While the giants in the healthcare industry are scrambling and restructuring to make themselves more efficient, small -cap companies are gradually or -as in the case of Array BioPharma (ARRY, Financial) - dramatically making their presence felt. We at Arrow Analysis
are certainly excited by these prospects.
The companies with potential
Array BioPharma-
Topping the list is, of course, Array BioPharma which showed an incredible 51% increase in share prices in January, according to S&P capital IQ. The company which focuses mainly on the fight against cancer has announced a pipeline acquisition from Novartis (NVS, Financial), leading to a dramatic increase in prices.
The drug, named encorafenib, is a BRAF-inhibitor is specifically designed to treat a form of skin cancer known as melanoma. Melanoma, if not detected in early stages, has a very low survival rate. Encorafenib showed promising initial results, prompting trials to commence to stage III.
What’s more intriguing about this deal is that Novartis practically handed the drug over to Array at almost no cost to the latter. Furthermore, Novartis has even agreed to contribute substantially to the phase III trial costs making it a win-win situation for our little candidate.
In addition to this, Array recently reacquired global rights to binimetinib, an MEK-inhibitor, which coupled with encorafenib could make a potentially deadly melanoma fighting team.
Ophthotech Corp.-
Another contender in the potentially-awesome-companies list is Ophthotech Corporation (OPHT, Financial). This biotech company is in the process of developing a possible treatment for wet-stage macular degeneration. One of the most common forms of age-related vision-loss, wet-AMD affects majority of Americans as they grow old and treatment for this disease alone constitutes of a $6 billion market.
Currently, macular degeneration is treated with Novartis' Lucentis, Roche's (RHHBY, Financial) Avastin, or Regeneron's (REGN, Financial) Eylea with Avastin capturing nearly 60% of the market. Ordinarily, this would be an almost insurmountable obstacle for a new brand, but not for this company. Ophthotech’s Fovista seeks not to replace the already established drugs, but enhance them.
Phase II trials of Fovista showed that patients taking both Fovista and Lucentis found a 10.6 letter improvement on a standard eye chart in comparison to Lucentis’ 6.5. Thanks to this, a potential partnership could arise between the Big Pharma heads and Ophthotech. Novartis has already agreed to pay $200 million upfront and another additional $800 million in royalties and milestone payments for rights to non-US sale of Fovista. Ophthotech also reported that royalties for Fovista’s ex-US sales will be in the healthy mid-30% range, a far up cry from any of its peers.
Inovio Pharma-
Developer of synthetic DNA vaccines, Inovio Pharmaceuticals (INO), is the third and final candidate on our list. Although the company hasn’t gotten a single drug approved in its thirty year tenure, a substantial payment arrived from Roche for some of its latest products. Roche agreed to pay $400million (with a $10million upfront payment) for exclusive license to two of its vaccines –the INO-5150 and the INO-1800. And though the deal for the INO-5150 eventually fell through, Roche is definitely sticking with the latter.
Inovio, whose pipeline boasts of promising vaccines for influenza, cancer, hepatitis C, malaria and even HIV, also excited investors with its immunotherapy technology, namely the VGX-3100. The vaccine is a potential safety-net for cervical dysplasia, which is the leading cause of cervical cancer. The drug showed promising results in early stages and phase III trials are expected to start in 2016.
Parting thoughts
In this fast and ever-changing economy, it is true that companies like Johnson & Johnson (JNJ, Financial) are the rocks of stability, and most would like to stick to their steady growth. But on analyzing the markets carefully, it is our opinion that small-cap biotech companies are the future. Sure, these won’t start churning out profits immediately, but with the right decision, and successful trials, they are on their way to being the next hot-shots of the industry. All investors need to do, is keep a weathered eye on them.
After all, even J&J started small once.
