Big Pharma Needs Growth: Two Severely Undervalued Companies Ripe for a Takeover

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Source: Thinkstock

Source: Thinkstock

At any given moment, there are literally hundreds of severely undervalued companies that are ripe for takeovers. In this article, I will focus on the pharmaceutical industry, where many investors have borth struck it rich when they find a blockbuster, and have gone broke with others as the company’s trials fail. This sector can be a bit of a casino, but a wise investor can tip the scales in their favor.

I have spent many hours of research in this sector. My PhD is in epidemiology and so this sector has long been one of my favorites. I am long two big pharma names – Pfizer (NYSE:PFE) and Gilead Sciences (NASDAQ:GILD). Both of these companies are flush with cash, but will eventually need sources of growth. That is why Pfizer and Gilead should be constantly on the lookout for companies that it can either buy outright or propose mergers with. Gilead has long been a growth story, whereas Pfizer has long been a reliable high dividend payer. Both companies and its stocks have been very rewarding. However, it needs to inorganically grow and not just rely on its own research and development teams.

Currently, there are two companies that are severely undervalued in my opinion and can easily be scooped up or absorbed by one of these larger names. Perhaps Pfizer should be most concerned, as its growth has really stalled. The two companies in question that I will discuss are Exelixis (NASDAQ:EXEL) and Synta Pharmaceuticals (NASDAQ:SNTA).

Trading at measly $4.25 per share, Synta may be sitting on a drug that could generate billions in revenue and result in the stock moving magnitudes higher than current levels. Why wouldn’t Pfizer or another competitor step in and scoop it up? The purpose of Synta has a leading anti-cancer drug candidate, ganetespib, which is showing extreme promise. Ganetespib belongs to a new class of drugs known as heat shock protein 90 (Hsp 90) inhibitors. Hsp90 plays a role in the maturation of client proteins, which help cells growth, divide, and survive. Compared to healthy cells, cancer cells are more dependent on elevated levels of Hsp90 to proliferate. As such, inhibiting the production of Hsp90 could stop certain types of cancer. Unlike other targeted therapies that seek out specific mutations — like Pfizer’s Xalkori, which are specifically tailored to seek out and attack specific mutated cells — Hsp90 inhibitors are believed to be able to disrupt several signaling pathways simultaneously to stop tumor cell proliferation.

Why am I so excited about this company? Well, the data is pretty convincing. Treatment with ganetespib has been shown in preclinical models to reduce some aggressive features of tumors, such as the ability to induce the growth of new blood vessels, the ability to spread to other organs in the body, and to resist attack by traditional therapies, such as chemo. Synta is primarily focusing on developing ganetespib as a treatment for non-small-cell lung cancer (or, NSCLC) breast cancer and colorectal cancer. If approved, the drug is expected to hit annual peak sales of $425 million to $600 million.

Here is the one problem: While its anticancer properties are not in question, successful formulation of a drug that can actively treat cancer in patients is indeed in question. It has been tough to move from the biochemistry to the in vivo therapy. If you are looking for the one company with a real shot to get FDA approval for an HsP90 inhibitor, then Synta is the best bet. Let’s review some of the data.

In Synta’s ENCHANT-1 trial, investigators are evaluating the efficacy and safety of ganetespib monotherapy for treatment of HER2+ or triple-negative breast cancer patients previously untreated for locally advanced or metastatic disease. In the overall trial, they are seeking to enroll 35 patients in each cohort. A few months ago, five patients were enrolled into the HER2+ cohort and 15 patients were enrolled into the triple-negative breast cancer cohort and an interim report was given. Of these, four patients in the HER2+ cohort and 11 patients in the triple-negative cohort were evaluated by an independent panel.

Of the four patients in the HER2+ group evaluated, three patients (75 percent) achieved an objective response, including one complete radiological response and two partial responses. One patient (25 percent) in this cohort achieved stable disease. Of the 11 patients in the triple-negative breast cancer cohort that could be evaluated, two patients achieved partial response (18 percent) and five patients achieved stable disease (45 percent), for a total disease control rate of 64 percent. This was quite promising.

Then there is the GALAXY trials. Last year, Synta reported that during the GALAXY-1 study, patients given ganetespib showed a median survival rate of 9.8 months, compared to 7.4 months for the group only given chemotherapy. However, the drug only reduced the risk of death by 18 percent, far lower than the company’s original projection of 31 percent in October 2012. Overall survival analysis suggested ganetespib led to 30 percent longer life. A sub-analysis examining those patients who were diagnosed more than 6 months prior to study entry (which would be the most sick patients), and the combination group had a statistically significant (p=0.01) hazard ratio of 0.36, or a 64 percent difference in survival compared to the standard care only group. Finally, the ganetespib group versus a standard care group had a statistically significant (p=0.0053) reduction in risk of 50 percent (hazard ratio=0.5) for the formation of lesions.

I need to highlight this because it is critically important. These lesions are what actually lead to folks succumbing to cancer and ultimately passing away. With Synta’s formulation preventing lesion formation, life is extended allowing patients to have a chance to fight the cancer and possibly survive.

Can the company stand on its own? I think so. The analyst coverage on this stock should catch your attention immediately. All the analysts that cover the stock are extremely bullish. In fact, the midpoint of the price targets for all six analysts is over $15.00 a share. My 2014 price target is $12.50. In short, Synta is a great play and new trials are underway. It is an obvious takeover target, and I think probably more appropriate for Pfizer. Synta burns a lot of cash on these projects so I’m sure they would welcome a cash partner. On its own, Synta is a top pick for me from 2014 into 2015 and could double in share price in my opinion.

