Prana Biotechnology - A Gamble Worth Taking For Both Long- And Short-Term Investors

Mar.20.14 | About: Prana Biotechnology (PRAN)

Summary

An approved Alzheimer's drug for disease modification will generate at least $5 billion a year in revenue on average, as no drugs currently exist.

LMTX from TauRx, Crenezumab from Roche, and PBT2 from Prana are best-positioned to succeed; PBT2 has the best overall position.

Prana's previous trials have been unimpressive, but hidden inside those results are clues to a highly-effective drug.

Prana stock is significantly undervalued, but is unlikely to remain so after releasing Phase IIb Alzheimer's results later this month.

There are few diseases as widespread and debilitating as Alzheimer's disease. It is one of the few diseases that has really stumped modern medicine, as the overall prognosis of someone with Alzheimer's disease today is not that much different from someone 50 years ago. Granted, knowledge of the disease has drastically improved over the years, but there are no disease-modifying treatments on the market today to slow or stop the progression of the disease. One company in particular, Prana Biotechnology (NASDAQ:PRAN), is well-positioned to address this market with their lead drug, and in a realistic but optimistic scenario, the share price could ducuple (increase by 10 times) by the end of the month. On the flip side, a pessimistic but realistic scenario could see the share price drop by 90% by the end of the month. But as will be discussed in this article, share price appreciation, though not necessarily by 10 times, is more likely.

Alzheimer's currently affects 5.2M people in America and 35M people globally. There are five treatments available for Alzheimer's disease, but none that target the core progression of the disease, only treatments that slow symptom onset by six to 12 months. This hasn't stopped these drugs from being commercially successful, as the current market for Alzheimer's drugs is around $5-$6 billion per year. The eventual size of the Alzheimer's drug market, if a disease-modifying drug is discovered, is estimated to be around $20 billion per year. The reason this market potential is so huge is that in the U.S. alone in 2013, over $200 billion was spent on direct costs on Alzheimer's (Medicare, Medicaid), and the equivalent of an additional $216 billion was incurred by family members in the form of unpaid care. In other words, even if Americans spent $20 billion a year on Alzheimer's drugs, this would still be 20 times cheaper than caring for those with Alzheimer's.

Alzheimer's disease is a neurodegenerative disorder that is characterized by the presence of amyloid plaques and tau tangles in the brain. Though it was subject to much scientific debate, the historical theory is that over time, amyloids in the brain (specifically amyloid beta, or amyloids with 42 amino acids) combined to cause amyloid plaques, large structures made up of thousands or hundreds of thousands of amyloids that disrupted nerves and killed cells. These large structures disrupted the pathways in the brain, which both negatively impacts the brain's normal functioning and causes the tau tangles to form, which did their own damage as well.

However, over the past five years, understanding of the disease itself has increased, which helps explain why some of the drugs in the past failed large-scale trials. Though initially unknown, it is now believed in many scientific circles that prior to forming large amyloid plaques in the brain, smaller amyloid molecules (called oligomers) are formed. These chemical structures are made up of as few as two beta amyloids that are combined, and these smaller structures cause the real damage by blocking communications in the brain and forming tau tangles. The amyloid plaques themselves may be a self-defense mechanism (again, subject to debate) designed to help combat the issue when too many amyloid oligomers are in the brain and the normal protective activity in the brain breaks down.

Overall Drug Market

There are a tremendous number of drugs currently in development for Alzheimer's, and a quick search would yield literally hundreds of drugs in various stages of development to treat this disease. This article will focus on drugs that could serve to achieve disease-modification status by targeting amyloid beta or tau tangles directly (see below for a more complete list of drugs out there). It is not that these are the only treatments that can be effective, as in fact, all five drugs currently approved for Alzheimer's do not target amyloid beta or tau, but it is incredibly unlikely that a drug targeted outside of this space will modify the core progression of the disease, as opposed to just improving symptoms.

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Source: researchgate.net

Let's now look at the major drug trials up to this point, and discuss why some of the results are easily explainable given our new understanding of the disease (and why some future drugs are more promising than others).

