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TheStreet Open House

Biotech Stock Mailbag: Zafgen, Bluebird, MannKind

Stock quotes in this article: ZFGN, ETRM, BLUE, MNKD

BOSTON (TheStreet) -- In this week's Biotech Stock Mailbag, I write about two stocks I actually like!

 

I disagree. If you're interested in an obesity-related stock with big potential, take a serious look at Zafgen (ZFGN), not EnteroMedics (ETRM)

EnteroMedics managed to eek out a lukewarm but positive recommendation from an advisory panel this week. As I cautioned previously, FDA medical device advisory panels tend to be circus-like affairs, so no big surprise VBLOC passed muster despite two failed clinical trials and mediocre efficacy (8.5% weight loss, adjusted for the sham device.) All too often, these panels give the thumbs-up to ineffective devices that are deemed "safe." Fortunately, doctors and insurance companies tend to have higher standards, which is why EnteroMedics' big challenge will be finding any doctor willing to implant VBLOC into their obese patients. Don't count on it. 

Let's pivot to Zafgen, which priced 6 million shares at $16 in its public debut Wednesday night. As I wrote in 2012 when Zafgen was still a private company, its lead drug beloranib works in the liver to reset or normalize a patient's metabolism. Obese people, especially those who are morbidly obese, have livers that work overtime converting food into stored fat instead of energy to be burned off by muscle. When these obese patients are treated with beloranib, their livers stop making fat and instead start converting food into energy, like the metabolism of a lean person. This is different from the way drugs like Vivus' (VVUS) Qnexa or Arena Pharma's (ARNA) Belviq work, which is by altering brain chemistry so that obese people feel satiated or have less desire to eat. Beloranib is given as an injection, which makes it less convenient than weight-loss pills, but certainly better than Enteromedics' implantable pacemaker. 

The comparison between Zafgen and EnteroMedics is apt because both companies are targeting morbidly obese patients who would be candidates for lap band (gastric bypass) surgery. In a small phase IIa study, belonarib-treated patients lost 10.3% of their body weight, adjusted for placebo, after 12 weeks. EnteroMedics' VBLOC-associated weight loss (adjusted for sham control) was 8.5% after one year. Remember, we're talking about twice-weekly injections (beloranib) versus VBLOC, an implanted device which wraps electrical cords around your vagus nerve and delivers 10-12 hours of zaps per day.

Zafgen isn't really close to advancing beloranib towards an FDA filing for severe obesity. Another phase II study and large phase III studies still need to be conducted. However (and this is important) Zafgen is also developing the drug as a treatment for Prader-Willi Syndrome (PWS), a rare genetic disorder which causes patients to become obsessed with food and eating. PWS patients have enormous appetites, and to prevent them from literally eating themselves to death, they have to be monitored constantly. Caregivers must lock cabinets and refrigerators to keep PWS patients away from food. 

Beloranib might be an effective treatment for PWS, so Zafgen is planning a phase III study to start later this year. If the study is positive, Zafgen will have a shortcut to FDA approval for beloranib, and in a potentially lucrative and protected orphan disease indication. That's smart clinical development. Zafgen management knows what they're doing. As I said above, Zafgen just went public on Wednesday night and the next round of beloranib clinical trials in multiple indications won't start until later this year. That means the Zafgen story won't play out immediately, but to me, it's the most promising obesity-related therapy out there.

I like Bluebird Bio (BLUE). The company's gene therapy platform took a big step forward last weekend, resulting in a 41% push in the stock's value through Thursday's close. Two patients with a faulty gene causing a rare, inherited blood disorder beta-thalassemia were each given a one-time infusion containing copies of a "normal" functioning gene. Within two weeks, the implanted, functional gene started producing working hemoglobin. Both beta-thalassemia patients in the Bluebird study went from needing monthly blood transfusions to manage their disease to not requiring transfusions at all. 

It's way too early to call Bluebird's gene therapy a cure for beta thalessemia because, well, we're only talking about two patients and it's not known how long they'll remain transfusion independent. But even with these early results, you can certainly see why investors got excited about Bluebird -- rightly so. In biotech, we're accustomed to thinking about drug development in terms of managing disease. It's rare we ever talk about actually curing disease, particularly with a one-time treatment like gene therapy. 

