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Bluebird's commercial uncertainties: don't obsess about them (yet)

Monday, 23-June-2014

•   Bluebird’s technology is disruptive.  The goal is to create a durable effect, or even cure patients, 

    which would create unambiguous value.

•   The company is only in a proof of concept stage.  There are too many important things that still

    need to go right (or wrong) before you should start obsessing about the economics.

•   It is impossible to value a new platform, but Bluebird’s current market cap of approximately $1

    billion will seem cheap if the technology is proven to be safe, effective, and lasting.


Learning from other paradigm-shifters


As I am sure you know, Gleevec is one of the most important cancer medicines of all-time.  Invented by a team of scientists at Ciba-Geigy, it was revolutionary because the drug’s novel mechanism (called tyrosine-kinase inhibition) targeted only a subset of patients whose cancer is caused by a specific genetic mutation.  A departure from the generalized approach of chemotherapy, the theory was that if you recognized and targeted the problem caused by the genetic abnormality, you might have a good shot at keeping the cancer at bay.  This approach is common practice now and has improved the median overall survival of many types of cancers substantially.  


However, as revolutionary as it has proven to be, the drug was nearly dropped from development by Novartis (NYSE: NVS) in 1996 (Ciba-Geigy and Sandoz merged to create Novartis) because they could not foresee how to make money off of it.  The company’s hesitancy stemmed from the fact that Gleevec targets a mutation most prevalently found in CML, an orphan indication.  Drug pricing was a lot different back then, and it was not well understood how small indications could be profitable.  As recounted by the excellent book The Philadelphia Chromosome by Jessica Wapner, Novartis’s marketing team ran estimates and concluded that the drug could only bring in a total of $100 million.  In other words, Novartis almost let commercialization uncertainties stand in the way of a great investment.  


It is easy now to see why that was so shortsighted.  As the book deftly points out (on page 169):

“There was no way the marketing team could have projected accurate sales data because kinase inhibition had never been attempted.  It was a completely new kind of medicine.  No one knew what the duration of treatment would be, the exact patient population for which it would be appropriate, or how quickly doctors would adopt the drug into their standard of care.  These calculations were simply outside their scope of reference because this drug was an entirely new way of treating cancer.”

Of course, Novartis ultimately did develop Gleevec.  Champions of the drug won out over the marketing people with the argument that drug companies exist to help patients.  If you can develop a treatment that significantly improves, or saves, the lives of even a small number of patients with an unmet need, there is always meaningful value in that (in more ways than one).  Gleevec was approved in 2001, and brought in $900 million the next year.  In 2013, worldwide sales were $4.7 billion.  Both are a far cry from $100 million.  The moral of the story is that the economics could not have been realistically estimated with a 1996 mindset.  Rather than obsessing over the economics, Novartis did the right thing by putting patients first, investing in the drug, and letting market factors take their due course.




I thought of the Gleevec story last week because it reminds me of some skeptical arguments I am starting to hear about Bluebird Bio (Nasdaq: BLUE).  The company had a phenomenal week after presenting data from two beta-thalassemia patients who were given Bluebird’s new and improved hematopoietic stem cell gene therapy (it used a new vector).  Both patients became transfusion independent within two weeks and, so far, the result has held up through 3.5 and 6.5 months.  An update will be provided later this year, most likely at the ASH conference in December.  Ben Fidler at Xconomy wrote an excellent recap of the data here if you have not had a chance to read up on the story yet.


The reason I say Bluebird is starting to sound a little similar to Gleevec is because a few skeptics I have spoken with privately are already throwing up red flags about how difficult it will be to make money off the product.  The biggest unknown, they argue, is how will Bluebird convince payers to cover it?  As Adam Feuerstein from did a great job describing in his recent mailbag post, charging for a one-time treatment like gene therapy presents a lot of challenges that payers are not accustomed to.  For example, will Bluebird charge a big up-front fee, like $1 million, or will they create some sort of annuity-like structure that follows patients’ progress over time?  The truth is that nobody has a clue about any of these things right now.


Bluebird is still in a proof of concept stage


While you should definitely be aware of those issues, I would not start obsessing about them yet.  The reality is that the Bluebird story is still in its infancy and we are only just beginning the proof of concept stage.  There are too many important things that still need to go right (or wrong) before you should start thinking hard about the mechanics of what a commercial rollout would look like. 


For example, the end of year presentation is VERY important because it will provide more clues about how durable and safe the new vector is.  Bluebird will present follow-up data on the two patients, and perhaps initial data on at least two more that have since enrolled in the same study.  There is also a chance the company will present some initial data on one or two sickle cell disease (SCD) patients around that time as well.  Any info they can provide on SCD is key because it is a much larger indication than beta-thalassemia.  An encouraging signal there would be big for the stock not only because of the additional economics at stake, but also because it would seem to confirm that Bluebird has a true platform on its hands.  You can bet that other follow-on indications will be studied quickly if both of those look promising. 


However, keep in mind that even if those presentations go well, it will still only be from a small handful patients.  MUCH more work still needs to be done before you can start thinking about this as a commercial opportunity.  Bluebird is currently enrolling up to a total seven patients in the ongoing beta-thalassemia study, and up to fifteen more in a new study that is also getting underway.  Important data from both of those will be available at various points throughout 2015. 


