Focus: Biotech-for-hire PeptiDream charts new path and becomes short target

PeptiDream

14/11/2019 02:22

* PeptiDream has been darling of Tokyo stock market
    * Has become Japan's top pharma firm by profitability
    * Partners to develop drugs for clinical trials
    * Short-seller Muddy Waters says investors 'deluded'

 (Adds details of Muddy Waters research, updates partners'
responses)
    By Rocky Swift
    TOKYO, Nov 13 (Reuters) - The promise of PeptiDream Inc's
 4587.T  drug-discovery technology and its lucrative
research-for-hire contracts have made it a darling of the Tokyo
stock market. Now, those gains have made it a target for
short-seller Muddy Waters. 
    The company, which has seen its market value jump fivefold
to $6 billion over the past four years, is now pivoting its
strategy to in-house research, using its technology that allows
it to create libraries of peptide chemicals that can bind drugs
to cells. 
    Muddy Waters Capital LLC says its investigations show the
biotech company's new, and traditional, businesses are flawed
and is betting its shares will fall back to earth as a result. 
    Since its listing in 2013, PeptiDream  4587.T  has grown
from a lab start-up into a company with the highest profit
margins in the Japanese pharmaceutical industry - without ever
having brought a drug to market. Its technology has attracted a
bevy of partners including Novartis AG  NOVN.S , Merck & Co
 MRK.N  and Shionogi & Co  4507.T . 
    "We're on the cusp of over the next 1-5 years of introducing
a multitude of drugs into the clinic through our big pharma and
strategic partnerships," PeptiDream President Patrick Reid told
Reuters in an interview. 
    "We'd rather get 5% of 100 drugs than get 100% of five
drugs," he said. He estimates that around half of all drugs
being worked on by PeptiDream partners are cancer drugs. 
    PeptiDream's rocketing market value has been helped by its
traditional fees for collaborating in R&D and licensing deals to
use its libraries. Its operating profit margin is 50%, the
highest of all 37 members in the Tokyo market's pharma index
 .IPHAM.T , where the average is 14%.       
    MUDDY WATERS DEALS DISPUTE
    However shares of the Kawasaki-based company fell 4% on the
Nov. 7 release of the Muddy Waters' report, which doubted the
viability of many of its existing partnerships and said
investors were "deluded as to its potential for commercialising
drugs".
    "There's real technology there, but it's the usefulness of
the technology that we question," Muddy Waters founder Carson
Block said in an interview with Reuters. "It's cool, but so far
it's been unable to yield anything that's meaningful."
    PeptiDream was now "massively overvalued", Block said. "Many
of these partnerships that are the basis of this valuation seem
inactive," he added, citing the findings of two locally hired
teams that looked into PeptiDream's business relationships.  
    PeptiDream's Reid declined to comment on the Muddy Waters
report, referring to a company statement that "completely
rejects" the short-seller's assertions.
    The company says it has 19 discovery and development
partners, predominantly big to mid pharma firms. Among its 101
programmes in progress, compared with 60 in 2017, two are
cancer-related compounds being developed with Bristol-Myers
Squibb  BMY.N  now in phase 1 clinical studies.
    Thirteen of PeptiDream's partners told Reuters their
partnerships were active and ongoing, including pharma giants
Bristol-Myers, Merck, Novartis, Bayer AG  BAYGn.DE  and Amgen
Inc  AMGN.O .
    Japan's Mitsubishi Tanabe Pharma Corp  4508.T  declined to
comment on the status of its relationship. The other five
companies did not respond to multiple requests for comment. 
    Block declined to name a price target for PeptiDream or the
size of its short strategy, which pays off when a stock falls.
    PeptiDream's shares are trading about 7% lower than before
the release of Block's report. PeptiDream is the second short
play in Japan for Muddy Waters, which became famous for its
bearish calls on Chinese companies. Muddy Waters announced a
short bet on Nidec Corp  6594.T  in December 2016. Shares in the
maker of precision motors have since risen more than 60%.
    "It's a bunt single, and that's better than a strikeout,"
Block said of PeptiDream's share fall, referring by bunt single
to a baseball play that sees a batter eke out a small gain.
    "Japan's potentially interesting. We might look to come back
and hit some more bunt singles and see if we can build up a
brand."
    
    PROTEIN HULA HOOPS
    PeptiDream's research partners do the heavy lifting in
bringing drugs through clinical trials to market - allowing the
company to avoid much of the large development costs and risks. 
    Even so, as the company increasingly looks to keep some
ownership of its research, it will still receive future
milestone payments and royalties. 
    On top of its research partnerships, it also has seven
licence agreements for its library or drug-discovery platform.
    PeptiDream concentrates on "constrained peptides",
particularly macrocyclic peptides - hula hoops of natural and
non-natural amino acids that can carry various cargoes to
specific types of cells - such as cancer or inflamed tissue.
    Founded in 2006, the company sprang out of the research of
University of Tokyo professor Hiroaki Suga. Suga looked to Reid,
then an associate professor at the university, to help forge the
connections to big pharma.
    As discoveries related to antibody and small-molecule
treatments dwindle, peptide-based compounds are likely to become
increasingly important as a class of drugs, said Bernstein
analyst Shen He, who has an "outperform" on the stock. 
    "PeptiDream is one of the best technology platforms out
there to solve this," He said. "But it's not an overnight
journey."    
    

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As steep patent cliff looms, Shionogi moves to develop its own
U.S. sales staff      urn:newsml:reuters.com:*:nL4N23P2AP 
Japan Pharma Stock Performance    https://tmsnrt.rs/2QfTdUv
PeptiDream Revenue, Profit Growth    https://tmsnrt.rs/351qFm1
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 (Reporting by Rocky Swift; Editing by David Dolan, Edwina Gibbs
and Pravin Char)
 ((rocky.swift@tr.com))