Biotech has had a scorching run for more than a year and a half, but as broader markets approach more realistic valuations with less potential upside, it becomes even more important to be invested in the right companies with truly meaningful catalysts on the horizon. George Zavoico of MLV & Co. knows how to pick winners from the field, and offers up solid ideas with visible growth drivers in this interview with The Life Sciences Report. Your inner gambler should take note: A beaten-down micro- or small-cap company might, with a bit of luck, bring home the gold.
The Life Sciences Report: I've gone back and looked at an unweighted index of stocks that you've covered previously. Overall, you've done very well. I'm also looking at the NYSEArca Biotechnology Index (BTK), which is up 45% over the last 52 weeks, far outperforming the S&P 500, which is up 24% during the same period. Biotech has clearly outperformed. Do you see any signs that this bull market in biotech stocks might be letting up?
George Zavoico: Not at this point. Overall market performance is still pretty healthy, and biotech fluctuates along with the overall markets. As the major indices bottom out, biotech tends to bottom out farther and lower, and as the markets rise, the biotech sector tends to peak higher than the major markets. Right now, I think that the biotech sector is in a fairly healthy growth phase.
TLSR: Could the biotech market sector be frothy at this point?
GZ: It is approaching frothiness. But having said that, the sector is also dependent on what individual companies accomplish. Shares of companies that haven't achieved certain milestones that they may have guided to, including reporting unfavorable trial results, are less likely to have performed as well as shares of companies that have been more active in moving their pipelines forward and have had positive trial results. But that doesn't mean they can't catch up if they achieve important milestones.
TLSR: Do you see any specific disease indications or therapeutic modalities that you think are going to be hot from here on-central nervous system (CNS), stem cell/regenerative medicine? Or is oncology still set to outperform?
GZ: I think there are still more oncology companies than in any other indication. There are a lot of interesting drug candidates in these companies' pipelines. Clearly, a lot of cancers are poorly treated currently, and there aren't that many alternatives, especially for second- or third-line therapies. Cancer will still be a key driver for the growth of the markets.
I also think orphan diseases are going to be an important sector. There are a lot of advantages for companies developing drugs for these indications, including being able to charge premium prices and getting marketing exclusivity. If a company has a successful drug for an orphan disease, it's a good investment.
CNS is going to be interesting going forward, especially neurodegenerative diseases. Alzheimer's disease in particular is going to be interesting because of the U.S. Food and Drug Administration's recent reconsideration of what it will look at as approvable endpoints in trials. It is looking less toward reduction of beta-amyloid levels and more toward the first early, or prodromal, symptoms of Alzheimer's, before there is a substantial loss of cognitive function.
Stem cell and regenerative medicine, you mentioned, will be very important too, because after many years of trying, a lot of progress has been made in the translation of data and findings into what could be the first widely used and commercially successful products for larger markets with unmet clinical needs, and not just for niche indications with only a handful of eligible patients.
TLSR: Regenerative medicine/cell therapy has been a huge laggard, getting absolutely no respect from the markets. Mutual funds have had to ignore these companies because their market caps were so low in most cases. Do you think cell therapies are going to take off as a sector?
GZ: The sector has been a laggard, as you say, partly because many companies were too small for institutional investors to own and partly because many companies were going for small, niche disease indications that didn't have particularly large market potential.
Only recently have some of these companies begun targeting broader indications, as well as into niche indications for which there is no satisfactory treatment, such as intermittent claudication, failed bone marrow transplantation and preeclampsia. While many of these trials are still in phase 1, some have progressed into phase 2 and phase 3. When these studies come to fruition, and if the results are positive, I can see this sector getting far more respect with a corresponding increase in valuations.
TLSR: Intermittent claudication causes great muscle pain, especially in the calf. You have picked up coverage of Pluristem Therapeutics Inc. (PSTI), which is dealing with that indication. Would you address it?
