Is Dermira Inc (NASDAQ:DERM)'s Confidence In Lebrikizumab Warranted?

Dermira Inc DERM just announced a deal with Roche Holding Ltd. (ADR) RHHBY that will see the former take over the development and rights (in certain targets, we'll get to this in a bit more detail shortly) to the latter's dermatology and respiratory disease asset, lebrikizumab.

All told, the deal could cost Dermira in excess of $1.4 billion. For a company valued at around $900 million at the time of the deal, that's a pricey commitment and one that many will regard as a big risk for Dermira and its shareholders. The details of the arrangement are in place to reduce this risk, of course, with the larger numbers reserved for payment at points at which Dermira will be guaranteed to start bringing in lebrikizumab derived dollars, but they far from negate it altogether.

This suggests that Dermira is highly confident in the drug's potential across its various target indications. Markets are asking, is this confidence warranted? Here's an attempt to answer that question.

Lebrikizumab is part of a family of drugs that target what's called IL-13. IL-13 is a cytokine that's thought to play a role in a variety of different diseases, but it's important to recognize that – right now, at least – the exact role it plays remains unclear in the scientific world. We know it has an impact in some diseases because there exists plenty of correlative data to reinforce this fact. What we don't know is why the correlation exists. In the biotechnology space, however, correlation is enough so long as the company that's developing a drug can demonstrate that the correlation is consistent (across a given patient population) and that it can both lead in a positive clinical benefit (say, a reduction in a symptom of the underlying disease) and that it can do so safely.

Before this deal came about, Roche tried to show that this drug could be an effective asthma treatment in a subset of asthma patients. The idea is rooted in the theory that the presence of the IL-13 cytokine leads to the expression of something called periostin. Periostin is a protein that is involved in as bronchial hyperresponsiveness, inflammation, and activation and proliferation of airway fibroblasts. Each of these things results in the exacerbation of asthma, so Roche believed that through the inhibition of IL-13 (which lebrikizumab can achieve) it would be able to reduce periostin levels and, in turn, reduce the severity of asthma symptoms.

The company set up two phase III studies to prove this concept and succeeded in one. In the second, however, it failed.

So what's happened now?

Well, Dermira thinks that it can employ the same underlying mechanism of action (MOA), IL-13 inhibition, to reduce the presence of certain signaling proteins that induce inflammation in the subcutaneous region. If it can, this could help overcome the swelling and itching associated with atopic dermatitis (AD), and the latter is Dermira's first target with this deal.

The company will pay $80 million to Roche upfront. This will be followed by another $55 million next year, by which point expectations are that a phase IIb trial in AD patients will be well underway, if not completed. Beyond that, and assuming the phase IIb trial completes successfully, Dermira will need to pay $40 million as a regulatory milestone payment on phase III initiation.

The remainder is rooted in regulatory milestones (unnamed, but we can assume this means approval) and royalties on net sales.

That's the AD indication. The flexibility of IL-13 is such that an inhibitor of the cytokine could potentially be applied to a wide range of different indications and it's reasonable to assume that Dermira management has a number of these wider indications in mind right now. Roche has held on to the rights to the drug in interstitial lung disease, but that's an early stage program so – as yet – the company's requirement to keep that one in its pipeline doesn’t really offer too much insight into the drug's potential or otherwise outside of the indication itself.

So, let's get back to the question – is this deal a worthwhile one for Dermira or has the company overpaid?

Markets are in the latter camp right now; Dermira currently trades for a circa 15 percent discount to its pre-announcement market capitalization. Given the potential of the asset in question, however, this may be something of an oversell. It's only a mid-stage asset in the AD indication, and it's going to cost Dermira something like $200 million to just get to a point whereby it can start thinking about a phase III protocol. With that said, with an IL-13 inhibitor, if management can prove that it works in one indication (and assuming consistency of MOA) then there's a strong chance that this efficacy will translate to another.

AD sales are expected to hit $5.6 billion globally by 2022. If Dermira can get lebrikizumab past the FDA in this indication, it could be looking at a 10-20 percent chunk of these sales within 5 years. Expand that potential to the range of lung and respiratory diseases that this drug could (and should) be able to target, then do the same for inflammatory conditions like rheumatoid arthritis (which, again, there's plenty of existing data to support potential IL-13 inhibition efficacy in) and there's a real argument that this could be a strong deal for Dermira, regardless of the near term market interpretation of its value. 

Discosure: The author has no positions in any of the stocks discussed in this piece.