There is another company that I also believe is incredibly undervalued and the Street is completely discounting. I have identified Exelixis as a great takeover target for Pfizer or any other of its competitors. I think after a selloff in shares, Exelixis may on its own be one of the best opportunities for a trader to double their money this year. Why should Pfizer or any other company care about Exelixis? Well, Exelixis has been riding high all year. This multibillion dollar market capitalization company was recently just cut in half after the company’s update to its phase 3 results for Cometriq (also known as cabozantinib) as a treatment for late-stage prostate cancer.

In a press release back in March, Exelixis announced that the independent data monitoring committee overseeing its COMET-1 phase 3 trial involving Cometriq in metastatic castration-resistant prostate cancer had recommended the trial proceed to its final analysis. Normally a trial proceeding is considered fantastic news as it would signify the safety, tolerability, and potentially efficacy of an experimental therapy. However, with the metastatic prostate cancer field beginning to get crowded by drugs from rivals, investors absolutely punished the stock sending it from $6.00 to just over $3.00 in a week.

There is a fear that Cometriq doesn’t offer a superior risk of death reduction. But a 50 percent drop on this news? That’s far overblown. Twenty percent would have been understandable. Now, the stock is starting to turn the corner once more. If anyone is going to buy them out, now would be the time. Exelixis stock dipped to $3.02 but has now recovered over to $3.50. But not only is it technically reversing, it has upcoming catalysts and has other things going for it, which in my opinion make it extremely compelling.

Soon we will learn the final results of the COMET-1 trial and I estimate the data will show that Cometriq demonstrates superior death risk reduction relative to the standard prednisone treatment in men with metastatic castration resistant prostate cancer who had progressed while using the combination of docetaxel and either Zytiga or Xtandi. If the drug shows effect and eventually had FDA approval, just how much are we talking about here? Well, Dendreon’s (NASDAQ:DNDN) Provenge could take $400 to $500 million in peak sales, which I believe Cometriq could do alone for metastatic castration-resistant prostate cancer. What else? Don’t forget, unlike many smaller biotechs, Exelixis has FDA approval for treatments. In fact, Cometriq is already approved to treat metastatic medullary thyroid cancer by the FDA and just recently receiving EU clearance to market its therapy in Europe. For this condition, Exelixis should see revenues of $100-$200 million when sales ramp up. This is extremely attractive for a larger company that needs a revenue stream to fund its own research and development.

But there is more. The company has a decent pipeline. Aside from thyroid cancer and prostate cancer, Cometriq is also being studied in two other phase 3 trials. These are the METEOR and CELESTIAL trials to study its effects relative to standard therapies. These trials will assess Comtriqs efficacy in hindering metastatic renal cell carcinoma and hepatocellular carcinoma patients who’ve received treatment with Nexavar. The only trouble is that competition is stiff with other companies. Thus, Exelixis data will have to be strong to gain market share. This may be why investors over reacted to the news that the COMET-1 study was continuing. In the mean time, the company has a bevy of other cooperative agreements with large players like Merck and GlaxoSmithKline that will provide the necessary cash that Exelixis requires to conduct its trials and further its research and development processes.

Exelixis also recently presented data for Cobimetinib in combincation with Vemurafenib to treat metastatic melanoma with a specific mutation (BRAF-600.) This is a little data heavy, but I will do my best to walk through the epidemiology. The phase 1b dose escalation study was designed to evaluate the safety and tolerability of cobimetinib in combination with vemurafenib. The dose escalation stage of the trial comprised 10 dosing cohorts of 3-6 patients and evaluated three different dosing schedules of cobimetinib in combination with twice daily administration of vemurafenib.

After the maximum tolerated dose, that is, the dose which patients can most reasonably withstand without severe side effects was defined, two dose cohorts were expanded and additional patients with BRAF-mutated melanoma who were either BRAFi-naïve or vemurafenib-progressing patients were accrued. As of October 1st, 2013, 129 patients had been treated, comprising 66 patients who had previously progressed while receiving vemurafenib and 63 patients who were BRAFi-naïve. Of the 63 BRAFi-naïve patients, 43 (68 percent) were previously untreated and 20 (32 percent) had been treated with agents other than a BRAFi. The majority of the patients had Stage IV, M1c melanoma at the time of enrollment (vemurafenib-progressors 82 percent, BRAFi-naïve 70 percent.) The median duration of follow-up in vemurafenib-progressor and BRAFi-naïve patients was 6.3 and 12.7 months, respectively.

The final results of the exploratory secondary endpoints of BRIM7 showed anti-tumor activity for the combination of cobimetinib and vemurafenib. In BRAFi-naïve patients (n=63), an 87% confirmed overall response rate (ORR) was achieved, including 10 percent complete responses and 78 percent partial responses. An additional 10 percent of patients achieved stable disease. The majority of tumor responses were observed within the first six weeks following initiation of treatment. The median progression free survival (PFS) for BRAFi-naïve patients was 13.7 months. Results for vemurafenib-progressor patients (n=66) showed a 15 percent confirmed ORR, 42 percent stable disease rate, and median PFS of 2.8 months. The median overall survival (OS) for BRAFi-naïve patients had not been reached, with a 1 year survival estimate of 83 percent. For the vemurafenib-progressor patients the median OS was 8.3 months with an estimated 1 year survival of 32 percent. Thus, the data were extremely favorable.

In summation, the data for both Synta and Exelixis are strong. Both deserve a multi-billion dollar market cap but are trading at a significant and short-term discount. Pfizer, Gilead, and its competitors will require growth. There is now question about that. The Street is completely discounting these companies and I think before it releases news that send stocks flying, a larger competitor that needs growth should consider stepping in.

Disclosure: Christopher F. Davis is long Pfizer, Gilead Sciences, and Synta Pharmaceuticals.

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