Secretase Inhibitors

The first major class of drugs is secretase inhibitors. These drugs reduce the formation of beta amyloids in the brain. There is a clear relationship between beta amyloids and Alzheimer's, in that the more beta amyloids in the brain, the more likely one is to develop Alzheimer's. This drug class has shown to be extremely effective at lowering beta amyloids in the brain, as going strictly by reduction, this class of drugs would be the most effective.

Both Merck (NYSE:MRK) and AstraZeneca (NYSE:AZN) have drugs in the pipeline that are effective in reducing the amount of amyloid beta in the brain, with Merck's drug MK-8931 actually showing reduction in amyloid beta of 80%-90%. In baseball, ties go to the runner, however in pharmaceuticals, where two drugs have roughly equal effectiveness, ties tend to be solved by something else, namely which company has a stronger distribution network and which is first to get approved. In this case, Merck's drug has about a six-month lead towards approval, and Merck is the much bigger pharmaceutical company, making Merck the stronger competitor. However, this class of products does nothing directly to reduce the quantity of oligomers in the brain or help with the tau/plaques. Thus, any treatment in this area is almost certainly going to be preventative, as opposed to curative. There is also research that suggests changes in the brain occur 20 years before symptoms of Alzheimer's, which may make preventative drugs not that preventative. Thus, though promising, drugs in this class will almost certainly prove inferior to other classes of drugs.

Anti-Amyloid Antibodies

The second major class of drugs is anti-amyloid antibodies. These work by targeting the beta amyloid, oligomers and plaques (though what is targeted is drug-dependent) with the intent of reducing the existence of these molecules in the brain after they have been created.

As to the major drug companies in this area, there are really only two still standing that have any chance of approval, Eli Lily (NYSE:LLY) and Roche (OTCQX:RHHBY). Eli Lily's drug Solanezumab failed a large-scale Phase III trial, as it wasn't deemed effective enough, though it may have had some mild effectiveness in early-stage Alzheimer's patients. Solanezumab is now going through another Phase III trial to test this theory. The other major drug company still in this game is Roche, that actually has two drugs in the pipeline. The first drug is Gantenerumab that is currently in Phase III studies and is very similar to Solanezumab and Bapineuzumab, another failed drug in this space. It is tough to see why any of these drugs would be successful, especially given that there is scientific evidence to suggest that these drugs do not target oligomers. However, this would explain why the drugs have shown some preventative effects but minor overall impact.

Roche's other drug, Crenezumab has a different mechanism of action, as it has shown that it binds to both oligomers and beta amyloids, in part due to its different immunoglobin backbone. In fact, Crenezumab was selected for a U.S. government study over both Solanezumab and Gantenerumab largely due to this different mechanism of action. This has the added benefit of reducing the inflammatory response, allowing higher doses of Crenezumab to be administered. Thus, Crenezumab should outperform its peers, as the drug can both be delivered in a higher dose and directly target the root cause of the disease. This drug is likely the best drug in development from the big pharmaceutical companies. However, it is still in Phase II trials and is going to be held back somewhat by its mechanism of action (too much drug leads to inflammatory response still), so it is too early to significantly discount the eventual market of PBT2 based upon the existence of this Crenezumab in the pipeline.

Smaller Pharmaceutical Attempts

As big pharmaceutical companies have focused on immunotherapies or secretase inhibitors, it has left a number of other promising areas for smaller companies to pursue. Two companies are especially relevant when discussing a disease-modifying treatment, TauRx and Prana Biotechnology.

TauRx is a private company founded in Singapore that focuses on solving the issues associated with the tau tangles that exist in Alzheimer's disease. The established view is that oligomers cause tangles that serve to further negatively impact those with Alzheimer's with the tangles actually causing more damage at the later stages of the disease. Thus, cleaning up tau tangles should help those with Alzheimer's, even though it is unlikely that tau tangles are the root cause of the disease.

Therefore, drugs like LMTX from TauRx could be very effective in helping improve those with either moderate or late-stage Alzheimer's disease. As TauRx is a private company, a deep-dive analysis into their odds of success is likely not as important (lots of red flags with their research, though their core concept seems valid), as their drug is likely complementary rather than competitive with PBT2. Focus on reducing tau tangles remains an underinvested area of Alzheimer's research based upon the possible benefits (financial and otherwise) that a successful drug in this area could bring to moderate-to-late stage Alzheimer's patients.

