|Analyst Bets on Extraordinary Science and Clinical Data: Greg Wade|
|Friday, 31 August 2012 06:11|
The Life Sciences Report: The Wedbush Management Conference was held in New York City in mid-August. What was the mood of institutional life sciences investors?
Greg Wade: The investors I talked to were upbeat. Most were looking for new ideas. They were optimistic that the marketplace would be stable enough in the latter half of 2012 for folks to make money in equities with good fundamentals. It was a very positive outlook.
TLSR: You also had some private companies presenting at the conference. What kind of exit strategies are they looking for? Do most of them want to do an initial public offering (IPO)?
GW: Yes. The valuations that can be achieved with public offerings are sufficiently positive that some private companies are considering them as viable financing options. The investing community, too, is more broadly considering IPO candidates, which is heartening for companies looking to meet with investors.
TLSR: Are companies expected to have clinical assets before they think about going public?
GW: That almost always depends on the indication and whether the data at hand predicts ultimate clinical success. Certainly, more advanced companies are going to have a broader audience of potential investors, but we've also seen promising, unique technology platforms. Companies with these platforms could attract the type of capital that would propel them to the clinical stage.
TLSR: We have had a wonderful rally in biotech since the end of last year. In talking with investors, especially institutional investors, do they feel the rally is going to continue?
GW: One reason for the strong rally that must be recognized is a real decline in volatility. That decline has created a very healthy financing environment for development-stage companies, and is very supportive of a strong overall index. Most of the investors I talk to are not trading the market; they are looking for specific investment ideas that might be well financed and have immediate attractive valuation.
TLSR: Could we talk about some companies that you like?
GW: There are two companies on the Wedbush Securities Best Ideas List, currently in my coverage, that I'd like to discuss. The first is Pharmacyclics Inc. (PCYC:NASDAQ), which we added when the stock was priced in the low-teens. It has since blown through our price target—up well over 350% since it was added and continuing to move up. The stock is trading at about $63 per share presently.
Investors clearly appreciate the safety and efficacy of the company's lead drug ibrutinib (PCI-32765), and the global development partnership that the company has struck with Janssen Biotech Inc., a subsidiary of Johnson & Johnson (JNJ:NYSE). The expected results from phase 3 studies and the absence of a requirement to finance the company's participation in global development of the drug make this a must-own hematology/oncology company. We continue to recommend the stock to investors, believing that there's some further work required on our model to properly value the biggest opportunity for the drug, which we think is as a chronic treatment for chronic lymphocytic leukemia (CLL).
TLSR: Ibrutinib is a small-molecule Bruton's tyrosine kinase (BTK) inhibitor, and it is well into phase 3. The company must have seen some outstanding phase 2b data for the stock to be up nearly 500% over the past 12 months.
GW: Yes. Even the phase 1 data—the first experience in humans—were incredibly striking, with a response rate of about 80% in patients. In the CLL setting, close to 90% of patients remaining on treatment were without progression, suggesting that the BTK target, at least in the CLL setting, might be an Achilles' heel for the disorder in some patients. Chronic therapies for hematologic malignancies have attracted significant interest from investors, the CLL market being the most well recognized. With CLL, you have a patient population of 115,000 in the U.S. alone, and the company has a dramatic opportunity to market a high-priced, safe medicine that folks will take every day for treatment of their leukemia. That is the biggest driver, and timing is really a question of when we'll have the first phase 3 data and how quickly the U.S. Food and Drug Administration (FDA) will act on the application.
TLSR: Looking at the performance of ibrutinib, are we apt to see an earlier approval than might be anticipated?
GW: I think the Street is comfortable with the idea that the CLL phase 3 study, which is beginning now, will probably finish early so the company can provide data for a new drug application (NDA), with data in H1/14 by our estimate. We certainly expect the data to be positive. At the same time, there is the chance that a single-arm mantle cell lymphoma study may read out positive data sufficiently robust to motivate the FDA to provide an accelerated approval. However, I don't think we'll see an application from either Johnson & Johnson or Pharmacyclics prior to the completion of those studies, which I believe are the earliest potential data points for approval regardless of strong results. There are a lot of existing therapies for these indications, and the FDA is somewhat bound by its regulations, which stipulate that when there are existing therapies, good clinical data must be presented before it considers approval of something new.
TLSR: What is the other best idea from the Wedbush list?
