Biotech RoundUp: ZymoGenetics Set to Dominate Thrombin Market
There can be opportunity when analysts get it wrong
ZymoGenetics (ZGEN), as I expected, received approval for its surgical bleeding control product RecoThrom. This is a 100% recombinant product. Bayer (BAY) is Zymo's partner on this, booking up to 20% of sales in the US. Bayer is also responsible for achieving ex-US approvals. The approval in the US caused a $40 mln milestone to be paid to Zymo.
Also as I expected, theoretical competitor Omrix (OMRI) dropped. Why do I call it a "theoretical" competitor? Well, OMRI's much-vaunted partner Johnson and Johnson (JNJ) has been trying to sell its human-plasma-based product Evithrom since August 2007. According to King Pharma (KG) (which owns cow-based Thrombin-JMI, the only product currently in the space) and Zymo, Omrix hasn't closed a single sale.
If you listened to the Zymo conference call, you heard me ask whether it would also take the company five months to close its first deal. Zymo's head of sales answered that he'd be mad if the company didn't have a sale closed by the end of next week.
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Now I've been around the block a couple of times in this space, but I have to say the soap opera around the $250 mln US thrombin market has been fascinating. There is no doubt among rational, non-conflicted people that Zymo's RecoThrom will dominate the market. Never in the long and highly profitable history of recombinant drug development has a product like RecoThrom failed to capture essentially all market share from animal- or human-derived products.
In this case, Omrix management started whispering sweet nothings in the ears of sell-side analysts who should have known better. Some of the analysts who fell for Omrix's line of bull were predisposed because they had brought Omrix public. Others were predisposed because they'd worked with Omrix founders and management in the same firm. The remainder was probably attracted by the strong rumor Omrix might be interested in shopping itself.
This brought us nonsense such as Omrix might capture a majority of the thrombin market. Or that some statistically and clinically insignificant differential in heart attacks seen in Zymo's Phase III trial would prevent the FDA from approving the drug. Or that because 20,000 unit vials are most popular, and Zymo won't have 20,000 unit vials until May, that Zymo somehow automatically defaulted the market to Omrix or King. Silly stuff.
I expect this might continue. One of these analysts will issue a note repeating the side effect issue as a concern, despite the fact the FDA stated (in some of the most unequivocal language I have ever heard of in an approval letter and drug label) there was no concern of side effects for RecoThrom. Another will repeat the silly vial size argument.
In this down market, they might get some traction as people are predisposed to believe the negative. That should be a good buying opportunity for those who have done their research. I believe RecoThrom will sell about $30 mln in 2008 and have essentially captured the US market by the end of 2009.
I actually wrote the above last night, and this morning I'm greeted with one of the funnier notes in a downgrade by Oppenheimer. This analyst says he doesn't believe the regulatory strategy for lupus is sufficient. However, the company has two Special Protocol Assessments from the FDA.
I've spoken about Special Protocol Assessments (SPAs) in the past. They are the FDA's way of coming to an agreement with a drug company that a clinical trial is designed appropriately to, if the safety and efficacy data are positive, result in FDA approval. This means there is no doubt the regulatory strategy is sufficient for approval. I know trading desks are exerting additional pressure on analysts these days, but is it too much to ask they at least look at the company's list of press releases and understand basic FDA programs like the SPA before issuing a rating change?
The Oppenheimer analyst's comment about IL-21 having side effect issues I guess is, if I'm being charitable, a matter of opinion. IL-21 is designed to be a substitute for IL-2. Both drugs are designed to stimulate the immune system. IL-2 sees the most use in kidney cancer and melanoma.
Unfortunately, IL-2 is very toxic. Most patients who are prescribed IL-2 as part of their cancer therapy have to do it on an inpatient basis. That means they must be checked into the hospital for the entire week-long duration of the typical treatment. Older patients are rarely prescribed the drug because they simply can't handle the side effects and, too often, die from the side effects of the drug. In clinical trials thus far, all patients using Zymo's IL-21 have done so on an outpatient basis. It really is a remarkable difference. Further clinical trials are necessary to determine whether IL-21 can match the efficacy of IL-2, but anyone claiming the drug will fail due solely to side effects is treading on thin ice.
ZymoGenetics is blessed with a fabulous, experienced management team. Its science is smartly done, as are its clinical programs. While RecoThrom is the first drug ZymoGenetics has put on the market itself, it is responsible for a large chunk of NovoNordisk's revenue stream from when Zymo developed recombinant blood factor products for that European drug company. They are not newcomers to the drug development and marketing game, so execution risk is less here than most biotechs at a similar stage of development.
I really wish the overall macro market was better because I'd then have no qualms about pounding the table on this name. For patient investors, especially those who have hedged overall market risk adequately, you should investigate this one further.
Avastin on the 23rd
I apologize for harping on this one, but I'm seeing it repeated constantly by folks inside the biotech investment community as a date to watch. On the 23rd, Genentech (DNA) finds out whether the FDA will follow the advice of their ODAC panel and require more information from Genentech before approving Avastin for breast cancer.
Biotech "experts" believe there is essentially no chance the FDA will go against ODAC. Count me in that group. In my little corner of the market, nobody expects approval.
Biopharma and pharma analysts whose research effort is more tuned to financial modeling and tracking script data simply don't have as much experience in dealing with the strange world that is ODAC and Dr. Richard Pazdur's Office of Oncologic Drugs (OOD). So much so that I've actually seen some analysts write they expect approval on the 23rd, with one prominent Genentech analyst telling his clients there is a 50-50 chance.
Now I'd be more than happy to have egg on my face on this one because it would be very good for the biotech space. But if generalists are expecting approval and OOD does what all we "experts" think they will do and reject the drug, it could get ugly for the sector – not to mention Genentech's share price.
Fast Money Drug Habit
Prof. Macke is one of the Fab Five on CNBC's Fast Money – a show I've become addicted to. In yesterday's show, it was nice to see commentary to be more careful of pharma stocks. The gang still believes they are good investments, but not here.
Y'all know I think pharma is a bad investment, especially long term. Fast Money is a trader's show, though, and I've consistently acknowledged the sector is tradable as long as you take care not to be the last lemming into or out of the name.
The current Fast Money favorite, Johnson and Johnson (JNJ), is too heavy on the device side for my personal taste. That said, it is among the least (if not the least) affected by the looming patent cliff. I wanted to mention this name specifically because I tend to get questions about it whenever it's talked about on Fast Money.
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