How much would you (more accurately, your insurance company) be willing to pay for a rare disease cure? It's a fun question to think about. 

How does $1 million per patient sound?

Crazy? Gilead Sciences (GILD) is being vilified in certain circles for pricing its hepatitis C cure Sovaldi at $84,000, or $1,000 per pill. Imagine what would happen to Bluebird if its gene therapy cost $1 million. 

Piper Jaffray analyst Josh Schimmer doesn't think $1 million is crazy. It's his starting point for pricing out Bluebird's gene therapy, in fact. He reasons this way: Alexion Pharmaceuticals (ALXN) charges $400,000-plus per year for Soliris to manage (not cure) a host of rare complement disorders. Many of the Soliris patients are kids, so their insurance carriers are paying $400,000 per year, every year, for treatment without pushback.

All of a sudden, paying $1 million for a one-time gene therapy cure doesn't seem so unreasonable. It might actually be a bargain. 

Bluebird estimates 15,000 beta-thalassemia patients in the U.S. and Europe. If every one of these patients was treated with Bluebird's gene therapy (which won't happen, of course, but hear me out), you're talking about $15 billion. From a volume perspective, $15 billion to cure a genetic disease isn't an outrageous number. Abbvie (ABBV) rakes in $10 billion a year in Humira sales just so patients can manage their rheumatoid arthritis. Insurance companies hate Gilead not because Sovaldi is priced at $84,000 but because they were totally unprepared financially to handle the millions of hepatitis C patients who want to be treated. It's the total cost to the healthcare system that causes sticker shock.

What if Bluebird was able to treat (and cure) 20% of those 15,000 beta thalassemia patients with a $1 million gene therapy? That's $3 billion in peak revenue, which is not entirely accounted for in Bluebird's current valuation, even with conservative risk adjustments and net present value calculations. 

But a $1 million price tag might be too radioactive for our healthcare system, even if it makes sense economically. There is an alternative approach if Bluebird wants to be pioneering. The company could say to insurers: Pay us a smaller amount -- let's say $250,000 -- for the initial gene therapy infusion and then $200,000 for every year the beta-thalassemia patient remains transfusion independent. If the patient relapses or the therapy stops working, Bluebird no longer gets paid. 

"This way, you're paying for real value," says longtime healthcare entrepreneur and former Biogen Idec (BIIB) executive Michael Gilman, currently working with Atlas Ventures to birth new biotech startups. If Bluebird's gene therapy is truly a cure, the company earns what amounts an annuity for every patient treated. Insurance companies win because they can budget for reimbursement, Gilman says. 

Bluebird has some time, obviously, before it needs to address gene therapy pricing. Look for more beta-thalassemia data at the end of the year. Last weekend's data has also raised the profile of the company's development program for sickle cell disease, which could dwarf anything that happens with beta thalassemia. Much of the move in Bluebird's stock this week is investors looking ahead and realizing the big opportunity in sickle cell is closer than anyone expected.

Cary L. writes:


Adam, Excellent chronology of the past promises made by MannKind (MNKD) management concerning their never ending partnership deal that is just around the corner. However, you need to update their latest retraction on this issue---in today's Wells Fargo presentation the MNKD executive retracted the promise made last week at the Goldman conference where the executive gave a 6-8 week time frame after approval for them to sign a partnership. Today they said this person had misspoke about this being the time frame.. Strange--one week the deal is ready to be signed and now less than a week later--executive had misspoke!


