The Biotech Investing Penalty Box
Added to the penalty box on 9-April-2014
Reason: Platform has been too unreliable for comfort
Halozyme Therapeutics (Nasdaq: HALO) is a platform company that is based on their recombinant human hyaluronidase enzyme, rHuPH20. rHuPH20 degrades hyaluronan, a substance that provides structural support in the extracellular matrix. A common use, for example, is to combine the enzyme with biologics to create subcutaneous therapies that otherwise would need to be infused intravenously. Amazingly, some products have transformed a multi-hour infusion into a 5-to-10 minute shot.
So far, the only product Halozyme has received FDA approval for is Hylenex. This is the recombinant enzyme alone, and is mostly used to facilitate the subcutaneous administration of drugs and fluids in an acute emergency room setting. Halozyme has experienced much better luck in the EU, where three products containing rHuPH20 have recently been approved. They are SC Herceptin, SC MabThera (both partnered with Roche), and HyQ-SC immune globulin (partnered with Baxter). Further down the pipeline, Halozyme is researching rHuPH20 in diabetes to see if it can be used to improve the efficacy of insulin pumps, in oncology to break down hyaluronan-rich barriers that surround some tumors, and partner Pfizer is testing it in combination with a PCSK9 candidate. You can see the whole pipeline here.
While Halozyme has world-class partners, and products that offer almost breathtaking convenience for patients, sadly the stock has proven to be too hot to handle for long-term investors. The problem is that its various programs have been prone to numerous, unwelcome surprises. In the United States, the FDA has put no less than three products on clinical hold, and one has been outright discontinued. Here is a rundown of some of the more alarming bumps in the road:
Chart via Yahoo Finance
A: April 16, 2012 – The BLA for HyQ-SC immune globulin was not approved on time. The agency asked Halozyme and their partner Baxter “to provide additional data to address concerns raised by the FDA related to the long-term chronic use of HyQ.”
B: August 1, 2012 – FDA sent Halozyme and Baxter an official complete response letter regarding HyQ. “The letter requested additional preclinical data to support the BLA. The primary issues raised in the letter focused on non-neutralizing antibodies generated against recombinant human hyaluronidase and the possible effects of these antibodies on reproduction, development, and fertility.” Furthermore, FDA put HyQ and another program, SC Cinryze, on clinical hold. The HyQ hold still technically exists to this day, though an amended BLA with additional preclinical data has been submitted back to the agency for review. The SC Cinryze hold was lifted about a month and a half later.
C: August 18, 2013 – After further testing, the same antibody problem reemerged in the SC Cinryze program and the product was discontinued completely.
D: April 4, 2014 – Patient enrollment in one of Halozyme’s PEGPH20 oncology trials was halted by its data monitoring committee due to “differences in the thromboembolic event rate” between patients receiving PEGPH20 and those who were not.
There are a couple of reasons why I’m not interested in owning the stock going forward.
First, things have reached a point at Halozyme where it has been one surprise too many. If this was a car, it is starting to look like a lemon. It is a very frustrating stock because one day they will have great news, such as an EU approval, yet shortly thereafter one of the blow-ups will occur. The various clinical holds are especially concerning given that the company’s platform almost entirely hinges on just the one enzyme. If things really go south and additional problems arise, there isn't much to fall back on. We have already seen examples A-D of surprises arising over just the last two years. I’m not willing to let my money ride on the fact that there won’t be an E, F, G, or worse.
Second, while Halozyme’s experience in the EU has been surprisingly smooth, it is clear FDA still views these programs with significant skepticism and caution. I’ll personally believe they will have another program approved here when I see it. The fact that FDA has such a high bar is a big deal because, while the EU products are very attractive, they are likely to only get the company to a breakeven type status. Halozyme’s future relies on the un-partnered diabetes and oncology programs in the US driving the company to meaningful profitability. If those programs don’t materialize, the financial picture could be mediocre at best for a long time.
I personally think the odds of the diabetes program becoming a big commercial success are long. Halozyme is hoping to get insulin pump users to use Hylenex every few days when they reset their pump. There are a couple of problems with this. First, as this recent story from the New York Times illustrates, type 1 diabetes is already an astoundingly expensive disease to cope with. That makes it very hard for any new product to break into the routine. Second, with all of the safety issues rHuPH20 has experienced in other uses, I’m not sure how enthusiastic regulators and/or prescribing doctors will be about recommending it for chronic use. Halozyme just wrapped up a 6-month look at a trial, and will be talking with FDA soon about updating the label to include diabetes. It will be interesting to see how that unfolds.
To conclude, the bottom line is that there are many other stocks out there that will allow you to sleep better at night. While I think there is undeniable appeal to Halozyme’s approach, I’m not willing to wonder where the next problem might come from. It would be a different story if the potential upside was unusually high, but in this case it isn't.
Who Am I?
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>>