Regeneron And Sanofi Have A Near-Term FDA Catalyst

At the end of April, biotech company Regeneron Pharmaceuticals Inc REGN announced that the FDA had accepted the resubmission of its Biologics License Application (BLA) for a drug called Kevzara. The acceptance qualified the application for a Class 1 response and sets the company up for a PDUFA date of May 22, 2017.

This resubmission marks the latest development in what has been a long and winding development pathway for the drug, which Regeneron is developing as part of a collaboration with Sanofi SA (ADR) SNY. Here is a look at the drug in question, with analysis of what an approval might mean for the two companies going forward and a discussion of whether such an approval is likely.

Kevzara is being developed as a potential treatment for adult patients with moderately to severely active rheumatoid arthritis (RA), and specifically, those who have had an inadequate response or intolerance to one or more disease-modifying antirheumatic drugs (DMARDs). The drug is part of a family of drugs called humanized monoclonal antibodies that act against the interleukin-6 receptor (IL-6R). IL-6 is a much-targeted cytokine that plays an important role in immune response. It's implicated in the pathogenesis of a large number of diseases, across a large disease type spectrum, including autoimmune diseases, multiple myeloma and prostate cancer.

Kevzara is designed to bind to the IL-6R, and in doing so, stop the IL-6 cytokine from activating the receptor. No activation means no inflammatory response initiation, and in patients with RA, it's the inflammation that serves as the root cause of the disease (and by proxy, the symptoms associated with the condition). Get rid of the inflammation and the hope is that this will relieve patients' symptoms.

And according to the data, it works.

The drug performed well in a pivotal trial that was set up to underpin the above-mentioned BLA. In the trial, which was close to 3,000 patients strong, the drug demonstrated clinically-meaningful improvements in reducing signs and symptoms of RA, improving physical function, and inhibiting radiographic progression of structural damage of the disease. The safety profile isn’t perfect (the most common AEs were neutropenia (6-10%), increased alanine aminotransferase (4-5%), injection site erythema (3-4%), and upper respiratory tract infections (3%)) but it falls in line with other treatments in this indication, and the benefits of the drug far outweigh the risks (for the majority) and markets expect that the FDA will agree come decision day.

So what went wrong with the initial application?

Well, to put it simply, we don't really know. Toward the end of last year, and as the markets approached what they felt was a surefire approval for the drug in this indication, the FDA issued a Complete Response Letter (CRL) to Regeneron and Sanofi. The two companies were pretty quiet following the issue, only revealing that the CRL decision was rooted in, and to quote, certain deficiencies identified during a routine good manufacturing practice inspection of the Sanofi Le Trait facility where sarilumab (this is the non-commercial name for the drug) is filled and finished.

So all we know is that something was wrong with the manufacturing facility, and the assumption now (with the FDA having reaccepted the application) is that the issue is resolved and focus will turn to safety and efficacy of the asset, as opposed to the manufacturing side of the equation, from an FDA perspective.

And as mentioned, we don't expect either of these areas to be an issue for the agency. The drug works, and works well, in a target population that desperately needs new drugs. It's relatively safe, and as per a study that concluded last year, it is stronger from an efficacy perspective than AbbVie Inc. ABBV's Humira – a blockbuster asset that serves as the current standard of care treatment in the RA space.

Of note, the drug just picked up approval in Canada, on an application that was based on the same data that the two companies used to underpin the US application, further strengthening the suggestion that it should get a regulatory green light from the FDA come May 22.

So what will an approval mean for the two companies?

This is a big market, and while the drug likely won't command premium pricing, it's still got a large potential earnings power. Analysts expect sales to hit $500 million relatively soon post-approval in the US, and to top out at more than $1 billion by 2020. These are conservative estimates. The higher end of the market puts peak sales at $1.7 billion.

Now it's all about the PDUFA. As noted, there's a very good chance of approval in the US come May 22. Beyond that, a successful commercialization strategy in Canada and a European application are major catalysts.

All said, this is a drug that suffered an unexpected setback with its manufacturing-related delay last year, but that is very much back on track, and heading toward approval, as things stand. Expect traders to load up ahead of PDUFA on Sanofi and Regeneron, and the two companies to run on approval news on May 22.

I have no positions in any of the stocks mentioned in the article and do not intend to open any positions near term.