By Jake King
As we wrote in a note on Monday, July 29 ,before the market open, an imbalance in the supply of stock in Biocryst Pharmaceuticals (NASDAQ:BCRX) may cause a reversal of the 183% gain seen in the last two weeks as investors re-evaluate the company's forward valuation. We suspect technical traders will place increasingly bearish bets, further pressuring the share price. While catalytic events vary over the next 12 to 18 months, we believe surprises in the interim will be predominately negative, as Biocryst reveals dilution from its not-so-transparent at-the-market, or "ATM," financing this quarter and prepares for a larger round of financing (Editor's Note: As this publication was in queue, Biocryst announced a $20 Million secondary offering) to take advantage of the recent run-up in share price. We suspect that BCRX may revert to the 50-day simple moving average ($2.07), as:
- Anecdotal data from the company's experimental angioedema drug, BCX4161, is scrutinized further;
- Investors realize that a planned New Drug Application for the influenza drug-candidate peramivir has a slim chance of approval;
- And competing angioedema products continue to post encouraging data, creating more barriers to entry for BioCryst's lead drug-candidate.
We note that the 183% run-up was primarily driven by open-label data from an 87-patient safety study of BCX4161, upon which the company's valuation is significantly dependent. Biocryst insinuates that BCX4161 will create a new treatment paradigm in chronic angioedema, but we question whether the quantity and administration of this drug, which requires that 4 pills be dosed every 8 hours, will lead to robust sales figures. Viropharma (VPHM), which has leading market share in the U.S., is developing a subcutaneous version of its popular Cinryze product that will likely replace the currently approved iv-administered formulation of Cinryze, continuing its market domination.
Furthermore, BioCryst announced at the beginning of this month plans to submit a New Drug Application to the FDA for its developmental influenza treatment peramivir, in-part initiating the stock's parabolic move in July. While Biocryst persists in submitting the NDA, patients treated with peramivir in a previous Phase III trial saw only a marginal benefit when compared to patients receiving placebo - an independent data safety monitoring committee actually stopped the Phase III trial early for futility last November. While the FDA will have no qualms with accepting and renewing the planned NDA, we fully expect the agency to reject the peramivir NDA following an in-depth review, likely in the second half of next year.
We believe that over the long-run, the lack of a commercial partner, capital and a poor track record of developmental errors will cause BioCryst's eventual downfall.
BCX4161 Faces an Uphill Battle
On July 22, BioCryst announced that a Phase I study of orally-administered BCX4161, a potential preventive treatment for Hereditary Angioedema (HAE), in healthy volunteers met its primary objectives, and the stock climbed more than 109% in the following four trading sessions. According to the company, these safety and tolerability results support advancement into a Phase IIa study in patients with hereditary angioedema. Although BCRX had begun an uptrend at the beginning of this month with the announcement that the company would be submitting a New Drug Application for peramivir, its developmental influenza treatment, to the FDA, it was the results of this trial that spurred BCRX into a parabolic move. BCRX climbed from a market capitalization of $130M on Friday, July 19th, to $232M as of the close on July 30th - the market has essentially valued the Phase I 4161 results at over $100M, a gross overvaluation given the risks that still exist for this early-stage asset, which we outline below.
Perhaps most disconcerting is that the results of this Phase I study are hardly indicative of the product's viability as an efficacious treatment for HAE. The open-label trial, as is standard in early-stage studies, tested BCX4161 in healthy patients. While we now understand that BCX4161 was well-tolerated among 70 healthy volunteers, investors are left with no proof that the product works as intended in HAE. At PropThink, we generally ascribe little value to open-label safety studies, as commercial viability hinges on efficacy results, proof that a drug provides a clinical benefit. Although BioCryst is now in the running as an angioedema therapeutic developer, the markets have been overly generous in ascribing value to this early asset, as proof of concept data won't likely be available for another year. It remains to be seen whether BCX4161 provides a clinical benefit for patients suffering from this debilitating disorder.
Hereditary angioedema is a rare autosomal-dominant disorder caused by mutations in the C1 inhibitor gene. This C1 deficiency causes uncontrolled activation of plasma kallikrein, which is in turn responsible for excess bradykinin in the body. Too much bradykinin leads to fluid leakage from blood vessels, causing the pain and sometimes dangerous swelling typical of HAE. BCX4161, says BioCryst, inhibits plasma kallikrein, thereby suppressing bradykinin production and the symptoms of HAE.
