Editors' Note: This article covers stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Biotechnology stocks had a fantastic 2013. The NASDAQ Biotechnology index (^NBI) is up 58% year-to-date, more than doubling the S&P-500's paltry 25% returns. Those silly non-biotech investors!
Will it continue in 2014? That's hard to say. Large-cap biotech stocks have had a very good year. The so-called "Four Horseman for Biotech" Amgen (AMGN), Biogen (BIIB), Gilead (GILD), and Celgene (CELG) each posted impressive returns in 2013. The graph below, courtesy of Yahoo-Finance, shows how these four behemoths of the sector compared to the sector average.
Investors may do very well by just continuing to own the sector leaders. But where's the fun in that? For this article, we try to focus on some small and micro-cap names we think will perform well in 2014 based on some bold predictions.
Prediction # 1: Braeburn Will Double-Down on Titan Pharmaceuticals
Titan Pharmaceuticals (OTCQB:TTNP) has been on a wild ride the past year. The stock traded as high as $2.50 per share early in 2013 ahead of the FDA's Psychopharmacologic Drugs Advisory Committee (PDAC) meeting that took place in March 2013 to discuss the company's new drug application (NDA) for Probuphine. Probuphine is Titan's implantable buprenorphine for the treatment of opioid addiction. The PDAC members voted to recommend approval of the product in March 2013. Just a few months earlier, in December 2012, Titan licensed the product to privately-held Braeburn Pharmaceuticals. Things were going well for Titan, including the FDA granting the product priority review in January 2013. As such, it was quite a surprise to Titan investors when the FDA issued a complete response letter (CRL) in April 2013.
We discuss the issues that comprise the CRL in this more detailed Seeking Alpha Pro article published in August 2013. The general gist of the letter was that the FDA, perplexingly, put more weight on the pharmacokinetic data than the actual human clinical data. Quite simply, the agency seems to want to see buprenorphine blood plasma levels similar between Probuphine and Suboxone, the current market leading product produced by Reckitt Benckiser. Suboxone generates roughly $1.5 billion in U.S. sales. The FDA gave pause to the Probuphine application because blood plasma levels in patients with Probuphine were far less than those taking Suboxone tablets, and that lead the agency to believe the product was not as effective as the current gold standard. This was despite the fact that Titan conducted a Phase 3 trial, PRO-806, directly comparing the two drugs that demonstrated statistically significant non-inferiority between the two products (36% vs. 35% negative urine samples during weeks 1-24 for Probuphine and Suboxone, respectively). This data has been both published and presented for peer-review.
Titan held a Type-C meeting with the U.S. FDA on November 19, 2013 in an effort to better understand the issues of the CRL more fully, and to review and discuss data with the agency. Earlier in the week, Titan announced that it had essentially found a path forward with the agency that revolved around experienced sublingual buprenorphine patients that are "stable" on 8 mg of drug daily. This is in contrast to the original application which called for use of Probuphine in opioid addicts starting therapy on Suboxone. We believe this effectively relegates Probuphine to second-line use, or as a maintenance therapy, at least with respect to the label / indication for use. We think once approved, addiction medicine doc will probably still use Probuphine at a similar rate to how we predicted prior to the complete response letter, or in around 5-10% of all their patients. In essence, we see the narrower label as having only a minor impact on peak sales.
Titan and Braeburn noted that secondary issues listed in the CRL, include finalizing the Risk Evaluation and Mitigation Strategy (REMS) and potentially doing a human factors study on the insertion and remove of the implant, are also being worked through. This does not concern us.
With respect to finding a path forward, it is now clear that Titan must conduct another Phase 3 trial with Probuphine, only now in patients stabilized on 8 mg of sublingual buprenorphine vs. the PRO-806 trial which enrolled patients stable on 12-16 mg. We find a number of things here interesting. Firstly, the agency told Titan that the trail "need not be large" but "adequate and well-controlled". We remind investors that the PRO-806 study enrolled a total of 287 patients and compared Probuphine to sublingual buprenorphine and placebo in a 2-2-1 randomization. We think Titan can get by with probably 200 patients in this next (yet finalized) Phase 3. Titan plans to submit a protocol assessment to the FDA in the next few weeks. PRO-806 initiated in March 2010, completed enrollment in September 2010, and offered up top-line results in July 2011. Data from PRO-806 was delayed around two months because the FDA requested a new statistical analysis plan from Titan in June 2011. We assume the new trial can begin in March 2014, enroll by the end of the summer 2014, and offer up data in the second quarter of 2015. PRO-806 cost Titan around 14 million all-in. We suspect that a new shorter, quicker Phase 3 can be down for around $9-10 million all-in. This will be funded by Braeburn. Assuming secondary issues are worked through concurrently, we suspect a re-filing of the application by the middle of 2015. With a six month review, the new PDUFA for Probuphine is looking late 2015.
