Seeking Alpha
, PropThink (389 clicks)
Long/short equity, deep value, event-driven, newsletter provider
Profile| Send Message|
( followers)

By Jake King

A study published yesterday in PLOS Biology offers a damning assessment of recent IPO PTC Therapeutics' (NASDAQ:PTCT) lead candidate ataluren. PTC began trading on the Nasdaq last Thursday and closed its public offering this Tuesday after selling 9,627,800 shares of common stock at a public offering price of $15.00. Shares of PTC Therapeutics, by their third day of trading on Monday, had climbed 17% to $17.54. The company carries a market capitalization of $415 million, an enterprise value of less than $250 million, accounting for the company's post-IPO cash balance.

According to PTC, Ataluren targets nonsense mutations to correct the underlying cause of a genetic disorder. Nonsense mutations are alterations in the DNA sequence of a gene that cause the ribosome to prematurely translate the gene transcript before a full-length, active protein can be produced. Ataluren is supposed to help the ribosome skip over the premature stop and restore production of the functional protein. The obvious and hot target here is Duchenne muscular dystrophy -- think Sarepta Therapeutics' (NASDAQ:SRPT) exon-skipping eteplirsen -- which is exactly where PTC is running clinical trials, along with cystic fibrosis.

The in vitro study, outlined in "A Lack of Premature Termination Codon Read-Through Efficacy of PTC124 (Ataluren) in a Diverse Array of Reporter Assays," raises some real questions about the drug's mechanism of action. The study was published by researchers at the University of Dundee who identified Ataluren's lack of efficacy during their own read-through agent discovery program. Here's the five-second takeaway (emphasis is our own):

Following the discovery of PTC124 [ataluren] there was some controversy regarding its mechanism of action with two reports attributing its activity to an off-target effect on the Firefly luciferase (FLuc) reporter used in the development of the molecule. Despite questions remaining as to its mechanism of action, development of PTC124 continued into the clinic and it is being actively pursued as a potential nonsense mutation therapy. To thoroughly test the ability of PTC124 to read through nonsense mutations, we conducted a detailed assessment comparing the efficacy of PTC124 with the classical aminoglycoside antibiotic read-through agent geneticin (G418) across a diverse range of in vitro reporter assays. We can confirm the off-target FLuc activity of PTC124 but found that, while G418 exhibits varying activity in every read-through assay, there is no evidence of activity for PTC124.

But there have been additional red flags that indicated something wasn't quite right with the therapy. The drug failed a Phase IIb trial as a treatment for DMD in 2009. The drug also failed a Phase III trial in CF that was completed in 2011. Nevertheless, PTCT has pushed forward with both programs based on subgroup analyses of the failed trials. The company initiated a randomized, double-blind, placebo controlled Phase III trial in 220 DMD patients and says that the study population and outcome measures used in the Phase III trial are based on the post-hoc subgroup analysis of the Phase IIb study.

The retrospective subgroup analysis showed a much larger treatment effect in mean change in six-minute walk distance between ataluren and placebo in this subgroup (younger DMD patients) than in the overall population. In CF, PTC is planning a Phase III trial to evaluate the efficacy and safety of ataluren in approximately 210 patients with CF caused by a nonsense mutation. The trial is based on a subgroup analysis of patients not receiving inhaled aminoglycoside antibiotics in the previous Phase III. PTC claims that the inhaled antibiotic tobramycin interfered with ataluren's mechanism of action.

PTC filed a marketing authorization application with the EMA in October 2012 for conditional approval of ataluren as a treatment for nmDMD. In its 120-day response this March, the EMA identified "major objections" regarding insufficient evidence of efficacy based on the single Phase IIb clinical trial, uncertainties about the effective dose, and questions about whether the confirmatory Phase III trial for this indication could be continued if the EMA grants conditional approval. Tellingly, the EMA informed PTC back in May 2012 that although ataluren falls within the scope of the regulation for conditional approval, "it appeared unlikely that a positive risk-benefit assessment for ataluren could be concluded primarily based on the results of our completed Phase IIb clinical trial." PTC actually filed a New Drug Application with the U.S. FDA in 2011 for nmDMD, which the agency refused to file, a relatively rare occurrence. When PTC filed a formal dispute, the regulatory body upheld its previous decision.

It's these kinds of stories that we file away for a revisit further down the road as there's now a growing body of evidence against ataluren's success in any of its ongoing clinical trials, and we're interested in what a trade might look like as readouts from those trials approach. The Phase III DMD trial won't read out until mid-2015 at the earliest, but based on the timing of PTCT's 120-day letter from the EMA and expectations for a response, an EU decision on conditional approval in DMD should occur by the end of this year. PTCT currently has no options listed, but we expect an EMA rejection and will be watching for a trade closer to the end of this year, or as options become available -- mark your calendar. The stock was down 7.5% in early trading Wednesday.

Disclosure: I am long SRPT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Jake King. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.

Source: The Evidence Builds Against This Recent Biotech IPO