As an oral and preventive treatment for HAE, BioCryst expects BCX4161 to be a differentiated and advantaged therapeutic option. Viropharma's Cinryze, a C1-esterase inhibitor and the only currently available prophylactic HAE treatment, dominates the landscape despite the fact that the biologic requires twice-weekly intravenous injection (a Viropharma training program allows patients to self-deliver at home). Viropharma expects sales of around $400M in North America this year.
Other approved HAE treatments include Shire's (NASDAQ:SHPG) Firazyr, an injectable antagonist of bradykinin B2 receptors designed for use during an acute HAE attack; Dyax's (NASDAQ:DYAX) Kalbitor, an injectable plasma kallikrein inhibitor also used during acute attacks; and CSL Behring's Berinert, another on-demand C-1-esterase inhibitor. DYAX also develops DX-2930, a self-administered, subcutaneous injection for the prevention of HAE attacks. The market is clearly crowding, and we note a number of defined barriers to entry for 4161.
Kalbitor acts by the same mechanism of action as BCX4161 and carries a black box warning for anaphylaxis - the drug's launch has been underwhelming. In December of 2009, the FDA approved Kalbitor as a treatment for acute angioedema attacks. But trials revealed a risk of anaphylaxis associated with the treatment, which, after a Complete Response Letter in November of 2009, prompted the FDA to require a prohibitive Risk Evaluation and Management Strategy for Kalbitor in addition to a Black Box Warning on the therapy's label. Interestingly, early trials were not entirely indicative of the anaphylaxis issue, and the risk materialized as more patients were subjected to treatment in later trials. Kalbitor's approved label includes:
"Potentially serious hypersensitivity reactions, including anaphylaxis, have occurred in patients treated with KALBITOR. In 255 HAE patients treated with intravenous or subcutaneous KALBITOR in clinical studies, 10 patients (3.9%) experienced anaphylaxis. For the subgroup of 187 patients treated with subcutaneous KALBITOR, 5 patients (2.7%) experienced anaphylaxis. Patients should be observed for an appropriate period of time after administration of KALBITOR, taking into account the time to onset of anaphylaxis seen in clinical trials. Given the similarity in hypersensitivity symptoms and acute HAE symptoms, patients should be monitored closely in the event of a hypersensitivity reaction."
Given that Kalbitor and BCX4161 both act by binding to and inhibiting plasma kallikrein, there remains the chance that 4161 generates similar adverse reactions. As a result, a whiff of dangerous hypersensitivity in forthcoming trials would suggest that the FDA require a similar risk management strategy as that imposed on Dyax's Kalbitor. We note that as a result of the requirement that a healthcare provider administer the drug, Kalbitor's launch has been underwhelming. The therapy generated revenue of $39.8M in 2012, its third year on the market, and the company was in fact forced to revise downward 2013 guidance from expectations for sales of $52-56M to $40-44M.
While 4161 has now been tested in 70 healthy patients, we remain hesitant to place significant value in a Phase I asset that has yet to demonstrate efficacy, in addition to its performance through the same mechanism of action as a known black-labelled therapy. While major hypersensitivities have yet to materialize, their presence could jeopardize entirely BCX4161's commercial viability, as 4161's intended use -- as a preventive therapeutic taken chronically -- becomes a complete non-starter.
BCX4161 has a heavy pill burden, requires frequent dosing and looming new formulations offer better alternatives. BioCryst has made clear that the bioavailability of BCX4161 is not ideal - namely, the company has been on the hunt for a 2nd-generation kallikrein inhibitor with improved bioavailability for quite some time. In fact, in BioCryst's planned Phase IIa trial, BCX4161 will require dosing of 400mg three times a day - four 100mg capsules thrice daily - a veritable handful of pills that is far from conducive to patient compliance. We suspect that despite its IV delivery system, patients will continue to prefer Viropharma's Cinryze due to its infrequent weekly administration.
In addition, consider that BCX4161, if approved, won't hit the market for another three years at the earliest. These timeframes segway into what may prove BCX4161's most critical long-term detriment - the approval of a simple subcutaneous Cinryze formulation.
