Not All Stem Cells Are Created Equal: Vernon Bernardino

by: Life Sciences Report

Biotech companies are fiercely competing to create the newest and best miracle drugs using stem cell technologies. How can an investor spot the potentially victorious outliers amid the chaos of rival scientific claims? The failure rate of new product development in the only recently understood cell space is terrifying, but in this interview with The Life Sciences Report, analyst Vernon Bernardino of MLV & Co. reveals his formula for evaluating the strongest contenders. Bernardino also names a few companies with products that may succeed in this new and competitive space.

The Life Sciences Report: Vernon, how do you pick investor entry points for the life science firms that you cover for MLV & Co.?

Vernon Bernardino: It all comes down to evaluating and then articulating whether a company's stock is still a compelling value.

TLSR: Do you cover biotechs in the autoimmune and anti-inflammatory spaces?

VB: I cover Dynavax Technologies Corp. (NASDAQ:DVAX), which has experienced some mixed study results for its hepatitis B vaccine, Heplisav. In our opinion, Dynavax's technology and approach is rather advanced, and it is the scientific status quo that needs to catch up to Heplisav.

Dynavax's stock has suffered, however, because not much is known about the patient population that it studied in looking for effects of its immune-stimulating approach. But the company is well aware of the issues it needs to address with the U.S. Food and Drug Administration [FDA]. The FDA seems to think the vaccine works, but further data points are needed, including safety data. The vaccine has only been tested in 2,000 or so patients in a clinical setting, so the safety data is not yet comparable to similar treatments.

TLSR: Heplisav also has an application to asthma?

VB: Yes. Asthma is associated with inflamed airways. In fact, the asthmatic's inflammatory response is most often an immune system overreaction. An asthma vaccine would putatively turn on the signal that dampens the inflammatory response. However, Heplisav's application to asthma is secondary to its hepatitis B application, and requires further study.

TLSR: How are Dynavax's financial fundamentals looking?

VB: At the end of June, the company reported it had about $105M in cash, but is likely to maintain a high burn rate because it is conducting an additional study that is expected to generate additional safety data. The additional data will accompany the safety data observed in clinical studies conducted in 2,000 hepatitis B patients so far. Generating safety data will cost a fair amount of money, and it is uncertain whether Dynavax will need to raise that money immediately. We believe that the company has enough cash on hand to get to the end of next year, but obviously, since these required studies are expensive, Dynavax will need to raise money again in the next six to nine months.

TLSR: What are the prospects for Dynavax acquiring a partner?

VB: Dynavax has publicly acknowledged having discussions with possible partners. However, any deals are pending the arrival of more safety information. The immunotherapy approach is, in many ways, unproven. The recent failure of Vical Inc.'s (NASDAQ:VICL) Allovectin, a cancer immunotherapy, for example, shows that the vaccine approach to melanoma has high potential for failure. Part of the problem is the basic science, which is still relatively early in development, but also the scientific knowledge needed to improve the process of selecting the correct patients to include in these types of studies.

TLSR: Can you talk about the importance of having scientists on the management team in a biotech firm?

VB: John Yu is a good example of the importance of having a scientist as a company's initial chief executive. Yu founded ImmunoCellular Therapeutics Ltd. (NYSEMKT:IMUC). And because he is a neurologist, he is able to explain the science at every level to investors.

Biotech investors can be very sophisticated. Many have MBAs, as well as PhDs and/or MDs. Yu can talk to them in technical language about why ImmunoCellular's cancer vaccine is a next-generation approach with a good chance of succeeding as a treatment. Of course, a biotech company rises or falls depending on how it manages cash burn rates. If a firm runs out of money, it does not matter how strong the science is. A forward-looking firm deploys its cash to create value by advancing the science of its lead product.

TLSR: What products does ImmunoCellular have in the pipeline?

VB: Its lead product is ICT-107, which is a dendritic cell vaccine similar to Dendreon Corp.'s (NASDAQ:DNDN) recently approved Provenge, for treating prostate cancer. Like Provenge, ImmunoCellular's dendritic cells are isolated from the patient, cultured with antigens highly expressed in cancer cells and then given back to the patient. In this case, the vaccine is targeted to glioblastoma multiforme in newly diagnosed patients. The phase 1 studies were very impressive. In fact, quite a number of those patients are still alive, although they're not followed by the company any longer.

