The recent pullback in biotech shares has not changed the time-tested theory of investing in small-cap drug development companies. Good or bad data will continue to move shares. In this interview with The Life Sciences Report, ROTH Capital Partners' Senior Research Analyst Joseph Pantginis tells us how investors willing to do some homework can make gains by reading between the lines of the biotech industry.
The Life Sciences Report: Joe, since late May 2009, the New York Stock Exchange AMEX Biotechnology Index [BTK] is up by a factor of four, even with this fairly severe pullback in biotech stocks. Have we moved into a period of consolidation?
Joseph Pantginis: Absolutely not. I think we are still in the environment where biotech and healthcare stocks should do well overall. By November 2013, biotech stocks were getting frothy. That included some high-quality stocks that had very quick run-ups. We like to see steady growth out of these names over time. A healthy letting-off of steam is a good thing.
One thing that will continue to bolster biotech is that big pharma continues to struggle with its pipeline. Companies are constantly looking for merger and acquisition [M&A] activity, and they need to be able to generate ideas and new drugs. Their internal research and development [R&D] platforms are not doing that anymore. Big pharma is constantly looking at both smaller biotechs and larger companies to fill in the gaps generated by the lack of R&D productivity. That's why we saw Pfizer Inc. (NYSE:PFE) looking at an M&A deal with AstraZeneca Plc (NYSE:AZN). In the end, biotech is still going to be a major driver going forward because it is generating the novel ideas and many of the new drugs.
TLSR: Small caps are in a more difficult environment now than they have been over the past few years. When we enter a more hesitant market, investors seem to take it out on smaller biotech companies. How do you think investors should approach small biotech stocks today?
JP: I think we are at a point now where the pendulum is swinging to this sector being oversold. It's similar to when the economy is frothy; there tends to be strong hiring to overhiring, and when things turn around, the pendulum swings the other direction and there tends to be overfiring of personnel. It's hard to find a happy medium.
Investors need to realize that the volatility factor in biotech is much more pronounced. For instance, if a Phase III trial works and the data are good, the stock could be up several-fold. If a trial fails, the stock is down 70% on the first tick. Investors get into biotech for the greater upside potential. They are looking for multibaggers, but they need to understand the downside potential for failed clinical trials. That's how they should approach smaller biotech companies.
TLSR: Prior to this biotech bull market, which began almost five years ago, investors were generally unable to make money on early-stage biotech stocks. Even good Phase I and Phase II data would not move stocks. What about now? Will statistically significant data continue to catalyze small biotechs and move their shares upward?
JP: The simple answer is yes. As you said, prior to the five-year run-up, it was hard to make money on earlier-stage Phase I or Phase II news. The problem is that investors need to be able to time these catalysts very carefully. A company with positive earlier-stage data could enter a quiet period or a dead zone for news flow, a period when the stock essentially moves up and down with the volatility in the biotech market. As an analyst making an investment case for a company, I focus on catalysts and milestones, which is what investors need to do to make money on these stocks.
TLSR: Stem cell/regenerative medicine companies seem to have lagged every other kind of biotech stock. Their collective performance represents a very long and frustrating battle for people who believe in the concept of cell therapies. We have proof of concept to show that some of these technologies are going to work in patients. Do you foresee cell therapy cycling into investor consciousness?
JP: Regenerative medicine and stem cells are among my favorite topics in the companies I look at. I've covered multiple companies in the space. I believe this sector will cycle into the investor consciousness. But, one of the things that has held this sector back is the lack of significant clinical data. The perception right now is that the stem-cell space - very broadly speaking - is still viewed as a "science experiment" and is lacking the real substantive clinical data sets. Just as in other sectors, investor acceptance is going to come down to good Phase II data, and not many of these companies have reached that stage yet.
One company that has been able to get that far is Aastrom Biosciences Inc. (ASTM), a company I used to cover. It had very nice randomized Phase IIb data in critical limb ischemia [CLI]. But the company then came up against roadblocks enrolling patients in its Phase III REVIVE trial. Aastrom cancelled that program in March 2013, and the stock took a hit. But it was one of the earlier companies that actually developed solid Phase II data.
