Xbiotech: 'On The Doorstep To Market'

| About: Xbiotech (XBIT)

Summary

Lead product candidate Xilonix is being reviewed for marketing authorization in an Accelerated assessment by the European Medical Agency (EMA).

FDA fast tracked Phase III global study for Xilonix to be completed by the end of 2016.

FDA fast tracked study for the treatment of serious infections due to S. aureus, incl. MRSA, has advanced into Phase II.

Extended production facility to be completed in 2nd-half 2016.

Short squeeze ahead?

Xbiotech has delivered on major milestones ahead of time

Following my last article on Xbiotech (NASDAQ:XBIT), Aug 17, 2015, Xbiotech has advanced its business in several aspects and is closer than ever to receive marketing authorization in Europe for its lead product candidate Xilonix. The EMA (European Medical Agency) has recently granted Xbiotech Accelerated review for its new drug application, allowing marketing authorization to be due in Q3 2016 - press release, business update.

Xilonix Europe - EMA accelerated review

Only five months ago Xbiotech has announced positive results in European Phase III study for its breakthrough therapy for colorectal cancer. Patients were assessed for responders using improved lean body mass (LBM) and EORTC performance as co-primary endpoints - a novel design established in collaboration with the EMA. Although the company reported a flub in November with some of the patients, it still had 333 evaluable patients to conduct a responder analysis. Out of these patients 33% randomized to Xilonix met both co-primary endpoints vs. only 19% in the placebo group plus BSC. Further to this, the company reported in their recent business update call that there was a 76% relative improvement in objective response rate for patients receiving Xilonix. Patients receiving the antibody vs. placebo were 53% more likely to have stable disease and a 26% reduction of serious adverse events (SAEs). On the basis of these results, Xbiotech has been granted accelerated review by the EMA. According to the Guidelines of the EMA, Accelerated review is only granted for"… medical products for human use which are of major interest from the point of view of public health and in particular from the viewpoint of therapeutic innovation…". In this case it's hard for me to imagine that the EMA will not grant the approval. Xbiotech has especially designed this trial with its novel primary endpoints together with the EMA and now received an accelerated review. Anything else would be a big surprise.

514G8 for S. aureus - FDA Fast track

Xbiotech also advanced to the Phase II of the clinical study with the highest dose of its antibody 514G8 for treating serious infections due to S. aureus, including Methicillin-resistant S. aureus (MRSA) - yet an unmet medical need - after having no dose limiting toxicities in the Phase I portion of the study. The 2:1 randomized Phase II portion will enroll 36 patients across approximately 16 clinical sites in the United States. The findings of the Phase I portion show a reduction of 50% in SAEs compared to placebo. SAEs were defined in the study as an event that was life threatening or resulted in prolongation of hospitalization or death . The Food and Drug Administration (FDA) has granted another Fast Track designation to Xbiotech for this.

Xilonix US- FDA Fast track

Also the other Fast-tracked FDA Phase 3 global study for treatment of metastatic colorectal cancer is one month ahead of schedule, according to the company's commentary on the business update. Currently, 286 out of the 600 patients were enrolled across 96 active sites all over the world. The completion of the study is expected to be at the last quarter of 2016.

Among other indications in their pipeline the above indications are in my opinion the most exciting ones. Three major catalysts are due until the end of the year 2016. The company is just about "… on the doorstep to market…"

Discovery platform and production

The production facility to be completed by the end of 1H 2016, according to the most recent business update. Filed and register with the respective regulatory body will take 9-12 months, but current production capabilities are sufficient to bridge the gap.

Xbiotech has developed through their proprietary discovery platform several antibodies in a very short time, reducing potentially time to market and costs. The most recent antibody against Ebola was cloned from two donors (here, here) within approx. 4 months and has also been verified to be effective by the United States Army Medical Research Institute of Infectious Diseases (USAMRID). In only 9 years the company has created a diverse pipeline of products and clinical possibilities, has been granted 3 Fast Tracks by the FDA and 1 Accelerated review by the EMA, has a strong financial balance sheet with USD 91Mln in cash and no debt and has a strong sense of cost efficiency - all of this has cost the company only USD 130Mln, according to the accumulated deficit as per year end 2015 10K filing.