Prana Biotechnology is a small company based out of Australia, and is the focus of this article. Prana Biotechnology's drug, PBT2 works based upon the metals theory of Alzheimer's disease. Though this theory isn't scientifically agreed upon, the concept is that that metals are the missing pieces that cause oligomers and plaques to overwhelm the body. Scientific support of the theory is growing based upon the increasing number of published works on this concept, though again, this is more of an interesting hypothesis than an agreed-upon fact. In any event, the theory states that beta amyloids and oligomers are naturally occurring in the brain, and the brain's defenses are normally enough to keep the overall quantity of these molecules in check. However, as we age, our brain steadily loses the ability to properly transport metals into the cells, and as these metals accumulate outside of the cells, they get used for nefarious purposes like forming oligomers. The brain's natural defenses are unable to cope, and this eventually leads to the formation of amyloid plaques using those same metals to help protect the brain. In addition, the relative lack of metals inside of the cells cause the cells to stop clearing beta amyloids as effectively in the brain, so the body is hit by a double-whammy of more beta amyloids and more oligomers.

The true science behind this theory seems strong, though in a sense, it is based more on a large string of disparate scientific evidence rather than a single smoking gun. For example, we know that 10%-30% of elderly people with enhanced levels of amyloid beta do not develop Alzheimer's, but 70%-90% do. Why don't the other 10%-30%? Likewise, it is believed that amyloid beta production does not appear to increase with age, but amyloid beta does accumulate when we get older and is a prerequisite for Alzheimer's disease. Why does amyloid beta not accumulate when young, but accumulate when people grow older? And why does Alzheimer's seem to target some areas of the brain, but leave other areas relatively untouched? The metals theory proposes the answer to those questions -- some elderly either do not have issues with metal transportation, or are very good at converting oligomers to amyloid plaques almost immediately, keeping the brain safe. Bad metal transportation as we age leads to accumulation of amyloid beta in the brain due to reduced effectiveness of clearance mechanisms, the areas in the brain where Alzheimer's starts have greater amounts of metals. But, frankly, proof in the hypothesis likely lies in whether or not PBT2 is successful.

From a financial perspective, PBT2 would be enormously successful if the metals theory is correct. It would be both preventative and curative, and the only disease aspect it would not cover is for people with moderate-to-severe Alzheimer's that have tau tangles (a drug like LMTX would still be needed for those patients). In any event, PBT2 would certainly be part of a cocktail of drugs, if the drug is successful, and given that no other company appears to have a drug near clinical trials, the company would have a monopoly on this approach, if successful. PBT2 seems very safe, and thus, could be used for mild cognitive impairment, in addition to Alzheimer's, if effectiveness is proven. Bottom line is that Prana Biotechnology could have a true blockbuster on their hands if the drug works, as the market position is nearly perfect.

Market Summary

In summary, we return to a list of major disease modifying drugs in development over the past few years. This table shows whether or not the drug can target amyloid oligomers, a distinction that has only recently gained importance as our understanding of Alzheimer's has progressed. No drug that has failed ever had as one of its focus areas oligomers in the brain (Bapineuzumab likely was capable, but due to inflammation concerns and focus on plaques, it actually had little direct impact). In addition, the excuses made to justify the clinical failures in Alzheimer's have rested upon the concept that treatment needs to start earlier. This excuse is likely only true for drugs that do not target oligomers or tau tangles, as once someone starts to show signs of Alzheimer's, it is likely too late for reducing beta amyloids alone to be sufficient.

