Puma’s Auerbach Gained on Pfizer’s Breast Drug Retreat

Alan Auerbach specializes in testing drugs that Big Pharma doesn’t want anymore, and that has made him a billionaire.

In 2011, the Puma Biotechnology Inc. chief executive officer leveraged the industry connections he gained from his past at a previous company to license an obscure breast cancer drug from Pfizer Inc. Now his latest company may have a bestseller, thanks to a trial Pfizer started.

If approved, neratinib could reap $2.5 billion in annual sales by 2020, according to a report from analyst Howard Liang of Leerink Partners LLC. Since a July 22 announcement that the drug improved disease-free survival by 33 percent in women with a certain type of early-stage breast cancer, Puma shares have more than tripled. While Puma, based in Los Angeles, is set to reap most of the profit, it was New York-based Pfizer that began the trial and enrolled almost all of its patients.

“The trial had been ongoing when Pfizer licensed it to us,” Auerbach said by telephone. “We realized there was a lot of reward. We also realized there was some potential risk.”

One question is whether the U.S. Food and Drug Administration will want to see two years of added data before rendering a decision on the drug, Leerink’s Liang said in an interview. Detailed results of the new trial weren’t announced, and side effects in previous studies have included diarrhea.

Under an amended licensing agreement announced 15 minutes before the trial result was released, Puma said it would pay Pfizer a royalty on neratinib net sales in the low-to-mid teens, and assume the costs of completing the trial and other studies of the drug Pfizer previously started.

The early-stage trial “was always a focus,” Auerbach said in an e-mail.

Reduced Rate

Auerbach’s personal stake in Puma is worth about $1.2 billion, according to the Bloomberg Billionaire’s index. He characterized the royalty rate in a statement as being reduced, compared with a previous agreement.

“In light of Puma’s recent announcement, we will review the terms and obligations of our contract as well the complete data report to determine next steps with Puma,” Pfizer spokesman Andrew Topen said in an e-mailed response to questions. He confirmed that Pfizer had initiated the trial and enrolled almost all the patients.

Auerbach, meanwhile, said all options are on the table for his company, including marketing the drug by itself, finding a partner to help sell it, or selling the company itself.

“My job is to do what is in the best interests of the investors,” said Auerbach, a former biotechnology industry analyst who sold a previous company he began, Cougar Biotechnology Inc., to Johnson & Johnson for about $1 billion.

Talks ‘Ongoing’

Talks to re-negotiate the licensing agreement with Pfizer were “ongoing for quite some time,” according to Auerbach, who said his company doesn’t share trial results with Pfizer prior to announcing them.

Puma shares almost quadrupled on July 23, after the neratinib data was announced, to $233.43. The stock has declined 14 percent since then, closing yesterday at $200.68.

Until just a few days ago, neratinib seemed like a long shot in early stage breast cancer. When Puma licensed the drug, the company said it would refocus testing on patients with metastatic disease, and would stop enrolling new patients in the early-disease trial that Pfizer had started.

In the trial, the drug was used as additional therapy in early-stage breast cancer patients whose tumors are fueled by a growth promoting gene called HER2. These patients are now treated with the Roche Holding AG drug Herceptin after their tumors have been surgically removed.

‘Little Expectation’

After Herceptin treatment was completed, some of the women got neratinib and some received a placebo for an additional year. Herceptin itself had failed to show any benefit when continued for a second year, so it wasn’t clear that switching to a second drug would work either.

“There was very little expectation” the trial would work, said Leerink’s Liang. “It was clearly a surprise.”

The trial will probably lead to approval, and the size of the market is large enough that neratinib would have big sales even if only a portion of early-stage patients on Herceptin later take the medicine, Liang said.

Unlike some biotech companies that try to test multiple drugs to manage the high risk of failure, Auerbach said he likes to focus on one drug at a time.

‘Human Capital’

“It is very difficult for a small company to act like a big company and develop five or ten different drugs,” Auerbach said. “You don’t have the human capital to do it.”

As a biotech analyst at Wells Fargo & Co., in the late 1990s and early 2000s, Auerbach noticed that some experimental cancer drugs were being put on the backburner by drug companies, either because they didn’t have the resources to test them all or because the sales potential was judged to be too small.

Auerbach started his first company, Cougar Biotechnology, with a goal of finding cancer medicines with potential he could develop.

In 2004, he licensed a prostate cancer product from BTG Plc that is designed to stop tumor cells from making a hormone they need to survive. He brought it into late-stage trials before Johnson & Johnson bought Cougar for about $1 billion in July 2009. The drug, Zytiga, had $1.7 billion in 2013 sales.

By the time he started Puma, with many of the same investors, out-licensing treatments from Big Pharma had become a much more common strategy for biotechnology companies, giving him more competition for potential assets.

In the Door

While at Cougar, though, Auerbach got to the know executives at many big drugmakers, giving him relationships to help get in the door, he said.

“My idea was I have unique relationships with companies,” he said. “I know their business development teams. I will go to them and see if there is something I can pull out that other people can’t.”

He examined pipelines of various drugmakers for treatments he might want to license. Neratinib looked like the most active of a class of cancer pills that attacked certain growth-promoting genes. Pfizer was in the midst of cost cutting and eventually agreed to license the drug, he said.

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