Does This Orphan Leukemia Treatment Have Blockbuster Potential?

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When most biotech investors think of cancer treatments, they tend to think of large established players like Roche and Amgen. However, more speculative investors who have an appetite for risk often favor smaller plays in the sector, such as budding orphan drug makers that produce effective treatments at premium prices. One such company on the move is Ariad Pharmaceuticals , which has risen nearly 18% over the past month.

Treating two rare types of leukemia with a single treatment
Ariad only has one approved drug, Iclusig, on the market. Iclusig treats adults with chronic-phase, accelerated-phase, or blast-phase chronic myeloid leukemia, or CML, that is resistant to tyrosine kinase inhibitor therapy. It also treats TKI-therapy-resistant Philadelphia chromosome-positive acute lymphoblastic leukemia. Both types of leukemia are extremely rare, with only 5,000 new cases of CML reported annually in the United States.

However, CML is well understood compared with other cancers. Therefore, Iclusig was the third CML treatment approved last year, following the approvals of Pfizer's Bosulif and Teva Pharmaceutical's Synribo. Due to the rarity of the cancers it treats, Iclusig is expensive and costs $115,000 per year for a once-a-day dose, approximately 15% more than Bosulif and Synribo.

Focusing on a drug-resistant orphan market
Tyrosine kinase inhibitors like Novartis' Gleevec -- which also include Bristol-Myers Squibb's Sprycel and Novartis' Tasigna -- are the most common treatments for CML. Bosulif is forecast to generate $341 million in annual sales by 2016, according to analysts surveyed by Thomson Reuters.

Meanwhile, Teva's Synribo competes with Iclusig since it also treats cases where two or more traditional tyrosine kinase inhibitor treatments have failed. Iclusig is a multi-targeted tyrosine kinase inhibitor, whereas Synribo is a protein translation inhibitor.

Therefore, treatments like Synribo and Iclusig are focusing on capturing a small slice of an already narrow patient group. CML treatments like Gleevec, Bosiluf, Synribo, and Iclusig are all designated as orphan drugs by the FDA, due to the rarity of the disease.

Solid second-quarter earnings
Last quarter, Ariad reported $13.9 million in revenue, a huge jump from the $320,000 it reported in the prior year quarter, which was wholly attributed to the FDA approval of Iclusig last December. The company's top line growth surpassed the analyst estimates of $11 million. However, Ariad is still unprofitable, reporting a second-quarter loss of $0.37 per share, down from a loss of $0.31 per share but topping the consensus estimate by $0.03.

At the end of the quarter, more than 610 patients in the United States were taking Iclusig. Ariad has the stated goal of treating 1,000 to 1,100 patients by the end of the year. That lofty goal could cause revenue to nearly double -- a prospect that has fueled the stock's recent rally. Expectations for Iclusig are high, with Credit Suisse analyst Jason Kantor expecting annual Iclusig sales to hit $1.44 billion by 2023. Other positive catalysts for the company include a European approval in July and testing of Iclusig on other forms of cancer.

Will the EPIC study yield epic results?
Many Ariad investors are now paying attention to its phase 3 EPIC study (standing for Evaluation of Ponatinib versus Imatinib in Chronic myeloid leukemia), which recently completed a 50% enrollment rate. The EPIC study compares the efficacy of Iclusig against Gleevec in newly diagnosed CML patients. The study is expected to reach a full enrollment of 500 patients by the end of 2013.

Iclusig is currently only approved for two treatments in Europe -- the treatment of patients who cannot tolerate or do not respond to Sprycel and Tasigna, and for those which Gleevec is not clinically appropriate. If the EPIC study is successful, Iclusig could become a primary treatment on par with Gleevec, Sprycel, and Tasigna -- and that lofty $1.44 billion peak sales target could actually be too modest.

The Foolish bottom line
Ariad is not a stock for the faint of heart. However, companies with a single orphan drug in their portfolio like Ariad are attractive takeover targets and hold up well when left alone -- simply look the recent interest around Alexion Pharmaceuticals, the maker of the most expensive orphan drug in the world, for a point of reference.

Ariad may have a promising treatment on its hands, but there are some hurdles it must overcome first. First and foremost, it must find ways to prove that it is a more effective treatment than the other CML treatments that have saturated the market -- something that the EPIC phase 3 study could accomplish. Secondly, the market can be very unkind to biotechs that put a single egg in a basket -- a simple misstep could snap this stock in half.

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