It would be an understatement to say the last few weeks have been harsh for biotech investors. However, I have used the dip to purchase beaten down companies that have upcoming catalysts and nice growing revenue from approved drugs. Medivation is a no brainer to buy at current levels as prostate cancer drug Xtandi revenue is growing substantially and management has built a nice mature low risk pipeline.
Acorda Therapeutics Inc (NASDAQ:ACOR) is another name I’ve bought into heavily over the last several weeks. Acorda’s stock has been stagnant for months as worries mounted regarding the validity of the patents protecting their multiple sclerosis (MS) drug Ampyra, which is expected to bring in over $400 Million in revenue this year. In accordance, the short float is extremely high at ~25% of shares. Many investors, like myself, were wary of investing in Acorda until there was more clarity on the direction the patent litigation would go. The direction is now clear. Acorda recently got a huge win with the USPTO’s decision to not institute inter partes review ((IPR)) on two of their main Ampyra patents and yesterday it was announced that generic drug behemoth Actavis (ACT) has agreed to settle their litigation with Acorda and not launch any generic of Ampyra until 2027, when the latest patent protecting the drug expires. Acorda is now significantly undervalued. With clarity on the strength of Acorda’s patent portfolio covering Ampyra, annual drug revenue over $400M, a strong drug pipeline, and a market cap of only $1.3B, I’m loading up on the stock as a short squeeze is now imminent.
Ampyra and Mature Pipeline Significantly Undervalued
Ampyra, a drug that improves walking in patients with MS, was approved by the FDA in the beginning of 2010 and sales have been on an upward trajectory since.
*Graph made in Microsoft Excel
Management has estimated the drug will bring in $410-420M in 2015, which is on the high end of previous estimates. This accounts for the majority of Acorda’s revenue and is responsible for fueling the company and development of their pipeline. RBC Capital Markets analyst Michael Lee stated in a recent note to investors that Ampyra sales alone for the MS indication should be worth $35-44 per share. With the stock price hovering around $30, investors can see how big a steal the current price is.
I’m not going to dive deep into the details of each drug in the pipeline, but it is fair to say the company has developed an impressive pipeline that focuses mainly on neurological conditions.
*Slide from Q2 2015 Earnings Conference Call
They have two other FDA approved drugs that treat spasticity and post shingles nerve pain but revenue from these compounds is minimal with sales under $20M annually.
Acorda is looking to expand the label indication of Ampyra for the treatment of post-stroke walking deficits. The 83 patient Phase 2 study illustrated a statistically significant improvement in walking ability and functional independence in post-stroke patients compared to placebo. The company is now enrolling a Phase 3 clinical trial which will test 540 post-stroke patients in walking ability following Ampyra treatment compared to placebo. Considering over 3.5 million people in the US have had a stroke which impairs walking ability, the potential revenue increase by expanding Ampyra’s label could be enormous.
Acorda has also initiated a Phase 3 clinical trial of CVT-301 for the treatment of OFF episodes in Parkinson’s disease patients. OFF episodes are characterized by a re-emergence of PD motor symptoms, such as impaired ability to move, muscle stiffness and tremor. Phase 2b data presented at the 19th International Congress of Parkinson’s Disease and Movement Disorders (MDS) illustrated a statistically significant difference in motor function in patients experiencing an OFF episode, treated with CVT-301, than patients treated with inhaled placebo. The speed in which the drug becomes effective is incredible, with clear separation between drug and placebo occurring in just 10 minutes.
*Slide from Q2 2015 Earnings Conference Call
Based on solid Phase 2 results, CVT-301 was acquired by Acorda in 2014 with the acquisition of Civitas Therapeutics for $525M. Importantly, before being acquired by Acorda, Civitas was planning to do an IPO based on the potential of CVT-301. The Phase 3 trial is expected to enroll 345 patients comparing two active drug concentrations with placebo. The primary outcome will be improvement in the UPDRS III scale, which measures motor ability, following CVT-301 treatment. It is estimated that ~350,000 Parkinson’s patients experience OFF episodes in the US and may benefit from CVT-301 treatment. Management believes peak sales would be over $500M annually for this indication and there would be significant overlap with current Ampyra prescribers who are already familiar with the drug. In accordance, during the last earnings call management stressed CVT-301 is their highest priority. The company maintains the full rights to the drug and is working on an international strategy for drug launch.
