Big Pharma has been struggling for years to produce drugs that are major breakthroughs in medicine. For these companies, gene therapy may be the promised land.
Gene therapy—treatments designed to replace faulty genes with healthy ones—offers potential cures for hundreds of genetic diseases, like hemophilia and muscular dystrophy.
That promise, and its rich commercial potential, has led to a land grab among the drug giants. The latest is Roche Holding (RHHBY), which agreed this past week to pay $4.8 billion for Spark Therapeutics (ONCE), a maker of gene therapy for a rare eye condition and hemophilia. Roche is offering $114.50 a share for Spark, a premium of more than 100% to the pre-deal price.
And last year, Novartis (NVS), Roche’s Swiss rival, paid $8.7 billion for AveXis, a maker of gene therapy for spinal muscular atrophy, or SMA, a fatal, inherited muscle-wasting disease. Novartis offered a nearly 100% premium to AveXis’ pre-deal stock price.
“Big drug companies are waking up and saying this is a real technology and that they need to be there,” says Marshall Gordon, senior research analyst at ClearBridge Investments, an active equity manager based in New York.
Gene therapy is growing up as a business, but the science is decades old. So far, the only replacement gene therapy that has been approved by the Food and Drug Administration is Spark’s treatment for a retinal disease that can lead to blindness.
More treatments could be approved in coming years. Many gene therapies have demonstrated impressive results in clinical trials, including the Novartis treatment for spinal muscular atrophy and Sarepta Therapeutics ’ (SRPT) treatment for Duchenne muscular dystrophy, or DMD.
The Novartis treatment could be approved by the FDA in the coming months in what would be an important milestone. Under Commissioner Scott Gottlieb, the FDA has been willing to consider approval of gene therapies without results from the three stages of clinical trials as it normally requires for drug approval. This reflects the FDA’s desire to get breakthrough treatments to sick or dying patients as soon as possible.
Another hurdle to come is the stratospheric prices these treatments will command. Spark’s therapy is priced at $850,000. Novartis has suggested that its spinal muscular atrophy treatment could cost $4 million. At those prices, it doesn’t take a lot of patients to have a lucrative drug—plus the prestige of potentially curing serious or fatal conditions. The price tags, however, could also provoke a pushback from private insurers and programs like Medicare.
If Big Pharma is piling into gene therapy, should investors follow?
There are plenty of risks, to be sure. In addition to possible resistance to prices, the efficacy and durability of the treatments, as well as potential side effects, remain uncertain.
Yet the commercial potential is enormous. An estimated 5,000 rare diseases are caused by a single gene mutation, making them eligible for targeted therapies. Even with limited patient populations for individual diseases, treatments could generate annual revenues of $1 billion or more, given the high expected prices.
A limited number of pure plays remain, creating scarcity value. Among the more promising is uniQure (QURE), which has a treatment for hemophilia B, the less common form of the inherited blood disease. (Hemophilia A has about four times as many sufferers.)
Also appealing is Regenxbio (RGNX), which is a leading developer of viral vectors, the delivery mechanism for gene therapy. It has more than 20 partners using its vectors, including Novartis and its SMA treatment. Regenxbio also has a handful of treatments that it is developing on its own, including one for wet age-related macular degeneration, or AMD.
Other pure plays include Audentes Therapeutics (BOLD), Solid Biosciences (SLDB), MeiraGTx Holdings (MGTX), and Voyager Therapeutics (VYGR). None of these is big; the largest, uniQure, is valued at $2 billion.
Gbola Amusa, an analyst with Chardan Capital Markets, sees continued takeover activity in the sector and views uniQure as a leading candidate. His two other top choices are Regenxbio and MeiraGTx.
“The space is maturing with big-cap pharma starting to buy,” Amusa says. “A lot of companies are looking at gene therapy and want exposure now.”
BioMarin Pharmaceutical (BMRN) and Sarepta Therapeutics are more diversified plays with exposure to gene therapy. Much of the excitement about Sarepta in the past year has been over its gene therapy for Duchenne muscular dystrophy, a fatal muscle-wasting disease, as well as one for Limb-girdle muscular dystrophy. BioMarin has several drugs on the market, and it has the lead position in a gene therapy for hemophilia A.
The stocks aren’t cheap based on conventional financial analysis. The pure-play companies have little or no revenues and generally steep losses. Wall Street evaluates them based on the sales potential of their treatments as well as franchise value, including manufacturing capabilities, which are critical in gene therapy because the treatments are among the most difficult and expensive to produce in the industry.
Some analysts were surprised at the price paid for Spark because its approved gene therapy for a rare eye condition appears to have limited commercial potential. It generated just $27 million in revenue in 2018, its first year on the market. And Spark’s gene therapy treatment for hemophilia A has been generally viewed as inferior to one from BioMarin. Spark’s stock was trading for almost half of its 2018 peak when Roche moved to buy it.
