Array Biopharma's recent deals with Novartis and Amgen are noteworthy on several accounts. They give Array $105 million in initial payments, as of June 30, 2010, and up to $1 billion in potential milestones, double-digit royalties, and commercial co-detailing rights - all rewards the company touts in a recent press release. That said, the company's stock price has hardly reflected the value of these deals.

While it rose 30 percent following the announcement of the Novartis alliance on April 19, the upside was only off a base of $3.02 (closing price as of April 19) and it has since fallen back. For most of the past year, the company's stock has hovered in the low single digits (closing at $3.45 on May 7). Robert Conway, Array's CEO, is frustrated, as indicated by his comments on a May 4 investor call on the "vast difference we see between the value of the individual programs and our current market capitalization."

Ten years ago, that was not supposed to happen to biotechs that strike compelling deals with Big Pharma in hot therapeutic areas. That is, Wall Street was willing to put a handsome value on such deals.

But more recently, investors haven't given biotechs much credit for striking significant, so-called "validating" alliances, in which Big Pharmas' due diligence helped investors evaluate a stock, and the Array situation is one more indication of that trend Also see "Pharmaceutical Strategic Outlook: The Trouble with Alliances" - In Vivo, 1 April, 2008.). On one hand, institutional investors now rely more on their own due diligence on biotech's scientific prowess and, on the other, investors are concerned that alliances will dilute the value of their holdings.

Array's most recent Novartis deal tells the story - it revolves around several Array MEK inhibitors, including ARRY-162, now in Phase I and other pre-clinical compounds. With Novartis, Array gets $45 million upfront, including a small milestone, a tidy figure for an early-stage compound and in line with other recent deals in the MEK space (Bayer and Ardea's April 2009 deal for Ardea's MEK inhibitor program, for example, included an upfront of $35 million and a potential to earn another $372 million in milestones). Further, Array could eventually receive an additional $422 million in milestone payments. And it can earn an additional $422 million in milestones.

Array also was particularly pleased with the deal - as well as with the Amgen alliance - because both retain some co-development and commercialization rights, which will enable it to become fully integrated. In the case of Novartis it has an option, which it calls "essential," to co-detail any drugs that come out of the deal, although specifics on how much the biotech can actually do on its own are not clear.

That deal's focus on MEK inhibitors is also noteworthy, given Big Pharma's interest in MEK and related targets along the RAS-RAF growth signaling pathway, where MEK sits; RAS-RAF, which is frequently activated in cancer, is believed to play a central roll in cell proliferation and survival. Array believes '162 (now named MEK-162) is the last unpartnered MEK inhibitor currently in clinical development and could be an improvement over earlier iterations (Also see "New Research Highlights Potential And Pitfalls Of BRAF Inhibitors" - Pink Sheet, 1 March, 2010.).

Science And Stellar Partners, But Undervalued, CEO Argues

Most important, Array now has a strategic collaboration with the number two oncology company worldwide (albeit way behind the market leader, Roche, in sales), with its deep pockets, a large and focused oncology business unit, clinical trials expertise, and networks of oncology key opinion leaders.

Such clout is crucial in the brutally competitive oncology environment, where companies are scrambling to find enough appropriate patients, investigators and funding for clinical trials. "This type of deal is core to our strategy to become a fully-integrated commercial-stage biopharmaceutical company and is a prototype for future deals," Bob Conway, CEO, told investors on an earnings call May 4. "We wanted a heavyweight pharma company to put the resources necessary to take advantage of the full range of opportunities with MEK and we think Novartis will clearly do that."

In Conway's opinion, the market has it wrong. The company has eight partnered drugs in clinical development, all associated with double-digit royalties, and three discovery collaborations (Also see "Array BioPharma Set To Raise Funds By Partnering Discovery Programs" - Pink Sheet, 7 November, 2008.). As these drugs move further through the clinical trials process, milestones will contribute more to Array's revenues; while in 2008 the company received no milestone payments, this year it expects $10 million and in 2011, $20 million, he noted. The company ended the second quarter of the fiscal year ended June 30, 2010 with $115 million in cash, including the $60 million payment from Amgen.

All in all, Array execs estimated that the risk-adjusted net present value of the potential income of its partnered drugs alone is "north of $400 million," significantly higher than the current market cap of roughly $190 million. That doesn't include what Conway considers its most valuable asset - Array's pipeline of unpartnered drugs, also worth about $400 million.

With pharma R&D in disarray, a record number of drugs going off patent between 2011 and 2013, and less funding for biotech start-ups, companies like Array that have a track record in discovering new drugs should command a premium, Conway argued. "We think there is going to be tremendous scarcity value, and I think you are seeing that already with some of the value of deals that are getting done, not only from Array but also from other companies like us," he said.

From Wall Street's perspective, however, whatever Array has isn't enough. Many analysts consider the stock fully valued as it stands.

Simos Simeondis of Rodman & Renshaw is in the minority when he agrees that Array is undervalued, but he also notes that investors don't like companies without near-term catalysts and Array is a long-term bet. And any investor interested in long-term bets - mutual funds, for example- can buy the stock gradually, which doesn't create a near-term run-up in price. "The global economy being what it is, investors are less willing to bet on early-stage companies," Simeondis said in an interview.

Moreover, Array faces important uncertainties. Many bet that MEK inhibitors will be drugs; "There's a strong body of evidence that MEK is critical in pathways," says David Snitman, Array's VP, business development. Array's R&D capabilities are matched by only a few other biotechs, such as Exelixis and Rigel, which are valued more but also have products in late-stage development, he added.

That said, the value of Array's and other companies' MEKs has yet to be proven in the clinic and may be significantly greater in combination with other targeted therapies than as monotherapy. Indeed, '162 failed last year in a Phase II trial for rheumatoid arthritis, and other MEK inhibitors, such as Pfizer's, have also come up short. That failure has turned out to be a mixed blessing; the lack of efficacy cast a pall on the compound, but the study also found the drug to be well tolerated and safe.

But Array has "never had a clinical program succeed," said Jeff Elliott, a UBS analyst who has taken a hard line. "They've had three single-arm trials, but all failed." Moreover, he said, Array has a number programs under way, but none seem to be in the lead, which complicates his efforts to evaluate the company. And furthermore, while Novartis' clout is important in oncology, the upfront in this case wasn't a huge bet for the Big Pharma, which makes many deals.

In addition, the company, like many biotechs, has scrambled at times for financing. In 2008, it entered into a financing arrangement with Deerfield Capital Management, one of its largest shareholders, to advance it $120 million in tranches to help fund development of its unpartnered pipeline at a an interest rate in the mid-to-high single digits. In January 2009, it reduced headcount by 10 percent in order to cut cash burn rate as a precaution during the volatile economy.

-Wendy Diller (w.diller@elsevier.com)

Array Biopharma Wins Two Important Deals In Six Months, But Wall Street Shrugs

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