Roth Capital's Dr. Joseph Pantginis Highlights 3 Speculative Biotech Stocks Worth Watching

Includes: GALE, IMUC, KERX
by: Ben Yoffe

Investing in speculative biotech equities can be one of the most challenging, and most rewarding types of trading an investor can do. In this industry fortunes can turn on a dime and riches can change hands faster than the blink of an eye. Thankfully for risk tolerant investors, these speculative biotech opportunities come along very often if you are listening to the right catalyst clues and doing important due diligence. The challenge for investors is to pick the right investment opportunities that carry the most reward with less risk.

I had the pleasure to discuss with one of the leading senior analysts for oncology and inflammation disease spaces, Dr. Joseph Pantginis, Senior Research Analyst of Roth Capital, about 3 speculative biotech stocks, which he believes are worth watching. In this interview, we will try to focus on the good sides, as well as the less pretty sides of each stock.

Prior to joining Roth Capital, Dr. Pantginis was a senior biotech analyst at Merriman Curhan Ford. He was also a senior biotechnology analyst at Canaccord Adams, focusing on the oncology, inflammation and infectious disease spaces. Prior to Canaccord Adams he was a biotech analyst at several firms, including Ladenburg Thalmann & Co., JBHanauer & Co., First Albany Corporation and Commerce Capital Markets. Dr. Pantginis received an M.B.A. in Finance from Pace University; a Ph.D. in Molecular Genetics; an M.S. from Albert Einstein College of Medicine; and a B.S. from Fordham University.

I am going to start with Galena Biopharma (NASDAQ:GALE), a biopharmaceutical company focused on the discovery, development, and commercialization of novel treatments for cancer. The company's lead product candidate is NeuVax (nelipepimut-S), a peptide-based immunotherapy currently being evaluated in a Phase III PRESENT trial for the adjuvant treatment of breast cancer. The trial was initiated in January 2012 and completion of patient enrollment is anticipated by the end of 2013, followed by interim analysis results in 1H14. In addition, Galena has initiated a randomized, 300 patient Phase IIb trial evaluating NeuVax in combination with Roche's (OTCQX:RHHBY) Herceptin in March 2013. Assuming it takes a year to complete the enrollment, the trial is expected to report results in 2H16. Galena's pipeline also includes Folate Binding Protein (FBP) peptide vaccine, intended to prevent the recurrence of cancer in patients who achieve remission after surgical resection and chemotherapy. A Phase I/II trial of the FBP vaccine in patients with ovarian and endometrial cancer is ongoing. Additionally, Galena has acquired Abstral, an FDA-approved sublingual fentanyl tablet for the treatment of breakthrough cancer pain. The company intends to launch Abstral in the U.S. in the fourth quarter through its own specialty sales force.

Ben Yoffe: Dr. Pantginis, oncology is a field with one of the highest attrition rates in the pharmaceutical industry. That said, what are the chances of success or failure for NeuVax in its ongoing PRESENT Phase III trial?

Dr. Pantginis: Thanks Ben for the opportunity to discuss these opportunities with you first. Regarding Galena's NeuVax we are dealing with two major factors, 1) the general perceptions of cancer vaccines and 2) the individual prospects for NeuVax. Unfortunately, these two factors are closely linked together still with high profile failures like Oncothyreon's (ONTY) Stimuvax, Vical's (NASDAQ:VICL) Allovectin and most recently GlaxoSmithKline Plc's (NYSE:GSK) MAGE-A3 vaccine for melanoma. Cancer vaccines are still viewed as highly speculative technology despite major advances in understanding, though interest in immunotherapy approaches remains high with physicians, pharma, and investors alike. We just need another winner, because the first U.S. example of an approved vaccine, Provenge of Dendreon (NASDAQ:DNDN) has not worked out very well at all. The immunotherapy field has made major advances over the last decade, based mainly on failures, by making a global reassessment of how the field will look at relevant patient populations, dosing and appropriate indications. One might have the best vaccine candidate out there, but it took many years to finally figure out that if you choose an indication like unresectable pancreatic cancer (median survival of 4-6 months), your target population is unfortunately dead before your immune system "gets going". With major observations from Yervoy studies and others, the FDA has even put it in writing in their "Draft Guidance" to the cancer immunotherapy arena that typical endpoints like RECIST will not necessarily apply and you might see disease progression before seeing benefit. This goes against decades of entrenched thinking in the oncology field and is no easy task to alter.

