Brinson Patrick's Christopher S. James: All Catalysts Are Not Created Equal Print E-mail
By George S. Mack of The Life Sciences Report   
Friday, 05 December 2014 08:56

Why do some good-news milestones cause stocks to languish, or even fall? Neurosurgeon Christopher James, managing director and senior biotechnology analyst at Brinson Patrick Securities, performs due diligence on stocks, in part, by connecting his clinical experience to the readiness of physicians and patients to adopt new therapies.

In this interview with The Life Sciences Report, James gives real-life examples of catalysts and their effects, and highlights three strong biotech plays that could return multiples of invested capital.

The Life Sciences Report: When a small-cap company fails to meet its primary endpoint in a Phase 2 trial, the stock can lose a big chunk of its value in minutes. However, with positive data, a stock may uptick and then level out. How do you deal with this kind of situation in small-cap names, primarily in Phase 1 and Phase 2 studies?

Christopher James: That's a big challenge in the small-cap biotechnology space—and yes, it appears these stocks get overly punished for bad data and don't reap the rewards of success. We try to mitigate that risk by looking for companies developing drugs for multiple indications. Too often, small-cap stocks are valued on one or maybe two drugs. In early drug development, the goal is to establish safety, in addition to understanding the pharmacokinetics (PK) and pharmacodynamics. Phase 2 proof-of-concept is where we start to see the inflection of share price, when value creation occurs. At this stage, stocks will generally trade fairly. Investors pay a tremendous amount of attention to Phase 2 data.

TLSR: What do you look for in a catalyst? We know small-cap stocks will be reactive on the downside, but how do you know that a milestone is going to be reactive on the upside?

CJ: It depends a lot on the stage of development. Completing enrollment of a study is meaningful, but it's certainly not going to drive the stock to significant levels. The most important near-term catalyst in most of these growth names is going to be data.

Let me cite an example of very meaningful data, and why it moved shares so dramatically. Regulus Therapeutics LLC (RGLS:NASDAQ) really had no data before the hepatitis C virus (HCV) data came out on Oct. 22. The company is developing oligonucleotides that target microRNAs (miRs), and its proposed HCV product is RG-101 (GalNAc-conjugated anti-miR targeting miR-122). People didn't have high expectations for RG-101 or the HCV indication. In fact, most people didn't even think of RG-101 as a drug. But it really surprised investors to the upside, and the stock has nearly tripled since that data release—even after a pullback in November.

"There is extraordinary upside potential in StemCells Inc."

A lot has to do with investor sentiment going into the data. In Regulus' case, sentiment was low, in part because HCV is an incredibly crowded market; however, the data showed a mean 4.1 logarithmic drop in viral load after a single dose of RG-101. Even though this was only a Phase 1 trial with 16 patients, the data release was truly transformational, and now Regulus is around $17/share with a market cap of about $840 million ($840M). I initiated coverage on the company when it was $6/share.

Other catalysts are regulatory milestones, the most obvious of which is a drug approval. But most of my companies under coverage are early stage, with the exception of a couple. We saw the approval of MannKind Corp.'s (MNKD:NASDAQ) Afrezza (human insulin of recombinant DNA origin, inhalable, delivered via Technosphere particles) on June 27, but then we saw the stock sell off on the news. Another meaningful milestone was MannKind partnering with Sanofi SA (SNY:NYSE) to market Afrezza. Product sales are the next step for a company like MannKind.

TLSR: How do you know when a product in development is going to be well received by the medical and patient community?

CJ: That question is always difficult to gauge. When I was chief medical officer of Retrophin Inc. (PINK:RTRX), our work with the product started well before we even went public. We did a lot of work to understand the market and the unmet needs. This is one of the reasons I like companies like Retrophin, which focuses on rare diseases. In orphan indications you often have strong patient advocacy groups that (1) are well funded, and (2) have established ties with the U.S. Food and Drug Administration (FDA) in advance of drug development. The FDA is well aware of the unmet needs, where there are often no approved therapeutic options. The FDA really wants these companies to succeed, and will do everything in its power to expedite approval. But gauging the market potential and demand for the product must start very early in the drug development process. Today, in my job as an analyst, I speak with key opinion leaders at medical meetings to better understand that underlying need.

TLSR: What are some of the challenges facing drug developers and investors?

CJ: Generally speaking, I can say that scale is a major challenge in the cell technology industries. I'm covering a couple of companies that are developing cell-based therapeutics, and one of these companies, Opexa Therapeutics Inc. (OPXA:NASDAQ), is developing a personalized T-cell therapeutic agent called Tcelna (imilecleucel-T) for secondary progressive multiple sclerosis. One of the biggest challenges to commercial success with Opexa is its ability to scale up to Phase 3 clinical and commercial levels.

"You have lots of shots on goal with Rexahn Pharmaceuticals Inc."

