The FDA Breakthrough Therapy Designation (BTD) was an offshoot of the Food and Drug Administration Safety and Innovation Act (FDASIA) that was signed on July 9, 2012, that called for a new designation to be created. Since 2012, only 147 drugs have been approved having this designation, which averages out to 21 approvals a year over the past 7 years. BTD is an elite level of review and the biggest beneficiaries have been big pharma, highlighted in the charts below. The real issue for investors is figuring out the impact in terms of value, which this designation can bring to a development-stage biotech. The key metrics to follow are patient population of the indication, the potential revenue streams, time to approval, possible future indications, and if there is more than one BTD.
Defining Breakthrough Therapy Designation and Prevalence
Breakthrough Therapy is given to a drug with the following characteristics:
- Intended alone or in combination with one or more other drugs, to treat a serious or life-threatening disease or condition
- Preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints.
If a drug is granted BTD by the FDA, the agency will expedite the development and review of the drug. All requests for BTD will be reviewed within 60 days of receipt, and FDA will either grant or deny the request.
FDA Breakthrough Therapy Requests
This chart shows that historically only about 39% of applicants are granted BTD designation. Of that 39% that get the coveted designation, only 147 drugs to date have been granted under the program, out of 771 total applicants.
Approximately 1 in 5 applications for BTD will actually get BTD, and then get approved under it. What is paradoxical about this number is that these drugs have to be at least through a phase 2 trial that demonstrated efficacy. According to BioMed Tracker, the likelihood of approval (LOA) is 30.7% for all drugs going from a phase 2 to phase 3 program. Therefore, BTD does not increase the likelihood of approval. So, why go through the trouble?
Average Approval Times
A study was done in 2015 by PhamaExec, which compared the average development time for all drugs, compared to BTD drugs. The article sought to figure out if a BTD was worth it. The charts show that there was a clear benefit for BTD over standard status or other special programs like accelerated or orphan designations. The benefit averaged 2.5 years earlier approval for a New Molecular Entity (NME), and 3.5 years earlier approval for a drug under an orphan drug or accelerated product approval designations.
PharmaExec
Big Pharma Dominating BTD Approvals
BTD seems to have an unintended consequence of assisting big pharma (see below). Since the program began in 2012, a total of 130 FDA approvals are split between 19 public companies and 5 private companies. The average market capitalization of these players is $138.2 billion, but the weighted average of $174.1 billion suggests that the larger players have a greater number of BTD approvals. The smaller subset of companies that only has one BTD approval totals 17. These companies represent a more pure play on BTD. The average valuation of these companies is $8.23 billion. Within this subset, the data is skewed by 4 players that got BTD on very obscure indications. This means that an $8.0 billion valuation for a BTD could be reasonable.
BTD Pure Plays
The reason the list of pure plays is so small is that a little less than half got swallowed up by big pharma, 12/29. All the companies with 2 or more BTDs were gobbled up by big pharma. This list essentially represents low hanging fruit for a Big Pharma acquisition. Any company with 2 or more BTDs would be in the hot zone for acquisition. Dissecting this list, the companies with the lowest market capitalization were targeting disease indications that represent small patient populations.
Market Size is Determinant in BTD Valuation
The worst performing company to ever receive a BTD is Theratechnologies (THTX). Trogarzo received FDA approval on March 6, 2018, to treat multi-drug resistant HIV patients. It is an antiretroviral intravenous drug that is taken every 14 days. Most of the participants in the study failed 10 or more antiretroviral drugs, which means this drug was developed for a very small niche of HIV patients. There are still severe side effects with the drug, like rash and immune reconstitution syndrome. Combined quarterly revenue for the company almost 2 years after launch is running close to $16 million per quarter. Their target patient population is approximately 10-12K patients annually which require new treatment. Progenics (PGNX) has a very weak pipeline. Their lead candidate is Azedra, which is a radiotherapeutic for unresectable locally advanced or metastatic pheochromocytoma and paraganglioma. This is a very rare disease that affects approximately 93 people per every 400 million population. The company is earning about $5.6 million per quarter based on the last quarterly report. Catalyst Pharmaceuticals (CPRX) is also in a similar situation with their lead drug candidate Firdapse. They received regulatory approval on November 29, 2018, for the treatment of Lambert-Eaton Myasthenic Syndrome (LEMS). This drug is targeting a patient population of 7,000-8,800 patients in the United States. Rounding out the bottom 4 is Stemline Therapeutics (STML) with their treatment of blastic plasmacytoid dendritic cell neoplasm (BPDCN). The company has quarterly revenue of $13 million and has a strong balance sheet with close to $200 million in assets. There are only 1000-1400 cases annually in the United States and Europe.