Drug

Mode of Operation

Status

Target

MK-8931, Merck

secretase inhibitor

Phase III

beta amyloid formation

AZD3293, AstraZeneca

secretase inhibitor

Phase III

beta amyloid formation

Gantenerumab, Roche

monoclonal antibody

Phase III

beta amyloids, plaques,

Solanezumab, Eli Lilly

monoclonal antibody

Phase III

beta amyloids, plaques,

Crenezumab, AC Immune/Genentech/Roche

monoclonal antibody

Phase II

beta amyloids, plaques, OLIGOMERS

LMTX, TauRx

tau aggregation Inhibitor

Phase III

Tau tangles

PBT2, Prana Biotechnology

metal ionophore

Phase II

beta amyloids, plaques, OLIGOMERS

bapineuzumab, Elan/Johnson &
Johnson/Pfizer (PFE, PRGO, JNJ)

monoclonal antibody

Failed

beta amyloids, plaques

Gammagard, Baxter International

Intravenous immunoglobulin

Failed

beta amyloids, minor oligomer focus, plaques

Flurizan, LY-2886721, Semagacestat and Avagacestat (four drugs)

secretase inhibitor

Failed

beta amyloid formation

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From an investment perspective, only PBT2 and Crenezumab are being developed by a publicly traded company. As a huge conglomerate in Roche is developing Crenezumab, share price is less impacted by any potential success an Alzheimer's drug might bring, and personally, I find that the drug doesn't have quite the same potential as PBT2. Prana Biotechnology, however, is a small company almost entirely dependent upon success in the Alzheimer's market, thus, the rest of the article will focus on the financial potential of PRAN as a stock and likelihood of PBT2 being effective.

Market Price for PRAN

PRAN has become somewhat of a battleground stock, where those both long and short have written articles, either on Seeking Alpha or another site. The bull argument seems to be that Prana Biotechnology has top scientific talent and tremendous amount of academic research supporting the drug's concept in mouse models and other laboratory tests. The bear argument is that the results from PBT2's two previous trials in diseased patients (a three-month study in Alzheimer's patients and a six-month study in Huntington's patients) both showed very little in the way of effects. The purpose of this article is to discuss how both arguments are inherently correct, though when looking into the details of how the drug interacts in the body, one can have high hopes for positive results in the Alzheimer's trial being conducted.

Huntington's Disease

The recent battleground has been over the Huntington's results, where Prana Biotechnology released results about a month ago on their Reach2HD trial that followed 109 patients taking either 100mg of PBT2, 250mg of PBT2, or placebo once daily. What has been nearly universally agreed is that the drug is safe, even at 250mg, and is not a cure for Huntington's disease. What is not agreed upon is most everything else.

Before going further, it is helpful to understand how PBT2 is expected to interact and help improve those with Huntington's disease. The metals theory for Huntington's disease isn't nearly as fully developed as the one for Alzheimer's disease, but as we age, the metal transporters in the brain lose their effectiveness. This leads to metals such as copper and zinc accumulating outside of the brain and looking for things to do. The problem for those with Huntington's disease is a mutant Huntingtin protein, a fact that is dangerous on its own. However, when this protein is able to interact with free-floating metals, things get far worse, as studies have shown. Thus, the concept is though it won't cure Huntington's disease, removing the metals from the Huntingtin protein and placing them back in the brain cells should improve symptoms.

The way PBT2 would work is to bind with the copper molecules, both free-floating in the brain or already bound to the Huntingtin protein, and transport them back in the brain cells. Thus, the copper isn't actually removed from the brain (as PBT2 is an ionophore, not a chelator), but rather transported from a dangerous location in the body to a safe location. By not removing the metal from the brain, there is a build-up of metal in the brain cells above what the brain would normally handle, meaning once the transporter is removed (PBT2), there could and should be kind of a waterfall effect as the metals flow out of the cells in a rush, kind of like a dam breaking and water rushing through.

With that as a backdrop, we can then look at the results of the trial. The trial was technically a success, because the primary goal was to determine safety, which was met. In addition, there were eight different cognitive endpoints measured using eight different tests. Though no cognitive endpoints were altered in a statistically significant fashion, one of the tests (Trail Making Part B) was improved in a statistically significant fashion. In addition, one serious side effect was reported, which was a significant worsening of Huntington's disease once the trial was completed and the patient stopped taking the drug. Looking at the results exclusive to Huntington's, one would have to take a very negative opinion of the results, as chance alone could justify the results that were reported.

