Short TSRO. Netupitant results could roil Tesaro

May 6, 2013 | RP

Shares of Tesaro Inc (TSRO) have recently traded to new all time highs and are now sitting at $29.40  The shares have now more than doubled since coming public at $13.50 in June of 2012.

However, a series of near term challenges to its lead drug candidate could see the shares drop back below $21.00 in coming weeks.

The latest leg up for Tesaro has largely been the result of optimism towards Tesaro’s prospects with its cancer drug Niraparib.  Niraparib is a poly (ADP-ribose) polymerase (“PARP”) inhibitor being evaluated for use against solid tumors.

Earlier this year Tesaro announced that it would be taking the drug into phase III trials for ovarian cancer patients.  Last week the company announced that it would also be conducting phase III trials for Niraparib in breast cancer patients.

The progress of the drug into phase III trials along with the large size of the addressable markets for these indications has led analysts to upgrade the stock, causing it to briefly touch above $30.00 before falling back into the $20’s.

Visibility has now increased somewhat with Niraparib, which does in fact merit a higher valuation for the stock.  Yet the fact remains that even if it is ultimately approved, the drug will see no revenues until at least 2017.

For the time being, the only real determinant for the bulk of the value of Tesaro remains its legacy project, Rolapitant.  Rolapitant is a “CINV” drug for treating and preventing nausea and vomiting induced by chemotherapy. It is the reason why Tesaro was founded and why they purchased the rights do develop that drug back in 2009.

The biggest near term threat to Tesaro is that the risk related to Rolapitant is surging even as the upside reward scenario has now dwindled.

Morgan Stanley recently upgraded the stock and assigned a $29.00 target based on the near term prospects for Rolapitant and the new and improved longer term prospects for Niraparib.

With the shares hovering around $29.00, it should be expected that any further good news will have limited effect, while any bad news could send the shares sharply lower.

Leerink Swann also delivered a strong upgrade to Tesaro, briefly sending the stock above $30.00.  Yet the Leerink report failed to included even a single mention of the impending results from Netupitant, which are expected out in the next few weeks.  It also did not take into account the fact that another competing NK-1 antagonist CINV will be going generic before Rolapitant even gets to market.

And herein lies the near term problem.

Rolapitant is a NK-1 antagonist CINV drug.  There is an older class of CINV drugs knows as 5-HT3 inhibitors. These include Anzemet, Kytril, Zofran or Aloxi.   These drugs are currently marketed by Sanofi (SNY), Roche, Glaxo (GSK) and Eisai respectively.

Within the newer NK-1 antagonist category, Rolapitant will compete with Emend which is marketed by Merck (MRK).

Problem number one is that by the time Rolapitant even comes to market in 2015 Emend will already be marketed as a generic drug.  There will be little reason for doctors to prescribe a nearly identical drug at a price which is several multiples higher.

Problem number two is much more severe and could have an impact within the next few weeks.

Swiss company Helsinn recently completed phase III trials of its own CINV, Netupitant, which actually combines the action of an NK-1 and a 5-HT3.  Because Helsinn is not a public company, analysts have largely ignored the market potential for this new drug. However, when it is mentioned, they have expressed a positive outlook for Netupitant’s results from phase III.

The reason that this is a near term problem is that ASCO is set to meet in Chicago in May.   Helsinn is also set to attend the Jefferies health care conference on June 3rd.  It is likely that one of these venues will be used to announce the results of the Netupitant trials. Results are widely expected to be positive. In fact, results may also be released even before the ASCO meeting.

The catch-22 for Tesaro is as follows:

If the results were to be unexpectedly poor, then there would likely be no boost to Tesaro given that the stock is fully valued and success of Rolapitant is already priced in.  If the results are (as expected) quite positive, then the impact on Tesaro and Rolapitant should be expected to be quite severe.

Doctors who prescribe a CINV will then have 3 clear alternatives from which to choose.

  1. Choose from one of the many existing 5-HT3’s.
  2. Choose a newer, yet generic NK-1 (Emend)
  3. Choose a combined therapy NK-1 / 5-HT3 (Netupitant) which has no generic

Electing to prescribe a non-generic NK-1 (ie. Tesaro’s Rolapitant) clearly does not fit into any of these sensible alternatives and it raises the prospect of Rolapitant effectively going straight to generic.

It also needs to be remembered that Rolapitant has not yet been approved, even though Tesaro’s share price seems to trade as if approval (and market acceptance) were already guaranteed.

Aspara Biotech Research recently put out a report on Tesaro that took an extremely dim view of Rolapitant’s prospects for phase III approval.  It noted that the rights to the drug had originally been purchased by Opko Health (OPK) for just $2 million at a time when Schering-Plough had already discontinued development of the drug.  At that time, 2008, phase II trials had already been completed. Tesaro then paid a very small premium above that $2 million to acquire rights to the discontinued drug.