GZ: Pluristem has a very interesting platform technology using placenta-derived cells, and it is going for a number of high-value, niche-type indications that are either orphan or that have no currently approved drugs. This includes patients whose bone marrow transplants have failed, and women with preeclampsia. It is also going after intermittent claudication (a symptom of peripheral artery disease). CLI is also under consideration, but there is some reluctance, I think, to actively pursue it at this time. If any of these play out and the results are good, then I can see the whole sector getting more respect and more attention.
TLSR: What is your value proposition for Pluristem?
GZ: The company is differentiated from other companies in this space in a number of ways. For one thing, it owns its own proprietary manufacturing system for expanding its placental cells. Pluristem is not relying on any contract manufacturer. Under the procedures and protocols that it has pioneered, it is able to modulate the performance of its PLX-PAD cells (full-term placenta-derived adherent stromal cells) for specific indications by modifying and optimizing the conditions under which they are expanded. In other words, it can modify what the cells do.
Second, placental cells are easily obtainable, and they are particularly amenable to expansion. Collecting placentas is not inconvenient to donors and it causes no additional discomfort, which is not the case for companies that rely on liposuction to get adipose tissue or bone marrow biopsies for their cells.
Pluristem also seems to be particularly adept at finding ways to fund the various indications it is exploring as potential indications. It is also studying exactly what the cells do to better understand how they function, which could help guide the company to new indications.
TLSR: Where is Pluristem in its life cycle as a company today? What are the catalysts in the near future?
GZ: A number of clinical trials and indications are about to begin or are already under way. The intermittent claudication trial is in phase 2 with a targeted enrollment of 150 patients.
Pluristem has a phase 1/2 trial underway for the regeneration and healing of muscle following traumatic surgery, particularly in hip replacement. In a total hip arthroplasty, the gluteus medius, a big muscle, is necessarily injured because surgeons have to get it out of the way to reach the joint. The company wants to see if intramuscular injections of its PLX-PAD cells into the injured tissue can reduce scar tissue formation and improve regeneration, so that patients don't end up with what's called an insufficiency limp. The company announced on July 11 that all patients in the trial, the placebo patients included, have been treated and are now in follow-up.
On July 18, the company said that the U.S. National Institute of Allergy and Infectious Diseases, part of the National Institutes of Health, recommended continuing studies of Pluristem's cells for the treatment of the lethal hematopoietic problems associated with acute radiation syndrome. An IV infusion of these cells could increase red blood cell count, hemoglobin and hematocrit levels by restoring hematopoiesis.
TLSR: On June 4, Pluristem announced that one patient in its phase 2 intermittent claudication trial developed a serious allergic reaction that required hospitalization. I don't think it was characterized as an anaphylactic-type response. What was your impression of this event?
GZ: It was a bit overstated. The patient did require hospitalization, which is why the event was reported to the FDA and why the trial went on a clinical hold. The reaction was a very mild and fairly benign skin rash that cleared up with antihistamines. The patient stayed overnight for observation, and was fine when she left. The patient had some comorbidities that may have prompted that sort of reaction. The FDA has submitted its queries, and the company is responding to them. The FDA has timelines it tries to adhere to as it makes a decision on whether to continue the clinical hold or allow the trial to continue. I see this being resolved toward the end of August or the beginning of September, with the trial restarting at that time.
TLSR: Are these cells being readministered, or is this a one-time injection of cells?
GZ: Well, so far its mostly been a one-time injection. Studies suggest that the PLX cells don't persist when transplanted and disappear within weeks, the proposed mechanism being an innate immune response that doesn't require an antibody response. In the intermittent claudication trial, some patients are randomized into groups that will get another dose 12 weeks later.
TLSR: I'm just wondering about the potential for an antibody response having been initiated after the first administration of those cells. There is also the possibility of an artifact being introduced as well, something totally unrelated.
GZ: Because it's an allogeneic transplant, meaning from another person, one would expect that a reaction might happen on readministration of the cells, but Pluristem hasn't seen any evidence of antibodies against PLX cells. Placental cells have been described as being immune-privileged, and could be less visible to the immune system.
TLSR: Immune-privileged like embryonic cells, right?