Today, a lot of stem cell companies in the clinic are still in the anecdotal stage, because the patient numbers are very small. Companies are doing spinal cord injury studies, but we're not going to see what a lot of investors would have liked to have seen years ago, which is that these patients would start walking again. This is a very long process.
Another reason the stem cell space has lagged is that companies have experienced a much longer and more arduous regulatory process with the U.S. Food and Drug Administration [FDA]. The FDA has required more information on the safety of the cells. For instance, when you put live cells into a patient, could they turn into teratomas, or a tumor? Investors still view this space as a science experiment, and clinical data will be the ultimate key driver that gets investor interest.
I do see a positive trend. I don't want to call it a sea change, but cash is starting to move back into the stem-cell space from the investor front. We are also starting to see significant grant money from places such as the California Institute of Regenerative Medicine [CIRM], which is giving out major grants-sums like $20 million [$20M] for particular disease indications. I think the increased flow of funds is another encouraging indicator for stem cells coming into investors' minds.
TLSR: Is there another company you might mention?
JP: I'd like to discuss Lion Biotechnologies Inc. (NASDAQ:LBIO). After the American Society of Clinical Oncology [ASCO] meeting last year, and at this year's ASCO [held May 30-June 3], the big, hot topic was and is immunotherapy. Coming out of ASCO 2013, the catchphrase was checkpoint inhibitors; now that ASCO 2014 has concluded, the same can be said with even greater emphasis. Checkpoint inhibitors are a major focus, with the anti-PD-1s [programmed cell death protein-1], such as MK-3475 from Merck & Co. Inc. (NYSE:MRK), and anti-CTLA-4s [cytotoxic T-lymphocyte antigen 4], such as Yervoy [ipilimumab] from Bristol-Myers Squibb Co. (NYSE:BMY). These targets are of major interest to pharmas, biotechs and investors. We're seeing that yet another company is looking to do a combination study with a PD-1 or CTLA-4 inhibitor nearly all the time.
Just as background, checkpoint inhibitors help modulate the immune system. An anti-CTLA-4 or an anti-PD-1 drug helps take the brakes off the immune system and modulate what are called T regulatory cells, which can stimulate, and sometimes quiet down or stop, the immune response. The ultimate goal with all of these checkpoint inhibitors and various immunotherapy approaches is to lift and boost T-cell responses. That's where Lion Biotechnologies comes in. Its technology is focused on using a patient's own T cells, or, in this case, tumor-infiltrating lymphocytes [TILs], to attack the tumor. I think of these TILs as the Navy SEALS of the immune system.
TLSR: Joe, here we are with another early-stage story. Are there anecdotal data that have gotten your attention?
JP: I'll give you some real numbers. There have been independent Phase I/II studies at four sites, including the National Cancer Institute [NCI], MD Anderson Cancer Center, Moffitt Cancer Center and at Sheba Hospital in Israel, where patients have been treated in a real-world setting. The consistency of the data among these sites is quite striking to us. The clinical data are evolving pretty much daily, but we're seeing about a 12% complete response rate with the TILs alone, with no combination drug, and we're seeing an overall or objective response rate in the 50% range-47% to 49% across the board. I would mention that overall response rates include complete response plus partial response.
TLSR: The fact that these data are so consistent among investigator- and company-sponsored studies goes against conventional wisdom, doesn't it?
JP: When oncology studies read out and when they are analyzed based on investigator assessments versus independent or central investigators, you'll normally see big deltas in the data. We would normally see a decent amount of variability among the various sites. That's why I see this consistency as being compelling. Yervoy was approved on a 10-11% objective response rate, and a 2% complete response rate. The rate of response, consistency and durability is key. There have been well over 136 patients at this point who have been treated with the therapy at these four different centers.
Another thing I might mention is that some investors view TIL technology as competitive with the checkpoint inhibitors, but I actually think the opposite. I think the technologies can be synergistic. There are combination studies being run currently, both at MD Anderson and the National Cancer Institute, combining the TIL technology with checkpoint inhibitors. In fact, some of the TIL-positive responses were in patients that were previously on a checkpoint inhibitor. There is a study going on at the Rosenberg Lab at the NCI in combination with Genentech/ Roche Holding AG (OTCQX:RHHBY) Zelboraf [vemurafenib], a small molecule BRAF kinase inhibitor that was approved for melanoma almost three years ago.
