Event – Positive NSCLC data to drive Allos' Folotyn franchise value

Despite the major success in gaining FDA approval for lymphoma drug Folotyn last year, the challenges and risks facing Allos Therapeutics remain high. But challenges bring opportunity and the next few months could prove critical in determining the value of the Folotyn franchise, through a successful commercial launch and clinical trial results in additional cancers.

Against the backdrop of increasingly slow new product launches, sales of Folotyn in the first quarter, due to be announced on May 5, will be scrutinised. Although Allos made Folotyn available in the US on October 5, 2009, the drug’s official commercial launch was not until January. Meanwhile, phase IIb data in non-small cell lung cancer (NSCLC) is also expected during the current quarter - positive results in this notoriously difficult cancer could generate significant share price gains.

Expanding the franchise

Allos gained approval last September for Folotyn to treat patients with relapsed or refractory peripheral T-cell lymphoma (PTCL), on the basis of phase II data only (Allos wins important approval and focus shifts forwards, September 28, 2009). Allos raised around $140m last year from two equity financing rounds to enable it to commercialise the product itself in this PTCL setting.

Without any formal commercial support, sales of Folotyn in the fourth quarter came in at $4m, so revenues over the next few quarters will be monitored closely for evidence of significant market penetration.

According to consensus forecast data from EvaluatePharma, Folotyn sales this year are expected to be around $61m, suggesting a quarterly rate of $15m, eventually reaching $480m by 2016.

Yet PTCL is a relatively niche setting with peak sales of $200m, so this forecast of revenues close to half a billion dollars will include assumptions that the drug gains approval in further cancer indications.

Tough nut

Although phase II trials are ongoing for Folotyn in Non-Hodgkin's lymphoma (NHL) and bladder cancer, the primary driver for additional revenues will come from NSCLC.

NSCLC has claimed a number of high profile late-stage developmental failures in the last few months, throwing the spotlight on earlier stage candidates (Therapeutic focus - Late stage set backs sharpen focus on earlier lung cancer candidates, March 31, 2010).

The NSCLC trial uses overall survival as the primary endpoint and will compare Folotyn with Tarceva in patients that are either current or former smokers, a subset population that is typically less responsive to Tarceva.

Although the trial is therefore weighted in favour of Folotyn, the design may not have the statistical power to prove a survival benefit over Tarceva.

As such, the trial will likely be deemed a success if the data is encouraging enough to support the start of pivotal phase III trials in NSCLC. A number of subgroups have been identified in the trial - heavy vs. light smokers, current vs. former smokers, squamous vs. non-squamous NSCLC and prior vs. no prior Alimta – giving Folotyn a number of opportunities to demonstrate an advantage over Tarceva. A clear win in one or more of these subgroups should justify further trials and should generate share price gains.

Allos had a cash balance of $159m at the end of December, but has also issued a cash burn guidance of $133m to $145m this year, cutting its reserves a bit fine.

Any share price increase could therefore tempt Allos into one last financing round to fully support its commercial activities and development work around Folotyn.

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