GZ: Yes. Obviously placentas and embryos aren't rejected by mothers while they're pregnant, even though the embryo has a different genotype from the maternal host. It could be the same for placental cells. It's still an open question, and further trials, including the intermittent claudication trial, should provide some answers.
TLSR: George, you said that Pluristem has its own manufacturing capabilities. Could this be a complementary contract manufacturing business whereby the company manufactures cells for other companies? Not necessarily placental cells, but any kind of cell. Is this a possibility?
GZ: Yes, the company has spoken about that possibility, but to the best of my knowledge, it does not have any customers yet.
TLSR: You have another new company under coverage. Could you mention that?
GZ: I'm now covering Omeros Corp. (OMER), which has a very interesting platform and high potential for success due to a number of early-, mid- and late-stage assets in development. The late-stage assets include a simple but elegant solution for inflammation during cataract surgery, which causes pain and makes it difficult for surgeons to insert replacement intraocular lenses. The product, OMS302, is an additive to the standard intraoperative irrigation solution that combines an anti-inflammatory agent, ketorolac, and a mydriatic (pupil dilating) agent, phenylephrine, both of which have been in use for more than 15 years in clinical ophthalmologic practice and elsewhere. It prevents inflammation, helps healing and maintains the dilation of the iris, which enables the surgeon to place the lens more efficiently, possibly avoiding complications. Two phase 3 trials were successful and showed that the clinical benefit warranted approval and marketing. A new drug application (NDA) was filed Aug. 1, and I project approval in mid-year 2014.
TLSR: I'm just curious: What were the endpoints in the phase 3 trial?
GZ: Pain following surgery was one of the endpoints. The other was intraoperative pupil diameter. Pain is a key endpoint for this indication since ophthalmic surgeons need their patients to be satisfied. Satisfied patients mean more patients will keep coming for this voluntary, high-volume surgery.
TLSR: What about the Omeros pipeline? What follows?
GZ: The middle-term value drivers for the company are a number of drugs in various stages of development. There's a CNS treatment that completed a phase 1 trial and is about to begin a pair of phase 2 trials and a trial for addiction completing phase 2. Omeros intends to commence two phase 2 trials of OMS824, a phosphodiesterase 10 inhibitor, in Huntington's disease and schizophrenia, before year-end.
Omeros is developing a monoclonal antibody, OMS721, as a complement inhibitor that is likely to go up against Alexion Pharmaceuticals Inc.'s (ALXN) Soliris (eculizumab) in a number of rare, niche indications, including its lead orphan indications, atypical hemolytic uremic syndrome and paroxysmal nocturnal hemoglobinuria. The former causes the formation of blood clots in small blood vessels in kidneys that can lead to renal failure and death, while the latter is a disorder characterized by the bursting, or lysis, of red blood cells. Both are caused by the abnormal activation of the complement system. Soliris is hugely profitable for Alexion, so if OMS721 even gets a fraction of the market, it could be very big for Omeros. If the therapy proves to be superior in safety, efficacy or convenience, or if it is priced lower than Soliris, which costs more than $400,000 annually, OMS721 might capture a bigger share of the market.
We'll have to wait a bit before that happens, though. A phase 1 trial just started, so OMS721 is several years away from the market if everything goes smoothly.
Behind these assets is an early-stage, preclinical platform technology for discovering orphan G protein-coupled receptors (GPCRs), and for finding new drug candidates for them. Omeros estimates there are 120 orphan GPCRs - that is, GPCRs identified by DNA homology for which there are no known natural ligands and whose function is not known. GPCRs are the target of many drugs currently available on the market, and many of them are, or have been, highly profitable for the companies that developed them. These are completely new targets, and Omeros has already discovered ligands in its chemical library that bind to about 50 different orphan GPCRs.
TLSR: George, it sounds like these very early- and mid-stage indications targeting GPCRs, CNS indications and addiction aren't the generics that the company has leveraged into the leading drug candidate, OMS302. Are these totally new molecules?