But beside the quicker and shorter Phase 3 trial, we find it most interesting that Titan will compare Probuphine head-to-head with a lower-dose sublingual buprenorphine. We remind investors that data from PRO-806 shows Probuphine is statistically similar to the 12-16 mg Suboxone dose - note the aforementioned 36% vs. 35% negative urine samples during weeks 1-24 for Probuphine and Suboxone, respectively, discussed above. The FDA is now making Titan and Braeburn do another Phase 3 to make sure it's comparable to a lower-dose. That's odd, but nevertheless gives us great confidence in the outcome of this new Phase 3. So from a trial risk standpoint, we think Titan investors have little to worry about.
The biggest issue for Titan investors today is the company's cash position. We remind investors that Braeburn just recently renewed its commitment to Titan and the product in November 2013. Braeburn now owns 9.65 million shares at an average price of $0.96 per share. That's 10.9% ownership. Titan has cash to get to early 2015. They are going to need added cash to support operations into 2016, we estimate to the tune of around $8-10 million. We think there is almost no chance that Braeburn lets Titan run out of cash, or at the very least, raise capital in the open market. Instead, we think Braeburn will double-down on its investment in Titan, seeking to bring its ownership level closer to 20% by the end of the year. For Titan investors, this is the most shareholder friendly path forward, and could be a prelude to an outright acquisition of Titan by Braeburn following Probuphine's final approval in about two years.
Prediction # 2: Neuralstem Will Get 'Breakthrough Therapy' Status for NSI-566 in ALS
Neuralstem, Inc (CUR) is a name we've written pretty extensively on in the past. We believe the company has a number of catalysts on the near-term horizon that will drive the shares significantly higher. These include: 1) Initial top-line data from the first and second cohorts of the phase 2 ALS trial in the first quarter 2014, 2) Completing patient enrollment and procedures in the phase 2 ALS trial by the end of the first quarter 2014, 3) Filing an investigational new drug (IND) application to begin phase 2 ALS trial in Mexico, 4) Enroll the first patient in the phase 1 spinal cord injury trial in early 2014, and 5) Phase 1b data from small molecule NSI-189 in the next few weeks. But the biggest catalyst for Neuralstem, and something that we have yet to really talk about, is the potential for the U.S. FDA to award the new Breakthrough Therapy designation (BTD) to NSI-566.
The FDA's new Breakthrough Therapy designation is intended to expedite the development and review of drugs for serious or life-threatening conditions. The criteria for breakthrough therapy designation require preliminary clinical evidence that demonstrates the drug may have substantial improvement on at least one clinically significant endpoint over available therapy. A breakthrough therapy designation conveys all of the fast track program features, as well as more intensive FDA guidance on an efficient drug development program. The FDA also has an organizational commitment to involve senior management in such guidance. We believe Neuralstem is aggressively pursuing Breakthrough Therapy status on NSI-566. ALS certainly fits the criteria outlined above and on the FDA's website for need, and the data to date with NSI-566 in preclinical and human clinical trials warrants consideration.
NSI-566 is Neuralstem's human neural stem cell product currently being studied in three potential blockbuster indications - amyotrophic lateral sclerosis (ALS), spinal cord injury (SCI), and ischemic stroke. For BTD, we'll focus on ALS only, even though we believe NSI-566 offers very intriguing potential in both SCI and ischemic stroke.
In ALS, the Phase 1 trial from all 15 patients and 18 procedures has been completed. Principal investigator, Dr. Eva Feldman, has been very active over the past year presenting the data at various medical conferences. The full data was presented at the American Association of Neurological Surgeons Annual Meeting in April 2013. The data show the method of intraspinal cell delivery was found to be safe, well-tolerated, and promising for other spinal cord conditions. Additionally, although the Phase 1 trial was not powered to demonstrate efficacy, there were clear signs of disease stabilization in the ambulatory subgroup of patients, along with long-term NSI-566 cell survival in patients through DNA fingerprinting technology.