GW: We originally added Halozyme Therapeutics (HALO:NASDAQ) to our Best Ideas List in the latter half of last year. We thought the risk profile and opportunity were attractive. The company has a partnership with Roche Holding AG (RHHBY:OTCQX), one of the largest pharmaceutical companies in the world, for multiple injectable protein therapeutics, as well as its own proprietary programs. There have been some ups and downs in the stock, but we have conviction that both the underlying business and the fundamentals of the technology are strong. We continue to recommend the stock to our clients, believing that Roche's Herceptin (trastuzumab) will have a fairly rapid transition outside the U.S. for the subcutaneous route of administration that is facilitated by Halozyme's Enhanze technology.
We also have a very significant focus on one of Halozyme's in-house programs, which improves the predictability of both timing and potency of insulin's activity when delivered via a subcutaneous pump. We are confident the company will be on a commercial footing in the U.S. with that technology in the first part of 2013. It's a fairly straightforward technology that's had a few bumps in the road, but we are confident that the fundamentals are going to drive the stock going forward.
TLSR: HALO's technology has led to the advancement of a couple of products that have nearly made it through major regulatory decisions. One is Herceptin for HER2-positive breast cancer patients, yet the stock has been very weak. It's down 33% over the past four weeks. Why has it been weak?
GW: The first product expected to be approved using the Enhanze technology was Baxter International Inc.'s (BAX:NYSE) HyQ (immune globulin + Halozyme's rHuPH20 [recombinant human hyaluronidase] enzyme). Some non-neutralizing antibodies to the active ingredient that facilitates the subcutaneous route of administration with hyaluronidase were observed. As a result, the FDA indicated to the sponsor, Baxter, that it was likely to receive a complete response letter instead of an approval, and that it would need to do more work to understand if this autoimmune observation, which was not clinically significant, was potentially troublesome. The Street is always concerned when the FDA raises a potential safety issue. But we note that there was no change to the Hylenex (hyaluronidase) label, and no warning letter associated with what is an already-approved product. Hyaluronidase is approved to facilitate the absorption and distribution of drugs delivered subcutaneously, and that continues to be the labeled indication for the enzyme on its own.
TLSR: Will approval of Herceptin support the rest of the pipeline? Will it prove the concept of the platform?
GW: Yes. A regulatory success will certainly be well respected by the marketplace and viewed as a significant positive. I also believe the income statement is going to be the driver for value creation for Halozyme starting in 2013 with its commercial efforts in the insulin pump setting.
TLSR: Are you playing this as a turnaround story?
GW: Well, it is now. It wasn't when we put it on our Best Ideas List. But we believe we understand the issues and the opportunities. The Street is more focused on regulatory issues right now and needs to look more at what the opportunity is.
TLSR: What is your next idea?
GW: Endocyte (ECYT:NASDAQ) is a really interesting company. It has been observed that solid tumors and activated macrophages often express a folic acid transporter, and that unlike the folic acid channel, this can transport folic acid conjugated to a drug into the cell. Endocyte has proven it can trick advanced ovarian cancer cells into pumping a toxic chemotherapeutic into themselves via this transporter, and thus delay disease progression. The results were sufficiently compelling to convinceMerck & Co. Inc. (MRK:NYSE) to enter a co-development and commercialization partnership. Vintafolide (EC145) is a small molecule, and because of that, some studies have estimated a 30,000–50,000-fold improvement in penetration in solid tumors. And it is possible, using a radiolabeled version of the product, to image patients and identify those whose tumors might best be addressed with a folic acid-targeted chemotherapeutic. The ability to identify patients who might most benefit is an important part of the technology.
Because strong results were shown in the company's randomized phase 2 study in women with advanced ovarian cancer, European regulatory authorities have indicated that they would be receptive to a filing for accelerated approval in Europe. We expect that to occur in Q4/12, with a new treatment for women with advanced ovarian cancer on the marketplace in the early part of 2014.
TLSR: How big can vintafolide be if it is limited to just the ovarian cancer indication?
GW: It would easily bring in several hundred million dollars in Europe, and there is a similar market opportunity in the U.S.
TLSR: Does approval in the U.S. and Europe triple Endocyte's market valuation?
GW: It is presently trading at roughly one time the potential sales it could achieve in Europe. The overexpression of folic acid transporters is a feature found in a variety of solid tumors, including those in lung cancer, which is one of the bigger problems we face. We are looking at a targeted therapy that could easily have billions of dollars of revenue.