I'm also covering StemCells Inc. (STEM:NASDAQ), which held its first analyst day event on Nov. 20. One of the biggest questions was whether the company would be able to produce its cell-based therapeutic, HuCNS-SC (purified adult human neuronal cells of fetal origin), to scale. HuCNS-SC is a central nervous system-based therapeutic that differentiates into multiple cell lines—neural cells, glial cells and astrocytes. The company does have the ability, at least based on our conversations, to produce billions of cells at both Phase 3 clinical and commercial levels.

TLSR: Is there a concern that the original cell line may not remain viable in perpetuity?

CJ: That is a concern, but as I previously stated, the company has the ability to scale it up into billions of cells, and has also mentioned that it can qualify additional fetal brains to expand that beyond the original fetal brain. The bigger challenge right now is to identify the optimal dose. Right now, it's 20 million (20M) cells in the spinal cord injury studies, and the top dose in the ophthalmic study of age-related macular degeneration with geographic atrophy is 1M cells.

I definitely think there is extraordinary upside potential on this name, and there are meaningful milestones to get this stock to my target price of $6/share within the next 24 months.

"Phase 2 proof-of-concept is where we start to see the inflection of share price, when value creation occurs."

The next data point will be the results from the second age-related macular degeneration (AMD) cohort of patients. We are looking for these data in Q1/15. We saw the first cohort drive the stock significantly in the summer. What's important about the second cohort is that there will be seven patients with slightly better visual acuity but greater geographic atrophy, and all these patients will have received the highest dose of cells, a cell dose of 1M. We could see even better efficacy in the second cohort compared to the first cohort, and the first cohort was pretty significant. I believe it was a 65 or 70% improvement in geographic atrophy.

TLSR: What are the potential ramifications of Roche Holding AG's (RHHBY:OTCQX) antibody lampalizumab, now in Phase 3 for geographic atrophy? Is that something that could take market share from StemCells, given that it's a drug rather than a cell therapy?

CJ: Lampalizumab is certainly a drug that we're aware of. It's a monoclonal antibody. Lampalizumab actually got pretty good reduction in geographic atrophy, and it was statistically significant. At 18 months, it showed a 20% reduction, and then 44% reduction in a specific subpopulation. That compares to 65–70% reduction that we saw with the StemCells' HuCNS-SC at one year.

This is a significant difference. Data from Roche's Phase 2 MAHALO trial with lampalizumab were presented at the annual meeting of the American Society of Retina Specialists in Toronto during August, and the drug appears to be efficacious, but there was a big difference from the earlier data. Early signs show that StemCells certainly has the efficacy advantage, but it's hard to make conclusions, because StemCells' patient numbers aren't there.

It's important to note that the advantage with StemCells' HuCNS-SC is a potential one-time treatment versus monthly intraocular injections of the monoclonal antibody by a physician, which are not only a discomfort for the patient but also raise a question of safety around multiple dosing. Our view is that a one-time transplant is a more ideal regimen for this patient population. But we're certainly going to be watching the Roche drug. In fact, we like the fact that lampalizumab is creating buzz around the indication. I think, net-net, it's overall a positive for StemCells.

TLSR: Roche's ongoing Phase 3 study with lampalizumab has 936 patients in the trial. Final data collection is slated for October 2018. What stage are we looking at for the StemCells trial?

CJ: StemCells is in a Phase 1/2 study. It is dosing patients with geographic atrophy AMD, and it's an open-label study. The next step would be to design a randomized, controlled Phase 2 study, and that process is currently underway. We expect that study to start in early 2015.

TLSR: Has the company seen any indications of efficacy in its thoracic spinal injury studies?

CJ: Yes. As someone who has treated devastating injuries in cervical spine, I'm very excited. I think there is a strong potential for success from what we've seen in thoracic spine. One patient recently developed some voluntary motor function in one of his toes. It's just one patient, and it's hard to make conclusions, but it looks like there could be some hints toward motor function restoration in these patients.

"Gauging the market potential and demand for the product must start very early in the drug development process."

If you're able to move your hand, you can essentially operate an electric-powered wheelchair, which would be a phenomenal improvement in the quality of life for patients, and a phenomenal breakthrough for the company. I'm very excited about this Phase 2 cervical study, and the potential to restore any motor function. Can you imagine the headlines? Every major news source would want to speak to the investigators and to the patients.

Restoring motor function is an exciting topic, but we are excited about AMD, too. I think, for the most part, investors are more interested in the ophthalmic side because it's more of a commercially established market.

TLSR: What is the growth driver for StemCells? Is it AMD with geographic atrophy?

CJ: That's one of the growth drivers. The geographic atrophy-AMD Phase 1/2 data will be released in Q1/15. Getting back to the cervical spine study, the company is now screening patients for Phase 2, and we will see the final data set from the Phase 1 study in both thoracic spine and AMD in H1/15. We have a number of data points in 2015 to help drive the stock to my price target.

TLSR: Can you talk about another company with interesting upcoming catalysts?

CJ: We like Rexahn Pharmaceuticals Inc. (RNN:NYSE.MKT), and we think there's a big disconnect between the current valuation of about $1.15/share and our $3/share target price.

