Array Biopharma (ARRY) will be reporting its financial results for the third quarter of their 2019 fiscal year prior to the opening of American markets on May 7th, followed by a conference call at 9:00 AM EST. So far in 2019, investors have enjoyed significant returns on Array, which is up 62.6% year to date (YTD). This outpaces the S&P 500 (up 17.5% YTD), the XBI (up 20.15% YTD), and the IBB (up 11.91% YTD).
Array is a mid-cap biotechnology stock that moved into the commercial phase in 2018. After a sell-off following FDA approval of BRAFTOVI and MEKTOVI, Array has come roaring back. In its first two commercial quarters, Array reported $14 million and $22.7 million respectively. This represented a nice 62.1% growth rate for consecutive quarters.
BRAFTOVI is an inhibitor of the mutated BRAF enzyme, while MEKTOVI is an inhibitor of the MEK enzyme. These agents are approved by the FDA for the treatment of mutated unresectable or metastatic melanoma. The launch of these drugs has been wildly successful thus far in my opinion. What has lead to this success though?
Well first, one needs to understand that BRAFTOVI and MEFTOVI are not the first BRAF and MEK inhibitors approved. Other agents like Mekinist, Tafinlar, Zelboraf, and Cotellic have been used by oncologists for several years, avoiding the need for Array to educate these providers on a new medication class. The tolerability and side effect profile of BRAFTOVI and MEKTOVI is superior to the other agents. As such, once BRAFTOVI and MEKTOVI were approved, oncologists began to switching patients currently on Mekinist, Tafinlar, Zelboraf, and Cotellic to BRAFTOVI and MEKTOVI. This does not frequently happen when new drugs are approved, but shows very strong support for these agents by the oncology community.
Of the 11 analysts providing EPS estimates for this quarter being reported, the average EPS is -0.20, ranging from -0.10 to -0.30 per Yahoo Finance. Expected revenue estimates range from $35 million to $74.6 million, with the average estimate being $54 million. In the past year, Array has beat expectations on three out of four earnings reports.
US Commercial Revenue Expectations
Based on the Symphony TRx data, I have estimated that commercial revenue from US sales of BRAFTOVI and MEKTOVI will come in around $31 million. This would represent a 36.6% growth rate for consecutive quarters. It will be interesting to hear the commentary from management regarding if the “switching” of patients from other agents to BRAFTOVI and MEKTOVI is complete, and how much of the growth was driven by these patients.
If one looks at Symphony’s revenue estimates, you will notice they estimate nearly $37 million in US commercial revenue. So what gives for the difference? Well in the most recent quarter, Symphony estimated $27.3 million in sales compared to the $22.7 million that Array recognized, meaning Symphony actually overestimated sales revenue. This is likely due to the 16.6% gross-to-net ratio management discussed during the conference call. This is often the result of patient assistance programs, rebates, vouchers, etc. If you adjust the Symphony estimate of $27.3 million by the 16.6% gross-to-net, then revenue comes in right at the $22.7 million that Array reported.
So what happens if we use the 16.6% adjustment on the $37 million that Symphony has estimated for this coming quarter? This results in a sales estimate right on with my other estimate, being just under $31 million in sales. This estimate could be altered if the gross-to-net ration has changed for this quarter or if Symphony’s numbers are off, which is possible.
What makes Array differentiated, is its ability to generate revenue from several streams. For example, last quarter Array beat expectations on a $40 million milestone for the first US sales of LOXO oncology’s drug larotrectinib, which was licensed from Array. First, Array is likely to have receive several a few milestones in the first quarter of 2019. The first, and likely the most sizable milestone, is the the regulatory approval and launch of BRAFTOVI and MEKTOVI in Japan for Array’s commercial partner Ono Pharmaceuticals. At the end of the quarter ended December 31st, Ono had $45 million in milestones for the achievement of eight regulatory milestones and an additional ~$95 million dollars related to five commercial milestones. While we are uncertain the exact terms of the milestone, I anticipate one or both of the approval and/or first commercial sale are a milestone under their respective milestone categories. These are likely to be a somewhat sizable milestone, as we did see the $40 million for LOXO’s first commercial sale of larotrectinib.
Another milestone, that is likely much smaller, is the dosing of the first patient in Mirati Therapeutic’s MRTX849 Phase 1/2 trial. This compound was licensed from Array, and at the end of the quarter ended December 31st, Mirati had $18.3 million in developmental milestones remaining, which I speculate may include the dosing of the first patient in this first clinical trial.
Other Commercial Revenue
Since BRAFTOVI and MEKTOVI were not launched in Japan until last in February, I am not expecting a significant amount of commercial revenue in such a short period of time. However, BRAFTOVI and MEKTOVI were approved last year in Europe, and have been licensed to Pierre Fabre. Royalties due to Array for Pierre Fabre’s sales start at 20%, and increase up to 35% for annual net sales over 100 million euros. As BRAFTOVI and MEKTOVI were approved in September of 2018, Pierre Fabre has had an entire quarter to begin sales, so I am expecting to see how they have progressed.
Other commercial revenue includes larotrectinib, a product licensed to LOXO Oncology. Array is eligible to receive royalties on net-sales of larotrectinib in the mid-single digits. Symphony has estimated $5.8 million in sales for the quarter ended March 31st. At a royalty rate of 5%, Array will only receive around $290,000. As such, this revenue stream is not likely to make a large iimpact on Array’s bottom line for this quarter.
Array received the rights to BRAFTOVI and MEKTOVI from Novartis in 2015. Part of this deal, included Novartis’s continued reimbursement for the Phase 3 COLUMBUS trial. This trial has been completed, but patient’s are still on therapy. As the trial has continued to wind down, so has the reimbursement revenue Array has received from Novartis. For the three and six months ended December 31st 2018, Array had received $8.9 and $20.8 million respectively. This compares to $22.4 and $40.6 million for the respective periods in the year prior. As you can see, the reimbursement revenue is down over 50% Year over Year for these periods. In the quarter ended March 31st 2018, Array recognized $24.8 million in reimbursement revenue. Based on the declining reimbursement revenue, I anticipate Array will report around $8 to $10 million for the quarter ended March 31st, 2019.
I think Array has a good chance of beating analysts’ consensus revenue for the quarter ended March 31st. I estimate that between the larotrectinib royalties, US commercial sales of BRAFTOVI and MEKTOVI, and the Novartis reimbursement revenue, Array will have roughly $40 million in revenue. That means Array would need roughly $14 million in additional revenue between Ono milestones and royalties, Mirati milestones, Pierre Fabre royalties, and any additional revenue to reach the consensus analyst estimate. I find it highly likely Array will be able to do this, unless their is a delay in the reception or recognition of a milestone or royalty. Other items I will closely watch include managements’ discussion of Research and Development costs, timeline for topline BEACON results, and timing of the new IND they have alluded filing this year. All in all, these are exciting times for Array as their large pipeline has finally matured and reached the commercial stage, and I look for them to have continued success.
For a discussion of other biopharma catalysts happening this week, visit our Biopharma Stock Watch May 6th-10th.
I/we long ARRY
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