Pharmacyclics was founded in 1991, and for much of its corporate history the company has underwhelmed investors and the markets. Aside from an expected parabolic rally during the dot-com bubble, shares of Pharmacyclics have spent much of the millennium trading in the single digits. However, at the end of 2011, PCYC started gaining upwards momentum as institutional investors recognized the value of Ibrutinib; this time, the rally was driven by solid clinical data and a robust development program, not irrational exuberance. Pharmacyclics’ pipeline contains 4 different compounds and targets 7 specific indications. It’s led by Ibrutinib (formerly known as PCI-32765), a BTK inhibitor targeting a variety of blood cancers.
Ibrutinib: Set to Lead In The Hematology Treatment Market
Ibrutinib is a Bruton’s Tyrosine Kinase (BTK) inhibitor, a class of drugs that targets B-cell receptors, which play a key role in cell signaling, survival, and proliferation in many B-cell cancers (leukemia, lymphoma, etc). Inhibiting these receptors stops cell proliferation, disrupts their adhesion, and causes cellular apoptosis. Pharmacycics is targeting 6 different malignancies in Phase III and Phase II trials with Ibrutinib:
- Chronic lymphocytic leukemia (CLL)
- Mantle cell lymphoma (MCL)
- Small lymphocytic lymphoma (SLL)
- Diffuse large B-cell lymphoma (DLBCL)
- Multiple myeloma (MM)
- Follicular lymphoma (FL)
Many analysts and industry observers see Ibrutinib as the clear leader in a new class of oral hematology drugs, and the company’s clinical data for Ibrutinib lends strong credence to this assertion.
Pharmacyclics presented a slate of Ibrutinib data at the 2012 American Society of Hematology (ASH) meeting from several of the drug’s target indications. The company’s combination Phase Ib/Phase II trials of Ibrutinib in CLL and SLL showed statistically significant efficacy. Pharmacyclics reported that in its study of 116 patients, there was a 68% overall response rate and a 96% rate of progression-free survival at 26 months for elderly treatment naïve patients. Patients with relapsed refractory CLL & SLL showed an overall response rate of 71%, with 75% of progression-free survival at 26 months of treatment. In addition, more than 90% of patients in the study saw tumor reductions. A 40-patient sub-study of high-risk patients (defined as those having inferior responses to chemo-immunotherapy) showed that Ibrutinib in combination with rituximab induced an overall response rate of 83%, with 38 out of 40 patients (95%) continuing their therapy with no disease progression. This Phase Ib/II trial showed that Ibrutinib was also generally well tolerated, with no reported negative effects on patients’ immunoglobulins or other hematologic parameters, the most common adverse events being diarrhea, fatigue, rash, nausea, and joint pain. Pharmacyclics stated that the majority of these events were addressed using standard over-the-counter medicines. Pharmacyclics and JNJ have moved Ibrutinib into Phase III trials in both the CLL & SLL indications.
In MCL, Pharmacyclics has also reported positive clinical data. The company’s Phase II study of 110 patients showed an overall response rate of 68%, with complete responses in 22% of patients (partial responses in 46%), and a median progression-free survival of 13.9 months. While these results are decent, they are not the most notable aspect of this Phase II trial. At the American Society of Hematology’s 2011 meeting, Pharmacyclics presented data on an initial 51 patients, reporting a 69% overall response rate and a 16% complete response rate. At the 2012 meeting, the company presented new data on this subset of MCL patients. Their overall response rate improved to 75%, and more importantly, their complete response rate more than doubled to 39%, with no changes in adverse events or Ibrutinib’s safety profile. Pharmacyclics and Johnson & Johnson are currently conducting 2 trials of Ibrutinib in MCL: a Phase II trial using Ibrutinib as a monotherapy in MCL patients that have received rituximab chemotherapy, and one in which patients have progressed further after receiving bortezomib chemotherapy. Overall response rate will be the trials’ primary endpoints, with duration of response and the progression-free survival rate acting as secondary endpoints. In addition, the companies are conducting a Phase III trial of Ibrutinib in comparison with temsirolimus, with this trial’s primary endpoint being progression-free survival compared to temsirolimus.