Neuralstem has now progressed into a Phase 2 trial. This Phase 2 dose-escalation and safety trial began in September 2013, with the first patient treated at Emory University Hospital in Atlanta, Georgia. This is where the Phase 1 study noted above was conducted. In October 2013, the Phase 2 trial expanded to ALS Clinic at the University of Michigan Health System, in Ann Arbor, Michigan. The trial is designed to enroll 12 ambulatory patients, in five different dosing cohorts, with a total of 15 procedures. All 12 patients will receive injections in the cervical region of the spinal cord, where Neuralstem's human neural stem cells could help preserve breathing function. Patients 10, 11, and 12 (the fourth cohort) will also receive injections into the lumbar region of the cord as the fifth cohort.
In the Phase 1 study, all patients received 10-15 total injections of 100,000 cells per injection, for a dosing range of up to 1.5 million cells. Most injections took place in the lumbar region of the spine, although the last cohort did also receive cervical injections. For example, Patient #11, Ted Harada, received 10 bilateral lumbar and 5 bilateral cervical spine injections at around 100,000 cells per injection. Ted's amazing recovery has been well-documented over the past year.
The design of the Phase 2 study calls for increasing both the number of injections and concentration of cells per injection. Neuralstem believes it can increase the concentration of the injection to 200,000 or 400,000 cells. Under this escalating scenario, the final patients (cohort five) might receive 20 cervical injections followed by 20 lumbar injections, with each injection at 400,000 cells. If one patient (Ted Harada) can show dramatic improvement in motor and lung function after only 1.5 million cells, management is clearly excited about seeing what 16 million cells can do.
We expect all procedures to be completed by the end of the first quarter 2014. Some patients are already blogging and posting videos on their experience post-surgery. We note that Emory University has secured a $3.0 million grant from the National Institutes of Health (NIH) for this study. Neuralstem believes this grant will cover the majority of the cost for the program. The primary endpoint of the study is assessment at 6 months post-surgery. As of today, the trial has proceeded to the second cohort. We expect top-line clinical data from the first and second cohort in early 2014, with full top-line data by the third quarter 2014. We believe Neuralstem will seek BTD on NSI-566 and be granted the designation during the second half of the year.
Prediction # 3: Avita Medical Will Be Acquired
We started looking at Avita Medical (OTCQX:AVMXY) In June 2013. Back in June 2013, we concluded that the company's leading product, ReCell® Spray-On-Skin™ was simply the best product on the market for pediatric burns and scalds. ReCell® is the company's autologous cell harvesting, processing and delivery kit that enables surgeons and clinicians to treat complicated skin defects, including chronic wounds, scars, burns, depigmentation, and aid in rejuvenation or reconstruction procedures quicker, easier, and cheaper than the current standard of care for each indication. ReCell® Spray-On Skin™ uses a patient's own skin cells to facilitate a regenerative process during which new skin is regrown. The cell suspension, which is sprayed onto an affected area to be treated, contains the appropriate mixture of healthy cells of different types to promote healing (keratinocytes and skin stem cells, or progenitor cells), skin structure (fibroblasts) and cells that reintroduce normal color (melanocytes) in areas where the pigmentation has become too dark or white as a result of injury, scars or disease. ReCell has been successfully used to:
- Close acute wounds due to burns of scalds.
- Heal chronic wounds, e.g. diabetic foot ulcers and venous leg ulcers.
- Improve the appearance of acne scars.
- Remove areas of discoloration, including both hyperpigmented and hypopigmented areas.
- Restore pigmentation to stable Vitiligo patients.
- Improve and enhance the appearance of scars from trauma, burns, surgery and other causes.
Avita's ReCell® compared very favorably to the current gold standard for treating burns and scalds, which is classic split-thickness meshed skin grafting. Results from the 82-patient 2007 study showed ReCell is a feasible, simple and safe technique. The product gives similar results to meshed skin grafting on healing and epithelialization time, with similar functional outcome, but with significantly less pain and post-operating healing on the biopsy site. This is because the ReCell® system allows for 80-fold expansion from the postage-stamp sized biopsy site to the treatment site vs. classical meshed skin grafting which can afford only a 2-to-4-fold expansion.
