As a former biotechnology researcher and 25-year Wall Street veteran, Griffin Securities Inc. Analyst and Scientific Director Keith Markey understands how novel, cutting-edge technology can produce extraordinary new products that bring in revenues with double-digit growth potential. Markey reveals his best ideas in this Life Sciences Report interview, providing his growth thesis for every name and describing why each has potential for at least a double.
The Life Sciences Report: You've been an analyst for more than two decades, and before that you were a wet lab bench guy working in the realm of endocrinology and neurobiology. You came to the financial industry when biotechnology was still nascent. How has drug discovery changed over time?
Keith Markey: One essential principle has not changed in biotech drug discovery: Biochemical pathways still pave the way to new therapeutic approaches. Your question goes to the technological advances, which have taken us to new levels of understanding and enabled scientists to identify new opportunities and improve basic drug discovery and development platforms. These advances include protein purification, recombinant DNA technology and cell culture systems, which have led, for example, to the first monoclonal antibodies, with subsequent progress enabling the production of fully human antibodies.
Looking into the future, one of the most promising areas is systems biology, where novel peptides and proteins will be developed using informatics and genomic technologies that facilitate not only research into how systems work, but also into how we can intercede at specific levels to derive a desired therapeutic effect.
TLSR: Are you talking about a synthetic biology approach too?
KM: Yes. It will involve new genetic engineering capabilities and high-throughput screening, as well as optimized cell cultures. The leader in the field appears to be Intrexon Corp. [private], which is led by R. J. Kirk, one of the most successful biotech entrepreneurs around. The unusual aspect of synthetic biology is the opportunity to create new biological molecules.
TLSR: Is synthetic biology about rational design? Or is it in silico research [done on computers]?
KM: It is not in silico research per se, but it does involve the creation of rationally designed biological molecules. These don't have to be peptides or proteins-they could be highly specific glycosylated molecules. Researchers will apply genetic manipulation and engineering to a particular problem to create a new molecule that isn't normally found in nature. In some cases, that molecule will be produced by a specific cell line, and the cells will be the effective agent. In other cases, the molecule will be purified and used itself for the intended purpose. High-throughput screening is critical to the success of this program.
TLSR: Keith, I generally discuss only public companies, but before we move on, tell me a bit about Intrexon.
KM: Intrexon acquired Immunologix Inc., which had a technology, called mAbLogix, to create monoclonal antibodies from tonsil tissue. It also acquired technology from Cyntellect Inc. [private] that could quickly identify cells producing a particular molecule of interest. Intrexon can marry those two technologies and combine them with its genetic engineering capability to create and then select for cells that produce a molecule of interest. That work now can be completed in a matter of a few weeks-much less than the months required under prior state-of-the-art capabilities.
TLSR: Let's go to some companies. Do you have a favorite?
KM: My favorite is MannKind Corp. (NASDAQ:MNKD), which has an inhalable insulin under development. The product is called Afrezza [human insulin of recombinant DNA [rDNA] origin for inhalation]. It has had its problems getting the drug through the U.S. Food and Drug Administration [FDA], partly because it developed a new version of an inhaler that it wanted to commercialize. The company thought that all it needed to do was a bioequivalence study comparing the new inhaler against the old one. But, as it turned out, the FDA wanted more than a small clinical trial as the determinant of equivalence. The FDA sent MannKind back to the drawing board, and the company is now conducting what it hopes is a final pivotal trial. That study, called Affinity 1, is measuring the efficacy of Afrezza delivered with the new inhaler versus the old one, with a third arm comparing Afrezza's efficacy against a short-term insulin analog, in this case, Novo Nordisk's (NYSE:NVO) NovoLog [insulin aspart [rDNA origin] for injection]. Patients involved in this study have type 1 diabetes.
Because MannKind was given orders to do another clinical trial, it decided to do two instead of one. With the FDA's guidance, it designed a clinical trial called Affinity 2 that involves type 2 diabetics. The purpose of the Affinity 2 is to expand the utility of Afrezza to include type 2 diabetics who are not well controlled by oral medication. The trial compares Afrezza to a placebo. The patients remain on their oral medications, and all the FDA would like to see is an improvement in glycemic control with the addition of Afrezza.