MannKind CFO Matt Pfeffer spoke Tuesday at an investor conference sponsored by Well Fargo, too late to include his comments in the story I published on the same day. Here's what Pfeffer said on the subject of an Afrezza commercial partnership. His quote comes from a transcript posted on Seeking Alpha:

I do want to address one issue which is, surrounding commercialization, which is in fact the partner because that's probably one of the most asked questions. And it's part of the one I have the hardest time answering mostly because I am just not able to. We have said publicly we are in discussions with multiple parties, something always good to be in, but we don't anticipate we are likely to announce a partnership before approval. So, how fast after approval? Well, that's been a controversial question and in our recent conference appearance one of my colleagues went out a little bit on a limb and do this kind of a hypothetical number and said six to eight weeks that could be right, it could also be wrong. Could it be less? It absolutely could be less and we are hoping the people including some very well qualified bankers who have been working on this for many, many months with these same partners and working towards an agreement and are anxious to get this done, probably because we all like to get it done sooner so we can get it on the market quicker and probably because they are completely success based in their fees.

But at the end of the day we really can't say. It's quite likely or possible that there will -- the final partnering candidates will await for the final label and have a few things to want to hash over with us. So could it be days after approval? Yes, it could. Could it be months after? It could be that too. So I don't want to set specific expectations, needless to say we'll do it as quickly as we can and we think we're pretty well equipped to do it pretty quickly after.


A few more thoughts on MannKind here as we inch closer to July 15 and the expected FDA approval decision for Afrezza:

1. I agree with MannKind's Pfeffer about the details of the Afrezza label potentially having an impact on any partner deal. A "bad" Afrezza label -- data showing glucose-lowering inferiority compared to prandial insulin, no hypoglycemia benefit or restrictions on Afrezza use to limited types of diabetics -- will make negotiating a good partnership deal more difficult for MannKind (or kill a deal altogether.)

2. MannKind's tenuous financial position and the undeniable misgivings about the commercial market opportunity for an inhaled insulin don't give the company much leverage in partnering negotiations. Expect any deal, if one materializes, to place much of the risk squarely on Mannkind. J.P. Morgan analyst Cory Kasimov spent time at the American Diabetes Association conference talking to doctors about Afrezza. Here's his overall impression:


We are attending the American Diabetes Association (ADA) conference in San Francisco, CA. On Saturday, the full results from Phase 3 AFFINITY trials for Afrezza (inhaled insulin) were presented in an oral session, and we also had the chance to speak with a handful of physicians on the product. The data - which wasn't entirely new post the FDA AdCom meeting in April - stressed the positive aspects of the product (inhaled delivery, fewer hypoglycemic events, and statistical non-inferiority vs. insulin aspart), but some concerns were raised in the Q&A session immediately following the presentations (insulin aspart lowered A1c slightly more vs. Afrezza bringing into question whether the two products were really equally efficacious, some pts withdrew consent after not liking the idea/demands of inhaling insulin which seems a little puzzling, and that Afrezza appeared to lower FEV1 slightly). Nevertheless, after the presentations we spoke to some physicians (community based PCPs) on Afrezza who generally had minimal safety concerns with the product, viewed the efficacy as comparable to injectable insulin, liked the fast onset and the convenient palm-sized device, and felt the drug had a place in the market (especially for pts who struggled with injections and weight gain). Despite this they did all note that awareness/enthusiasm for Afrezza was not especially high in the diabetes space. On that note, we were somewhat surprised by the relative lack of buzz around the product at the meeting, given the positive AdCom and pending PDUFA (July 15). Below we go into more detail on various points. Overall, physicians seem to view Afrezza as a useful, albeit incremental, addition in the treatment armamentarium (at least for some pts who might not be able to deal with consistent injections) but our main concerns remain the commercial potential of Afrezza and the relatively high valuation of MNKD (esp considering >450M fully diluted shares outstanding).


3. That last point about Mannkind's fully diluted share count is very important, even if it's something retail investors choose not to focus on much. I assure you, institutional investors pay a lot of attention to fully diluted share count and true market value, as does any company in the market for acquisitions. RBC Capital recently initiated coverage on MannKind with an outperform rating and a Street-high $16 price target. However, the RBC analyst's financial model (from which his price target is derived) uses 388 million basic shares outstanding for MannKind. Everyone else correctly uses MannKind's fully diluted share count of 450-460 million, which includes in-the-money warrants and options. 

The difference is significant. Using RBC's model, MannKind's market value today -- before a single paying patient brings lips to the Afrezza inhaler -- is $4.3 billion. But MannKind's real market value today is more than $5 billion.



Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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