Avita's clinical and case study data is nothing short of fantastic. We have highlighted the company's efforts in burns and scalds and for the treatment of venous leg ulcers in two separate more detailed articles on Seeking-Alpha. A U.S. Phase 3 study in burns and scalds is currently ongoing. The venous leg ulcer study is being conducted in Europe. Our analysis shows that ReCell® is a potential $250, with upside to that figure based on the outcome of additional clinical programs in vitiligo, and in aesthetics and reconstruction. The product sells for around $1,000 per treatment, which will still offer favorable reimbursement to the would-care professional under the new CMS reimbursement guidelines for ambulatory surgical center payments.
The reasons we believe Avita will be acquired are three-fold. Firstly, the stock is incredible cheap. The current market capitalization is only $25 million, and ReCell® is already approved and on the market throughout Europe generating around $3 million in revenues. Avita also collects license and collaborative payments from distribution partners, bringing total revenues to around $4.5 million. We believe that ReCell® offers $250 million in sales potential once approved in the U.S. and fully-reimbursed in Europe. Operational overhead is low, and thus the company could represent tremendous leverage to an acquirer at this stage.
The second reason is the changing reimbursement market, brought on by the recent finalized legislation enacted by the U.S. Center or Medicare and Medicaid Services (CMS). These new payment rules are designed to package both wound care products and procedures into one APC code for both ambulatory and in-office care. The decision is good news for some and very bad news for others. For example, we think Cytomedix (OTCQX:CMXI) will do very well given the new procedures, whereas competitors such as Shire Pharma (SHPG) and privately-held Organogenesis are in trouble. We expect fewer reimbursement dollars to go around starting in 2014, and thus see a wave of consolidation on the horizon for key players in this space as they attempt to maintain market share and improve economies of scale. Potential acquirers of Avita include Osiris Therapeutics, Shire Pharmaceuticals, Smith & Nephew, Kinetic Concepts, and Cytori Therapeutics.
The third reason we believe Avita may be in play is the recent resignation of the CEO and Chairman of the Board. Out are William Dolphin as CEO, and Dalton Gooding as Chairman. In is Ian MacPherson as interim Chairman. Current CFO, Tim Rooney, was appointed as interim CEO. Through our time covering Avita's stock we have heard of significant shareholder angst, especially in Australia, the company's founding roots. Issues include management pay packages, increasing losses, and delayed timelines for enrollment in the company's clinical trials. Avita has relocated from Australia to just outside Los Angeles, CA. It's at the epicenter of the regenerative medicine movement. The company may very well bring in a new CEO in an effort to right the ship. Then again, with the stock so cheap and consolidation likely in 2014, we would not be surprised to see them scooped up.
Prediction # 4: Cynapsus Therapeutics Shares Will Triple In Value
My three previous predictions I'm making specific calls on the drug or company itself; I call for an enhanced partnership, a new FDA designation, and a merger. If these hold true, all three stocks should perform very well as a result. However, for my fourth prediction, I make no mistake about it - we think Cynapsus Therapeutics (OTCQX:CYNAF) shares will triple in value in 2014.
Cynapsus is developing APL-130277, a sublingual thin film formulation of apomorphine. Apomorphine, sold as branded Apokyn, is currently available as an injection. The product is the gold standard for the treatment of "off episodes" in Parkinson's patients. Apokyn for injection is a highly effective, yet terrible burdensome and horribly inefficient, ill-conceived drug. Apomorphine injection sells around $50 million worldwide despite the fact that the subcutaneous injection requires fifteen steps, often impossible for the frozen "off" Parkinson's patient to administer themselves.
Cynapsus, thanks in part to some clear and opportunistic regulatory and intellectual property efforts, controls the rights to a sublingual formulation of apomorphine for this indication. In this route of oral administration, the drug is absorbed into the bloodstream by diffusing through the tissues of the mouth. The formulation technology for sublingual drug administration is well developed, and has previously been successfully applied other drugs that undergo rapid first pass metabolism and / or for which rapid absorption into the bloodstream is required. Advantages of the sublingual formulation route include rapid uptake into the bloodstream and the opportunity to closely reproduce the pharmacokinetic profile of the injected version of the drug.