I don't see how this trial could go wrong. We are talking about adding the hormone insulin to something that has not been controlling patients very well. The only way it could possibly go wrong is if patients suddenly start responding well to drugs that haven't been working for them. In the company's last conference call, Al Mann, the founder, chairman and CEO, talked about how the estimated price for Afrezza will be about $2,000 [$2K] per patient per year, slightly above what the oral insulins are going for at this time.
TLSR: $2K per patient per year is significant. How big is the market?
KM: There are about 19M diagnosed diabetics in the U.S. today; 84% of them take either insulin or oral diabetes medication. At $2K per patient, that is equivalent to $31.9 billion [$31.9B] per year in potential sales. You must adjust the 19M total for the 16% not taking insulin or an oral medicine.
There aren't too many drugs with that type of market potential. I don't think many diabetic patients will prefer injecting themselves multiple times a day to taking an inhalable drug that actually does more for them than the injectable drugs anyway. Afrezza's unique delivery system, and the actual structure of the delivery molecule, which MannKind calls Technosphere, enables the drug to exhibit the same type of pharmacokinetic profile seen with the pancreas' response to food consumption.
TLSR: When will we know something about the trials?
KM: The Affinity 1 trial should be completed in May, and Affinity 2 should be finished in June. We'll hear the results in August, and the new drug application [NDA] should be submitted by early October. If the trials work, MannKind will not only get FDA approval, but it may have a marketing advantage. The Affinity 1 trial is designed to test whether Afrezza is superior to short-acting insulin analogs in terms of better glycemic control and fewer incidents of hypoglycemia. It could also be used to treat the type 2 diabetic population. These two trials are crucial.
TLSR: Why did the company switch inhalers?
KM: Simply to have a more efficient delivery system.
TLSR: You said this was your favorite stock. Nektar Therapeutics (NASDAQ:NKTR) developed Exubera [insulin rDNA origin for inhalation], and it was approved. Pfizer Inc. (NYSE:PFE) marketed Exubera for less than a year and then gave up on the product, giving it back to Nektar with no strings attached. I have no idea if Nektar tried to get someone else to pick up Exubera, but the product was never heard from again. Why is Afrezza going to be successful?
KM: The difference between Exubera and Afrezza is that Exubera had starch as an excipient [an inert material serving as a medium or carrier for a drug]. Starch needs to be enzymatically degraded and removed from the lungs to allow the lungs to absorb additional insulin. A patient might need two puffs of Exubera to get an appropriate dose of the drug, but because of the starch, the second puff does not necessarily deliver the same amount as the first. That is not true with Afrezza. There is a linear relationship between the number of times a patient inhales Afrezza and the amount of insulin delivered into the blood.
There's another thing. MannKind's inhaler is about the size of-and looks a great deal like-a police whistle. The Exubera delivery system was about 12 inches long and 1-2 inches in diameter. It was not something patients could carry around easily. But a patient can put the Afrezza inhaler in a pocket, take it out at dinner, do an inhalation right in the middle of a restaurant and nobody would even know it.
TLSR: I note that you follow Ligand Pharmaceuticals Inc. (NASDAQ:LGND) and RXi Pharmaceuticals Corp. (NASDAQ:RXII). You also follow one nonbiotech company, Unilife Corp. (NASDAQ:UNIS), and I'd like to hear why you like it. Go ahead and choose one.
KM: Let's start with Unilife. It has a novel safety platform of devices for delivering drugs, largely prefilled devices. Its main technology rests with a fully incorporated safety system that's built into a normal-looking syringe. It gives the user control over the rate of retraction of the needle into the syringe barrel once the drug has been administered.
I used to follow some of the largest syringe makers in the world, but I've never seen anything like Unilife's technology. It's elegant. The company has a number of products, including EZMix, that incorporate two chambers, one containing the diluent [a diluting agent] for reconstitution of a drug in powder form in the other chamber. The separation helps keep molecules stabilized until time of use. Unilife also has two self-injectors-one single use and another that is multiple use and electronically driven. I believe the latter is the only one of its kind in the industry at this time.
Unilife has one contract for its safety syringe at this point, with a generic drug company that is still undisclosed, but that contract should go into effect, meaning that it probably will generate revenue for Unilife by the early part of fiscal 2014, which begins July 1. We've seen an upturn in interest in Unilife over the last three or four weeks, with the daily trading volumes frequently exceeding 1M shares a day. I believe this reflects the contract going into effect, and the belief that the company is going to sign additional contracts in the near future-Wall Street's interest in the stock has perked up.