We have high hopes for NeuVax based on clinical data to date which was based on "asking all the right questions" with regard to clinical trials and the added complexities of immunotherapy. In the end, a very thorough Phase I/II program was conducted which went far in identifying the correct patient population and dosing regimen to move forward with in the ongoing Phase III PRESENT study (under Special Protocol Assessment). With that said, we project 40% chance of success and a 2017 launch.

Yoffe: What is your opinion on some of the more vocal bear case issues raised?

Dr. Pantginis: To start at the beginning, a main recurring argument has been "if NeuVax is so good, how come Apthera (privately held company that Galena acquired to gain ownership of NeuVax) was only bought for ~$7 million?" We believe there are two key factors to consider - 1) Apthera at the time was a distressed asset and 2) cancer vaccines as a technology remained (pretty much still do) out of favor. We need to focus on the fact that we have positive randomized Phase I/II data and an ongoing Phase III study under SPA.

One frequent point against NeuVax is all the retrospective analyses and "data mining" conducted as part of the Phase I/II. Science dictates that questions need to be answered before progressing into Phase III and the main question was answered, namely "what is the right patient population" for PRESENT. Most of the analyses and subgroups looked at in the Phase I/II program were all prospective analyses and retrospective analyses did certainly take place, and again, as science dictates, the Phase I/II study was the time to do it. We now know the answer to several key questions for the relevant target population including 1) node status, 2) HLA type 3) HER2 expression levels and 4) dosing regimen, including boosting data.

Another bear case point that keeps coming up is also one that frequently comes up for Phase II oncology studies in general and that is the role of "statistical significance". If a study were to show statistical significance in Phase II that would be quite a surprise and quite positive. But overall, in the real world, what is the role of a Phase II study? It is to identify whether a drug shows clinical activity in a particular indication and ask other questions as well, and in the case of cancer vaccines, questions like we discussed above - it is all the goal of clinical science at this stage of development and focus on statistical significance, especially when studies are not powered to do so (intentionally) is a weak argument, in our belief.

Yoffe: What is the commercial potential for NeuVax?

Dr. Pantginis: We believe a good way to view the market potential is to consider that Herceptin (blockbuster drug) addresses only about 25% of the HER2 positive patient population as the expression of HER2 must be in the "high" or IHC 3 levels in order for the antibody to bind. NeuVax can address the remaining group (HER2 1+/2+), while accounting for the reduction of the overall addressable market by HLA type and node status for example. So with that said, the U.S. market is ~30,000-40,000 patients and 50,000-80,000 patients in the E.U. If NeuVax were priced conservatively, say at $50,000 for the course of treatments, it represents blockbuster potential in the U.S. alone.

Yoffe: The Company is currently prepared to re-launch Abstral in the U.S. According to Source Health Analytics, Abstral's U.S. sales in 2012 were $3 million. Do you believe that the drug has greater sales potential?

Dr. Pantginis: We project peak sales (5-years) for Abstral of $60 million, which should help offset the company's burn as it moves the Phase III NeuVax PRESENT study forward. We believe the $60 million number is achievable based on the characteristics of the drug, namely more rapid acting and also crosses the blood-brain barrier. Based on 2012 data, Fentora has ~40% market share with $161 million in sales and Actiq has ~7.5% market share with $30 million in sales.

Yoffe: What is the value of the company's other peptide-based vaccine, folate-binding protein?

Dr. Pantginis: The FBP vaccine has longer term potential for the company as it could address the large markets of ovarian and endometrial cancer. Right now however, investors will generally not look beyond the NeuVax program and the market potential for the near term launch of Abstral.

Yoffe: Does the company have sufficient liquidity to fund the operations through the upcoming targets?

Dr. Pantginis: Until just recently, September 13th, the company was in a potential perceived liquidity crunch as it managed its cash need expectations between potential partnering cash in the future, near term start of Abstral revenues and financings. The company priced a $35 million equity financing and in our discussions with management, they indicated that the current funding runway should be sufficient to get them to the Phase III answer in the PRESENT study.

Yoffe: What is your rating and price target for GALE?

Dr. Pantginis: We have a Buy rating and $7 price target on shares of GALE. All of our valuations are based on a clinical NPV valuation approach in which can flex key assumptions like launch year, chance of success and peak sales. NeuVax counts for the lion's share of our valuation - $5 per share (projected 2017 launch, 40% chance of success and $700 million peak sales estimate, which we believe could certainly be conservative based on the size of the addressable market). Abstral, to launch in 4Q13, adds $1.69 per share in value based on a $60 million peak sales estimate. Lastly, the FBP vaccine accounts for $0.27 of our current valuation based on a 2022 projected launch, 10% chance of success and $300 million in estimated peak sales.