In DLCBL, Pharmacyclics is also moving forward, but there is a lower level of clarity on where the company will go from here. Pharmacyclics has completed a Phase II trial in patients with relapsed and refractory DLCBL in two genetic subtypes of the cancer (the activated B-cell subtype, and the germinal center subtype). This Phase II resulted in wide variations in clinical results by patient subgroups.
- Heavily pre-treated patients (16 patients, 22.86% of total): There was an overall response rate of 23% for patients in this particular subgroup.
- Activated B-cell subtype patients: These patients saw an overall response rate of 41%, consisting of a 17% complete response rate, and a 24% partial response rate, the strongest out of all subgroups
- Germinal center patients: Only 1 patient in 20 had a partial response
This data contradicts established theories regarding survival in DLCBL, as active B-cell patients usually have a worse prognosis than germinal center patients. Pharmacyclics commented on these trial outcomes: “This study supports the use of ABC DLBCL molecular subtype as a biomarker for enrichment of patients for future Ibrutinib studies. The safety profile is favorable, with Grade 3 or higher Adverse Events, related and unrelated, in typically 5% - 10% of the patients.” A new Phase I/II trial is being conducted in newly diagnosed DLCBL patients, and Pharmacyclics is set to provide updates on this indication in 2013 as it rolls out a longer term strategy for Ibrutinib in DLCBL.
In MM, Pharmacyclics has reported less promising results, however there remains room for further development in this indication. Shares of Pharmacyclics fell sharply alongside its Q1 2013 earnings (the company is in the process of altering its fiscal year to align with the calendar year), due to the company’s concurrent announcement that an early Phase I trial of Ibrutinib, dosed at 420 mg, failed to achieve its primary endpoints, defined as both partial and complete responses. This trial was conducted with patients that were heavily pre-treated, with the median being 4 prior treatments. And while this dose was well tolerated, it simply failed to meet the objectives of the trial. Pharmacyclics did note that several subjects did achieve minor responses and stable disease. The company is initiating new trials at 2 higher doses, 560 mg and 840 mg, and is combining Ibrutinib with dexamethasone at the 560 mg dose (possibly the 840 mg dose as well). Data is expected over the course of the next 12 months for these doses of Ibrutinib.
Finally, Pharmacyclics is testing Ibrutinib for follicular lymphoma (FL). Phase I data for heavily treated (with a median of 3 prior therapies) patients were presented at ASH 2012. Pharmacyclics reported an overall response rate of 44%, with a 19% complete response rate. In the 2.5 mg/kg dosing arm, progression free survival came in at 13.4 months for those patients that reported at least 1 tumor response assessment, for an overall response rate of 55% in this subgroup. There was a higher response rate of 56% and progression free survival of 19.6 months in patients dosed at the 5-mg/kg dose of Ibrutinib. Ibrutinib was well tolerated in this trial, and Pharmacyclics reported no cumulative toxicity upon commencing extended dosing.
The Market Opportunity for Ibrutinib
Ibrutinib’s solid clinical trial data in a host of hematological indications supports the view that Ibrutinib is poised to be a market leader. Credit Suisse has stated that Ibrutinib has “unparalleled single-agent efficacy in chronic lymphocytic leukemia,” and has taken note of “extremely impressive data in mantle cell lymphoma.” Historically, orally dosed drugs such as Ibrutinib have had success in not only taking share away from existing, non-oral therapies for a particular disease, but in expanding the total addressable market as well. The American Cancer Society estimates that there will be about 16,000 new cases of chronic lymphocytic leukemia and over 22,000 cases of multiple myeloma in the United States in 2013. Ibrutinib’s competitors reported around $6 billion in sales during 2012 ($3.77 billion for Revlimid, $302 million for Thalomid, and $2 billion for Velcade). Other blood cancer therapies, such as Gleevec, have global sales of around $5 billion, giving Pharmacyclics a large addressable market. Duration of treatment is key in expanding the market, and with progression free survival rates of up to 96% (26-month survival in elderly naïve CLL patients), Ibrutinib stands to gain meaningful share, and analyst estimates call for sales of as much as $5 billion by 2015 in CLL as well as Ibrutinib’s other indications.