TLSR: Unilife has a market cap of about $200M. I'm thinking about a couple of companies-C.R. Bard Inc. (NYSE:BCR) and others-that are larger and handle disposable, single-use syringes. They are all looking for ways to increase margins. I wonder how Unilife could compete against these larger companies, which already have huge sales channels and marketing teams, if it decides to create similar products?
KM: The difference between the major syringe manufacturers-Becton, Dickinson and Co. (NYSE:BDX) in particular, which is the largest-and Unilife is that Unilife specifically targets the pharmaceutical industry with its devices, rather than going into the end-user market, which would be hospitals, physicians' offices and the sort. As a result, it doesn't need as large a sales force. If and when it gets contracts with pharmaceutical drug companies, those contracts would probably be in effect for seven years, and would not be subject to the same level of competition as they would in the end-user market.
I must say that Unilife does plan to charge a premium over other safety syringes, but there are mitigating factors. The Unifill syringe, which is the company's basic safety syringe, looks exactly like a regular syringe and takes up only as much space as a regular syringe. That is very different from other types of safety syringes, which may have sheaths to be deployed or other add-on devices that make them rather bulky.
TLSR: Go to another idea.
KM: Ligand Pharmaceuticals is a good story. It partners with pharmas for internally developed drugs and for the use of its solubilizing agent, called Captisol. We're looking for a number of very good things to occur over the next two years.
Most important, I believe we'll see significant increases in royalties from a drug called Promacta [eltrombopag]. It's a thrombolytic agent sold by GlaxoSmithKline (NYSE:GSK) that generates multitier royalties for Ligand. The other major contributor to revenues is going to be Onyx Pharmaceuticals Inc.'s (NASDAQ:ONXX) anticancer drug, Kyprolis [carfilzomib]. Kyprolis was approved in July of last year for multiple myeloma. Ligand recognizes royalties on a one-period lagging basis, and therefore Kyprolis didn't contribute much to Ligand's 2012 results. The same applies to the recent FDA approval of Promacta for treating chronic hepatitis C [HCV]-related thrombocytopenia. That decision came in November of last year, so the label expansion had no effect on 2012 results for Ligand. The HCV market is much larger than the idiopathic thrombocytopenic purpura market, which was the original indication for the drug. We are looking for a nice ramp in revenues from both products over the course of this year and the next.
TLSR: That was a great addition to the Promacta label. How much do you see revenues ramping this year?
KM: We're looking at royalties going from $14M in 2012 to about $25M in 2013. Overall, we're looking for revenues that include sales of Captisol and some collaborative research and development [R&D] to go from $31.4M in 2012 to about $42.5M in 2013, and then on to $64M in 2014. Ligand operates a very lean corporate structure, so we expect most of the incremental revenues to go straight into the bottom line. We are looking for a nice healthy increase in not only earnings, but also cash flow.
TLSR: Keith, I count nine products that are currently being marketed with Ligand's Captisol, including Kyprolis. Are your assumptions for revenue growth based strictly on these products?
KM: No, not entirely. I don't break out the other products largely because they are too small individually to treat that way in my model. Instead, I have built a moderate growth rate of about 7% into an "all others" category.
TLSR: The question that I just asked goes to the remainder of the development pipeline. I counted one NDA and two phase 3 products. How much icing are these emerging products going to put on the cake?
KM: I don't think it's possible, at this point, to understand what additional drugs are going to contribute, partly because at least one-and possibly two -we don't know anything about.
At this point in time, at least for 2013 and the bulk of 2014, Kyprolis and Promacta are going to be the most important sources of incremental revenue growth for the company. Further out, the company has an even larger pipeline than what you have mentioned.
TLSR: This is an interesting business model. Ligand doesn't have a sales force to deal with, and you could think of these products as being 100% margin items that go all the way to the bottom line, untouched by selling, general and administrative expenses. Is that the value proposition?
KM: Yes. The company, by minimizing its corporate structure, keeps its expenses under extremely tight control. It doesn't have, as you said, any marketing expense. It just has administrative and general corporate expenses. Its R&D budget is predetermined.
TLSR: Go ahead with your next idea.
KM: There are two other companies that I follow and want to mention. They are Novelos Therapeutics Inc. (NVLT.OB) and RXi Pharmaceuticals.
Novelos has a very interesting, unique, lipid-like molecule that recognizes a membrane structure commonly found on cancerous cells. The company has created three different versions.