As noted by Aspara, Opko had disclosed in its 10K that

Development of Rolapitant and the other assets had been stopped at the time of our acquisition and there were no ongoing clinical trials. None of the assets acquired have alternative future uses, nor have they reached a stage of technological feasability.

The apparent reason for this halt in development was that results from phase II had been quite marginal.  There was therefore substantial room for doubt regarding an ultimate phase III approval. As a result, Schering-Plough discontinued work on the drug before selling it for almost nothing.

The results of the trial were just barley significant at the 5% level (p value of 4.5%) and the results also coincided what appears to be a statistical aberration in the placebo arm. In other words, even though Rolapitant appears to have received an artificial boost to its observed effectiveness (a clear advantage), it still just barely achieved statistical significance.

The conclusion from this is that there is in fact a much higher than normal likelihood that the marginal statistical significance seen in phase II will reverse itself when shown in phase III results.

Once again, it is the case that there is little remaining upside to a successful phase III.  But in the event that the phase II results do reverse themselves following the marginal phase II study, the results will be negative to the extreme.  It would then be the case that the value of Tesaro would be solely dependant upon its other two drug candidates.  Neither of these is expected to produce revenues until 2017-2019.

As a result, if Netupitant posts positive results in May, then we can expect to see the share price quickly retreat back to around $21.00.  But if the very marginal Rolapitant then fails its phase III later this year, then the share price certainly falls into the teens, down around 50%.

The body language coming out of Tesaro suggests that the company is aware of this quickly impending problem.  Tesaro appears to be de-emphasizing Rolapitant in case the drug either fails in phase III or else can’t compete with generic Emend.

In March, Tesaro raised $95 million ($91 million net of underwriting commissions) via an equity offering at $18.00, around 40% below current levels.  At the time the company still had $125 million in cash, such that there was no pressing need to raise new money. In addition, there was no specific use of proceeds disclosed in the prospectus. Tesaro disclosed that

We anticipate that we will use the net proceeds of this offering to fund our development programs, including clinical trials for our product candidates, for working capital and for general corporate purposes.


We may also use a portion of the proceeds to in-license or acquire, as the case may be, product candidates, technologies, compounds, other assets or complementary businesses, though we have no current understandings, agreements or commitments to do so.

The result of this offering is that Tesaro now has a very healthy cash balance of $198 million, equating to $6.10 per share.  When the price was still at $18.00 this meant that there was actually a very significant downside cushion for investors in the stock.  However with the stock now hovering near $30.00, this $6.10 in cash per share offers minimal downside cushion.

But it should be clear from this offering and its disclosed use of proceeds that Tesaro is attempting to diversify away from Rolapitant.  It should also be clear that Tesaro hasn’t even decided how it will specifically do so.  Instead it is just raising money while the share price will allow it.

This should certainly have been even clearer for anyone who listened to the last quarterly conference call. Hopefully it did not escape the attention of listeners that Tesaro mentioned

Enrollment continues in each of our three Phase 3 trials of Rolapitant.

As shown at ClinicalTrials.Gov, Rolapitant was originally scheduled to conclude its phase III trials by December of 2012.  The trial has been enrolling at 200 sites around the world.  Yet they have not even been able to complete enrollment and it is 5 months past the scheduled completion date.

Rolapitant is currently undergoing multiple phase III trials which are scheduled to release top line data (only) later this year.  In addition, Rolapitant is the only near term revenue candidate for Tesaro.

Yet despite this critical importance to Tesaro, on the conference call we can see that any discussion of Rolapitant is limited to a few brief paragraphs.   The focus of the call is then entirely switched to Niraparib and TSR-011, neither of which has any revenue potential for at least 4 years.


In evaluating these developments, one must remember that Tesaro is entirely dependent upon Rolapitant for any revenue potential within the next 4 years.  One must also remember that the phase II results for Rolapitant were in fact quite marginal.

Phase III trials for Rolapitant are now being repeatedly delayed as enrollment continues well beyond the deadline.

First, this does not bode well for the overall results of Rolapitant in phase III.

Second, even the mere delay of phase III results is highly problematic for Tesaro.  This is because the delay will negatively impact Tesaro’s ability to actually sell the drug due the Emend going off patent as well as the coming launch of Netupitant.

As a result of these factors, Tesaro is clearly trying to position itself as a company which has other alternatives and opportunities beyond Rolapitant.  The company is raising money without a defined use of proceeds and is de-emphasizing Rolapitant in its conference calls. In short, Tesaro is well aware of the impending problem, even though investors are not.

It remains the case that at least 80% of the value of the share price is a function of the prospects for Rolapitant.  Even optimists do not predict Niraparib revenues until 2017.

As a result, when Helsinn releases results for Netupitant in the next few weeks, Tesaro shareholders should expect a volatile ride with the share price potentially heading back to below $21.00 where it began the month of April.

Investors also need to keep in mind that over 18 million insider shares of Tesaro were locked up due to the recent equity offering.  This lockup  expired on April 28th, just in time for the shares to hit all time highs.  Yet this is also just in time for selling to be possible just as Netupitant results are coming to market.