GZ: These are entirely new molecules. The company uses the generics only in what it calls its PharmacoSurgery platform for eye, urology and knee surgery indications. The company's early-stage programs are new molecular entities (NMEs).
TLSR: Is the Omeros business model designed to fund its NME development platform with the generic products that it's combining and repurposing?
GZ: Yes. These PharmacoSurgery products have a very low cost of goods, and the margins are very high. But please understand that while the components of these products are generic, the specific drug combination and method of use is proprietary, so the product is protected.
Upon approval and commercialization of OMS302, I expect money to be plowed into the development of the company's middle- and early-stage compounds. I also expect Omeros to partner one or two of its candidates so it can earn upfront fees and milestone payments that will fund projects it might want to keep and carry through to approval and commercialization.
TLSR: Would you share another idea?
GZ: Acadia Pharmaceuticals Inc. (ACAD) has been rocking and rolling. The value of its lead drug, pimavanserin, has finally been recognized. Of course, that was prompted by the FDA decision enabling Acadia to submit an NDA without having to do a second phase 3 trial for the drug for Parkinson's disease psychosis (PDP). Now all Acadia needs to do is execute the filing on time and get the drug approved and launched.
With more confidence in the pimavanserin platform, Acadia is planning a trial of pimavanserin in Alzheimer's disease psychosis (ADP), which is a much larger indication than PDP. Based on its success with PDP, there is enhanced confidence the drug will be effective in the psychosis associated with Alzheimer's disease.
TLSR: Acadia is up tenfold - actually more than 1,100% - over the past 52 weeks. Brand new targets and mechanisms in CNS are extremely valuable, but this company, which was a micro cap a year ago, now has a $1.7 billion ($1.7B) market cap. Does it still have upside?
GZ: Based on the fundamentals, the time needed to get the approval and the time and resources to get the ADP trials up and running, we think Acadia is now at fair value. We recently moved to a Hold from a Buy on Acadia, while, simultaneously, raising our one-year price target. That's how fast its stock has appreciated in value.
We've seen the share prices of companies drop upon FDA approval lately - investors buying into the news and selling after the news. We'll see how Acadia behaves, because I fully expect pimavanserin to be approved by the FDA, though not until 2015 for PDP. Acadia guides to filing an NDA by the end of next year. There will probably be an advisory committee meeting. We'll also see how the ADP indication plays out, because that could be huge. Depending on how the clinical development plan for ADP proceeds - and if market penetration of pimavanserin for PDP is faster than projected after approval and launch - there could still be significant upside to the stock.
TLSR: Pimavanserin is in phase 2 now for ADP. What year could we potentially see an approval? Could it be 2016? Later, perhaps?
GZ: It's not likely in 2016; possibly in 2017. What we have to see first is the FDA and Acadia coming to an agreement on trial protocol, both in terms of what the endpoints are and how many patients are needed to show efficacy. Acadia may have to do an adaptive study to begin, first with a dose-escalating portion to show that pimavanserin is safe in a small number of Alzheimer's disease patients, and then enrolling more patients at a safe dose in the latter half of the study to look at a variety of efficacy endpoints. The results of that trial should inform the design of a phase 3 trial.
I don't expect the ADP trial to take a lot longer than the PDP trial because there are far more patients available, and very few competing drugs for that particular indication.
TLSR: I'm thinking that endpoints, and therefore efficacy, in the PDP trial were easier to measure than they are going to be for the ADP study, because it is easier to communicate with a Parkinson's patient. Do you believe it will be more difficult to measure the endpoints in the Alzheimer's psychosis trial?
GZ: Because psychosis tends to affect Alzheimer's patients who are pretty far along in their disease, I think most of the endpoints - in fact, all of the endpoints - will be dependent on caregivers' and physicians' assessments of patients.
TLSR: Are you modeling any value for Acadia's alpha adrenergic agonists, which are partnered with Allergan Inc. for chronic pain and other indications?
GZ: I think those have upside value, but are pretty far from the market. Most of Acadia's value is in the launch and commercialization of pimavanserin. But we're watching the development of those compounds as well. With progress and within a particular timeframe, I imagine they'll gain value.