Other Pipeline Assets
While the core of the bullish thesis for Pharmacyclics rests on Ibrutinib, it’s not the company’s only asset. The company has 3 more compounds in its pipeline, which offer further potential upside for investors. The first is Abexinostat HCI, a histone deacetylase inhibitor. These inhibitors have the ability to induce widespread transcriptional changes and other alterations by removing acetyl groups from the lysine residues located on histones. Pharmacyclics has partnered with Servier to develop Abexinostat, giving Servier exclusive rights to the compound outside the United States. The drug is currently in Phase II trials for the treatment of several types of lymphomas and demonstrated favorable data at the 2012 meeting of the American Society of Hematology. Pharmacyclics reported a 64% response rate in follicular lymphoma (with a 7% complete response rate), as well as a good safety profile, with the most common adverse events being nausea, vomiting, and fatigue. Pharmacyclics is moving forward with new trials of Abexinostat in follicular lymphoma, and I expect more color on this pipeline asset over the course of 2013. Pharmacyclics has retained rights to the drug in the United States, and while the drug’s ultimate value is unclear, it does leave room for upside should it post better-than-expected clinical results. Pharmacyclics is also developing PCI-27483, a Factor VIIa inhibitor currently in Phase I/II trials for potential use in treating pancreatic cancer. However, expectations for the drug are low, and the trial has been slow to progress given its use of single-agent gemcitabine, which has fallen out of favor as a preferred regimen in pancreatic cancer. However, Pharmacyclics has extracted some value from PCI-27483 by inking a deal with Novo Nordisk (NYSE:NVO), under which the company acquires worldwide rights to PCI-27483 for specific non-oncology indications. Under the terms of the agreement, Pharmacyclics received $5 million upfront and is eligible for up to $55 million in milestone payments. The company’s final pipeline asset is a BTK inhibitor for autoimmune diseases, but it is in preclinical testing, and as such it is too early to speculate as to what its ultimate potential may be.
Financing Ibrutinib’s Development: A Lucrative Deal for Pharmacyclics, and a Lucrative Deal for Investors
Shares of Pharmacyclics have risen not simply because Ibrutinib has demonstrated solid clinical data in a variety of cancers, but because of the lucrative deal that underlies the company’s development of Ibrutinib. In December 2011, Pharmacyclics struck a deal with Johnson & Johnson’s Janssen pharmaceutical division. Shares of the company initially plunged by well over 10%, as investors worried that this deal meant that a takeover of Pharmacyclics was unlikely to happen. However, given that since this deal was struck, shares of Pharmacyclics have risen by over 300%, it appears that this deal has helped create a great deal of shareholder value. The terms of the deal are quite favorable to Pharmacyclics. The company received $175 million upfront and is eligible for up to $825 million in further milestone payments:
- $250 million for the initiation of five Phase III clinical trials, with a $50 million payments for each trial. The importance of this should not be underestimated. Pharmacyclics is receiving these payments not for reporting successful Phase III trials, but for the mere initiation of them. Essentially, these payments allow the company to fund its 40% share of Ibrutinib development costs, shifting much of the risk to Johnson & Johnson.
- $225 million related to Ibrutinib’s “regulatory progress,” which is defined as approval filings in both the United States and other key international markets like Europe.
- $350 million related to FDA (and other regulatory agency) approval of Ibrutinib. The timing of these payments will coincide with a likely surge in Pharmacyclics’ commercialization expenses, thereby mitigating any weakening in the company’s cash position
Profits on sales of Ibrutinib will be split equally, with US sales being reported by Pharmacyclics and international sales being reported by Johnson & Johnson (in the United States, the drug will be co-commercialized, with Pharmacyclics taking the lead on commercialization efforts). Pharmacyclics, however, is responsible for only 40% of the costs of developing Ibrutinib, with Janssen responsible for the remaining 60%. In addition, Pharmacyclics’ potential losses during the first 3 years of Ibrutinib sales are capped at $50 million, thereby limiting potential future cash burn. As of now, Pharmacyclics has claimed three of its $50-million Phase III milestones, and the company ended its most recent quarter with $286.103 million in cash & investments and no debt. Pharmacyclics posted a profit of $1.02 per share in its latest quarter, but that profit was due to $100 million in milestone payments. The company’s operating expenses totaled $23.94 million in the quarter, and even if they were to rise by over 25% to $30 million, Pharmacyclics would still have enough cash & investments to fund operations for 9 quarters, a figure that does not take into account future milestone payments. It is highly unlikely that the company will need to issue equity to bridge itself to sustained profitability; ample existing cash reserves combined with a clear stream of future milestone payments will give the company enough financial capacity to see Ibrutinib through the clinical trial process, as well as FDA approval.