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Next up is Keryx Biopharmaceuticals (NASDAQ:KERX), a biopharmaceutical company focuses on the acquisition, development and commercialization of medically important pharmaceutical products for the treatment of renal disease. Keryx is developing Zerenex (ferric citrate coordination complex), an oral, ferric iron-based compound that has the capacity to bind to phosphate and form non-absorbable complexes. Keryx has successfully completed a U.S.-based Phase III clinical program for Zerenex for the treatment of hyperphosphatemia (elevated phosphate levels) in patients with chronic kidney disease (CKD) on dialysis, conducted pursuant to a Special Protocol Assessment (SPA) agreement with the FDA. Keryx has recently announced that it has submitted the Zerenex NDA for the treatment of hyperphosphatemia in patients with CKD on dialysis, and the European MAA filing remains on-track to be filed shortly. Zerenex is also in IIb development in the U.S. for the management of phosphorus and iron deficiency in anemic patients with Stages 3 to 5 non-dialysis dependent CKD. Investor attention will likely turn to ASN conference in November, where key readouts from the Phase II CKD study and additional analyses from the Phase III long-term dialysis study are expected to be presented. Keryx currently retains all rights to commercialize, market, and distribute Zerenex in all regions outside of Japan and other Asia Pacific countries, and has indicated a willingness to partner the drug in the EU and potentially in the U.S. In addition, Keryx's Japanese partner, Japan Tobacco and Torii Pharmaceutical has filed its New Drug Application for marketing approval of ferric citrate in Japan.

Yoffe: Based on the long term Phase III study of Zerenex in CKD, what are your expectations for the company's NDA submission?

Dr. Pantginis: We think the thesis is quite simple for Keryx at this point. With positive and differentiated clinical data in hand from the long term Phase III study of Zerenex in ESRD (under SPA), we believe that Keryx is well positioned for potential approval in the U.S. and the E.U. Management alluded to continuing discussions on the BD front, but the launch could be addressed by a small specialized sales force targeting the 8-10 largest dialysis practices covering >80% of the patients.

Yoffe: Would you please summarize the bear thesis for Zerenex?

Dr. Pantginis: While some of the bear case has been focused on the bundling of dialysis drug pricing, it is important to point out that these pricing pressures, including recent statements out of CMS indicating a 9.4% reduction in reimbursements, does not include oral drugs such as Zerenex. Another main argument has to do with whether Zerenex will obtain NCE status as well as potential competition from generics.

Yoffe: What is your opinion on these arguments?

Dr. Pantginis: We believe the "iron sparing" component of Zerenex' profile will differentiate the drug upon anticipated approval. We believe that not enough emphasis is currently being placed by the street on the iron sparing parameters seen to date, especially in the Phase III. The pharmacoeconomic benefit that can be seen using Zerenex can easily reach hundreds of millions of dollars with reduced iv iron and ESA use such as Epogen.

Secondly, we believe Zerenex has patent protection at least through 2024 and we would like to provide a few bullet points to address the NCE/patent discussion:

  • Key patents for Zerenex, covering API, the surface area and intrinsic dissolution provide coverage through at least 2024.
  • In contrast to commercially available, OTC formulations of ferric citrate formulations, the Zerenex API is highly concentrated. For an OTC formulation to reach the Zerenex ferric citrate dose, the product would need to be either formulated as a larger pill or dosed based on a higher pill number. Given current patient concerns with pill burden with Renvela, alternative dosing with OTC ferric citrate formulation is likely not commercially viable.
  • A patent application covering Zerenex formulation through 2029 is currently pending with the USPTO, with office action currently initiated.
  • Moreover, the company intends to include unexpected findings from the Phase III long term study in ESRD patients, to provide additional layers of protection.
  • The company believes that Zerenex should qualify for both NCE (based on active moiety) and PTE (based on active ingredient, determined by the USPTO). Both are expected to be determined post approval.
  • Keryx provided the precedent of Ferrlecit, a sodium ferric gluconate granted NCE by the FDA, in spite of other ferric dextran formulations previously approved by the FDA.
  • Zerenex has a different cationic/anionic profile compared to ferric ammonium citrate (an OTC product), which may cause acidosis at the concentrations required to reach Zerenex-level iron.
  • A series of old citrate filings with the FDA are dated prior to 1962 (Kefauver Harris Amendment of the Federal Food, Drug, and Cosmetic Act) and 1970 (the last date of the grace period for the K-H Amendment). Many of these filings relate to nutraceutical formulations.
  • Keryx also anticipates ~10 years of exclusivity in the E.U.