Acadia Pharmaceuticals (ACAD) is more representative of the mean. In many Parkinson's patients, the drug regimens they take eventually cause hallucinations called Parkinson's Disease Psychosis. Their lead drug candidate Nuplazid has the potential to be a blockbuster with 50% year over year results and year-end guidance close to $330 million. The potential patient population with Dementia-Related Psychosis (DRP) is 2.4 million and only half are being treated. ACAD got a BTD for Parkinson's Disease but also got a BTD just recently for DRP which could make them a ripe target for big pharma. In September 2019, they halted their trial for strong efficacy which is a positive indicator that they are likely to get that coveted second BTD approval.
Blockbuster Threshold
The key to understanding the effect that a BTD will have on a stock is related to its potential patient population. Valuation is very much tied to the patient population along with the expected revenues. Blockbuster status is defined as drugs that generate over $1.0 billion in annual sales. In general, this threshold, according to the analysis, seems to lead to a value for BTD drugs of $10.0 billion, like Neurocrine Biosciences Inc. (NBIX). In 2018, they had revenues of $451 million. Credit Suisse is projecting $786 million in 2019 and $1.18 billion in 2020. There are exceptions to this rule because Alnylam Pharmaceuticals (ALNY) has a much richer valuation than its revenue supports, but it has a deep pipeline and has been awarded 3 BTDs.
BTD Stocks to Watch
High Flyers
Dicerna Pharmaceuticals (DRNA):Delivering RNAi is a novel platform technology. Their first indication is for primary hyperoxaluria which is a rare genetic liver disorder that is characterized by the overproduction of oxalate which can cause severe damage to the kidney and liver if it is not removed. This disease affects less than 200,000 patients in the United States, but the company expects peak sales between $500 million and $1.0 billion. Results showed normalization in 14 out of 18 patients. They received BTD in July 2019. If they meet the endpoints in a larger trial, there is a good chance of approval.
Big pharma also weighed in on the results and Roche Holding AG (OTCQX:RHHBY) is set to licensetheir treatment for Hepatitis B for $1.47 billion in milestone payments. They also struck a deal in November with Novo Nordisk (NVO) for their GALXC platform technology to treat metabolic disorders. NVO made a $50 million equity investment plus an upfront milestone payment of $175 million with additional milestone payments and royalties possible. The company has a $1.8 billion market capitalization and could have at least 2 partners should trial results confirm their findings.
Nektar Therapeutics (NKTR): The Company has amassed an impressive pipeline of drugs. They have a number of partnerships including BMY in oncology, Biogen (BIIB) in Lupus, PFE in oncology, and LLY in psoriasis and atopic dermatitis. Their BTD came in August 2019for the treatment of unresectable metastatic melanoma. Their lead candidate NKTR-214 was used in conjunction with Opdivo to boost the production of Natural Killer cells by targeting the IL-2 pathway. NKTR has a $3.7 billion market capitalization but $1.7 billion is in cash and marketable securities. Their enterprise value is $2.0 billion but their numerous cancer indications make them an ideal pipeline filler for the right big pharma. They are courting 5 at the moment.