Consensus forecasts call for Pharmacyclics to reach profitability in 2016, with EPS of $0.75. Credit Suisse, one of the few sell-side firms with estimates further out than 2016, models EPS of $0.69 in 2016, followed by EPS of $0.77 in 2017 and $2.88 in 2018, representing growth of 11.59% in 2017, and 274.03% in 2018 (the firm actually estimates that Pharmacyclics will become profitable in 2015, but only through milestone payments, with sustained profitability from product sales commencing in 2017). Based on its closing price of $69.94 on February 8, Pharmacyclics trades at 93.25x estimated 2016 earnings, but only 24.28x Credit Suisse’s estimated 2018 earnings. Considering the growth rates that Pharmacyclics is likely to see, these multiples, despite being several years down the road, are not wildly expensive. In addition, 2 other factors are likely to sustain Pharmacyclics’ stock: a favorable technical outlook and its large insider ownership.
Technicals, the Investor Base, and Takeover Prospects
From a technical perspective, shares of Pharmacyclics have more room to run. The company’s RSI (Relative Strength Index) is currently at 59.2, and stocks are considered overbought at an RSI of 70 or above. In addition, the stock’s exponential moving averages are also bullish (a bullish signal arises when shorter-term moving averages cross longer-term moving averages), with Pharmacyclics’ 5-day EMA above its 13-day, 20-day, and 50-day moving average. Other technical indicators for the stock, such as moving average convergence-divergence are generally either neutral or bullish (different methods of technical analysis may simultaneously yield conflicting forecasts about a stock, therefore it is best to look at them in aggregate).
A large level of insider & institutional ownership further supports shares of Pharmacyclics. Robert Duggan, Pharmacyclics’ CEO, has direct ownership of more than 12 million shares, not counting additional shares owned indirectly through trusts and family members. Duggan’s direct stake of 12.08M shares give him control of 17.3% of Pharmacyclics’ 69.78M outstanding shares. Baker Brothers Advisors, which focuses on biotechnology companies, holds over 16% of the company’s shares. Other major investors include Capital World Investors, with an 8.08% stake, T. Rowe Price with a 6.58% stake, and Primecap, with a stake of 4.32%. Together, Pharmacyclics’ 5 largest investors control 52.63% of the company. Such a deep concentration of investors lends credence to the notion that Pharmacyclics has long-term potential. With the company’s CEO personally owning over 17% of the company, his interests are fully aligned with those of outside investors, and since becoming CEO in September 2008 (admittedly through what many interpret to be a boardroom coup), PCYC has delivered returns of over 2,600% to its investors. While future gains may not reach such levels, the company’s trajectory is solid, and there’s room for continued gains if Pharmacyclics continues to execute as it has over the past several years.
What about a takeover? While this is certainly a possibility, my thesis for Pharmacyclics is not built around such an assumption. With a market capitalization approaching $5 billion, Pharmacyclics is not an acquisition target that will be considered lightly. And given the fact that Pharmacyclics is deeply intertwined with Johnson & Johnson, the number of companies that can take control is limited. While a takeover of Pharmacyclics by Johnson & Johnson is certainly possible, there have been no rumors of such a deal, and investors considering adding to or initiating a position in the company should do so based on fundamental reasons.
While shares of Pharmacyclics have rallied sharply over the past year, additional upside remains. Ibrutinib, with a host of solid clinical trial data, is poised to become a leader in the hematology market, and Pharmacyclics has ample financial capacity to see it through potential FDA approval without raising new equity capital. The company’s deal with Johnson & Johnson is structured on quite favorable terms, and its pipeline offers room for additional upside. With CEO Robert Duggan personally owning over 17% of the company, and a majority of shares held by the 5 largest investors, there is a high level of institutional and insider support for Pharmacyclics, and I believe that such support is warranted. While 2013 may not offer investors the same levels of profit as 2012 did, there are still gains to be realized.