However, when compared to the previous Phase IIa trial for Alzheimer's, the results seem dramatically better for the company, as they increase the likelihood of success of the Alzheimer's IIb trials. One of the main reasons for this is that the Alzheimer's IIa test also showed statistically significant improvement in the Trail Making Part B test. Though showing positive impact on one test in either trial isn't that comforting, the fact that the same test was significantly improved on two different trials in two different diseases makes it far less likely either result was random. In addition, the significant worsening side effect is actually a positive sign the drug worked, as this is due to the build-up of copper in the brain cells that then flood the brain after PBT2 is removed from the system. This side effect is going to be dose-dependent (greater the dosage, the more likely this side effect is to occur), since PBT2 is an ionophore and not a chelator, but helps again prove PBT2 is moving metals around in the brain.

The results overall still aren't that great, though, and there is an excellent article on Seeking Alpha that may shed light on the possible issue of under-dosing of PBT2 in patients. If we analyze the two diseases, we can start to see where this might apply:

Alzheimer's Disease

Huntington's Disease

Top Dosage Used

250mg PBT2

250mg PBT2

Age of onset

Around 70 years of age

Around 40 years of age

Speed of Onset

Changes occur 20 years before Alzheimer's, though maybe 10 years before MCI, MCI lasts 10 years, Alzheimer's lasts for 5-15 years

Around 20 years from onset of symptoms

Root cause

Metals believed to be root cause of disease, tau tangles caused by metals/oligomers. If metals fixed before tau damage becomes irreversible, recovery theoretically possible

Mutant Huntingtin protein root cause. Even if metals removed, symptoms will still degrade over time (just slower)

Drug design

Ionophore allows for better clearance of beta amyloids, though will allow build-up of copper over time

Ionophore has no benefit over Chelator, as it causes build-up of copper over time

Dosage/ Knowledge

Prana's scientists are Alzheimer's experts, and there are numerous studies showing metal impact on Alzheimer's

Prana's scientists are not Huntington's experts, and there are fewer studies showing metal impact on Huntington's

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  • Alzheimer's has a much later onset than Huntington's disease. Since the rate of metal build-up is likely age-dependent, it means that a lower amount of free-floating metal causes damage in Huntington's versus Alzheimer's. Thus, conceptually, a greater amount of drug would be needed to combat this effect in Huntington's versus Alzheimer's.
  • The drug is designed from the ground up to treat Alzheimer's, not Huntington's, as it is an ionophore not a chelator.
  • PBT2 could, in theory, reverse Alzheimer's damage (at least early-to-moderate stage). It cannot reverse damage in Huntington's.
  • Prana's scientists are experts in Alzheimer's, and dosage models for Alzheimer's are more advanced than Huntington's.

Where this ends up is that whether or not one believes that 250mg of PBT2 is the right dosage in Alzheimer's, it is almost certainly the wrong dose for Huntington's. Simply put, the dosage for Huntington's has to be higher based upon the factors above in order to have a roughly similar impact. Given the expertise of those involved exclusive to Alzheimer's research and the relatively low impact seen thus far from trial results, the more probably outcome is that Huntington's patients are being under-dosed. The Phase I trial for PBT2 used 800mg in healthy patients with no side effect, and thus, I personally would like to see 800mg used as an arm of the Phase III Huntington's trial. This will likely lead to greater side effects seen, where significant worsening of the disease is observed upon cessation of taking PBT2 (as it is an ionophore and not a chelator), but the benefits outweigh the risks, as greater efficacy will almost certainly be seen and that side effect is manageable long term.

PBT2 for Alzheimer's Disease

Though PBT2 might have usage for Huntington's disease, the focus of PBT2 and Prana Biotechnology has always been about developing a disease-modifying drug for Alzheimer's. Based upon the results up to this point, it is reasonable to infer that:

  • The drug is safe at 250mg dosage.
  • The drug moves metals in the brain in humans.
  • The theory behind the drug for Alzheimer's is sound. Though this is not seen from the trial results to date, there is strong scientific evidence in support of this theory discussed above or in other Seeking Alpha articles.

