Is Roche a Small Biotech's Best Friend?

Is Roche a Small Biotech's Best Friend?

Since smaller biotechs can often be swayed by market speculation, partnering up with a major pharmaceutical company like Roche can instantly pique investors' interest. Let's take a look at two companies that have recently collaborated with Roche -- Inovio Pharmaceuticals and Curis -- and see what that means for investors.

Believing in Inovio
Inovio Pharmaceuticals is a polarizing stock for biotech investors; this can be seen in the stock's Motley Fool CAPS board, where it holds a mediocre one-star rating. The bulls believe that the company's pipeline of synthetic vaccines for cancer, hepatitis B and C, influenza, and HIV could significantly improve the quality of care for patients. Meanwhile, the bears point out that although Inovio was founded 30 years ago, it has yet to release a single marketed product, while its debt and outstanding shares have significantly increased.

Roche surprisingly showed its support of Inovio in a recently announced licensing agreement in which the two companies will work to commercialize Inovio's multi-antigen DNA immunotherapies for prostate cancer and hepatitis B. Both vaccines are therapeutic and showed positive results in preclinical studies. However, neither one has advanced to phase 1 trials yet.

Roche is paying Inovio an upfront payment of $10 million followed by $412.5 million in milestone payments, along with "double-digit" tiered royalty payments on product sales if approved.

The deal with Roche is a shot to the arm for Inovio, which only reported total revenue of $4.1 million in fiscal 2012. Last quarter, Inovio's revenue -- completely comprised of research grants -- only came in at $786,000, as its net loss more than doubled from $4.1 million to $10.9 million. Therefore, Roche's involvement with Inovio comes at a good time for the company, since this new stream of revenue should help stabilize Inovio's stock price in the near term.

More importantly, Roche's partnership could draw investor attention to Inovio's other treatments, which include the hTERT cancer vaccine -- which could potentially treat breast, non-small-cell lung, and prostate cancers -- and its H7N9 influenza vaccine, which has shown success in animals.

Expanding its oncology portfolio
Roche has also expanded its oncology portfolio to cover more treatments. Roche's subsidiary, Genentech, is partnered with Curis in a long-term project to target a pathway that some cancer cells exploit to prolong their survival. Curis and Genentech's cancer treatment, Erivedge, was approved by the FDA in January 2012 for the treatment of basal cell carcinoma. It is the second skin cancer treatment to ever be approved by the FDA, after Roche's melanoma treatment Zelboraf was approved in August 2011.

Last quarter, strong sales of Erivedge fueled Curis' 24% year-over-year revenue growth to $5.4 million (comprised of Erivedge royalties), as the company edged toward profitability -- narrowing its prior year quarter's loss of $0.04 to $0.02 per share. Analysts, who were expecting Curis to report $4.43 million in revenue and a loss of $0.05, were completely taken by surprise. Sales of Erivedge should continue ramp up in the coming years .

Why the little guys matter
For Roche, working with experimental companies like Inovio and Curis could help it prepare for the patent expirations starting next year for Herceptin. Herceptin is Roche's top-selling treatment for HER2-positive metastatic breast cancer, generating $6.3 billion in sales in fiscal 2012.

However, a new subcutaneous formulation of Herceptin was recently approved in the EU, which could completely replace its current intravenous treatment. Administering the new injectable version of the drug only requires two to five minutes, compared to the 30 to 90 minutes needed for the current intravenous version.

If subcutaneous Herceptin dominates the market as a result, its small partnerships with Inovio and Curis will still help expand Roche's defensive moat, although they won't be necessary to protect its top line from generic Herceptin.

The Foolish takeaway
For biotech investors looking for a more conservative growth stock, Roche fits the bill nicely. In the first half of fiscal 2013, its group sales rose 5% from the prior year as its core earnings per share climbed 12%. More importantly, its HER2 franchise grew 11% to 3.3 billion Swiss francs ($3.55 billion), accounting for 14% of the company's top line. For investors looking for more speculative biotech stocks with higher growth potential, Roche's smaller partners Inovio and Curis are also definitely worth a look.

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