ViroPharma, in collaboration with Halozyme Therapeutics (NASDAQ:HALO), is developing SC Cinryze, a subcutaneous formulation of the leading preventive HAE treatment. Recall that Cinryze currently requires twice weekly IV infusion, and although an in-home training program provided by VioPharma has made administration more convenient than visiting a healthcare facility, Cinryze's availability as a rapid, self-administered injection suggests even broader use. Once approved, we expect SC Cinrzye to rapidly become the go-to prophylactic HAE treatment.
Clinical trials of the combination have been encouraging to date, and a Phase IIb trial slated to read out early in 2014 will be demonstrative of the product's efficacy - and a major negative catalyst for BCRX. SC Cinryze on the market before BCX4161 is a major barrier to entry.
Despite BioCryst's Positive Spin, Peramivir Won't Receive FDA Approval
On July 11, BioCryst announced in a press release titled "BioCryst to File Peramivir NDA Supported by BARDA/HHS Funding" that the company plans to submit a New Drug Application for peramivir, its developmental treatment for influenza, before year's end. Subsequently, the stock climbed 50% before the reported success of BCX4161 on July 22 sent shares soaring higher.
We believe that retail investors, unaware of peramivir's poor history of development and misled by the involvement of BARDA/HHS, have misinterpreted what will ultimately prove to be a negative event for BCRX. Two key takeaways that have not been appropriately factored into this 50% move will have a profound effect on BCRX's stock price:
- Although the FDA will likely accept and file the planned NDA, we believe the U.S. regulatory body will ultimately reject peramivir due to a lack of efficacy.
- The financial involvement of BARDA/HHS, the U.S Biomedical Advanced Research and Development Authority (BARDA), part of the Department of Health and Human Services, is purely a formality. The government's previous enthusiastic support of peramivir has been cut off, despite that BioCryst continues to tout an antiquated "$234.8 million" contract.
First, peramivir's Phase III pivotal trial, designed to provide the efficacy data needed for FDA registration, proved a failure. Peramivir provided a negligible clinical benefit compared to a placebo treatment in patients hospitalized due to serious influenza, and an independent safety monitoring committee recommended the study be halted for futility in November of 2012, three years after the trial began. In its latest peramivir-related press release, BioCryst conveniently fails to mention this.
The trial (NCT00958776) tested peramivir plus standard of care against placebo plus standard of care treatment:
The difference between peramivir and control groups for the primary endpoint was small and the recalculated sample size was greater than the predefined futility boundary of 320 subjects. Based on this information, the independent data monitoring committee (DMC) recommended that the study be terminated for futility. No unexpected adverse events were identified and the DMC expressed no concerns about the safety of peramivir.
"The goal of this analysis was to reassess the sample size required for the trial, and to make adjustments to the study if necessary. Based on the DMC recommendation, we have suspended enrollment of patients in the trial," said Dr. William P. Sheridan, Senior Vice President and Chief Medical Officer of BioCryst Pharmaceuticals. "We are proceeding with a full analysis of unblinded data from the trial, and a final decision will be made following completion of the analysis and further discussions with our development partners; however, it is unlikely that peramivir development for US registration will continue.
The Phase III trial was designed to measure an improvement in vital signs and oxygen saturation from baseline, as well as viral load. Not only did the product flop in the study, but the trial had already been altered (in tandem with the release of prior Phase III safety and virology data) to increase its chances of success. In February of 2011, BioCryst changed the primary efficacy analysis of the study to focus on a subset of patients not treated with neuraminidase inhibitors in order to "provide the greatest opportunity to demonstrate a statistically significant peramivir treatment effect." Essentially, rather than test peramivir against other approved and standard of care neuraminidase inhibitors like Roche's (OTCQX:RHHBY) Tamiflu (oseltamivir, a prodrug) and GlaxoSmithKline's (NYSE:GSK) Relenza (zanamivir), the company decided to test Peramivir against a placebo. Even after lowering the threshold for success, peramivir still proved only marginally more efficacious than a saline injection.
Now, the company says that after discussion with the FDA and BARDA/HHS, it will submit a NDA for IV peramivir before the end of this year. Here, it's important to understand that the FDA, in relation to proposed New Drug Applications, is not in the business of telling drug developers whether a submission is approvable -- so long as the filer presents sufficient data for review, the FDA is open to reviewing. In other words, the FDA's stance, so long as the NDA contains a complete data package is, "sure, we'll take a look." Refusal to File letters are an uncommon occurrence.
