2 Oncology Biotechs For The Future

Includes: ARIA, AVEO, GALE
by: Bio Matt

Biotech investment can be risky, but also lucrative. Sarepta Theraputics (Formerly Avi BioPharma) SRPT has seen one year gains in the range of 3300%. On the other hand, investing at the wrong time, such as before a clinical trial failure or FDA rejection can be devastating. Celsion Corporation CLSN is down over 80% from its Phase III trial failure.

Overall, the NASDAQ Biotech Index has had fantastic return of 38% over the past 365 days. The historic return is also excellent, with 10 year gains of 248%. Investing in biotech is what I like to term an educated gamble, similar to counting cards. While the fate of biotechs ultimately lies in the results of their trials and the decisions made by the FDA, you can find the right stock by analyzing the clinical trials conducted. Investing in run ups to a catalyst, such as trial results release or FDA decision, has become very popular of late, but I try to stay away from that area, as it is risky and often not based on well thought-out research.

I am relatively young, educated in science/medicine, and have money to speculate with, and so, I like biotechs. I do prefer to do thorough research before making any investment. Currently, I have about 45% of my portfolio in biotechs, and I believe that the sector will continue to flourish even if the markets head into a downward spiral. With oncology becoming a more lucrative space, I believe 2 companies with the brightest futures are Aveo Pharmaceuticals AVEO and Galena Biopharmaceuticals GALE. Both of these companies have crucial years in 2013 and have the potential to become mid cap companies in the near future.

Aveo Pharmaceuticals

Aveo Pharmaceuticals is a small cap biotech with a lead candidate which has completed clinical testing and is known as tivozanib. Aveo is currently trading at a market cap of $319 million and a PPS of $7.31. Tivozanib (AV-951) is an oral VEGFR inhibitor, which is potent even at picomolar concentrations. VEGFR inhibitors work by essentially stopping vascularization to the tumor and thus cutting off blood flow and growth. The problem with many VEGFR inhibitors is that they are useful only in advanced cases of cancer, as inhibiting VEGFR is ineffective when vascularization is not prolific.

The FDA advisory committee is expected to make a recommendation regarding Aveo's NDA on May 2nd, 2013, and its PDUFA is expected before July 28, 2013. Tivozanib is a potential first line/second line treatment for advanced clear cell renal cell carcinoma [RCC]. Aveo also has 2 other products currently in clinical testing; ficlatuzumab, which is in phase II trials, and AV-203, which is currently in Phase I trials. Tokyo-based Astellas paid Aveo $125 million up front ($75 million licensing fee and $50 million R&D funding) and could potentially pay up to $1.3 billion in potential milestone payments for partnership rights to tivozanib. Kyowa Hakko Kirin still retains the rights to develop and commercialize tivozanib in Asia, however. Both companies will share development costs and revenues from both North America and the EU. This along with the recent offering of 7.6 million shares (about $57 million US) has allowed Aveo to have about $150 million in cash on its books. Additional royalties will also be received by Aveo upon FDA approval.

Aveo recently released the final results from its phase III TIVO-1 trial, which consisted of 517 patients. Tivozanib showed a progression free survival (study's primary endpoint) 2.8 months greater than that of Nexavar(Sorafenib), a Bayer/Onyxx product approved for advanced RCC. 53% of patients in the sutanib arm of the study did go onto using a subsequent therapy after sutanib, and almost all went onto using tivozanib, Only 17% of sorafenib patients went on to use a subsequent therapy, showing tivozanib's superiority in comparison to sorafenib. Overall survival, the study's secondary endpoint, was not statistically significant between the two however. TIVO-1 did show that in a subset of 69 patients with material available for biomarker evaluation, PFS was almost 10 months greater in tivozanib than sorafenib. The most common AEs associated with tivozanib were hypertension, diarrhea, and neutropenia (common with cancer treatments), which means that the safety profile is above par and in line with Nexavar.

