Before we begin, Array Biopharma has potential to be abig binary event mover. Check out my article on What To Do When You’ve Picked a Winner if you’re interested in what I think you should do next!
I received a quick, seemingly simple reader inquiry on the back of Array Biopharma’s news that they received approval for the BRAF/MEK inhibitor combo of encorafenib and binimetinib. Simply put:
Could Arry Bio be a take over target?
- Array’s current valuation and growth potential
- Array’s positioning in the market
- Array’s competitors in the melanoma space
Array Biopharma valuation and growth potential
The approval of encorafenib-binimetinib marks the end of a protracted drug development cycle for ARRY, one that began with in-licensing of binimetinib from Novartis back in 2010. The pair of drugs was first tried together in 2013, but it wasn’t until we saw results from the COLUMBUS trial in late 2016 that it became clear that the combo would likely receive FDA approval eventually.
The pair of drugs was approved for the first time on June 27, 2018, under the brand names Mektovi and Braftovi, making these some of the easiest brand names to remember (enRAFenib and bRAFtovi, biniMETinib and MEKtovi). Usually the names these drugs end up with are some cryptic clue into the development, with the truth known only to the developers themselves.
What about the valuation of the drugs? For a similar pair, projections of sales climb upwards of $350 million annually eacah. This suggests that ARRY could tap substantially into a $700 million annual market. If they can reach up to those lofty sales numbers, then they stand to grow toward earnings per share of $3.33.
Of course, that is all in due time, and you would not know that ARRY had an approved drug if you’re looking at their chart:
Of course, there is often a selloff when the anticipation has built for approval in a drug, since it is often pretty clear before approval that the drug will get the green light from the FDA. They now have to shift toward a mode where they’re earning the valuation they maintain. Likely, it will take some time before they are profitable, particularly in this case where they have significant competition.
Still, the earnings upper limit defined by the sales projections for Novartis’s drugs suggests that we could see a valuation (at a conservative P/E of 10, which is right around where Pfizer sits, and well below comparable companies like JNJ and MRK) of something as high as $30 per share, which is nearly double where they stand today. This is, of course, an upper limit based on projections from Novartis’s drugs.
The reality is more likely to be that encorafenib/binimetinib will not be able to command this high a market position, since there is already established competition. We could very well have another situation like Tesaro’s, where approval of their first main oncology product has been followed by a slow decline lasting over a year as the market sobers up.
Array’s competition in the melanoma space
Array faces two main competitors in the space of BRAF inhibition: Novartis and Roche. Both have combinations for BRAF-mutated melanoma approved. Roche’s is cobimetinib/vemurafenib, and Novartis has dabrafenib/trametinib. Each of the combos is effective in its own right.
Is there a case to be made for either one of these competitors buying out Array at a premium over today’s valuation? Currently, ARRY is valued at some $3.56 billion.
And we can be clear about one thing: a BRAF/MEK inhibitor combo won’t garner the same level of valuation that Kite’s drug did to get Gilead’s attention…and almost $12 billion. At this point, I do not see a major reason for either Novartis or Roche to take Array out, as the sales potential of another combo like this may simply not be high enough to justify it.
Now, there are other potential buyers out there, other players in the melanoma space. Amgen has the intralesional immunotherapy Imlygic, signaling that they’re serious about being players in the melanoma field. However, their focus of late has been more on the deevelopment of immunotherapies, as opposed to targeted therapy.
Otjher immunotherapy players like Bristol-Myers Squibb and Merck could also be possible contenders to take Array out, considering their interest in the melanoma space. However, the immune checkpoint inhibitors also have potential to be used in BRAF-mutant patients, so it is likely that we’ll see these companies seek more to become competitors, rather than entering by integration with a buyout.
Plumbing Array Biopharma’s pipeline
We shouldn’t focus solely on Array’s only approved drug. The company has a deep pipeline, with the following drugs in phase 3 clinical trials:
- Encorafenib/binimetinib for colorectal cancer
- ARRY-797 for congestive heart failure
- Ipatasertib for prostate and breast cancer
- Selumetinib for thyroid cancer
- Varlitinib for biliary tract and gastric cancer
Certainly, not all of these drugs will succeed in clinical trials, but they do have a shot in each case. Let us also not forget that Array was the original developer of larotrectinib, the wunderkind drug from Loxo Oncology. Array will receive a royalty from the sale of this drug, boosting their bottom line that much more.
Likely, the sheer size and promise of the pipeline, along with $430 million in cash and short-term assets to back them up. With a quarterly cash burn of around $22 million, Array has the legs to survive 5 more years with no increase in sales to offset the losses. This makes them a rather attractive long-term investing prospect, if you ask me, as 5 years should be enough timr to see one or two more drugs to approval, if the clinical data bear out.
As with all things biotech, it is very difficult to predict much with certainty. Clearly, Array continues to remain highly valued, around $1 billion higher than the aforementioned Tesaro, which finds itself in a similar approved drug/competition situation.
And rumor has it that Roche wants to buy Tesaro. So if they are a takeout target, I don’t see why Array couldn’t be, also. However, it’s also possible that Array will keep on keeping on by itself, but with more rapid growth potential than Tesaro has.
Overall, I would personally peg the prospect of a near-term buyout at maybe around 40% odds, but that should not necessarily dissuade you from looking for a favorable entry point to make a long-term investment. With its deep pipeline, Array continues to have substantial growth potential, and very soon they’ll be able to leverage the marketing of their own product, in addition to generating passive cash flow from their old deal with Loxo Oncology.
The next step will hinge mainly on whether they can meet sales growth figures, and whether they can shepherd a second approval into the world to expand their reach further.
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