TLSR: What is the next inflection point for Endocyte? What catalyst is going to drive this stock?
GW: The stock will likely appreciate in anticipation of a positive European regulatory decision in the early part of 2014, or late 2013. But we are focused on a number of potential catalysts in 2013.
Specific to vintafolide, data from a randomized lung cancer study could be available in 2013. That would be very interesting to investors. In addition, as a result of the substantial cash payment that Endocyte received in the deal with Merck, it has the resources to drive three different programs into the clinic—another chemotherapeutic targeted with folic acid, an inflammation drug that targets activated macrophages using folic acid and, lastly, a promising treatment for polycystic kidney disease that focuses treatment to the cysts in kidneys of these patients. The company is going to have a dramatically expanding pipeline with a targeted small-molecule therapeutic agent, and will be approaching potential commercialization of that agent in the latter half of the year. Those are the catalysts, and I believe Endocyte is going to see its stock appreciate very significantly.
TLSR: Is vintafolide partnered with Merck for both non-small cell lung cancer and for advanced ovarian cancer?
GW: Yes. The global opportunity for the drug is partnered with Merck.
TLSR: How many points does Endocyte give away to Merck?
GW: It is 50/50.
TLSR: This pipeline looks very deep, but I'm sure the market is not giving any value to the company's other candidates whatsoever.
GW: That's right. The company has $200 million-plus in cash, and it is not even trading at two times cash. Based upon my conversations with investors, I think it is becoming a better-known story.
TLSR: Your next pick?
GW: I would focus investors on Anacor (ANAC:NASDAQ), a platform-chemistry company. It utilizes boron-based organic molecules to create new drugs. It is appropriately conservative in its approach. Boron-based molecules are fairly reactive. It started by making topical drugs. The main indication of the company's lead drug is on onychomycosis—toenail fungus. Phase 3 data for its first of two phase 3 studies are expected in the second week of January 2013, and the next is expected six weeks later. The drug is tavaborole (AN2690), and it is well tolerated by patients. We know it gets through the toenail. I think the marketplace is ready for a safe, effective, topical treatment for this dermatologic indication.
TLSR: What's your next idea?
GW: Novavax Inc. (NVAX:NASDAQ) has a very robust and interesting biologic manufacturing capability. It uses its expression system to manufacture virus-like particles to make vaccines, and has significant government support for both pandemic and seasonal flu vaccines. Recently, the company has shown a good result for treatment of a respiratory syncytial virus (RSV), one of the last significant pathogens that we don't have a vaccine for. This product would protect elderly folks, neonates (newborns) and young children against the virus. There is a strong chance that the company will enter into a significant global partnership for development of an RSV vaccine this year. That, combined with the opportunity it has in flu vaccine development, is very interesting. A lot of investor attention is being paid to Novavax.
TLSR: This sounds like the kind of company that could receive nondilutive capital from governments. Has Novavax been able to finance itself with grants from European or North American governments?
GW: Yes. The U.S. government is supporting the company through a contract in excess of $100 million to advance development of both pandemic and seasonal flu vaccines. The money will support the creation of manufacturing infrastructure and clinical regulatory work on the product. The technology allows for very rapid production of the vaccine, which will help in the event of a global health issue.
TLSR: Rapid production is the real value driver here, isn't it?
GW: Yes. Historically, very significant mortality has been associated with pandemic flu. The U.S. government places a very high priority on protecting the population from another potential pandemic.
TLSR: You follow Oncolytics Biotech Inc. (ONCY:NASDAQ; ONC:TSX). I note that you rate it Outperform.
GW: Absolutely. We're expecting interim progression-free survival data very soon from the head-and-neck cancer study. Oncolytics is developing a very interesting idea with regard to cancer treatment, using a virus to treat a disease that is uniquely susceptible to viral infection.
Obviously, there are limitations to the continuous treatment of a patient with a virus. The human body oftentimes responds by an immune response that inactivates the product. But Oncolytics' reovirus (Reolysin) doesn't appear to elicit the type of robust response to this virus and repeated treatments are possible. It has shown the ability to infect tumors broadly throughout the body, and multiple tumor types are potentially susceptible to this approach. In addition to potentially killing tumors via the virus reproducing in cells and lysing (pretty much exploding them), the viral antigens can stimulate an immune response. The damage done to the cells by the viral infection can be sufficient to resensitize them to radiation and chemotherapy. Fortunately, there are no overlapping side effects with the most commonly used cancer treatments—radiation and chemotherapy—so this is, potentially, a broadly useful treatment.