“Five billion dollars for Spark now makes virtually everything else in gene therapy look exceedingly cheap on a relative basis,” wrote Evercore ISI analyst Josh Schimmer. Gordon of ClearBridge, a shareholder, says Spark was appealing because of its strong science, manufacturing capabilities, and “some of the leading people in gene therapy,” including its head of research and development, Katherine High.
Barron’s last highlighted the innovations and opportunities of gene therapy in a September 2017 cover story (“Gene Therapy Is Nearing a Major Breakthrough”). Our three top picks then were AveXis, Spark and Regenxbio—two of which have been bought. Regenxbio has nearly doubled in value since then.
Replacement gene therapy generally targets so-called monogenic diseases like Duchenne muscular dystrophy or hemophilia that are caused by the absence or severe deficiency of a critical protein—the result of a defective gene that fails to code for the production of that protein. Some of these diseases lack treatments entirely or have ones with limited effectiveness.
The treatment procedure involves packaging healthy genes into neutered viruses, usually harmless adeno-associated viruses, or AAV. These are delivered in a single large administration into the bloodstream or area of the body where the disease is present. The viruses, or vectors, attach to targeted cells and deliver the new genes, plus so-called promoters that direct cells to make the missing proteins and hopefully alleviate or cure the disease.
Replacement gene therapy using viral vectors is one of several treatments under the rubric of gene therapy. So-called CAR T–cell cancer treatments, including one from Novartis that won FDA approval in 2017, use genetically re-engineered cells from the immune system. The much publicized CRISPR technology aims to edit out disease-causing genetic mutations. Leading companies in that area include Crispr Therapeutics (CRSP) and Editas Medicine (EDIT). CRISPR treatments are less advanced than replacement gene therapy and probably involve more risk because of the possibility that misplaced gene edits could cause diseases like cancer.
Researchers have made big strides in replacement gene therapy since an 18-year-old patient died in 1999 from a severe immune response after an experimental gene therapy treatment. A key has been development of better viral vectors that get the genes to the right place in the body in sufficient quantity without triggering serious immune responses.
The treatments are designed to be administered once, because the body develops an immune response to the viral vectors that carry the healthy genes. As a result, the treatments generally involve doses of trillions of neutered viruses that pose manufacturing challenges as well as the risk of patient toxicity. That goes a long way to explain the sky-high prices for these treatments. The industry argues that existing treatments for diseases like hemophilia, SMA, and DMD can cost more than $500,000 annually per patient—for a lifetime—and that a potential one-time cure is a relative bargain at even at a few million dollars.
Here’s a look at seven publicly traded gene therapy specialists:
UniQure, with its gene therapy for hemophilia B, is going after a ripe target because hemophilia afflicts an estimated 20,000 people in the U.S. And hemophilia is expensive to treat. Clotting factor, which can cost over $500,000 a year per patient, isn’t ideal because patients often need weekly infusions and are still subject to bleeds.
For gene-therapy developers, hemophilia and many other protein-deficiency diseases are good targets because people need only a fraction of the normal protein level. For hemophilia, clotting can occur with just 10% of the normal factor level. A successful gene therapy could eliminate the need for replacement clotting factor and transform the lives of hemophiliacs.
UniQure’s early-stage trial produced an average of 31% of the normal factor level in three patients. The company is enrolling about 50 patients in a confirmatory study, with results expected next year and possible FDA approval in 2021.
The company also has a treatment for Huntington’s disease, with a clinical trial due to start later this year. Huntington’s is a fatal inherited disorder that usually manifests during adulthood. Its most famous victim was the folk singer Woody Guthrie, the writer of “This Land Is Your Land.”
UniQure has doubled so far this year, to $55, but there could be upside in a deal or commercial success. Amusa of Chardan Capital has a price target of $70. H.C. Wainwright analyst Debjit Chattopadhyay estimates that the uniQure hemophilia B treatment could generate sales of more than $1 billion annually at about $850,000 per patient if approved.
“Regenxbio is basically an ETF for AAV-based gene therapy,” says Amusa, referring to the adeno-associated viruses used for replacement gene therapy. The company offers broad exposure because it has licensed its vectors to more than 20 partners, including Novartis for its SMA treatment, and will get royalties estimated at close to 10% on commercial successes. That could prove lucrative if the Novartis treatment is approved and generates over $1 billion in annual sales.
Regenxbio is also developing several of its own treatments, including one for wet age-related macular degeneration, a retinal condition affecting the elderly that is the leading cause of blindness. That treatment is designed to be a substitute for current wet AMD drugs like Lucentis and Eylea by producing a protein that alleviates the condition but doesn’t cure it. Amusa says expectations are low for that treatment. There is a large commercial opportunity because existing wet AMD drugs generate $10 billion annually in sales.
A risk with Regenxbio is the expiration of some patents on its vectors in the early 2020s. But Amusa thinks the patent portfolio will last longer than some on Wall Street anticipate.