In light of the exuberance with which novice biotech investors might view BARDA's interest in funding the NDA, we find it important to point out that BARDA/HHS's involvement is little more than formality at this stage in peramivir's disappointing development. In 2007, BARDA awarded BioCryst a $102.6M four-year contract for the development of peramivir for the treatment of influenza. Since then, the contract has been amended twice. In 2009, BARDA extended the program by 12 months and $77.2M to shift peramivir's development to an intravenous formulation and toward the treatment of hospitalized patients. Yet again the contract was modified in February 2011 to account for the aforementioned changes in the Phase III protocol - another $55M. Following the November 2012 failure and a full analysis of the peramivir data, BioCryst received a Stop-Work Order from the HHS in April of 2013 directing the company to cease work on peramivir under the U.S. Government contract. The BARDA/HHS contract for peramivir's development has cost the U.S taxpayer $234.8M in aggregate and lasted two years longer than originally intended. Meanwhile, peramivir remains a dud.
Nevertheless, BARDA is fronting most of the NDA submission cost - a $1.96M expense under PDUFA V regulations.
With the government funding the NDA, not BioCryst, there's simply no reason not to submit. But that doesn't change the fact that a large, controlled study of peramivir was halted for futility. Understanding that the FDA will readily accept a full and complete NDA package regardless of the product's approval chances, the FDA will likely accept and file the peramivir NDA. Nevertheless, we fully expect the FDA will reject peramivir based on a lack of efficacy. Assuming a submission in the fourth quarter, per BioCryst's guidance, and a filing within two months, peramivir's rejection will fall late in 2014.
Capital Needs Beget Dilution
As noted above, we expect that BioCryst has been making prodigious use of its existing At the Market sales agreement, selling common stock at market prices, which will be revealed in forthcoming quarterly statements. In addition to this behind the scenes dilution, we expect a full-blown secondary offering to materialize following this latest rally. By management's own admission, the company has just nine months of cash to sustain operations, and BioCryst will need to raise a substantial sum in order to extend its operational ramp materially. Historically, BioCryst has raised when it has 9-12 months in cash on the balance sheet. On BioCryst's first quarter earnings call, management said, "We ended the quarter with cash and investments of $28.9 million ... Based upon our restructured operations, our existing cash provides us liquidity into the second quarter of 2014 ... we expect operating cash usage [in 2013] to be in the range of $22 million to $26 million."
Capital-intensive biotech companies will use any opportunity to raise at a premium, and we suspect that management is preparing for a more substantial and sizable secondary offering in tandem with the parabolic performance of its stock. The company's existing registration statement, which went into effect in August of 2011, allows for the sale of $70M in stock, in aggregate. The company issued $1M through its At the Market arrangement in 2011, $17.8M in 2012, and an additional $300K in the first quarter of 2013, leaving up to $51 million accessible under BioCryst's existing shelf registration.
Despite repeated suggestions from management that peramivir stockpiling could provide "non-dilutive financing," we have low expectations that the government will be willing to put up any more cash for an arguably failed product. Bulls will undoubtedly spotlight the potential for a ulodesine partnership to firm up the balance sheet, but ulodesine, BioCryst's pre-Phase III gout treatment, has been collecting dust since last summer. Pharma isn't scrambling to pick up a gout asset with limited commercial potential.
BioCryst will have at the end of the third quarter less than $19M in cash and investments. We estimate that through the use of its ATM BioCryst may have raised an additional $7M in the second and early third quarter. Operating cash use of $22-$26M in 2013 will rise next year with the initiation of a Phase II HAE trial, and the movement of one of the company's pre-clinical 2nd-generation HAE treatments further along the pipeline will further accelerate cash burn, if only minutely - BioCryst's cash and equivalents of $19M won't last long. While the existing ATM may extend the operating ramp through the end of this year, we suspect that an exceedingly positive news flow from BCRX in the fourth quarter of 2013 (explained below) and ensuing price appreciation will catalyze a full secondary offering in the magnitude of $20-$30M. In addition, the revelation that the company has been diluting excessively behind the scenes - made clear in the company's second and third quarter earnings reports - will serve as negative events in the interim.
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