The phase 2 trial is designed with a randomized control arm, which means it could be used for the final approval study. ImmunoCellular has, nonetheless, decided to conduct a phase 3 study. But if the phase 2 results are really positive, it would then be unethical for ImmunoCellular to do a phase 3 study that includes placebos. The company also has ICT-121 and ICT-140, which, like ICT-107, are autologous dendritic cell-based vaccines targeting cancer, but are still early stage. We currently rate ImmunoCellular as a Buy with a $6 price target.

TLSR: How did you arrive at the target price?

VB: Our valuation methodology for ImmunoCellular used a mathematical formula that factors in a product's potential to drive future earnings but changes depending on study release dates, discounts and comparable company valuations.

TLSR: Your investment bank is involved in underwriting Galena Biopharma Inc. (NASDAQ:GALE). What's interesting about Galena?

VB: Galena is in a phase 3 clinical trial with a vaccine called NeuVax [nelipepimut-S], which targets underserved breast cancer patient populations. Obviously, when a breast cancer patient is first diagnosed with breast cancer, the disease should be treated right away. But many breast cancer patients survive the first treatment and later experience a recurrence of breast cancer. Galena's vaccine, by strategy, prevents a recurrence, and at the least increases the time until the recurrence-potentially increasing overall patient survival rates for breast cancer.

TLSR: Does Galena have any other products?

VB: In March 2013, Galena acquired Abstral, which is a fentanyl product to manage breakthrough pain in cancer patients. The acquisition is part of Galena's preparation to enter the oncology space in a substantial way should NeuVax be approved by the FDA. Acquiring Abstral is a low-cost strategy to get a toehold in the marketplace. Fentanyl is a non-opioid and can be used by outpatients dealing with toxic side effects from chemotherapy.

The other product Galena has is a folate binding protein [FBP] vaccine, which, like NeuVax, uses the immune stimulation strategy but targets a different oncogenic peptide. The FBP vaccine has shown promising results in an ongoing phase 1b study in 20 treated cancer patients. We rate Galena as a Buy with a $6 price target.

TLSR: How does the shape of the entire cell product biotech space affect the prospects of a specific stem cell-product firm for valuation purposes?

VB: Our method for finding winners over time is to examine the whole cell product space - not just for stem cells, but also for cancer vaccine cell products like those produced by Dendreon and Oncothyreon Inc. (ONTY) and ImmunoCellular. The winners are likely to be companies with a scientist at the helm and management that understands that funding follows good science, not necessarily vice versa.

Most of the cell-product winners are not going to be like Dendreon, which got to the finish line on its own. Most will partner with deeper pockets. On the other hand, Dendreon may have to sell hundreds of millions of dollars' worth of vaccine just to breakeven, because the margins on its vaccine are terrible. And when it gets cells from a patient, it can only make one, two or three doses at the most. That becomes very expensive. In contrast, ImmunoCellular's approach can produce about 20 doses per patient. If each has the same price point, it makes ImmunoCellular's product more commercially viable. Obviously, if you can make 20 doses out of one sample, your margins will be better.

These are the kinds of problems that are shaking out in the cell product space. The long and the short of it is that companies have similar cell space approaches on their drawing boards. Firms that can achieve initial economies of scale, whether or not the products have been proven to work, will continue to lead the pack in attracting investors. Value is a partial function of the health of the whole cell product development sector.

TLSR: Thank you for your time, Vernon.

VB: Very good talking to you, Peter.

This interview was conducted by Peter Byrne of The Life Sciences Report and can be read in its entirety here.

Vernon Bernardino is an analyst in MLV & Co.'s life sciences equity research department. His principal focus is on biotechnology, biopharmaceutical, specialty pharmaceutical and immunotherapy companies that focus on treatment of cancer, infectious diseases and cell-based therapies targeting inflammatory disorders and vascular diseases. Bernardino has more than 10 years of experience covering life sciences companies at various financial institutions, including Rodman & Renshaw, UBS and Dawson James Securities. Earlier in his career, Bernardino held a position as a buyside analyst at Nicholas-Applegate Capital Management, and founded the strategic advisory group Oceros Advisors LP. Bernardino holds a bachelor's degree from Rutgers University and a master's degree in business administration [finance] from the University of San Diego.

1) Peter Byrne 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.
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3) Vernon Bernardino: 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: Galena Biopharma 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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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. I have no business relationship with any company whose stock is mentioned in this article.