Biotech Stock Mailbag: Vertex Pharma

BOSTON (TheStreet) --Vertex Pharmaceuticals (VRTX) will release results from the first phase III study of its experimental hepatitis C drug telaprevir sometime this quarter. I'm starting to get a bunch of email about expectations for the telaprevir data, including this message from Sanjin M., who asks:

" Any guesses on what to expect from Vertex Pharmaceuticals when it announces phase III hepatitis C test results? Will the stock go higher if the data are positive?"
Mailbag

I want to dive into this topic in more detail next week (assuming I'm not too late and Vertex announces top-line results), but just in case that happens, here's a quick cheat sheet on expectations for Vertex's telaprevir phase III studies in hepatitis C:

The first telaprevir data we're going to see comes from the phase III study known as ADVANCE, which enrolled treatment-naïve hepatitis C patients. Unlike most phase III studies, investors assume 100% that telaprevir works and that the ADVANCE study will be positive. The $8 billion question (Vertex's current market cap) is how well will telaprevir work? (i.e., by what magnitude will treatment with telaprevir improve the cure rate for hepatitis C patients?)

Right now, my best read on Street expectations is for telaprevir to demonstrate hepatitis C cure rates (the Hep C jargon is "SVR") in the 70-75% range compared to a cure rate in control patients in the mid-40% range.

Vertex's stock price in the low $40s basically bakes in a telaprevir cure rate of 70-75%, so I don't expect the stock to move higher if the actual result hits that range. In fact, a number in the low 70s may actually cause the stock to sell off a bit. Call it a "sell on the news" reaction.

A cure rate for telaprevir with a "6" in front will be a disaster, causing Vertex to sell off a lot.

A telaprevir cure rate in the high 70% range, perhaps even something with an "8" in front, will be viewed very positively. Vertex's stock price could move higher on that kind of data.

None of these predictions are set in stone and I should warn everyone that expectations for the telaprevir data are very high, so I may be totally underestimating the way investors will react.

John M. writes, " I was wondering your thoughts on Arqule (ARQL). Although they only have phase 2 data, the lung cancer results are pretty encouraging, the company has money for several years of operation, some income and partnerships, etc. Considering the market size, and on the basis that 40% of drugs that have successful Phase II trials go on to approval, the odds-adjusted risk reward ratio looks phenomenal. What is your take?"

This is the time of the year when I start compiling a mental list of data I'm really interested in seeing when the American Society for Clinical Oncology (ASCO) annual meeting rolls into Chicago in early June.

The phase II study of Arqule's ARQ197 in second-line non-small cell lung cancer is definitely on the list.

The top-line results from the study released on March 31 are intriguing: The combination of ARQ197 plus Tarceva yielded a progression-free survival of 16.1 months compared to PFS of 9.7 months for Tarceva alone. Is a six-week improvement in PFS clinically significant for these advanced lung cancer patients? Perhaps. The PFS benefit in the ARQ197 study wasn't statistically significant and phase II studies often (always?) look better than what comes later when phase III studies are conducted.

Still, cancer drugs have been approved on worse-looking data and Arqule gets kudos for running a decently-sized, randomized and controlled phase II study, which is more than what we get from most biotech companies with cancer drugs in development. The treatment effect of ARQ197 looks even better in the prospectively defined subgroup of patients with non-squamous lung cancer.

Hopefully, Arqule has submitted the ARQ197 data for the ASCO meeting so we can see the study's nitty-gritty details, including survival data. It will also be important to hear from Arqule the plans for ARQ197's phase III study program. Lung cancer is a tough market commercially because doctors have a lot of options (not necessarily all good, but numerous) for patients newly diagnosed or who are progressing into second and third lines of therapy. This makes trial design for new lung cancer drugs particularly important.

Arqule and its shareholders have certainly benefited from the ARQ197 data already. The stock jumped 63% on March 31, after the phase II data were released. The stock has moved higher since then, trading around $6.25 as I type this Thursday afternoon.

It's hard to get really excited about a stock after such a big move, especially since the road forward for ARQ197 is still quite long. But then, Arqule's market cap today of around $280 million is far from obscene.

In terms of catalysts for the stock, I'd next look to the ASCO meeting in June where we should see more of the ARQ197 data in lung cancer as well as data from a separate and smaller phase II study of ARQ197 in patients with various soft-tissue cancers.

While reviewing the Biotech Stock Mailbag Readers' Portfolio last week, I noted the absence of any short-sale picks in the portfolio. This prompted Evan F. to write:

" You misstate that no one recommended a short sale in the BSMRP portfolio. I, in fact, called to short Vertex at $42.15 and I stand behind it. Just setting the record straight."

