12 weeks of rash followed by 12 weeks of flu-like symptoms (from the standard of care) will be preferred to 48 weeks of flu-like symptoms from the current treatment regimen. This morning's data further dented this prized belief.

There were also no data from the control arm presented. Historic controls typically underestimate the treatment effect in clinical trials. The worry here is a 65% SVR might not look so promising if the control group ended up seeing a SVR in the mid- to upper-50% range. I don't have an insight as to whether that might be the case, but it's something to watch carefully when the next data point for this trial arrives.

People are searching for a reason why Vertex stock is down on these data. The non-fundamental reason is simply "selling the news". Others are suggesting that people are selling because a pie-in-the-sky SVR of around 70% wasn't reached. I don't buy that anyone with a serious enough position in Vertex to cause today's drop believed 70% was very likely.

Sellers based upon fundamental analysis are likely selling for three reasons, the final two being related:

1) Discomfort with no control arm data.

2)
Much higher dropouts in the telaprevir arm due to drug-specific side effects.

3)
Realization that telaprevir's side effect profile opens the door to other drugs like a similar one from Schering-Plough (SGP), which saw no rash in an early Phase II study.


ASCO Catches A Clue

The biggest scientific meeting of the year for biotechnology investors is the American Society of Clinical Oncology (ASCO) meeting in early June. It marks the end of the traditional biotech investing season. It tends to feature the most important data for oncology companies. It attracts the most Wall Street attendance of any conference.

ASCO has been benefiting its members financially by releasing abstract data to members a couple of weeks ahead of the meeting. Non-members who pay to attend don't get the abstracts until the meeting starts. This practice has been going on for years, creating a not‑so‑secret market for the thick abstract books – whose value has reached as much as five figures to those whose investments can benefit by an early peek.

I've written about this nonsense several times, with the most detail in this April 2004 story.

Credit goes to RealMoney.com's Adam Feuerstein for beating ASCO about the head and shoulders about this policy. He actually got his credentials revoked for one ASCO meeting for violating the disclosure rules and reporting detail from ASCO abstracts he'd obtained from multiple Wall Street sources ahead of the meeting.

We'll see if this policy lasts longer than one year. I suspect it will. Wall Street smart money has turned away from buying the abstract books to simply paying presenting doctors consulting fees to disclose their information early. This means doctors won't be as affected in the pocket book as they were the last time ASCO tried to do something about this.

The SEC, despite knowing about this insider-trading problem represented by these "consulting" gigs for over two years now, has done nothing. Much of this happens at the Spring AACR (March or early April each year) meeting. The same doctors tend to attend both meetings, and the firms that specialize in matchmaking docs and hedge funds hold organized "sessions" where the doctors talk about upcoming presentations. This is one reason why the "ASCO effect" has been blunted in the last two-three years.


Dynavax Deal

There is no doubt in my mind a primary future pathway for treating many types of diseases will be manipulation of our immune system. One of the most promising approaches to this includes the manipulation and use of the body's Toll Like Receptors (TLRs). I'm not going to get into the science of this except to say TLRs seem to be the body's immune system gatekeepers in a sense, responsible for dampening or boosting immune responses. It's a complicated system, our immune system.

My firm found Dynavax (DVAX) via a tip from some of the management teams my firm covers in the immunology space. Dynavax announced a deal with Merck (MRK) for Heplisav, a TLR-based vaccine against hepatitis B. Merck will fund all future development of the vaccine. Dynavax gets $31.5 mln in upfront cash, up to $105 mln in milestones, and double-digit royalties on sales. It's a good deal for Dynavax that won't take it to profitability but also won't be insignificant for its business.

Dynavax shares have been depressed ever since a ragweed allergy drug failed trials. The trial failure was likely due to a lack of ragweed pollen in the air around the study centers. It is hard, after all, to study the effect of a ragweed allergy drug when there is no ragweed to make people allergic!

One of the more influential biotech hedge funds, Deerfield Capital Management, believed in the ragweed program so much it fronted Dynavax the cash for a follow-up trial. It's an interesting deal and an interesting trial. If the immunology space interests you, take a closer look at this company.


Sector Rotation

Time will be the judge of whether the market now rotates to technology as I predicted back in August. In Toddo's article this morning, he notes mutual fund year end could be a proximate cause for waves of sector repositioning. Funds will, by their nature, look for what's hot. Y'all know I've thought biotech was a good place for some time.

Check this three month comparison chart of the NASDAQ Biotech Index (NBI), NASDAQ Composite (IXIC), Dow Jones Industrials (DJI), and the S&P-500 (GSPC). If mutual funds are looking at this, it could be a profitable 2008 in biotech, as I've hoped.

I'm in Orlando right now for the American Heart Association Scientific Sessions conference. It's darn muggy here! The goal is to run across a promising young (non-device) cardiology company to add to my firm's coverage universe. Cardiology companies generally have the highest chance of success bringing drugs from Phase I to market – 20% compared to oncology companies at 5%.

Position in DVAX.

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