Iovance Biotherapeutics (IOVA):The Company is focused on immuno-oncology drugs that treat melanoma, cervical cancer, head & neck squamous cell carcinoma (HNSCC), and non-small cell lung cancer (NSLC). Interim data show a 36.5% ORR in melanoma and a 44% ORR in cervical cancer. The company has a BTD for advanced cervical cancer. They have a $3.3 billion market capitalization and they raised $425 million. What has likely captured the imagination of investors is that they are one of the first to truly personalize medicine. However, they are not alone. They do have a competitor called Marker Therapeutics (MRKR) with a similar-sized pipeline and arguably similar trial results utilizing similar personalization techniques. The market capitalization of MRKR is tiny in comparison, coming in at $144 million. Both companies take T-cells from a biopsy, expand the colony, and then inject it back into the patient. The primary difference is that the IOVA treatment lympho-depletes the patient, whereas the MRKR treatment leaves the immune system intact. In the final step of the IOVA treatment is an injection of interleukin2 (IL-2) to activate the Tumor Infiltrating Cells (TILs). Immuno-Oncology is becoming a crowded space, so caution is warranted when evaluating two companies doing essentially the same thing, getting similar results that have such a large disparity in market cap. The only difference is the BTD and cash in the bank.
Deciphera Pharmaceuticals (DCPH): The Company's lead candidate ripretinib was granted BTD on November 4th for Gastrointestinal Stromal Tumors (GIST). The Company currently has a $3.0 billion market cap, up from $2.3 billion before the announcement of the BTD. The Company maintains a solid cash position of $635 million. They expect to submit their NDA in Q1 2020, and investors have been bidding up the price of the stock in anticipation of approval. The company estimates the accessible market is 4,700 patients annually. The data from the trial was very good, median survival moved from 1 month to 6.6 months. There were a lot of minor side effects, but they were well tolerated given the severity of this deadly form of cancer. The ORR was 19% and progression free survival was 46 weeks. The development is still very early, so investors need to be cautious given the limited patient population and the low ORR, which could be improved by competitors looking to go after this indication with a combination therapy.
Value Propositions
Eiger BioPharmaceuticals (EIGR):This biotech only has a market cap of $318 million but can boast 3 BTDs. They have 2 BTDs for their lead candidate Lonafarnib. One for Hepatitis Delta Virus(HDV) and another for Progeria and Progeroid Laminopathies. Another drug, Avexitide, received BTD for Post-bariatric Hypoglycemia. All these are orphan drugs, but the HDV has greater than 2.0 million HDV patients in China and could represent serious upside should they get approval. The total addressable market is 300,000 patients and that represents over $1.0 billion in peak sales for this indication alone. The 2019 EASL study showed a 100-fold increase in antiviral activity with combination therapy, which makes their DLIVR phase 3 study so important. Investors who are heavily discounting the possibilities in China and the earnings potential of HDV could be creating an opportunity for value investors. The company only has 4 drugs in their pipeline and 3 are BTDs. This stock is valued oriented on many fronts.
CytoDyn Inc. (OTCQB:CYDY): Leronlimab is their lead candidate. This HIV drug is on the cusp of filing a BLA in the coming weeks. They believe that approval should not be far behind, they are expecting approval by Q2 2020, for combination use of HAART antiretrovirals and leronlimab in HIV, for patients that failed previous treatments. Other results demonstrated a 95% responder's rate in monotherapy. This allows them to file for BTD in HIV monotherapy. They have also said that if their results continue to be positive in Triple Negative Breast Cancer (TNBC), they will file for BTD by the end of January 2020. The company reported a reduction in Circulating Tumor Cells (CTCs) to zero with only 2 injections. They expect to have 4 more patients enrolled in the coming days which could allow them to file for a BTD, assuming the results continue to track. The significance of the data is that keeping CTCs below 5 copies/dL, dramatically increased the 5-year survival rate. Leronlimab is a platform technology drug and they could see a minimum of 2 to 4 BTDs in the coming year. They are ready to start dosing leronlimab in their NASH and Graft Versus Host Disease(GvHD) trials. They expect readouts next year that could add to the validity. Conservative revenue forecasts call for $2.1-4.2 billion, exceeding all measures of blockbuster status. This is clearly one to watch.
Investment Summary
It is clear that getting a BTD adds significant value to a company. Based on historical averages, a pure play company with a BTD for a significant population could be worth $8.3 billion. Companies that meet these criteria should be thoroughly evaluated for their blockbuster (over $1.0 billion in peak sales) potential. Other companies should be evaluated for their potential as a platform technology and the ability to put up more than 1 BTD. The other thing that investors need to consider is that not all BTDs are created equal. There is clearly a correlation between the size of the potential patient population and the valuation.