Yoffe: The Company is evaluating the potential for Zerenex in patients with chronic kidney disease who are not on dialysis. How significant is it for the company?

Dr. Pantginis: The CKD market has the potential to be a significant label expansion for Keryx. There are over 7 million Stage 3 patients, 0.4 million Stage 4 patients and 0.5 million Stage 5 patients according to the National Kidney Foundation. To consider the regulatory path, the FDA will not approve a CKD drug based on reducing phosphate alone, whereas positively impacting hemoglobin levels is an approvable endpoint. This is where Zerenex could come into play, but we will wait to see what the path forward looks like.

Yoffe: What is the global market potential for Zerenex?

Dr. Pantginis: In the U.S. alone there are 300,000-400,000 dialysis patients with the market leader Renagel/Renvela generating sales of over $500 million and the laggard Fosrenol generating sales of ~$170 million. We believe our $350 million peak sales estimate is achievable due to the differentiation of the drug, namely the iron sparing component.

Yoffe: It seems that the management has limited experience in developing a commercial organization or marketing pharmaceuticals. Moreover, it has not secured a commercialization partner in the U.S. and EU. What is your impression?

Dr. Pantginis: I believe that the commercialization picture, while promising, does also represent a potential overhang on the stock, due to the reasons you just quoted. The NDA is filed, we anticipate a smooth ride through the FDA approval process, but the street now needs visibility on how the drug will be taken forward; by themselves, partnered, or acquired. Behind the scenes, management has indicated that they are deep in pre-commercialization activities and has also said to stay tuned for some key hires.

Yoffe: What is the financial picture for Keryx?

Dr. Pantginis: The company ended 2Q13 with $80.4 million in cash and equivalents so they have a decent cash balance to bring the launch forward if they were to go it alone. Also consider that this cash balance is important potential leverage in any ongoing partnering discussions or potential acquisition.

Yoffe: What is your rating and price target for KERX?

Dr. Pantginis: We currently have a Buy rating and $16 price target on KERX. Our valuation of Keryx is based solely on the Zerenex opportunity for the treatment of hyperphosphatemia in ESRD patients. In order to highlight the value of this program alone, we do not include CKD patients as part of our projections. In the U.S. we project a 2014 launch, 90% chance of success and $350 million peak sales estimate ($7.70 NPV per share). In the E.U. we project a 2014 launch, 85% chance of success and $250 million peak sales estimate ($6.23 NPV per share). Lastly, Keryx is entitled to our projected 12% royalty from JT Torii for sales in Japan, which we assign $2.11 in NPV per share off of a $200 million peak sales estimate.

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The last one is ImmunoCellular Therapeutics (NYSEMKT:IMUC), a clinical-stage company that is developing immune-based therapies for the treatment of brain and other cancers. ImmunoCellular is conducting a Phase II trial of its lead product candidate, ICT-107, a dendritic cell-based vaccine targeting multiple tumor-associated antigens for glioblastoma. The trial will be complete when 64 events have been reached, most likely in 3Q13 or 4Q13. The data analysis of the trial is estimated to require three to four months to complete, and topline results are expected in 4Q13 or 1Q14. Additionally, the company has initiated a Phase I clinical trial of cancer vaccine ICT-121 as a potential treatment for patients with recurrent glioblastoma multiforme (GBM). The difference between ICT-107 and ICT-121 is that ICT-107 is activated by cellular antigens, while ICT-121 is activated by a peptide (CD-133). ImmunoCellular's pipeline also includes ICT-140, a dendritic cell vaccine targeting seven antigens that are over-expressed in ovarian cancer, as well as cancer stem cells. ImmunoCellular plans to conduct an open-label Phase II trial of ICT-140 in 30 patients with ovarian cancer who are at high risk of having a first recurrence. The Phase II trial is anticipated to begin in the first quarter of 2014.

Yoffe: ImmunoCellular is approaching a pivotal event in the company's history with the Phase II ICT-107 results. What are your expectations?

