October 1, 2009 (Vol. 29, No. 17)

Outcomes Vary for Three Different Companies on Quest for Promising Treatment

Melanoma is one of the toughest cancers to crack; it has been described as a graveyard for drugs and companies given the unusually large number of compounds that have failed in clinical development.

This year was not unlike other years in the field of melanoma drug development in that we had (unfortunately for patients and investors) more failures in the space, including two high profile ones with Onyx Pharmaceuticals’ and Bayer’s Nexavar and Synta Pharmaceutical’s Elescomol. However, we did see a company that is developing a promising melanoma drug, Medarex, get bought by Bristol-Myers Squibb (BMS), in large part because of the promise this specific drug holds in the treatment of melanoma and prostate cancer.

Medarex’ Ipilimumab is an anti-CTLA-4 antibody that many experts in the field believe has the best chance of all the drugs in development for this indication to make it. Given the scarcity of treatment options in this space, any drug that shows efficacy and safety has a first mover advantage and can generate significant revenue. However, given the fact that almost nothing has worked in this setting, investors are understandably skeptical about any one drug’s success.

On February 26, Synta reported that its Phase III trial comparing Elescomol in combination with paclitaxel to paclitaxel alone in chemo-naive patients with stage IV metastatic melanoma was suspended  due to the greater number of deaths observed in the Elescomol arm.

The stock had been trading in the $8–10 range and took a major hit on the day of the news, closing at $1.36 before stabilizing around $2 in the next few weeks. Prior to the company presenting more details on the failed trial at the ASCO meeting in late May, shares more than doubled from around $2 to close at $5.

The presentation of data providing clear evidence that the drug failed killed any remaining hope for Elescomol and essentially sealed the fate of the company, since it does not have any compounds in even mid-development stage. Investors reacted negatively to the disappointing data, and the stock has been hovering between $2 and $3 per share, roughly around the company’s cash position.

We see this outcome as typical for a small, one-trick-pony biotech stock: if the one asset makes it through Phase III, they are worth at least hundreds of millions and many climb over the $1 billion mark. The majority of them fail, however, and the stock trades at, and usually below, cash until they go at it again, by inlicensing a compound, merging with another company, or going out of business.

Two months later, on April 27, Onyx and Bayer reported a failure of their own. Specifically, their jointly developed small molecule, Nexavar, failed in its Phase III trial in patients with unresectable stage III or stage IV melanoma. The trial was terminated early following a planned interim analysis by the DMC. Onyx shares barely flinched, closing at $25.46 down from $26.75 the day before, losing just 4.8% of their value.

How the market reacted to the news in each case is indicative of two things: just how much was riding on each of these  programs, and investors’ expectations about the trials. In Onyx’ case, investors saw the chance of Nexavar working in melanoma as a free option, and the stock price was thus not punished by the failed trial. Another way to interpret this, of course, is that investors never really believed Nexavar had a chance of working in this indication.

In the case of Synta, it was all or nothing for Elescomol; had the trial worked, the stock would have skyrocketed. It was not to be, however, and investors assigned to the shares what they saw as the fair value for this company: it was only worth around its cash position, since the other compounds it is attempting to develop are unproven and many years away from results in pivotal trials.

The third act in the melanoma drama this year came in July 23, when Bristol-Myers Squibb reported its intention to acquire Medarex for $2.4 billion, or $16 per share, a 90% premium to where Mederex shares were trading prior to the offer. The firms have been collaborating for four years, and BMS already owned a 2% stake in Medarex. A Phase III trial with Ipilimumab for the treatment of metastatic melanoma is currently under way.

The deal was completed last month, and the price tag and premium that BMS was willing to pay is indicative of pharma’s need for new and differentiated compounds and the lengths companies will go to in order to acquire compounds in development for indications with large unmet medical needs.

Simos Simeonidis, Ph.D. ([email protected]), is director and senior biotechnology analyst at Rodman & Renshaw. Web: www.rodm.com.

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