Is YM the Next Incyte?
Nobody can know for certain whether YM's stock price will mimic Incyte's chart pattern, but right now, things are looking positive and the stock seems undervalued.
Incyte (INCY) has been around a very, very long time. It predates the NASDAQ Biotech Index (^NBI), in fact, having been founded in 1991. It has an accumulated deficit of $1.6 billion, unusually large even by biotech standards. It has lost money almost every year since its inception.
In November 2011, Incyte saw Jakafi (JACK-uh-fee) approved for the treatment of a bone marrow disease called myelofibrosis. Myelofibrosis is the gradual scarring of the bone marrow causing all sorts of problems. The initial issues are reduced numbers of red blood cells, white blood cells, and platelets.
Anemia, infections, easy bruising, and bleeding are typically first indications of the disease. The liver and spleen start working overtime to make up for the deficiencies caused by underperforming bone marrow. The liver and especially the spleen swell, sometimes to the size of a basketball, causing significant abdominal pain. These symptoms are often what send patients to the doctor.
The first substantive data set on Jakafi was released at the American Society of Hematology (or ASH) meeting in December 2008. That initial phase II data set showed the drug shrank spleens and helped reduce some symptoms. The company entered phase III trials in mid-2009. Positive data on the first trial were released in late 2010, and positive data from the second trial were reported in 2011. Jakafi is the first drug approved by the Food and Drug Administration for myelofibrosis.
The chart below shows the path of Incyte shares (light blue) and the NBI (white, included for reference) from the early phase II data in 2008 through the present. Investors who bought on the ASH 2008 data could have exited at the top with better than a 450% gain.
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At last week's ASH meeting, YM BioSciences (YMI) reported substantive phase II data on CYT387, also for myelofibrosis. CYT387 appears to improve spleen size and quality of life about the same as Jakafi, but CYT387 has an extra bonus effect: It seems to reverse the anemia plaguing myelofibrosis patients. While the data are early, data presented last week at ASH show the anemia benefit is real. Overall, the side effect profile for CYT387 also appears to be superior to that of Jakafi.
The myelofibrosis market is not a huge one. There are upward of 130,000 patients in the US, which puts myelofibrosis into orphan disease territory. Nevertheless, the market opportunity is reasonably substantial, with chronic treatment and long median survival times for most patients.
Incyte had a checkered past prior to its success with Jakafi. YM is no different. YM's breast cancer drug tesmilifene failed phase III trials. Nimotuzumab, YM's follow-on to Avastin, suffered from lack of resources, poor timing, and poor regulatory strategy. My firm has covered YM since 2005, so we've lived through most of this drama.
YM acquired CYT387 when they acquired Australian biotech Cytopia in 2009. Management of Cytopia assumed control of the company shortly thereafter. Tesmilifene is long gone and new management (wisely) punted the responsibility of developing nimotuzumab off to partners. CYT387 is now the company's lead drug and the only one YM is spending meaningful money to develop.
Looking at Incyte's chart, I have to believe past history is weighing on YM's stock price. Despite CYT387 having a superior profile to Jakafi, stock price gains leading into and after the recent ASH conference have been minimal. I believe this makes YM undervalued.
To be sure, CYT387 won't be approved for a while. The phase III pivotal program will start in mid-2012, and approval probably won't come for three years. The company has over $70 million in the bank, but will need money from investors or a partner to launch the pivotal program. This will be a worldwide clinical trial program, so management would be best served by selling the company or partnering the drug.
Smart biotech investors never buy a company just for the partnering or the buyout, however. The core fundamentals of the company have to be strong, or you're just fooling yourself and exposing your portfolio to unnecessary risk.
I spent most of my time at ASH attending different sessions on myelofibrosis. Incyte's Jakafi is a fine drug for these patients, but the early profile of CYT387 appears to be a better fit for this disease. CYT387's side effect profile appears cleaner at this stage, and the anemia benefit really has doctors excited.
Nobody can know for certain whether CYT387 will ultimately be successful or whether YM's stock price will mimic the Incyte pattern on the chart above. I happen to think the stars for a similar price gain and successful regulatory path for YM are more aligned than not at this point, which is why I believe the stock is undervalued.
Major next steps will be a partner or acquirer for YM to get CYT387 into pivotal trials. YM could also decide to do this alone, which would not be as positive. Also important will be details on the pivotal program design. Those details should arrive no later than spring 2012, with pivotal trials starting summer 2012.
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