In April 2011, discussions between Cynapsus and the FDA led to conclusions that the agency would accept for consideration an new drug application (NDA) for APL-130277 provided that Cynapsus can demonstrate apomorphine maximum serum concentration (Cmax) and total amount absorbed (area under the curve, or AUC) that are in the range of 80% to 125% that produced by Apokyn. The Agency further stipulated that the time to peak serum concentration should be in the same range as that specified in the Apokyn label (10 to 60 minutes). To date, the company has completed two clinical studies with the goal of refining its sublingual formulation and demonstrating the required pharmacokinetic profile.
Cynapsus management is now conducting a larger formulation study, CTH-103, that includes three dose, an active comparator, and a placebo-controlled arm in a randomized cross-over bioequivalence Phase 1 trial comparing APL277 to subcutaneous apomorphine. The trial seeks to enroll 48 subjects in 3 dose cohorts. Patients within each cohort will receive either APL-130277 or subcutaneous apomorphine in random order. Following a 1 day washout period, they will then cross over to the drug not administered on Day 1. We expect results from CTH-103 in January 2014. Study endpoints include a complete pharmacokinetic profile with comparisons to subcutaneous apomorphine data, and safety and tolerability. The study is funded by a $0.948 million grant from the Michael J. Fox Foundation (MJFF) and will serve as a "dry run" for the larger pivotal bioequivalence trial, CTH-201, to be performed in 2014. Cynapsus is also planning a safety and tolerability study in patients with Parkinson's disease who have not been previously exposed to apomorphine. CTH-301 is planned to be a 3-arm study in 150 patients, with duration of 16-weeks.
We like Cynapsus because APL-130277 is simple concept. In our work on Cynapsus we spent considerable time looking at Apokyn marketing surveys, third party payer surveys, and a large number of comments about the product taken from Parkinson's disease patient online message boards. The general conclusion was that patients have mixed emotions to the drug. Many call it a "wonder drug" in terms of efficacy, noting the dramatic improvement in quality of life associated with its use. However, most complain about the difficulty of administration and the disliking needles. From a patient's perspective, Apokyn is the right drug, wrong delivery.
Physicians and third party payers seem to agree. Market research conducted by Cynapsus shows that neurologists and movement disorder doctors prescribe Apokyn to about 5% of Parkinson's patients. They describe "inconvenience", "difficulty starting therapy", and "injection site reactions" as key barriers preventing more widespread use of the injectable product. On average, they say that they would prescribe a sublingual version to 30% of patients. That's an impressive six-fold increase in sales from the $50 million we noted above. A survey of payers found that 90% of the responders would reimburse the product within three months of approval by the FDA. Roughly 75% of the responders would reimburse at an average wholesale price equal to the apomorphine injection, with another 50% amenable to a premium price of 25% if the company can show clinical benefit over the injectable product.
Throwing these statistics into our financial model leads us to conclude that APL-130277 is a potential $400 to 500 million product. Given the quick timelines outlined above, we believe this target can be met in five years after launch, or around 2022. Cynapsus stated goal is to develop APL-130277 to the point where the U.S. NDA is ready for filing, and then to out-license to a suitable partner for commercialization. To complete this task, the company must complete the CTH-103 pilot study (funded by the Michael J. Fox Foundation) and then conclude the bioequivalence study and follow-up safety study. Data from CTH-103 is expected in January 2014. We see this as the catalyst for a major valuation revision to take place over the subsequent never several months, all ahead of the initiation of the pivotal program around the middle of 2014.
Cynapsus Therapeutics is a little-known, small-cap Canadian pharmaceutical company that has, in our view, a far better solution to a major problem affecting Parkinson's patients. The concept is simple and the path to commercialization has been validated. The stock is cheap, and the risks are relatively low. Yes, Cynapsus will need to raise cash prior to the start of this program, but even when we factor in dilution necessary to raise upwards of $10 million in 2014, we still see the shares as extremely cheap. The current market value is only $16 million. Applying a price-to-peak royalty multiple of 3x and discounting back at 20% we estimate the fair value of the company's shares at $1.25. This represents roughly three-fold upside from the current price today of only $0.40 per share.