True. Evan is right. What I told him in response and repeat now is that I only received two short-sale recommendations for the BSMRP. His Vertex short was one; the other came from a reader recommending a short in Cell Therapeutics ( CTIC). Neither short recommendation made the final BSMRP because they didn't garner enough votes. Looking back, the Cell Therapeutics short would have been profitable, better than the long (and underwater) Cell Therapeutics position currently in there.

Michael M. writes, " Adam, I saw on Briefing.com that an analyst, I think MKM Partners, talked about Gilead Sciences (GILD) having an interest in buying InterMune (ITMN). Any thoughts?"

Gilead could buy InterMune. Or Gilead could buy Pharmasset ( VRUS). How about Vertex or United Therapeutics ( UTHR)?

I've heard mergers-and-acquisition conjecture connecting Gilead to all of these companies (conjecture being the operative word). All could have a strategic fit within Gilead, although there are equally as forceful arguments to be made against any of these rumored deals.

Gilead's M&A track record to date is mixed. The acquisition of Triangle Pharmaceuticals in 2002 was brilliant because it brought the company the HIV drug Emtrvia, which Gilead then combined with its own HIV drug Viread to form the blockbuster combo-pill Truvada. Later deals acquiring Myogen and CV Therapeutics, however, have not yielded comparably positive returns for the company or shareholders to date, which leaves a lot of investors with a queasy feeling when thinking about Gilead possibly venturing forth to gobble up another company.

Sanford Bernstein biotech analyst Geoff Porges (one of the smartest, most thoughtful biotech analysts in the business, by the way) says managing a growing cash stash is something Gilead management must address in the near term. The company net cash balance is expected to rise from $2.9 billion last year to more than $22 billion in 2015, Porges says.

What should Gilead do with all that moolah?

"While the company will choose between possible dividend, share buybacks, M&A and accumulation, we believe an immediate large one-time buyback in addition to ongoing annual repurchases is the preferred route; this could generate up to 20% earnings-per-share accretion and would boost the three-year EPS CAGR from 14% to 20%," writes Porges in a recent note to clients.

Porges adds: "By buying back stock, management would send a positive outlook to investors about the company's outlook and use of cash, potentially allowing the stock to command a higher multiple. It would also leave plenty of room for tactical M&A and licensing activity. Companies such as Pharmasset and Intermune represent attractive strategic fits but it is unclear if they would provide the post-2017 cash flows Gilead needs. United Therapeutics, with its specialty cardiovascular franchise, is also a viable target."

Moving on. An email from Duncan P.:

" In a recent press release from Adventrx Pharmaceuticals (ANX), it was stated that the company will meet with the FDA in the last week of April to review the rejection of the ANX-530 New Drug Application. Do you foresee this meeting having any impact on the stock price, positive or negative?"

Adventrx shares took a hit on March 1, when the company received a "refuse to file" letter from the FDA, turning away Adventrx's approval application for the chemotherapy drug ANX-530. In the letter, the FDA said drug stability data from the third-party commercial manufacturer of ANX-520 was insufficient.

As Duncan points out, Adventrx is meeting with the FDA in the last week of this month to determine what sort of (and how much) drug stability data on ANX-530 is needed for the agency to accept the application for review.

Adventrx CEO Brian Culley has already said the company is planning for a "worst-case" scenario in which the FDA will require 12 months of stability data on ANX-530 that comes from the actual manufacturing facility to be used for the commercial supply of the drug. If this is what the FDA asks for during April's meeting, Culley has said Adventrx could resubmit the ANX-520 application in six or seven months because the needed drug stability testing of ANX-530 is already underway.

In round figures, let's just say this scenario has Adventrx re-filing ANX-530 in December, so all in, the drug is delayed by a year.

Getting back to Duncan's main question, if Adventrx can emerge from its FDA meeting with a requirement of less than 12 months of new stability testing of ANX-530, then Adventrx may be able to re-file sooner. That should be good for the stock.

Whether or not Culley and his team can convince the FDA to lower its manufacturing requirements won't be known until Adventrx updates investors after the meeting.

For the record, I'm not too high on the commercial prospects for ANX-530, as I've stated in previous Mailbags.

Via Twitter, @dsalt writes, " Saw your piece on Opexa Therapeutics (OPXA) last September. Good writeup. What's your feeling towards them for this year? Next week good news?"

My ambivalent feeling about Opexa last September remains unchanged today. The company's experimental multiple sclerosis "vaccine" Tovaxin failed a phase IIb study in September 2008, sending the stock into the gutter. Since that setback, Opexa has tried to retrospectively mine the study looking for any smidgen of positive data. In late October 2008, Opexa claims to have found a subgroup of MS patients in the study who benefited from Tovaxin. Every few months or so, Opexa reiterates or elaborates upon this post-hoc (and ultimately useless) analysis of the negative Tovaxin data.