Tivozanib, if approved, would treat both 1st and 2nd line in regional and distant renal cell carcinoma, which make up about 35% of renal cell carcinoma patients. Most patients who are less advanced have localized renal cell carcinoma, however. According to GlobalData, it is forecasted that the total renal cell carcinoma therapeutic space should be worth about $5 billion by 2022. Tivozanib is also expected to cost about $90,000 to $95,000 annually per patient, which should bring peak sales estimated in the $900 million range in 2022. 85% of total sales should be outside Asia, meaning that with split commercialization, Aveo and Astellas should each bring in about $400 million annually. Tivozanib is likely to face tough competition, but has high PFS value and is slightly above par safety profile. Tivozanib has higher PFS values than Nexavar (sorafenib) and Avastin (10.2 months).

With $400 million in revenues annually and additional royalty payments from Astellas, Aveo could easily have revenues north of $600 million by 2022 just from the commercialization of tivonazib. With a conservative PE of 10 and 50% margins, Aveo would have a market cap of $3 billion just based on tivozanib. Similar orphan companies such as Ariad Theraputics ARIA trade at a $3 billion market cap with 1 approved product on the market.

Galena Biopharma

Galena Biopharma Inc, is a small cap biopharmaceutical company with 1 approved product, which is known as Abstral. Galena is currently trading at a market cap of $190 million and a PPS of $2.29. it has about $36 million in cash currently with another $10 million in convertible securities. It has $15 million debt to pay Orexo for a recent acquisition, but with a cash burn rate of $5-6 million per quarter and partnership with Teva TEVA in Israel, Galena should have enough cash to make it to mid 2014 without need to raise additional capital. At that point, it will need to raise some additional capital if a partnership deal has not been struck. Galena should be cash flow positive by late 2014 orearly 2015, as it does have 1 approved product.

Galena recently acquired Abstral (fentanyl) from Orexo AB (ORX.ST) for $10 million upfront and $5 million within the first twelve months of closing, plus low double digit royalties and milestone payments. To pay for this, Galena will enter into a non-dilutive debt financing. This will allow Galena to market the product in the US, and according to CEO Mark Ahn, turn Galena into a cash flow positive company within 18-24 months.

Abstral is a new and first in class treatment option for breakthrough cancer pain (BTcP) in opioid-tolerant cancer patients. This allows cancer patients to feel relief within 1 minute of sublingual administration, whereas other treatments take up to 30 minutes. All AEs were also in line with that or regular oral fentanyl. Both patients and clinicians prefer this method over use of cheaper generic fentanyl tablets, due to its time to reach maximum plasma concentrations and thus relieve pain. Abstral should gain about 30-40% of the $400 million US market share, as 84% of patients preferred Abstral over their current opoid regiment for pain. While Abstral will not become a blockbuster ($54 million in 2012 EU sales and a total market of $400 million in the US), it does allow Galena to reach market with an approved product and build relationships with oncologists, which will be crucial in the future marketing of NeuVax (Nelipepimut).

NeuVax, Galena's leading candidate, is currently in Phase III trials (PRESENT) for the prevention of Recurrence n Early-Stage Node-Positive Breast Cancer with Low to Intermediate HER-2 Expression. NeuVax or nelipepimut, is a peptide (E75) derived from the immunodominant extracellular region of the HER2 receptor, and is combined with the immune adjuvant granulocyte macrophage colony-stimulating factor (GM-CSF) to further bolster the immune response in breast cancer patients. By combining a peptide with an immunoadjuvant, GM-CSF, the peptide can be injected without a specific delivery system. In basic terms, patients that are HER-2 positive overexpress the HER-2 ligand, and this binding interaction is thought to contribute to tumor growth. To inhibit growth, the extracellular domain (nelipepmut) will bind to free HER-2 ligand, thus reducing the ability to bind to the receptor, which stops tumor growth.

The immunodominant extracellular domain is used in this case to increase in vivo stability. While HER-2 1+ patients were previously classified as HER-2 negative patients, it has been shown that in fact these patients do express a low to intermediate number of HER-2 receptors and have a significantly worse outcome than non HER-2 positive patients (If some analysts read into medical journals they may know this).