TLSR: I wonder why the company started with such a tough indication. Squamous cell carcinoma of the head and neck is very difficult to deal with, yet many different oncology indications may be susceptible to the reovirus. Is the company targeting an unmet need?
GW: Yes. If I recall correctly, all oncolytic virus companies started out using intratumoral injections. Head and neck tumors are, obviously, quite accessible via that approach, with strong evidence of the potential for efficacy. The study design for its ongoing phase 3 is very similar to that of Eli Lilly and Co.'s (LLY:NYSE) Erbitux (cetuximab). In fact, the reovirus study is a carbon copy of the Erbitux phase 3 study, and is being managed in a very similar way. The route to registration is well worn using this development strategy.
The interim analysis data, which we are expecting shortly (likely in August), will look at progression-free survival results from the first 60–80 patients. This will help assess whether there are reasons to be optimistic about success in overall survival rates, and how many patients it might take to get to that endpoint. They will be the first randomized, controlled data in a solid-tumor setting for an intravenous oncolytic virus delivery. It is a very important data point for the company. Because of the broad opportunity in front of the drug, we think investors would be well served to pay attention to the results. Even if the results are positive and the stock moves up, the big picture remains compelling. We are counseling investors to keep their eyes open.
TLSR: Oncolytics has been weak. It is down 39% over the past six months. In this first randomized data, the drug will be measured against a control arm, and definitive evidence of efficacy could be demonstrated. Is the weakness because Oncolytics is a one-drug company? Why has no faith been given to Reolysin?
GW: There has been a slight delay in the readout (presentation of data), and concerns that this delay is due to a problem. I don't think that is right. The company has a completely new and novel way of treating cancer, and I think there is some skepticism about its potential viability.
TLSR: You don't follow Addex Therapeutics (ADXN:SIX; ADDXF:OTCBB) formally, but the company presented at your conference. Are you familiar with it?
GW: Sure. We had a chance to catch up with our friends from Addex at the conference. I don't think the company has a strong U.S. following, despite what we believe are very compelling data for its metabotropic glutamate receptor 5 (mGluR5) inhibitor, dipraglurant. The company is confident that it will find a partner to develop the product, first in an indication for Parkinson's disease levodopa-induced dyskinesia (PD-LID). With support and validation, investors will come to appreciate the opportunities for the drug in the PD-LID indication. Addex is an interesting, undiscovered company, and is undervalued perhaps because of the stock's low trading volume, Swiss stock exchange listing, and the relatively modest number of patients treated in its dipraglurant clinical studies.
TLSR: Are any prominent companies working on allosteric modulators, like Addex is?
GW: I am not familiar with any other companies pursuing these as a general approach.
TLSR: That gives us some hint as to why this is an undiscovered technology from the market's point of view.
GW: Addex has had a lot of programs, some of which haven't succeeded. Making allosteric modulators is difficult—it is about finding the right drug for the right indication. I certainly think dipraglurant hits that mark. We shall see. With a partnership, I think Addex will be a different story.
TLSR: I find it interesting that allosteric modulators don't compete with receptors that are bound by the ligands in the organism on a normal basis. It opens up all kinds of opportunities.
GW: Yes, absolutely. I think we should let the body decide what notes to play, and maybe just tune the piano; make it a little louder or quieter when appropriate. We certainly have a large body of data for the type of unfavorable effects that can come from drugs that act in the central nervous system that go knocking on a lot of receptors all the time. The trick has been specificity. I think some folks at Addex are getting to the heart of that issue as well.
TLSR: Thank you, Greg. This has been fun.
GW: Any time you want to talk about stocks, I'm always here.
Greg Wade earned both an undergraduate honors degree in medical biophysics and doctorate in physiology from the University of Western Ontario in London, Canada. He has worked on the sellside since early in 2000, first at Pacific Growth Equities and subsequently at Wedbush PacGrow LifeSciences, where he was promoted to managing director in 2011. Greg's coverage of emerging biopharmaceutical companies is supported by his analyst team members David Nierengarten and Chris Marai.