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TheStreet Open House

Biotech Stock Mailbag: Exact Sciences, Galena, Amgen

BOSTON (TheStreet) -- Welcome back to the Biotech Stock Mailbag. Richard V. asks:

Adam, I follow you on Twitter and saw you comment on Exact Sciences (EXAS) and the pricing of Cologuard. Can you elaborate more in a future Mailbag about what [Cologuard] price will be considered a positive or negative for Exact?

Great question, Richard. On Monday, the FDA approved Cologuard, the first non-invasive screening test for colon cancer which works, in part, by detecting the presence of mutated DNA in stool. Exact Science's Cologuard is superior to existing stool-based colon cancer screening tests, most notably for the detection of pre-cancerous lesions. Colon cancer is preventable and curable if pre-cancerous lesions are detected early and removed before they have a chance to progress into full-blown malignancies. Exact Sciences believes widespread adoption of Cologuard has the potential to put a dent in colon cancer rates. 

With Cologuard's approval secured, Exact Sciences' next challenge is marketing the colon cancer screen and pushing adoption. Cologuard's list price is $599, much higher than the $30 cost of existing stool-based colon cancer screening tests. No one pays the list price for a car without negotiating for discounts, so likewise, insurance companies and Medicare will also negotiate with Exact Sciences to determine a Cologuard reimbursement rate. This is where the next battle between Exact Science bulls and bears will be fought.

Exact Sciences has submitted to Medicare analyses supporting a $502 reimbursement rate for Cologuard. Bulls believe an actual Medicare reimbursement rate in the range of $300 to $500 per test will be a win. (Private insurers will generally follow Medicare's pricing decision.) Bears counter with analyses suggesting Medicare's reimbursement rate for Cologuard will be in the $100 to $150 range. At this low price range, Exact Sciences would lose money on each Cologuard test sold, clearly a big problem. 

Medicare officials are expected to announce a preliminary Cologuard pricing decision later this month or in early September. Obviously, this is a very important catalyst for Exact Sciences and its stock price. 

Count me in the Exact Sciences' bull camp. I believe Medicare will grant a favorable reimbursement rate for Cologuard. 

The technical arguments for and against premium pricing are complex, so I'm not going to get into the weeds describing them here. The big mistake Exact Sciences' shorts are making is believing past Medicare pricing decisions and cost-effectiveness analyses covering older colon cancer screening tests are the correct precedent by which to judge Cologuard.

In conjunction with the FDA approval Monday, the Center for Medicare and Medicaid Services (CMS) issued a proposed (and favorable) National Coverage Decision for Cologuard. Exact Sciences is the first company to submit a product for parallel review by the FDA and CMS under a pilot program aimed at reducing the time between FDA approval and Medicare coverage. 

Here's what Patrick Conway, chief medical officer and deputy administrator for innovation and quality for CMS, said about Cologuard on Monday:

This is the first time in history that FDA has approved a technology and CMS has proposed national coverage on the same day. This parallel review represents unprecedented collaboration between the two agencies and industry and most importantly will provide timely access for Medicare beneficiaries to an innovative screening test to help in the early detection of colorectal cancer.

It doesn't make any sense for CMS to praise Exact Sciences for developing an innovative colon cancer screening test and voluntarily submitting for joint FDA/CMS review, and then undermine that effort by low-balling the reimbursement rate so Exact Sciences can't actually market the test.

Last month, the FDA proposed new policies aimed at increasing the regulatory oversight and review of diagnostic tests. The agency's goal is to improve the reliability of so-called laboratory developed tests (LDTs) tests, particularly those which use DNA sampling to diagnose disease or determine optimal treatment. CMS' interest is in having companies pursue dual FDA/Medicare review. CMS (the government) saves money if Medicare recipients are screened more regularly for preventable or treatable diseases like colon cancer.

Exact Sciences is the poster child for what FDA and CMS want with respect to the development of new DNA diagnostic tests. If CMS reverses course and slaps Cologuard with a low reimbursement rate, it will be a major disincentive for other companies to follow in Exact Sciences' footsteps. 

My prediction: CMS comes back with favorable reimbursement in the $300 to $500 range for Cologuard. The Exact Sciences' shorts have been wrong about the Cologuard pivotal study results, wrong about FDA approval and wrong about the proposed National Coverage Decision. They'll be wrong about pricing, too.

At $300 per Cologuard test, Exact Sciences has the potential to generate peak U.S. sales around $1 billion. 

@adamfeuerstein would you support $GALE if they overhauled management? — Alex Gold (@alexanderwgold) August 12, 2014

No. 

Galena Biopharma (GALE) CEO Mark Ahn deserves to be fired for the DreamTeam stock promotion scandal and his very well-timed stock sales. An internal investigation into the matter was completed in July, but the company has not yet disclosed what corrective actions, if any, are being taken, according to its 10Q filed for the second quarter. A separate SEC investigation into the DreamTeam scandal is still under way. 

Unfortunately, whether or not Ahn stays or goes has no bearing on the outcome of the Neuvax phase III breast cancer study. If you're a regular reader, you know my strongly held belief that Neuvax does not work, and therefore, the phase III study is going to fail. If you believe, like I do, that Neuvax is a zero, then Galena is still significantly over-valued today. 

Abstral sales in the second quarter were flat sequentially and weren't down only because of a large order from a single customer. Galena warned third-quarter sales of Abstral could be negatively affected by this large order. Looking ahead, Abstral sales will also be hurt by Express Scripts  (ESRX) adding the cancer painkiller to its 2015 formulary exclusion list. I've explained previously why Galena's latest product acquisition, Zuplenz, will flop commercially


Jason M. writes:


Adam, did you happen to notice how Ampio Pharmaceuticals (AMPE) subtly moved the goal posts again? In their most recent press release of 'positive data' for Ampion (in an open-label safety study with seven patients, no less), Ampio states they anticipate no delay in filing a Biologics License Application with FDA in the first quarter of 2015. But earlier this year, Ampio said they expected to file the Ampion BLA by the end of 2014, so there really is a delay.


You're absolutely correct, Jason. Nice catch. The Ampio games continue. 

Peter Z. comments:


I saw you talking on Twitter about Amgen (AMGN) and Onyx so I thought I'd offer my view: Amgen overpaid. 


You're not alone. I haven't polled enough investors to say definitely, but my sense of the emerging consensus view is that Amgen was duped into paying $10 billion to acquire Onyx Pharma. The deal worked out great for Onyx shareholders, not so much for Amgen's. Onyx's main asset was the multiple myeloma drug Kyprolis. The results from the ASPIRE and FOCUS studies just announced by Amgen demonstrate Kyprolis is an effective multiple myeloma therapy overall, but just not one worth a $10 billion price tag to acquire. 

Wall Street has a funny way of shrugging off bad acquisitions, which helps explain why Amgen is actually trading higher Thursday, one day after the company announced the failure of the Kyprolis FOCUS study. Investors might be giving Amgen a pass on Kyprolis because the company has already started a restructuring process to cut costs and possibly unlock additional shareholder value. Amgen fired 15% of its workforce and shut down some facilities in July. Wall Street is hoping Amgen continues to restructure, possibly by selling off its flat-lining EPO business, in order to focus more on new products and its research pipeline. 


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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