Dr. Pantginis: The survival data from the Phase I study are quite compelling in our belief, however I would be remiss if I did not mention the obvious caveat. These data are based on an open label study in a small number of patients (21 patients enrolled - data from 16 presented at ASCO 2012). With that said, perspective is always required for a particular tumor indication and ImmunoCellular's Phase I data showing 16.9 months median PFS and 38.4 months median OS are pretty compelling to us.

Glioblastoma remains an unmet need with the standard of care, radiation and Temodar, unchanged for quite a while with less than exciting efficacy. We point out that while the caveat must be made that the data are being compared to historical controls the expected survival times (PFS and OS quoted above) are in a very tight range across multiple clinical studies and this is somewhat of a unique feature for glioblastoma (PFS of 6.9 months and OS of 14.6 months). We therefore think that the glioblastoma vaccines in development (ImmunoCellular's ICT-107, Celldex's (NASDAQ:CLDX) CDX-110, Agenus' (NASDAQ:AGEN) Prophage G-100, Stemline's (NASDAQ:STML) SL-701) have more credible data for their stage of development.

In the end though the ICT-107 Phase II is a well designed study, in our belief, being randomized, multiple trial sites and in a large group of patients for glioblastoma. The answer, either way, should be quite definitive in our belief and we believe it will be positive.

Yoffe: As we discussed, a significant level of risk is amplified when dealing with the idiosyncrasies of an oncology setting. Last year, Oncothyreon lost more than half its value after its cancer vaccine, Stimuvax, failed to meet the primary endpoint of overall survival in a pivotal Phase III trial in non-small-cell lung cancer. That said, given that the only available clinical data on ICT-107 come from a small dataset (single, open-label trial of 16-19 patients), do you think it reveals another significant risk?

Dr. Pantginis: Overall, I do believe the risk is heightened because of the small patient numbers, but going to my last answer where I discussed the glioblastoma setting in general, survival times are very very tight in the literature and clinical setting under the current standard of care so I believe this helps to balance the risk out a bit.

Yoffe: What is the competitive landscape of the GBM market?

Dr. Pantginis: There are many drug candidates in development for glioblastoma though I think the competition was sparse. At the outset, there was much hope originally for Avastin, which first received approval in the recurrent setting but to a very lukewarm to cool reception by physicians. At ASCO the frontline Avastin Phase III called AVAglio also showed no survival benefit. There are multiple targeted therapies in development as well such as mTOR and PI3K inhibitors. However, in the end, I truly believe that the cancer immunotherapy approach will be the most transformative with regard to increased survival benefits and we believe the four leading players are IMUC, CLDX, AGEN and STML.

Yoffe: In case of bad news, what is the value of the rest of ImmunoCellular's pipeline?

Dr. Pantginis: In the end the Phase II readout later this year for ICT-107 is truly a very important binary event for the company and if the study fails or is perceived to fail, the stock could easily be down 50-70% when the market opens. The company is not a one hit wonder, however, it will currently be hard to place meaningful value on ICT-121, which only just started Phase I and ICT-140 which has not entered the clinic yet. If the study fails, the company will need to realign its resources carefully as it manages its earlier stage pipeline.

Yoffe: If ICT-107 is successful in the ongoing Phase II study in GBM, do you believe the company could become an attractive acquisition target?

Dr. Pantginis: With randomized Phase II data in hand, assuming positive, a required box will have been "checked off" in the BD office of a potential partner. We hear constantly that pharma will not even look at you as a potential partner unless you have randomized Phase II data (generalizing). While Dendreon really has muddied the waters of immunotherapy with a struggling commercial model, it has also hurt the perception of autologous therapies in our belief. With that said, many autologous companies, especially ImmunoCellular, have much lower COGS and already include automation in their manufacturing process. I think this could be attractive to partners but any signed term sheet will ultimately come down to the anticipated gold standard of survival benefit.

Yoffe: How far can ImmunoCellular go with the current funding?

Dr. Pantginis: The company ended the quarter with $25.5 million in cash and does have an outstanding ATM facility. The current cash according to our projections is just under one year of runway, so it does get them beyond the all important Phase II data catalyst. However, if the study is positive, the company will require significant funding to run a larger randomized Phase III study, which could come from partnering cash, equity financing, debt financing or even straight out acquisition.

Yoffe: In closing, what is your rating and price target for IMUC?

Dr. Pantginis: We currently have a Buy rating and $6 price target on IMUC. Our valuation of ImmunoCellular is based solely on the ICT-107 opportunity in front line glioblastoma projecting a 2017 launch, 30% chance of success and $700 million peak sales estimate ($5.96 NPV per share).

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.