TLSR: Could you talk about another idea?
GZ: Cerus Corp. (CERS) is a very interesting company. It developed a blood pathogen inactivation system, called INTERCEPT, for all three products derived from blood donations - platelet concentrates, plasma and red blood cell concentrates. A key milestone that the company recently reported was an agreement with the FDA allowing it to file for premarket approval (PMA) for the platelet concentrates in the U.S. without having to do another phase 3 trial. Assuming an approval, this shortens the time to commercialization by one to two years.
Notably, the company is already selling its INTERCEPT Blood System in quite a few countries, mainly in Europe. All of Switzerland uses the product for platelet concentrates. Much of France uses the system. A number of centers in Germany, Belgium and other countries use it. INTERCEPT is a revenue-generating product for an unmet need because emerging pathogens, viruses in particular, might be penetrating the blood supply, while bacterial contamination of platelet concentrates, though rare, still kills patients.
Once the authorities that regulate the blood supply look at INTERCEPT, it becomes a no-brainer. However, these are typically bureaucratic government organizations, and sometimes it takes a crisis, as it did in Switzerland with the untimely death of a child who was administered platelet concentrates contaminated with bacteria, to get INTERCEPT approved and used.
There's no real blockbuster here in the sense that the company will end up with billions in revenue from this product after it gets more approvals. But Cerus is a relatively risk-free and an incrementally positive investment that I see growing steadily year over year. I think approval in the U.S., possibly in the second half of next year, would be a strong catalyst for the stock.
TLSR: Could these systems be used in the field, such as in developing countries, as easily as they could be used in a modern clinic?
GZ: Yes. Basically, INTERCEPT is a kit with bags for treatment and for storage of the final product, and what's called an illuminator, an ultraviolet light that catalyzes the reaction between the additive and the DNA of pathogens, which are prevented from replicating. All that is needed is an electrical supply and other basic equipment for blood handling-refrigeration for plasma and red blood cells. Platelets are kept at room temperature. The really big markets are the big blood centers-the American Red Cross, the New York Blood Center and others.
TLSR: Let me hear another name.
GZ: A very interesting company that is growing by acquisition but has taken a bit of a beating lately is Spectrum Pharmaceuticals Inc. (SPPI). Very recently, it acquired a distressed company called Talon Therapeutics Inc. and all of its assets, including Marqibo (vincristine sulfate liposome), which is a liposomal-encapsulated vincristine. It was approved in late summer 2012 for relapsed Philadelphia chromosome-negative acute lymphoblastic leukemia (ALL), which is a rare type of leukemia. I think Spectrum got an excellent deal for only $11.3 million ($11.3M), a very small outlay of cash. It also issued 3M shares to cover Talon's indebtedness.
The asset, Marqibo, plugs right into Spectrum's existing sales force, and it can bolt on with virtually no additional cost. The only near-term cost would be to launch the product, but because this is such a small indication, it's not going to be an expensive launch. It should launch by the end of this year.
Spectrum has also taken on responsibility for completing two phase 3 trials in larger indications for Marqibo. One is in patients over 60 who are newly diagnosed with ALL, the second is also in patients over 60 who are newly diagnosed with aggressive non-Hodgkin's lymphoma. Again, these indications play right into Spectrum's strength as a hematologic oncology company with an existing sales force that is already marketing three products.
Spectrum got a lot of attention in the past couple of years by selling Fusilev (levoleucovorin), in place of the generic drug, leucovorin, which was in short supply, to patients with colorectal cancer. Sales were more than halved year over year when ample supplies of generic leucovorin reappeared on the market earlier this year. But I don't think of Spectrum as a "Fusilev-centric" company anymore.
While, in the short term, it may be difficult to substantially grow sales of Fusilev and its other products, Zevalin (ibritumomab tiuxetan) and Folotyn (pralatrexate), Spectrum could have three interesting new products on the market by the end of next year: Marqibo; belinostat (a histone deacetylase inhibitor for peripheral T-cell lymphoma) and Captisol-enabled melphalan (recently licensed in from Ligand Pharmaceuticals Inc. and indicated as a conditioning treatment prior to autologous bone marrow transplant in patients with multiple myeloma).
