With the market selling off on higher rates, $XBI / biotech index is taking a nose dive. People are throwing the baby out with bathwater!
THIS INSTRINSICALLY GIVES A LOT OF OPPORTUNITIES – PARTICULARLY AROUND THOSE COMPANIES THAT HAVE REALLY ATTRACTIVE STRATEGIC VALUE AND SOME FLOOR VALUATION.
What kind of qualities 1) defines attractive strategic value and 2) provide some floor valuation for downside protection?
While there are many biotech companies that fit the criteria, I would use Blueprint Medicine ($BPMC) as an example.
Blueprint Medicines’ asset profile is as follows:
ATTRACTIVE STRATEGIC VALUE
Strategic value means MOAT – which is essentially DURABLE CASH FLOW. In pharma, if you layer on high growth therapeutic area, that is essentially the definition of strategic value – something that large cap pharmaceutical companies would love to acquire to drive their growth.
In order to drive growth of large cap pharma, the asset must be sizable – at least $1bn or more – a blockbuster drug.
Blueprint Medicine has assets that can grow into blockbusters with high level of confidence around durability of cash flows.
Ayvakit: ~$1bn product with no/limited competition
drug that is currently approved for advanced systemic mastocytosis (SM). Recently, $BPMC had read out PIONEER study in non-advanced SM – essentially moving into frontline.
Non-advanced SM market is a steadily growing market that is currently significantly under-served with current approved medications.
With positive data from PIONEER study, many physicians are waiting for the drug to be approved officially approved by the FDA so that they can prescribe to their patients while some are already prescribing the drug to moderate/severe patients on off-label basis.
With no looming competition AND a next-gen molecule in P1 study, $BPMC’s systemic mastocytosis franchise appears to be well-positioned to develop into $1bn+ revenue franchise with minimal competitive pressure.
However, $BLUE has something WAY more exciting in the pipeline – and they are its portfolio of EGFR TKIs (tyrosine kinase inhibitors).
BLU-945 / BLU-701 / BLU-451: multi-blockbuster potential as next-gen EGFR TKI following Tagrisso
For those following cancer space closely, Tagrisso is a drug that essentially exemplifies key characteristics of a megablockbuster:
- Tagrisso is extremely efficacious: became an instant standard of care just on efficacy alone.
- Tagrisso is extremely clean: limited side effect allowed the drug to move swiftly to earlier line.
- Tagrisso is oral small molecule drug: it is very easy for patients to take and also it is extremely profitable for pharmaceutical manufacturer.
Tagrisso has Achille’s heel and it is that patients that take Tagrisso and develop resistance to Tagrisso do not have an option.
The success of Tagrisso has created this problem and $BPMC is $BPMC is currently developing next-gen EGFR TKIs that would follow Tagrisso and so far the data looks promising.
Pre-clinical model showed BLU-945 (blue line) was able to shrink EGFRm tumor size while osimertinib (Tagrisso- redline) could not and was in-line with placebo.
Initial patient efficacy data showed dose response and already showed activity in initial cut. BPMC has not hit MTD (maximal tolerated dose) and will increase dose.
Initial safety data also looked promising – however, safety likely gets worse from here given BPMC plans to increase dose.
Revenue opportunity for a successful post-Tagrisso EGFR TKI is enormous given Tagrisso’s current revenue – in 1H22, Tagrisso generated $2.7bn of sales (annual run-rate at $5.4bn) and is still growing at mid-teens!
VALUATION IS ALWAYS THE LAST QUESTION –
Blueprint Medicine’s current market cap is $4.2bn, but given high cash balance, its current enterprise is $3.4bn. Is that cheap? Is that expensive? It depends on how you underwrite potential market opportunity and probability of success for BPMC’s systemic mastocytosis franchise, EGFR TKI pipeline, and small molecule pipeline.
PAYING $3.3BN (based on today’s price of $70 per share) for 1) de-risked >$1bnrare disease franchise and 2) upside potential for what could be $5bn+ oncology drug is interesting enough such that it warrants some time to think about it
After all, buyer universe for this kind of platform is vast – it is pretty much everyone except AZN – which owns the EGFR TKI space now.
Acquisition of small molecule development platform reminds me of Pfizer’s acquisition of ARRAY Biopharma for $11.4bn (vs. $3.3bn of BPMC today).
Key excerpts from press release in which Pfizer talked about strategic rationale for ARRAY acquisition are as follows.
—Proposed acquisition strengthens Pfizer’s innovative biopharmaceutical business and is expected to accelerate its growth trajectory particularly in the long term
—Opportunity to strengthen category leadership in Oncology with the addition of a breakthrough combination of BRAF/MEK inhibitors under investigation for a potential first-in-class therapy for patients with BRAF-mutant metastatic colorectal cancer
—Expands Pfizer’s pipeline with multiple high-potential targeted investigational cancer therapies and adds a large portfolio of royalty-generating out-licensed medicines
—Plans to maintain highly productive research unit in Boulder to complement Pfizer’s research hubs
—Transaction valued at $48 per Array share in cash, for a total enterprise value of approximately $11.4 billion
*not investment advice. Do your own research