This week, Opexa announced that it was presenting more data from this phase II study of Tovaxin at the upcoming American Academy of Neurology (AAN) annual meeting. I guess we'll wait to see exactly what's in this data presentation, but just how different could the "new" Tovaxin data be from the "old" Tovaxin data presented at last year's AAN annual meeting?

Meantime, Opexa has long promised to begin a new phase II study of Tovaxin in MS patients, yet that study never seems to get underway. This old phase II study of Tovaxin is starting to smell a bit ripe from overuse, don't you think?

One more time... "BioZombie" writes, " I wanted to ask you something that seems to get (annoyingly) brought up on every message board for a stock you mention. Could you please address the masses regarding positions that your co-workers, friends, family, etc. may hold in stocks that you write about? It seems every time you write something negative (which does seem to be most of time, since MOST drugs, if history is any indicator, are doomed to fail) the boards scream that pals of yours must hold a short position in the underlying stock.

Does TheStreet or any person you know have prior knowledge of your writings, and if they do, are they able to take a position based on an article you are about to publish? I think if this were clearly answered (and I'm sure it has been in the past) the rest of us could limit some of the crybabies shouting conspiracy theory every time you write something negative.
"

I don't expect to convince the haters and conspiracy nuts, but once again, I point everyone to TheStreet's conflict of interest policy for editorial employees like myself. This is one of the most restrictive conflict of interest policies for financial reporters and editors you will find anywhere, and in fact, the policy was quite radical when instituted by Jim Cramer when he founded TheStreet a decade or so ago.

As a reporter/columnist for TheStreet, I cannot own any individual stocks, nor can I short any stocks. (The only permissible exception is owning stock in TheStreet.) I am prohibited from investing in investment partnerships like hedge funds. I am allowed to own mutual funds, which I do through my company-sponsored 401(k). (Although I'd be hard-pressed to tell you which mutual funds I own.)

The only compensation I receive for my work is a paycheck from TheStreet. I have no Swiss bank account. I have no friends, relatives or hedge funds holding my investments in secret trading accounts. Manila envelopes filled with cash are not being delivered to my door.

Lastly, I don't tell anyone about stories I'm writing in advance of publication. Now, let's be clear on this last point. A big part of my job involves speaking to a wide swath of sources, many of whom are professional investors -- including biotech hedge fund managers. This is a common practice for all financial journalists, and in fact, it would be impossible to do my job well without my Wall Street sources.

How do I know that these hedge fund sources aren't taking positions in stocks in advance of any story I write?

By never telling them when I plan on publishing a story, or even what information or viewpoint will be contained in the story. That's the best I can do and still perform my job. Let's be realistic here. Hedge fund managers aren't stupid, so if I call someone and we have a conversation about stock XYZ, Mr. Hedge Fund doesn't have to exert too much brainpower to deduce that I might be planning on writing about stock XYZ. But will he know what I plan on writing? No. Will he know when I plan to publish? No.

And let's not forget, I'm usually quizzing Mr. Hedge Fund about stock XYZ because I know he already has a long or short position. Most of my Wall Street sources have been in my Rolodex for years. I trust these people because their track record with me is golden. They know how to pick stocks, they know how to pick apart clinical data and they have finely honed bull#$%% detectors. If someone betrays that trust, he (or she) is gone. Lastly, I'm not naïve. I've been a business journalist for 20 years. I know that everyone has an angle, everyone talks his book, so I don't just blindly believe everything I'm told.

Finally, via Twitter @ywsr snarks, "Hi Adam, I am thinking of suing u for a gazillion bazillion dollars. I hurt my finger when I opened your tweet."

You want to sue me? Get in line, buster.

-- Reported by Adam Feuerstein in Boston.

Follow Adam Feuerstein on Twitter.

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

More from Stocks

This Is What's Hot Thursday - Stocks Slide, Intel's CEO Woes & Major Movers

This Is What's Hot Thursday - Stocks Slide, Intel's CEO Woes & Major Movers

Daimler's Profit Warning Should Terrify Traders Before Earnings Season Begins

Daimler's Profit Warning Should Terrify Traders Before Earnings Season Begins

Stock Market Just Took Another Beating -- Here's What You Need to Know

Stock Market Just Took Another Beating -- Here's What You Need to Know

Starbucks Stock Performance in 2018: -12%

Starbucks Stock Performance in 2018: -12%

Dow Logs Eighth Straight Drop as Stocks Slump

Dow Logs Eighth Straight Drop as Stocks Slump