Beyond beta-thalassemia, Bluebird has an open IND for a study of 8 SCD patients, and their lead indication, childhood cerebral ALD (an ultra-rare disease), has a study intended for registration that will finish enrollment sometime next year.  While we will not likely see data from the cerebral ALD study for a while, it is important for the enrollment to go smoothly.  The overall point is that Bluebird will be very busy over the next year and a half trying to establish proof of concept, so much can still go right or wrong in the meantime.  As an investor, you should be way more focused on the science side of things than on the mechanics of what commercialization might look like. 


Bluebird’s gene therapy will be very valuable if it works


While I am not one to throw caution to the wind as an investor, I feel comfortable saying the economics will eventually be fine if the data looks good for two primary reasons:

First, Bluebird’s technology is disruptive.  The goal is to create a durable effect, or even cure patients, which would create unambiguous value.  Right now, the only curative approach to beta-thalassemia, for example, is an allogeneic stem cell transplant.  Transplants are challenging though because patients have to deal with the possibility of graft versus host disease and other related issues like prolonged immunosuppression.  Additionally, most non-transplant patients have to deal with costly and inconvenient blood transfusions once a month.  If the gene therapy approach is proven to be safe, effective, and durable, the value it represents will stack up very well against both of those scenarios.  Trust me, you will not have to worry about money coming in if their technology works.


Second, Bluebird’s current valuation of approximately $1 billion is not overly expensive when you consider the lofty goals the company is trying to achieve.  If additional proof of concept data is encouraging over time, you will look back on today’s valuation as having been cheap.  While it is true that the stock is VERY risky because such little data has been seen so far, the potential upside is also significant since it represents a new paradigm.  For that reason, I am comfortable owning it at this level without obsessing too much about where it will land one day.  It is more of a directional bet on a classic binary situation.  The stock will basically either be $0 or a lot higher one day.  I would feel differently if was more expensive, but $1 billion is not ridiculous all things considered. 


On a side note, Bluebird also has a CAR-T program in oncology that they have partnered with Celgene (Nasdaq: CELG).  It gives additional justification for holding the stock.  As Kite Pharma’s (Nasdaq: KITE) hugely successful IPO illustrated last week (Kite is already valued at well over $1 billion), there is high hope for CAR-T and the market is already placing significant value on it.  However, most investors have not factored CAR-T into Bluebird’s numbers because they and Celgene have provided such little detail about their development plans so far.


Coming up with realistic estimates right now is a fool’s errand


Another reason why I am not obsessing about creating highly detailed estimates right now is because it is a fool’s errand.  Read the quote again from The Philadelphia Chromosome above and think about it in the context of Bluebird’s gene therapy.  Just as kinase inhibition was unknown for cancer back then, gene therapy is also a completely new kind of approach for these blood diseases.  No one knows what the duration, patient population, or adoption trends will look like for it either.  And trying to guess when you only have six months of data from two patients is frankly a little nuts.


In truth, I did create a rought model so that I have a ballpark idea of valuation in my head (something that you should do too), but I am not going to over rely on it.  Mine is private, but I will use an example from JP Morgan to show you how imprecise this type of exercise is right now.  Last week they raised their price target on Bluebird to $53, and said they arrived at that figure by assigning a 50% probably of success to beta-thalassemia with peak sales of $1.2 billion, and a 50% probability of success to childhood cerebral ALD with peak sales of $260 million.  They assign no value to SCD and no value to CAR-T.


The problem with that type of estimation is that it cannot possibly be anywhere near reality.  There are too many unknowns.  Either the technology is going to fall flat on its face, for which the value is easily calculated, or it will be a success and you cannot possibly know what its future path will be.  For example, JP Morgan has already said they place no value on SCD (a potentially huge indication), but as an investor that is not so easy to ignore.  You can also bet there will be other indications we cannot even conceive of right now if the technology works.  In instances like this, rather than racking your brain trying to come up with a precise fair value, you are much better off just placing a directional bet.  The time for a more detailed look will arrive later.




The bottom line is that Bluebird is currently is in a stage right now that is too early for you to let commercial uncertainties get in the way of an investment.  Don’t make the same mistake Novartis almost made with Gleevec in 1996.  The bean counters will eventually have their day, but for right now put patients first, follow the science, and hope the company is able to have a huge impact on outcomes.  If they do, I am certain there is still plenty of room in the stock for the market to reward you handsomely.  With some very intriguing early data, and a lot more to come over the next year and a half, I think Bluebird is definitely worthy of an investment right now.


One last thing…if you do need something to obsess about right now (don’t we all), it should be the regulatory path to approval for something like this.  That is a huge unknown.  Another gene therapy company, uniQure (Nasdaq: QURE), has already received approval in the EU for a gene therapy called Glybera under an exceptional circumstances pathway, but the route to FDA approval, especially for broader indications like beta-thalassemia and SCD, is uncertain.  Nobody has any idea about how large the studies will need to be for FDA, and how many years of safety data they will want to see, before approving a product like this.  My guess is that Bluebird will not even ask FDA what the requirement looks like until they have much more data in hand later next year.  In the meantime, I’m placing a directional bet that the studies go well.

Who Am I?
Brad Loncar

I'm an individual investor from Kansas City.  My focus is on biotech stocks, but I enjoy investing in all industries. I'm an old-school, buy and hold investor who believes the best way to outperform and grow capital is to own innovative companies with good management teams over the long-term. more>>

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