Reductions in SAEs indicate that the antibody is effective

Both in the European phase III trial for colorectal cancer and in the Phase I portion for the treatment of serious infections due to S. aureus, reduced numbers (up to 50% in the S. aureus trial) strongly indicate a clinical benefit. By way of example, I would like to draw the attention to the results of the Phase III study for the treatment of colorectal cancer patients with regorafenib - also known as Stivarga and which received marketing approval from the FDA in 2012, and EMA in 2013 etc. In my opinion, this study is a good example or anti-example respectively of how SAEs relate to clinical benefits.

Regorafenib is marketed by Bayer AG and was approved by the FDA in 2012 and the EMA 2013. regorafenib is used to treat patient in metastatic colorectal cancer who failed previous standard therapies and thus is intended as 3rd and 4th line treatment option - Lines of treatment CRC Click to enlargeIt was reported in the CORRECT study trial that the patients had a median increase in overall survival of only 1.5 months vs. placebo with a lot of patients experiencing serious adverse events. The EMA has commented the results as "… modest clinical benefit… could suggest a activity limited to a subgroup of the population…" in their assessment report on the marketing application in 2013, but have nevertheless issued the marketing authorization for Europe. The following image was obtained from the assessment report and gives an overview of adverse events in the CORRECT study. Click to enlargeIncidences of SAEs was only slightly lower in the placebo group (43.8% vs. 39.5%) and were mostly related to general physical health deterioration. This might indicate that failing to reduce SAEs - especially when related to general physical health - has negative impact on the outcome. Or in the case of regorafenib a modest clinical benefit, according to the comments of the EMA.

So far my conclusion from this is that reducing and managing SAEs directly translates into a benefit for the patient and perhaps an improvement in physical health, quality of live and subsequently overall survival. This is also undermined by the following research paper, discussing the role and impact of lean body mass, quality of life on mortality risk in cancer patients . Xbiotech's antibody Xilonix targeting IL-1a does not only reduce SAEs but also shows tumor response activities as revealed at an investigator's meeting last year.

Stock price has yet underperformed the market since IPO

Nevertheless, the shares of XBIT have performed poorly since the IPO in April 2015, evaporating millions of dollars in market capitalization to currently USD 400mln.

Xbiotech has no major analyst coverage, no major investment bank, no significant institutional ownership. These seem to be the pitfalls of the company and a breeding ground for short sellers. In addition, some investors have filed a class action law suit against the company after a flub in a trial at the end of last year, which has most probably made some market participants insecure. But so far the company did not have to make any provisions in their year end 2015 financial statements.

However, the short sellers have steadily increased their positions to about 1.7mln shares (as of 31.03.2016). I have tried a simplified approach to follow the short sales. Based on my calculations, I came to the conclusion that the average short price must be at around USD 16.04 per share. Having said that, if you include an estimation of 14% cost of carry, the net average price short price must be at around USD 13.65 - above this is the negative profit territory.

Obviously, my calculations are based on the assumption that there is only "one" short seller. From there I have calculated the daily return since IPO and the weighted average price according to short interest overview as of 31.03.2016 (i.e. change in Short interest x average volume weighted price for that week). The average short price is then concluded from the average weighted weekly price multiplied by weekly change in short interest. Historical volatility was determined according to a given formula (for a brush up). The cost of carry was then assumed to be the price difference between a theoretical 1 year Call Option and Put Option (Current price = Strike price), in relation to the current stock price of USD 12.00 - cost of carry equals 14%, which is equivalent to the average borrowing costs for a short seller. For detailed calculations please see my excel sheet.

The short sellers might be right with their negative view, if the company will not have any success with its drugs and subsequently runs out of cash by the end of 2017. If and when this should happen, the short sellers took the right position. But in the recent months the company has delivered positive results on all their major milestones and the share price has rebounded from its lows at around USD 7.00 to currently around USD 12.00 Not far away from the average cost price of the short sellers.

Conclusion

The company has - this goes without saying - delivered on all their significant milestones in respect to the science and fundamentals. They are on track, ready for production and have a strong balance sheet with 91Mln in cash. Although stock price clearly has underperformed the market since IPO and short interest has increased, the stock price recently arrived to a turning point. We have seen some nice upward momentum since the lows last year and approaching a critical price level for the short sellers. Is there going to be a short squeeze ahead? I don't know... but anyhow, whether there will be a short squeeze or not, in my opinion this is not the crucial point. In the end fundamentals will prevail and that the company will generate profits as soon as year end 2016, once marketing approval is obtained for Europe. In the meantime it can continue and expand its discovery platform towards a "True Human" change in Biotechnology.

Disclosure: I am/we are long XBIT.

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.