Kythera Has Hairy Strategy

Investors are high on Kythera Biopharmaceuticals Inc. following a decision this month by an FDA panel to recommend approval of its drug to reduce chin fat. But before that news was barely digested, the Westlake Village biotech announced a secondary offering to fund its expansion – including development of a drug to relieve male-pattern baldness. In short, Kythera wants to not only eliminate your double chin but put hair on your head – a cosmetic dream for aging adults. The company’s stock shot up 25 percent to $50 a share immediately following the March 9 announcement by the FDA panel. Shares have hovered in that range since, closing March 18 at $47.64. The potential hair treatment involves a license with Swiss drug maker Actelion Pharmaceuticals Ltd. giving Kythera worldwide rights to setipiprant, a chemical that inhibits the prostaglandin D2, or PGD2, receptor in the scalp. High levels of PGD2, a lipid that behaves like a hormone, are associated with hair loss. In research studies, the inhibitors promoted hair growth and extended its growth phase. A separate agreement with the University of Pennsylvania gives Kythera patents to apply setipiprant to male pattern baldness and secures the cooperation of Dr. George Cotsarelis, a professor at Penn’s Perelman School of Medicine who discovered the connection between hair loss and PGD2. Kythera Chief Executive Keith Leonard said the hair project is consistent with Kythera’s overall mission of developing cosmetic drugs that require a doctor’s prescription but aren’t paid by insurance. “This venture into the hair loss market demonstrates to our investors that Kythera is dedicated to strategically expanding our product portfolio,” Leonard told the Business Journal. “Our vision has always been to develop and commercialize high-value, innovative aesthetic products.” Of course, there are already a host of male-pattern baldness drugs on the market, led by Johnson & Johnson’s Rogaine brand of minoxidil, which is also available over the counter in generic form. Minoxidil works by stimulating dormant hair follicles, but it must be applied as a skin cream and has limited effectiveness in growing new hair. The other drug in use is Propecia from Merck & Co. It is approved for oral use but has been known to cause a reduction in male hormones, leading to erectile dysfunction– a turnoff for men trying to maintain at least an appearance of virility. It also is available as the generic finasteride. Kythera believes setipiprant offers advantages over both competitors since it can be taken orally and has not been shown to decrease sexual function. The worldwide rights could cost the company up to $27 million based on research and regulatory milestones, in addition to sales royalties. Ahmed Enany, president of the Southern California Biomedical Council, a downtown L.A. trade group, said that from a consumer viewpoint, credibility is a major challenge in both the fat-loss and hair retention markets. Competition includes pills advertised on TV and over-the-counter treatments that don’t require doctor visits or prescriptions. However, Enany likes Kythera’s strategy of accumulating scientific data and doctor recommendations to distinguish its products from competitors. “The market is growing because the demand is there, but with most products there’s no science,” he said. “FDA approval makes it definitely a legitimate product.” Costly testing However, setipiprant still requires extensive clinical studies. Lab tests with human-donated hair follicles showed improvement in “follicles from most but not all donors.” And while clinical studies with more than 1,000 patients have shown the drug is well tolerated, Actelion conducted those for other applications, including allergies and asthma. Kythera plans to begin a study on setipiprant late this year or early next. “We believe we have the possibility of reaching initial proof-of-concept data in a very capital efficient manner,” Leonard said. Still, it will take years before the treatment gains FDA approval, if at all. Rogaine required 20 years and 20,000 patients in clinical trials. Kythera licensed its flagship fat treatment ATX-101 from UCLA in 2005 – and it has yet to gain FDA approval. Indeed, Kythera, founded in 2004, has never sold a product and had accumulated losses of $308 million at the end of last year, with $136 million lost in 2014 alone. Nearly all of that money was spent on clinical trials and preparation to commercialize ATX-101. What’s more Leonard anticipates increasing the company’s headcount to 220 by the end of year from 119 currently. Most of the hires will be salespeople for ATX-101, both local and in the field. To fund this expansion, the company executed a secondary stock offering earlier this month. The oversold offering issued nearly 3 million shares at $48 each. After subtracting brokerage and other fees, Kythera will net about $135 million. Enany said Kythera is following the conventional playbook in launching a dilutive offering just after a big jump in the share price, and on the cusp of approval for its first product. “It’s dangerous to be a one-trick pony,” Enany said. “You need to diversify product offerings, even as you are getting FDA approval for the first drug. It adds to the market valuation of the company. Suddenly there is a lot of money to be made, and that’s why they made the secondary offering.” Chris Schott, an analyst at J.P. Morgan in New York who covers Kythera, believes ATX-101 could deliver $500 million in annual revenue, but it will take years to develop. “We anticipate a moderate launch uptake in 2015 (we forecast second half sales of $15 million) before accelerating in 2016 ($95 million sales forecast),” Schott wrote in a March 9 note to investors. In fact, he believes the success of ATX-101 could make Kythera a takeover target in the consolidating specialty pharma sector. “Several larger organizations could leverage their established aesthetics footprints in launching ATX-101, potentially driving even further upside to our near- and long-term estimates,” wrote Schott, who has a $60 price target on the stock. But with the company’s market valuation at $1.26 billion, Enany at the Southern California Biomedical Council would like to see Kythera grow on its own. He likens its potential to Allergan Inc., the Irvine-based maker of Botox that agreed in November to a $66 billion buyout by Activis plc. It could even eventually play in the same league as Thousand Oaks neighbor Amgen Inc., with a value of $123 billion. “Are they in position to be the next Allergan, or the equivalent of Amgen in aesthetics, or are they on the selling block?” Enany asked. “I would rather see them independent and growing by adding products, but they need money to figure out the next steps. A lot of decisions need to be made immediately after FDA approval.”