Puma Biotechnology Priced Like Takeover Target: Real M&A

Puma Biotechnology Inc.’s surging valuation is stoking optimism its chief executive officer will succeed in selling his second straight drug developer to a major pharmaceutical company.

Puma’s experimental breast-cancer treatment is viewed so favorably that its shares fetch $822 million after less than 11 months of trading, more than all other U.S. peers that also had no sales in the past year, according to data compiled by Bloomberg. The stock has doubled since April even though Puma only just started enrolling patients in the final stage of testing neratinib, which it licensed from Pfizer Inc. in 2011.

CEO Alan H. Auerbach sold his previous venture, Cougar Biotechnology Inc., for about $1 billion to Johnson & Johnson before U.S. regulators approved its prostate-cancer drug that’s turning into a billion-dollar product. While any oncology-focused drugmaker may consider purchasing Puma given its prospects, they may wait until its phase 3 is completed, Cowen Group Inc. said. UBS AG says Puma could fetch about $40 a share, 37 percent more than yesterday’s price.

“It’s a management team that’s made people a lot of money in the past, and almost certainly will do the right thing for investors,” Eric Schmidt, an analyst at Cowen in New York, said in a telephone interview. Auerbach has “picked up another asset on the cheap from Pfizer and is doing a great job with it.”

Raising Money

Puma licensed neratinib from Pfizer in 2011 and raised $60 million that year from a private placement to fund development of the experimental breast-cancer drug. After the stock began trading over the counter in April 2012, Los Angeles-based Puma collected about $129 million in October from a sale of shares, which were listed that month by the New York Stock Exchange.

While Puma has the most market capitalization among U.S. biotechnology companies that posted no revenue in the past 12 months, there are bigger drugmakers with some revenue even though they don’t sell any products. Businesses such as Pharmacyclics Inc., which is valued at $6.6 billion, receive milestone payments from partners and other fees. Puma hasn’t collected such funds.

Auerbach founded Los Angeles-based Cougar in 2003 and sold it to J&J in 2009 while abiraterone acetate, its experimental prostate-cancer treatment, was still being developed. The U.S. Food and Drug Administration approved the drug, which is marketed as Zytiga, in 2011 for use in patients with late-stage prostate cancer who had already received chemotherapy. It also won European approval.

More Patients

Three months ago, the FDA said Zytiga could be used in earlier stages of prostate cancer, which could spur four times as many patients to take it, J&J says. Analysts project Zytiga sales will total $1.3 billion this year, according to the average of estimates compiled by Bloomberg.

Just as Puma licensed its lead drug candidate from another company, Pfizer, Cougar got abiraterone acetate from London-based BTG Plc. The employees who helped make Cougar a success joined Auerbach at Puma, the CEO said in a phone interview.

“My team here at Puma is largely my team at Cougar,” said Auerbach, a former analyst at Wells Fargo & Co. “When I founded Puma, we took a lot of pages from the Cougar playbook.”

Auerbach said he has three options for Puma: selling the company, marketing neratinib -- if approved by regulators -- with his own sales force, or licensing the drug to another business.

“Today, I am not making that decision,” he said. “My past history and my future history will always show I will always do what is in the best interest of the shareholders.”

Starting Enrollment

Puma said in February that it planned to start enrolling patients in March and April for the third and final stage of trials generally required for regulatory approval. It’s testing neratinib in metastatic HER2-positive breast cancer, a typically more aggressive form of the disease linked to a protein called human epidermal growth factor receptor 2. A metastatic cancer is one that has spread to other areas of the body.

The trial will compare neratinib with GlaxoSmithKline Plc’s Tykerb, testing it in patients for whom two or more prior treatments have failed. Tykerb produced 239 million pounds ($379 million) in 2012 revenue for London-based Glaxo. Based on earlier data, Puma’s drug looks like it could overtake Glaxo’s, according to Cowen’s Schmidt.

“Its overall profile appears superior to that of Tykerb,” Schmidt wrote in a research report published Feb. 22. In a phone interview, Schmidt said Puma’s medicine is “clearly active for breast cancer,” meaning tests have shown it impacts the disease, though bigger trials are needed to prove its safety and efficacy.

Neratinib, Tykerb

The test comparing neratinib with Tykerb could yield data in 2015, and, if approved, Puma’s drug may bring in $1.1 billion of annual worldwide revenue in 2025, the analyst said.

The American Cancer Society estimates more than 232,000 new cases of breast cancer will be found in American women this year, more than any other form of the disease among females. HER2-positive tumors make up about 18 percent to 25 percent of cases, according to Cowen.

Results from four second-stage trials of neratinib -- for both breast cancer and non-small cell lung cancer -- may be released this year, Auerbach said.

Because of that time frame, potential buyers of Puma may not make offers until 2014, according to Matthew Harrison, an analyst at UBS in New York. Still, Auerbach’s history with Cougar is boosting optimism among investors that Puma’s drug will prove successful and that the company could be taken over, the analyst said. He sees a transaction around $40 a share. The stock closed at a record high of $29.15 yesterday.

Today, Puma shares fell 2.1 percent to $28.54.

AstraZeneca, Bristol

The most likely buyers are large pharmaceutical or biotechnology companies that already sell cancer drugs, said Les Funtleyder, a health-industry analyst at New York-based investment fund Poliwogg. He cited AstraZeneca Plc, Bristol-Myers Squibb Co., Takeda Pharmaceutical Co., Celgene Corp. and GlaxoSmithKline as potential acquirers.

AstraZeneca, based in London, sells the cancer drugs Iressa and Zoladex. The company, facing the loss of patent protection by the end of 2014 for drugs producing more than 40 percent of its sales, has experienced repeated setbacks in developing new products. CEO Pascal Soriot said in a February interview that he would consider buying companies in the range of $3 billion to $4 billion.

Bristol-Myers, which sells the cancer drugs Sprycel, Yervoy and Erbitux, lost patent protection on its former top-seller, the blood-thinner Plavix, in 2012. After spending $2.5 billion to buy Inhibitex Inc. last year, Bristol-Myers was forced to halt development of the experimental hepatitis-C treatment it acquired after patients developed heart failure.

Takeda, Celgene

Takeda, based in Osaka, Japan, bought Millennium Pharmaceuticals Inc. in 2008, gaining the cancer drug Velcade. Celgene of Summit, New Jersey, sells the cancer medicines Revlimid and Abraxane, and just won approval for Pomalyst.

Esra Erkal-Paler, a spokeswoman for AstraZeneca, Bristol-Myers’s Jennifer Mauer, Takeda’s Rebekah Childers, Celgene’s Brian Gill and Glaxo’s Melinda Stubbee declined to comment.

Given that J&J bought Auerbach’s last company when it was still conducting phase 3 trials, the stage Puma is entering now, investors may be optimistic about Puma’s takeover prospects, Funtleyder said.

“Cougar is a good guidepost because you have the same players involved,” Funtleyder said. “People’s natural inclination when the management has sold a company before is to assume that they’re going to do it again.”

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