Another advanced drug in the pipeline is Plumiaz for seizure treatment, which is in Phase 3 clinical trials and has expected peak sales of $200M annually. Earlier stage drugs include CVT-427 for migraines, which will enter Phase 1 studies this year and rHIgM22 in MS which is also at the Phase 1 stage. Bottom line, the company has a healthy drug pipeline with multiple shots on goal and huge upside. Currently investors are not even valuing the company at market for current Ampyra sales in MS let alone putting any value on the drug pipeline.
Ampyra Patent Protection Strong
The main reason investors sold off shares, were reluctant to purchase new shares, and increased the number of shorted shares, was hedge fund manager Kyle Bass challenging two key patents covering Ampyra through an inter partes review ((IPR)) petition. As soon as investors caught wind of the petition in February, Acorda shares plummeted nearly 25%. Kyle Bass is using IPR to make money shorting biotech stocks since he knows investors will be scared with the outcome hanging over the stocks. Acorda is not alone, Bass has filed over 25 of these challenges against other drug makers since it is relatively cheap exercise to file a petition. In Acorda’s case where over 90% of revenue is generated from Ampyra sales, investors for good reason do not like uncertainty. However, on August 24th the USPTO ruled that they would not even hear Kyle Bass’ case against Acorda as the evidence cited as prior knowledge did not suffice, mainly poster presentations from conferences, and nothing to illustrate that Ampyra’s effect on MS walking ability was obvious. In other words, Bass didn’t even make it past the initial review of the petition. Importantly, the ruling cannot be appealed. This didn’t stop Bass from refiling petitions based on other flimsy evidence, but any likelihood of success at this point is slim to none. Like I said, filing petitions is a cheap exercise so Bass is hoping to keep investors scared long enough to continue to make money shorting the stocks. His time has run out on Acorda.
As is common in today’s biotech field, Ampyra is also being challenged by generic drug makers who have filed for abbreviated new drug applications (ANDAs) to offer the generic version of Ampyra. As expected, Acorda has filed infringement lawsuits against these generic companies. A Markman hearing is set for September 2016 to consider the company’s infringement claims against the ANDA filers. It appears the threat from these ANDA’s is small as Actavis (ACT) yesterday declared they were settling their dispute with Acorda and will not launch any generic version of Ampyra until 2027, when the last patent protecting the drug expires. When the second largest generic drug company in the world drops their challenge of the validity of the patents that is a very good sign.
Acorda has 5 orange book patents covering Ampyra with protection out till 2027. Their legal team is second to none, having been named in 2013 as one of the four best legal departments in the nation and recently winning the Legal Media Group 2015 Life Sciences Award. The last two months have provided a lot of clarity regarding the strength of the patents covering Ampyra and it should make long investors rest easy and those 25% of shorts toss and turn.
Biotech stocks can fluctuate wildly and caution should always be taken when investing in this field. Acorda’s financial position is strong with over $300M in cash and Ampyra drug sales supporting the business. There should be no more stock dilution unless the company wants to make another acquisition. Although Acorda is not completely out of the woods regarding challenges to its Ampyra patent portfolio, the USPTO decision to not hear Bass’ IPR petition and their recent settlement with Actavis bodes well for establishing the strength of their intellectual property. The risk/reward profile looks very good at current levels.
Despite having grown Ampyra drug sales steadily over the last several years to upwards of $400M annually and a very healthy drug pipeline with several advanced candidates, the stock has been beaten down based on patent disputes. With every decision to date regarding the IP protecting Ampyra being ruled in Acorda’s favor, investors should begin to remove some of the perceived risk in the stock and begin to purchase shares. This is exactly what I have done as the company boasts an extremely small market cap of only ~$1.3B. Almost all biotech stocks on the market with this size valuation have no approved drugs and would hope for a drug doing the revenue Ampyra is.
Analysts seem to agree, with the average price target of the stock being ~$42. Following Actavis decision to not pursue generic Ampyra litigation, Cowen slapped a $65 price target on the stock representing over 100% upside from current levels. With over 25% of the current share float being shorted based on the hope that the Ampyra intellectual property would not hold up, it’s time to let the squeeze begin.
Don’t be late to the party – Click Here to see what 4500 Wall Street Analysts say about your stocks.