Regenxbio is valued at $1.9 billion. Its shares, up 25% this year to $52, are down from a high of $82. Amusa has a price target of $127.50 and a Buy rating. Evercore ISI’s Schimmer recently upgraded Regenxbio to Outperform from In Line, while maintaining a price target of $79, citing “optionality that skews to the upside.”
Audentes’ main treatment targets X-linked myotubular myopathy, or XLMTM, a fatal muscle condition, and it also has a therapy for the ultrarare Crigler-Najjar, a serious disease that results from the body’s inability to process bilirubin, which is formed from the natural breakdown of red blood cells. Audentes reported in October “meaningful improvements in neuromuscular and respiratory function” in an early-stage trial involving seven XLMTM patients. CEO Matthew Patterson says babies in the trial were able to come off ventilators, an otherwise rare occurrence in the disease.
Audentes shares are up 50% this year, to $33. The challenge for investors is that its lead XLMTM product has smaller commercial potential than other gene therapies, with fewer than 100 babies born with it in the U.S. each year. It could generate $500 million in XLMTM revenue, assuming a $4 million price on the treatment. Amusa has a Buy rating and a $40 price target.
MeiraGTx is a British company focused on gene therapies for several rare, inherited eye conditions. It has teamed up with Janssen, a unit of Johnson & Johnson (JNJ), which has commercial rights to that program.
After going public last year at $15, MeiraGTx shares hit a new high of $16 last week after the company placed $80 million of stock with some well-regarded biotech institutional investors, including Perceptive Advisors and J&J, which bought half the deal. The company is valued at about $500 million.
Amusa raised his price target on the stock to $40 from $30 last week while maintaining a Buy rating, writing in a client note that he sees an “increased probability of an acquisition by J&J in the coming years.” The company retained rights to gene therapies for macular degeneration; a condition caused by cancer radiation treatment that curbs saliva production; and amyotrophic lateral sclerosis, or Lou Gehrig’s disease.
Voyager Therapeutics got a big lift last week, rising 25%, to $16, after it reached a deal with AbbVie (ABBV) to develop treatments for Parkinson’s disease and similar diseases using Voyager’s viral delivery mechanism to deliver therapeutic antibodies to the brain. The deal, which provides for up to $1.5 billion of payments, excited investors because Voyager’s market value was just $400 million—it is now closer to $500 million.
Gordon of ClearBridge likes Voyager, saying that a gene therapy for Parkinson’s is better than commonly believed and that the AbbVie deal will provide cash to fund other gene therapy programs.
Solid Biosciences has a compelling human story. Its CEO, Ilan Ganot, a former investment banker at JPMorgan, co-founded the company in 2013 after Duchenne muscular dystrophy was diagnosed in his young son; the disease generally puts boys into wheelchairs by their early teens and leads to death by the early 20s.
Solid received backing from some prominent biotech investors for a DMD gene therapy, but initial results from a clinical trial released in early February were disappointing and much worse than what rival Sarepta has reported. Two of the boys in the trial had very low levels of dystrophin, the muscle protein that the treatment is designed to produce.
Baird analyst Brian Skorney wrote at the time that the results were “very weak” and could be a “death blow” for the Solid program. Solid said it has a “meaningful treatment” and plans to evaluate its potential at higher doses. Its shares, at $11.50, are off 50% since the news, trimming the company’s market value to $375 million. With its lead program in trouble, Solid looks like a stock to avoid even at a depressed price.
Sarepta Therapeutics has managed a shrewd pivot and has become a leading gene therapy company. It developed the first FDA-approved drug for DMD, called Exondys 51, that can help 13% of boys who have a particular genetic mutation. That drug, which generated about $300 million in sales last year, and similar ones under development at Sarepta, use a different technique than gene therapy. The drug requires regular doses at a cost that can run over $500,000 a year. Barron’s has long written favorably about the prospects for Exondys 51 and Sarepta.
Recognizing that gene therapy could help all boys with DMD, the company moved to develop a treatment that could cannibalize its existing drugs. The move has worked because Sarepta has the leading gene therapy for DMD, with impressive early-stage clinical trial results. Its shares are up 40% since the initial gene therapy results were announced last year, to about $145, giving the company a market value of $11 billion.
“Sarepta has the biggest free-standing platform in gene therapy globally centered on muscle disease that’s still underappreciated,” says Nomura Instinet analyst Chris Marai. The company received more good news last week with favorable initial data in a small clinical trial involving a gene therapy for Limb-girdle muscular dystrophy. Marai has a Buy rating and $230 price target.
JMP Securities analyst Liisa Bayko sees a large opportunity for Sarepta in Duchenne muscular dystrophy because there are an estimated 70,000 patients globally, including more than 10,000 in the U.S. It is one of the more prevalent rare diseases, and there are no treatments to stem the progression aside from Exondys 51. She has a Market Outperform rating and $275 price target.
“The opportunity to do good is breathtaking,” Sarepta CEO Douglas Ingram says.
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