One is going to be a positron emission tomography [PET] imaging agent. It's called LIGHT [I-124-CLR1404], and it's a small-molecule, cancer-targeted agent that can potentially detect tumors and metastases in a wide range of cancers. It is in late phase 1.
Another is an imaging agent for use during surgery. It's called GLOW2 [CLR1502], and it is a small-molecule, nonradioactive optical imaging agent to be used intraoperatively to see tumor margins. It uses a fluorescent moiety that's attached to the delivery molecule and shows extremely high specificity for cancer. It doesn't seem to miss any cancer, but that has to be defined in further trials. At a preclinical level, against more than 50 different types of tumors and cell lines, only two instances were found in which the delivery molecule did not recognize the malignant cells. This compound is preclinical, but it may enter the clinic later this year.
The third is a therapeutic agent called HOT [I-131-CLR1404]. The difference between the PET imaging agent and the therapeutic agent is the nature of the radioactive iodine that's attached to the delivery molecule. In the case of the PET imaging agent, it's iodine-124. In the case of the therapeutic agent, it's iodine-131. This one is in a phase 1 trial.
TLSR: Tell me a little about RXi Pharmaceuticals.
KM: This company has a unique pedigree. It was founded by Nobel laureate Craig Mello to commercialize small inhibitory RNA or siRNA. He was co-recipient of the 2006 Nobel Prize in Medicine for RNA interference [RNAi].
The company, over the years, has developed a self-delivery attachment to the RNA portion of a molecule that enables the RNA to get into the cell. That is a very important hurdle to overcome because, as most companies in the siRNA space will attest, getting an siRNA molecule into a cell is not the easiest thing to do. The other problem is getting it to the appropriate cell. I like the strategy RXi is pursuing at this point, which is to treat conditions that require only a local administration of its drug.
The company's lead siRNA is called RXI-109, which targets the expression of a cellular signal called connective tissue growth factor [CTGF], which plays a crucial role in fibrosis. It is being tested to prevent scar formation dermatologically, and also for an ophthalmic condition called proliferative vitrealretinopathy [PVR], scar tissue formed in the eye when a patient has a retinal detachment. PVR occurs in 8-10% of patients who get a detached retina, so this would be an orphan indication and something the company would be happy to partner out. I think it would prefer to continue with dermatological applications internally for a while.
TLSR: Why is the stock up 64% over the past four weeks?
KM: The company announced results from its phase 1 clinical trial with RXI-109 for dermal scarring. It was a single injection study that showed there were no safety issues. The drug had no ill effect on wound healing, and it also provided a sense of efficacy. I say it that way because the results, at this point, are still blinded.
TLSR: This phase 1 study was double-blind? That's unusual.
KM: Yes. It just completed enrollment and treatment. And the company should release additional information in the not-too-distant future from a similar phase 1 trial that involves multiple injections, rather than a single administration.
TLSR: Could the company possibly get proof of concept from this phase 1 trial?
KM: I would think so, but it does plan to conduct a phase 2 study involving plastic surgery later this year.
TLSR: Keith, this has been a real pleasure.
KM: I've enjoyed it, too. I love talking about these companies. They have such unique capabilities and promising drugs in development. Thank you.
This interview was conducted by George S. Mack of The Life Sciences Report and can be read in its entirety here.
Keith Markey, analyst and scientific director with Griffin Securities Inc., is an equities analyst with more than 25 years of experience. In addition to conducting research, he provides advisory services on partnering/licensing, mergers and acquisitions, and financing for companies in the biotechnology, pharmaceutical and medical device sectors. Previously, Markey held various managerial positions in the Value Line Research Department, supporting the Value Line Investment Survey with original research and by selecting stocks for coverage. He began his career as a biochemist, working in the fields of endocrinology and neuroscience. His research, which resulted in more than 30 publications, contributed to modern understanding of regulatory biochemistry and stem cell plasticity. Markey has lectured on scientific and financial subjects, and is a member of the Licensing Executives Society and the National Association of Science Writers. He earned a doctorate in neurochemistry from the University of Connecticut and a master's of business administration in finance from the Leonard N. Stern School of Business at New York University.
1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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3) Keith Markey: I or my family own shares of the following companies mentioned in this interview: Mannkind Corp., Novelos Therapeutics Inc., Unilife Corp. I personally or my family am paid by the following companies mentioned in this interview: None. Griffin Securities has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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