It is rare to see an actual pipeline of proposed products in clinical trials in the small-cap space. Rexahn's focal point is oncology, but it is focused diversely. You have lots of shots on goal with this name. You have Archexin, which is an RNA-based therapeutic—an antisense compound—as well as a two small molecule approaches with differing mechanisms of action. In addition to that, the company has a platform.

"The most important near-term catalyst in most of these growth names is going to be data."

Last year was tough for the stock because of the lack of catalysts, but the company has a number of significant drivers coming in Q1/15. We will see Phase 1 data from Supinoxin (RX‐5902) in solid tumors in patients who previously failed other regimens. Also in early 2015, we will see Phase 2 proof-of-concept data from Archexin (Akt-1 antisense oligonucleotide inhibitor) in metastatic renal cell carcinoma. That's a program we're very excited about, and probably the most significant near-term growth driver for the stock. Then, possibly in late in Q1/15, we could see data from RX-3117 (fluorocyclopentenylcytosine) in patients with solid tumors. I think 2015 will shape up to be much more meaningful for Rexahn than 2014.

There are lots of ways to create value with Rexahn. Once we start to see some data—some hints of efficacy—early next year, I think the discussion around partnership should pick up. That could be a significant driver as well.

TLSR: You and I previously discussed BioCryst Pharmaceuticals Inc. (BCRX:NASDAQ). At the end of May, the company reported positive results from its Phase 2a OPuS-1 trial with its lead molecule BCX4161 for prophylaxis of hereditary angioedema (HAE). You have the stock rated Market Outperform with a $15/share target price. Tell me why you like the company.

CJ: BioCryst is one of the rare small-cap companies that is well capitalized. It reported approximately $128M on its balance sheet in its Q3/14 earnings report, so there is certainly no need to do any near-term financing. We're most excited with the HAE program. By the end of 2014, the first patient will be dosed in the OPuS-2 trial, which will take a year to complete. That could certainly serve as the pivotal study. The mechanism has been validated in OPuS-1, and those results were phenomenal.

TLSR: Is there a current overhang on this stock?

CJ: BCX4161 is an oral drug, and one of the things that investors have been concerned about is the formulation change in dosing. It is going from a hard capsule formulation to a soft gel capsule formulation, and there is also a pill burden around that.

The OPuS-2 study is going to be over 12 weeks, versus OPuS-1, which was four weeks. You're talking about 9-15 pills/day over 12 weeks instead of four weeks. That's a lot of pills.

"Scale is a major challenge in the cell technology industries."

But I'll remind you that these patients are extraordinarily motivated. One HAE attack can kill you. There's going to be a strong motivation to not miss any doses. But dosage is one thing that we're going to be watching.

We're also excited about a second-generation kallikrein inhibitor compound for HAE. One of them will be advanced in H1/15. We have seen better PK and greater potency characteristics with the second-generation compounds.

TLSR: What would be the advantage there? Does greater potency and improved PK mean fewer pills per day?

CJ: Yes, a once daily administration. But we're also talking about significantly higher bioavailability. You have the potential to reduce HAE attacks even further and, potentially, to prevent HAE attacks. It would be a true prophylactic, taken once a day, to prevent all HAE attacks. The second-generation kallikrein inhibitor is not just about better compliance; it's also an opportunity for a more potent compound overall.

TLSR: BioCryst has a broad-spectrum antiviral, BCX4430, a candidate for hemorrhagic fevers such as Marburg virus. I'm sure the company is thinking about using the antiviral in Ebola virus disease, where government funding can be readily accessed. The company had previously guided that nonhuman primate testing might begin by the end of 2014, and be completed in Q1/15. Do you know if these studies have begun yet?

CJ: Yes, that study is underway, and we are really pretty excited about BCX4430. The company did do a dose-ranging study in cynomolgus monkeys that demonstrated a statistically significant increase in survival at the highest dose tested. The caveat is that no animals survived past 21 days. Next, the company will be going into rhesus monkeys. This study has probably already started. It was supposed to begin in November with a higher-dose regimen.

The company has received additional funding of $2.4M, recently awarded by the U.S. National Institute of Allergy and Infectious Diseases for manufacturing. There are good trends toward efficacy at the lower dose, and the company is going to be dosing higher. We're excited about that program as well.

TLSR: Is the company still on track for an investigational new drug (IND) application filing for BCX4430 before the summer of 2015?

CJ: It's going to depend. We will see data in Q1/15, so I think the company is on track to file the IND.

TLSR: The latest World Health Organization situation report noted that deaths had quadrupled from Ebola virus disease in Guinea, Liberia and Sierra Leone since the previous report. With that kind of epidemic progression and mortality, is BCX4430 a candidate for an expanded access, compassionate use program? And could a Phase 1 trial begin soon?

CJ: Just given the number of deaths, I think that's certainly a possibility. We've always thought about BCX4430 as going directly from animals to infected patients. Once you establish safety in humans, it's feasible to make the leap to the IND within a year, and that a therapeutic could be approved. Certainly, an experimental agent like this could be available for these patients even before approval.

TLSR: Thank you.

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