In addition, this author's belief based upon both the mouse models and the expertise of the scientists involved is that 250mg is likely the correct dosage for Alzheimer's patients. Thus, the question becomes: Why was the Phase IIa results for Alzheimer's so underwhelming for PBT2?

First, a little discussion on how exactly PBT2 will interact inside of the brain. PBT2 will take any copper or iron from outside of the cells in the brain and move them inside of the brain cells. However, what the PBT2 molecule actually takes the metal from is absolutely crucial:

Copper taken from

Immediate Impact

Effect on Symptoms

Frequency of relative occurrence (over time)

free-floating unbinded copper

removes free-floating copper

would improve symptoms slightly

Increases over time

Oligomers (non trimer nor dimer)

forms two additional smaller oligomers

would worsen symptoms significantly

Decreases over time

Oligomers (trimer or possibly other large oligomer)

forms one beta amyloid and one smaller oligomer

would worsen symptoms slightly

Unsure

oligomer (dimer)

forms two beta amyloids

would significantly improve symptoms

Increases over time

amyloid plaques

nothing breaks free

nothing

Decreases over time

amyloid plaques

beta amyloid breaks free

would worsen symptoms slightly

Decreases over time

amyloid plaques

oligomer breaks free

would worsen symptoms significantly

Decreases over time

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What is being shown here is that the vast majority of places where PBT2 could take copper from actually serve to worsen Alzheimer's disease in the short term. However, as PBT2 is given over time, the odds of it binding at points that will lead to worsening of the disease go down, and the odds of it binding at places that will improve the patient go up. In other words, the drug will actually worsen the patient (or at least worsen the biomarkers) at first if it is working properly, but eventually improve the patient over time, overcoming the initial drop in cognitive abilities (or at least biomarkers) that it will cause at the beginning.

Though this seems groundbreaking, it really is not. In fact, this actual concept was seen 14 years ago with an Alzheimer's study of clioquinol given to 20 patients. Though you have to buy the study to see the full results, clioquinol (a precursor to PBT2 and very similar chemically to the original PBT) was given to patients, and the corresponding tau and CSF-GAP-43 (biomarker for Alzheimer's) were measured. Though it is a bit tough to correlate, since PBT2 wasn't used and beta amyloid wasn't measured, the study showed a significant increase in the biomarkers used to show Alzheimer's at one week and a mild increase overall at three weeks (though the levels dropped from one week to three weeks). In other words, the patients showed an increase of neurodegenerative markers at first, and then those biomarkers started to drop over time.

Correlating how PBT2 would work compared to Clioquinol is difficult, as you are comparing different dosages, different methods of action (chelator vs. ionophore) and different levels of effectiveness at passing the blood brain barrier. Best guess is that PBT2 likely begins improving the patients compared to placebo (after accounting for the initial drop) at around one to two months, and thus, the improvement seen at three months in the Phase IIa trial is legitimate, but only due to the improvement that occurred during the last month or two of the trial. Improvement after month three, though, would likely be more rapid and not have that initial ramping period, thus, it is very possible that the results for the Phase IIb trial could be, say, eight times better than the IIa trial, even with only a four-fold increase in duration. This is in contrast to the Huntington's trial, where a longer duration will likely not lead to much improvement, but a higher dosage should prove more effective.

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To further detail the likely progression of PBT2 in the brain see above, as this is an attempt of a visual representation of how PBT2 may impact the brain over time. The blue line represents the optimistic case of PBT2, something hopefully true for sufferers with early-or-mid stage Alzheimer's disease. Point A represents the nadir of the drug, where the drug actually performs the worst compared to placebo (guess is at 10 days in or so). Point B is when the performance of patients on the drug and on placebo match. Point C is where the drug is reaching maximum effectiveness and the patient is improving most rapidly in the process (pure guess is around six months). Point D is when the drug has mostly cleared all the plaques and oligomers in the body, and is mostly preventative at this point.