TLSR: Lion Biotechnologies is not using an antigen-presenting cell technology like those being developed by Dendreon Corp. (NASDAQ:DNDN), which ROTH has Sell-rated, and ImmunoCellular Therapeutics Ltd. (NYSEMKT:IMUC), which ROTH has Buy-rated, is it?
JP: With either Dendreon or ImmunoCellular, you're creating therapeutic cancer vaccines where you're presenting antigens to dendritic cells, which then "train" a T cell or B cell to recognize that antigen, then go find the antigen and kill the cell that's expressing the antigen. That's what these cancer vaccines are doing. What Lion is doing with its TIL technology is culturing tumor fragments after excision, then assaying T cells for tumor recognition, then selecting and expanding numbers of those cells and giving them back to the patient by infusion. They weren't present in significant quantities for a therapeutic effect before the technology was applied, and are now being selected and returned in therapeutic numbers to swarm the tumor.
TLSR: You've referenced checkpoint inhibitors and how important they seem to the investment community, and I'm noting that one such company, Celldex Therapeutics (NASDAQ:CLDX), is on your firm's Focus List. Celldex, a smaller-size mid-cap, has been hit pretty hard in this biotech pullback. Tell me about the company.
JP: We have Celldex on the Focus List because we believe it is true leader in the cancer immunotherapy arena. The company's two lead products are glembatumumab vedotin [CDX-011], which is in a pivotal Phase IIb for breast cancer, and rindopepimut, which is a cancer vaccine in Phase III and Phase II [potentially pivotal] for front-line and recurrent glioblastoma, respectively.
Especially coming out of this just-wrapped-up ASCO, I am excited about Celldex's version of a checkpoint inhibitor called varlilumab. I was excited about the product for a very long time, but really could not put investor focus on it because it was preclinical. In the latter part of 2013, we received the first look at first-in-human data in both solid and hematological tumors, and we were quite impressed. At ASCO 2014 we received an update on these patients, and based on the high level of prior treatment of the patients, the monotherapy data are impressive. A little perspective: While Yervoy and the anti-PD1s "take the brakes off" the immune system, varlilumab "presses the accelerator" on the immune system. The company has already started to sign collaborative agreements, including with Roche and Oncothyreon Inc. (ONTY), for combination studies. With regard to the stock pullback, this name certainly falls into the category I mentioned earlier regarding quality names that have been oversold.
TLSR: I know you're also following GenVec Inc. (NASDAQ:GNVC), a true micro cap with just a $40M market cap. Could you give me a brief summary of your investment case for GenVec?
JP: GenVec has seen a bit of volatility in its time, but the underlying technology of adenovirus delivery and vaccine technology remains strong, in my belief. The company has been out of favor for quite some time due to the Phase III failure of TNFerade in pancreatic cancer, and investors were not ready to focus on the company's earlier-stage vaccine programs. In addition, GenVec had previously signed an exciting worldwide partnership with Novartis AG (NYSE:NVS) for a gene therapy product for hearing loss and balance disorders. This was very exciting to us, but lack of visibility on when the investigational new drug application [IND] would be filed kept some pressure on the stock I believe. However, Novartis has filed the IND and is getting going with the Phase I program. Needless to say, hearing loss is a major global market, and any clinical benefit could be transformative for both GenVec and Novartis. In the meantime, GenVec is looking to out-license its various vaccine products, including respiratory syncytial virus and herpes simplex virus.
TLSR: Thank you for your time.
This interview was conducted by George S. Mack of The Life Sciences Report and can be read in its entirety here.
Joseph Pantginis, Ph.D., joined ROTH Capital Partners in 2009. Prior to joining ROTH, Pantginis was a senior biotech analyst at Merriman Curhan Ford [now Merriman Holdings Inc.]. Pantginis 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 JbHanauer & Co., First Albany Corp., Commerce Capital Markets Inc. and Ladenburg Thalmann & Co. Inc. Prior to his tenure on Wall Street, Pantginis served as an associate manager/scientist of Regeneron Pharmaceuticals' Retrovirus Core Facility. Pantginis received a master's degree in business administration in finance from Pace University, a doctorate in molecular genetics and a master's degree from Albert Einstein College of Medicine, and a bachelor's degree from Fordham University.
1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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