GZ: Sure. As I've said before, Prana's approach to treating early Alzheimer's disease is unique. Its small-molecule, orally available drug, PBT2, appears to redistribute certain cations, zinc in particular, but copper and iron as well, away from beta-amyloid and back into the natural, intracellular compartments where they are normally sequestered. The cations promote precipitation and plaque formation, and interestingly, cation-driven protein precipitation of Huntingtin protein and alpha-synuclein contributes to the progression of Huntington's disease and Parkinson's disease, respectively.
Lately, Prana has been on a tear because topline results of a phase 2 Huntington's disease trial, called Reach2HD, are due in September or early October. With promising early results in Alzheimer's disease already in hand, positive results in Reach2HD would help validate the underlying hypothesis of the way PBT2 works. Imagine the value of a single, small molecule drug that may be effective in treating three debilitating neurodegenerative diseases.
Topline results of an ongoing phase 2 trial in Alzheimer's disease, called IMAGINE, are expected in March of next year. In July, the Australian authorities approved a proposal to commence a 12-month safety extension of IMAGINE that should provide longer-term safety results, as well as an indication of the durability of response to PBT2. The primary endpoint of IMAGINE is its effect on beta-amyloid deposits in the brain by imaging.
I'm enthusiastic about Threshold because it's a pipeline in a drug. Its leading drug candidate, a hypoxia-activated prodrug called TH-302, is being evaluated in nine phase 1, 2 and 3 ongoing trials right now, in a variety of cancer indications both as monotherapy and in combination with other agents.
Threshold just started a phase 2 trial of TH-302 as monotherapy in advanced melanoma early this month and has guided to starting a 10th trial in an as-yet undisclosed indication that will be registrational. This would be its third pivotal trial: The first two are in soft tissue sarcoma (in combination with doxorubicin) and pancreatic cancer (in combination with gemcitabine). Before the end of the year, updated results from up to five ongoing trials may be presented at medical conferences. Positive results, even if in only two or three of these trials, would underscore the broad potential for this drug in oncology, and serve as a catalyst for the stock.
TLSR: It was great being with you. Thank you.
GZ: George, thank you very much. I appreciate your continuing interest.
This interview was conducted by Source: George S. Mack of The Life Sciences Report.
George B. Zavoico, Ph.D., has more than eight years of experience as a life sciences analyst writing research on publicly traded equities. Prior to joining MLV & Co, he worked at Westport Capital Markets LLC and Cantor Fitzgerald in their research departments. He received The Financial Times/StarMine Award two years in a row for being among the top-ranked earnings estimators in the biotechnology sector. His principal focus is on biotechnology, biopharmaceutical, specialty pharmaceutical and molecular diagnostics companies engaged in discovering, developing and marketing drugs and value-added diagnostics for the diagnosis and treatment of cancer and cardiovascular, inflammatory/immune and central nervous system diseases and disorders. Prior to working as an analyst, Zavoico established his own consulting company, serving the biotech and pharmaceutical industries by providing competitive intelligence and marketing research, due diligence services and guidance in regulatory affairs. He also wrote extensively on healthcare and the biotech and pharmaceutical industries for periodicals targeting the general public and industry executives. Zavoico began his career as a senior research scientist at Bristol-Myers Squibb Co., moving on to management positions at Alexion Pharmaceuticals Inc. and T Cell Sciences Inc. (now Celldex Therapeutics Inc.). He has a bachelor's degree in biology from St. Lawrence University and doctorate in physiology from the University of Virginia.
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.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) George Zavoico: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Pluristem Therapeutics Inc., Omeros Corp., Acadia Pharmaceuticals Inc., Cerus Corp., Spectrum Pharmaceuticals Inc., Prana Biotechnology Ltd., Threshold Pharmaceuticals Inc. 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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