The last point, E deserves an in-depth mention, and that is because the lines (green and red) detail two different possible scenarios. The green scenario is the one we hope for, as in this scenario, PBT2 has done an excellent job of clearing the oligomers. The brain is known to be self-healing, and in this scenario, the brain is able to finish the job as it heals itself and clears the tau tangles and rebuilds synapses now that the cause of the damage is gone. The brain is steadily restored, and most, if not all, of the damage done by Alzheimer's is cured by PBT2 alone.

However, there is another scenario, played out by the orange and red lines above. In this scenario, PBT2 does help the brain, but the damage already caused is too great to overcome. Though PBT2 is able to clean up the oligomers, the tau tangles or other damage already done continue to degrade the brain until the end result of death. Something like LMTX from TauRx could reverse this process, but for now, this outcome is sadly a possible one that I personally expect for those with advanced Alzheimer's disease. In the end, though, there is really no knowing which path those taking the drug will follow, a huge risk area in the current Phase IIb trial.

One final note is that the first negative thing that will be written regarding the Phase IIb results, if successful, is that the results are somehow tainted, because the trial only had 42 patients. This concept misses the point of statistical significance and small sample sizes. Proving statistically significant improvement is much harder in a small sample than a large one, as the improvement shown has to be more significant so that it isn't chance. From an investment perspective, the drug achieving statistical significance in a smaller trial is likely the more effective drug, meaning that the drug is likely going to be prescribed more, and thus, more financially successful.

The bigger issue with a small sample size is that significant side effects may not appear that could derail the eventual drug approval that would be seen in a larger sample size. Given that PBT2 just completed a 109-person Huntington's trial for six months, this issue is somewhat mitigated by the existence of those other patients and no ensuing major side effects. Point isn't that the small sample size is going to be an advantage (it isn't), but given that the trial has very objective endpoints, multiple different scans and is double-blinded, this small trial will likely have more reliable results than many other trials four times as large (see Dimebon). And if PBT2 does achieve statistically significant improvement on a secondary function, especially if it achieves it on the NTB scale, this shouldn't be a cause of concern, but rather one of celebration.

Valuing PRAN

The next question specific for Prana Biotechnology is what is a fair market value for the company. Or more specifically, what is the company worth if they have different outcomes for the IMAGINE (Phase IIb Alzhemier's trial). Though obviously, the results could fall between the discrete states below, the four possible outcomes are:

  • Huge success, endpoint met of amyloid reduction and statistically significant NTB improvement.
  • Partial success, endpoint met of amyloid reduction and improvement on one or two secondary tests, such as executive function. Drug is moving to Phase III trials for Alzheimer's.
  • Partial failure, endpoint of amyloid reduction met and no improvement on secondary tests, or endpoint of amyloid reduction not met. Drug is not moving to Phase III trials for Alzheimer's.
  • Complete failure -- safety issues arise or other results are so bad as to bring viability of PBT2 for Huntington's into question.

To determine the fair market value for Prana Biotechnology, a number of steps need to be computed, the first one valuing PRAN independent of PBT2. PRAN has between $20M and $30M in cash, and a library of over 1,000 MPACs, and a Parkinson's drug in preclinical trials (PBT-434). The valuation is more art than science here, but it clearly cannot be worth less than its cash on hand. For the purposes of discussion, we'll put the value at $50M.

Next area is determining the market size of PBT2 for both Huntington's disease and Alzheimer's treatment on a yearly basis of sales. The current market size of Huntington's disease is a bit over $700 million, and as discussed in the article above, the value of a disease-modifying Alzheimer's drug is at least $5 billion. If PBT2 is shown to be enormously effective for Alzheimer's, the market size for the drug would increase, so these calculations will use $7.5 billion in the best-case scenario. For Huntington, $100 million is a relatively conservative estimate for the annual revenue of PBT2, as the drug itself may not be overly effective even if approved (especially if approved only at 250mg), and faces competition from both approved and pipeline drugs not described in this article.