It is also known that patients with higher expressing HER-2 cells do not respond to immune-based therapies, as HLA expression is downregulated by HER-2 positive tumor cells, making immune-based therapies ineffective. A similar vaccine, E39, being developed by the Cancer Vaccine Development Program [CVDP] also showed that patients expressing lower levels of HER-2 benefited from vaccination. This shows that the method of action used by the E79 vaccination is valid in HER-2 1+/2+ patients and that Galena used the completed phase I/II trials to find a group of patients who would benefit most from administration.

Since HLA downregulation wasn't well understood until after the start of the trials (trial was initially started before Galena existed), it was not understood that 3+ patients would not respond as well to an immune-based therapy. The phase III PRESENT trial may not be as successful (since its more widespread) as the subset analysis performed in the phase I/II trials, but it is aimed at a more specific population of patients who will receive proper dosage of NeuVax. Lastly, patients will not be outside of the node-positive 1+/2+ target population that Galena intends to treat with NeuVax. Phase I/II trials such as that in NeuVax are designed to prove efficacy and safety in a small population of patients, which Galena has shown thus far.

The population of 1+ and 2+ HER-2 breast cancer patients represent an unmet medical need, as 50-60% of all breast cancer patients have to wait after surgery or chemotherapy/radiation. About 25% of the 1+ and 2+ node positive patients will have a recurrence, which Galena hopes to reduce with NeuVax administration. In 2012, Phase II trial was data was released, which showed fantastic results in a subset of the population studies. At 36 months, patients on a placebo saw a 24% recurrence, with 0% of NeuVax patients having a recurrence. At 60 months, only a 5.6% recurrence was seen in NeuVax patients, compared to 26% in placebo patients. AEs were limited, with grade 1 and 2 injection site reactions being the most common.

Additional analyses from these trials also showed that the E75 vaccine was able to induce intra and interantigenic spreading in vaccinated patients, decreased peripheral blood Tregs and serum TGF-β, and increased memory CD4+ and CD8+ T cells. Galena finished this PII trial in 2012, and was granted a special protocol assessment to start the PIII trial in 2012. They hope to have full enrollment for the trial be the end of the year, with data reading out at some point in 2015. The phase III trial is using essentially the same protocol as the Herceptin trials, but with 1+ and 2+ patients instead of the more advanced 3+ patients that would be prescribed Herceptin.

Galena also started a phase IIb trial in February for NeuVax plus Roche's Herceptin (PINK:RHHBY) in 3+ HER-2 patients. Phase IIa results were also very encouraging. 62 patients were enrolled into the study, with both groups almost split even on number of patients. At 24 months, Herceptin alone had a 12.5% recurrence rate vs. NeuVax + Herceptin, which had a 0% recurrence rate. Genentech is helping sponsor the Phase IIb study for 300 patients, which is expected to read out in 3-4 years from now(Information of this may be found in the presentation by CEO Mark Ahn during the company's presentation at the Future Leaders of Biotech presentation).

The target population of 1+ and 2+ patients would mean a population of about 30,000-40,000 patients in the US and 70,000-80,000 patients in the EU. This would mean that Galena is targeting a population about 2.5 times bigger than that being targeted with 3+ HER-2 patients using Herceptin (2012 US sales $6.3 billion). While it is not wise to speculate on potential earnings on an annual basis for NeuVax, with the majority of HER-2 patients being targeted and the positive results from the Phase IIa trial of NeuVax and Herceptin, NeuVax could potentially be a multi-billion dollar product. This of course is based upon success Phase III trials in both NeuVax as a monotherapy and NeuVax as a dual therapy combined with Herceptin.

Furthermore, approval is about 3-4 years, as NeuVax will realistically be presented to the FDA in late 2016/early 2017. Galena does also have a promising protein they are targeting gynecological cancers with, known as folate binding protein alpha, which strengthens their pipeline. Galena will present Phase I data on this protein at ASCO in June this year, which could spark additional interest. With a current market cap of under $200 million, the sky could be the limit if phase III trials are successful in NeuVax. Galena will need to raise additional capital in the future if a partner is not obtained, however. As explained at the beginning of the article, biotech investing is very risky, but I see the bullish case made by the study's investigators along with Rich Steffens to be much more valid than the bearish case for Galena.

Disclosure: I am long GALE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.