A fair multiple of sales also needs to be calculated. Three will be used, as that is conservative but closer to the historic industry average than the current one (currently MRK is 3.5, AZN is 3.3 and PFE is 3.9). The bigger thing to note, which is also part of the reason for the conservative number, is that PBT2's U.S. patent expires in 2025 (Europe in 2023), relatively soon for a drug at this phase of development. Though this is somewhat disconcerting, patents can get extended when drug companies attempt to use the drug for other purposes. As MCI (mild cognitive impairment) is a precursor to Alzheimer's and likely caused by the same root causes, it is very possible PBT2 could be used to combat MCI as well. As this will require another trial down the line to prove, PRAN will likely be able to extend their patent coverage, though the situation itself is worth watching and considering.

Dilution and time to market need to be taken into account, as well. Prana Biotechnology doesn't have the amount of money to take either of these drugs through a costly Phase III trial, and thus, will either need to dilute existing shareholders or give up part of their future profits in the form of a partnership. In addition, none of their drugs will likely achieve sales in CY14 or CY15, and thus, the value of annual revenue streams in the future are less than the value of those same revenue streams today. Spectacular results in the Phase IIb trial will reduce dilution, enable more favorable terms for a partnership and likely reduce time to market. For the purposes of this discussion, the calculations will assume 50% value in the best-case (dilution, time to market, partnership, etc. take away half of future value) and 33.3% value in standard case (take away two-thirds of future value for present shareholders). Though a Phase III trial will certainly be needed in the U.S., it may not be needed in all countries, and as Prana Biotechnology is an Australian company, it may be possible for PBT2 to get approved in Australia without another trial that would improve Prana's position substantially.

Last is the hardest factor to measure and the one with the most bias, namely, the likelihood of success for PBT2 to get approved based upon the results in clinical trials. The historical average of a drug getting approved heading into Phase III trials is approximately 50% (recent studies say 44%), though that number by itself is heavily modified based upon a number of factors. For PBT2, some of the factors are the following:

Factors Increasing Odds of Phase III Success

Factors Decreasing Odds of Phase III Success

same approach hasn't failed

small pharmaceutical company

Primary Indication (Alzheimer's)

Secondary Indication (Huntington's)

expedited approval/easier approval by FDA

small molecule drug

no solid approved drugs

new molecular entity

solid trial design (subjective), dual arm

targeting Alzheimer's disease

small patient size

Click to enlarge

In the end, this section is more up to each individual's opinion than any hard facts, and thus, to each their own. I have put in 50% odds for eventual Alzheimer's approval based on excellent results, 25% odds of approval for standard results and 33% odds of approval for Huntington's approval. Feel free to use your own.

Now that all the key factors have been finalized, we can show the final calculations:

Core Value

Hunt. Mkt.

Alz. Mkt.

Sales Mult.

Odds Hunt.

Odds Alz.

Discount Rate

Mkt Cap

Share Price

Great Success

50

100

7500

3

50%

50%

50%

5750

136

Success

50

100

5000

3

33.3%

25%

33.3%

1332

31

Failure

50

100

0

3

33.3%

0

33.3%

83

2

Complete Failure

50

0

0

0

0

0

0

50

1.2

Click to enlarge

Where we have ended up is that a lot depends on PBT2 and the Alzheimer's results, as is to be expected. Simply put, if the trial results are excellent, there is a sound basis for the stock to appreciate by a factor of 10. Likewise, if the results are disastrous, there is a sound basis for the stock to drop by a factor of 10. As reasoned in this article, the likelihood of success is far greater than that of failure, but both outcomes are realistic.

Conclusion

Rarely in investing are there truly binary events. PRAN is currently trading at around $11 a share, but it is almost guaranteed that it won't be trading around $10 a share in a month. Whether that answer is much higher or much lower lies in the IMAGINE results, or Phase IIb Alzheimer's study that is going to be released shortly. There are many reasons to be excited about PRAN's prospects for the IMAGINE trial. The trial had 95% retention, an extension study based on it and even a non-affiliated video based upon the success of one of the patients (personal belief is it is real, as a fake video would have used better "models"). As discussed above, the possible market is huge, the science is unique and the competitive situation is excellent. All that is needed is for the drug to be effective, and there are legitimate reasons that the results up to this point may not have been groundbreaking, but the upcoming results certainly could be. As to the end-result, what would be the fun of knowing ahead of time?

Disclosure: I am long PRAN. 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.