Biotech Forum Daily Digest: Notable Trial Failures; NASH Continues To Be Tough Space To Solve; Spotlight On ADMA Biologics

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Includes: ADMA, AGN, AMGN, ARDX, CARA, EGLT, GALT, JNJ, KITE, LGND, PFE, PRTA, PTIE
by: Bret Jensen

Summary

Biotech continues to churn right below a resistance level that has been in place throughout 2016. Interestingly, small caps are currently outperforming the large caps in the sector.

I believe this reflects both increasingly positive sentiment on the space as well as a noticeable pickup in M&A activity in the small- and mid-cap segments of the sector.

All the other notable news, events, and analyst ratings from across the sector, as well as a spotlight feature on ADMA Biologics.

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Biotech continues to churn right below a resistance level that has been in place throughout 2016. Interestingly, small caps are currently outperforming the large caps in the sector. Within the Biotech Forum portfolio we are seeing huge recent moves in the likes of names like Ardelyx (NASDAQ:ARDX) and Cara Therapeutics (NASDAQ:CARA), among others, on no real news.

I believe this reflects both increasingly positive sentiment on the space as well as a noticeable pick up in M&A activity in the small & mid-cap portions of the sector. Both Pfizer (NYSE:PFE) and Allergan (NYSE:AGN) have been particularly busy as acquirers since the Treasury Department derailed their mega-merger in late April.

As noted in a recent article, I believe the recent uptick in M&A activity in small and mid-cap portions of the industry will continue and should be bullish for the sector through year end. Although it should be noted that there appears to be a reversal in sentiment in this sector in early trading Wednesday.

Bad news for Amgen's (NASDAQ:AMGN) Kyprolis on Tuesday. The drug has failed in its first Phase III study in newly diagnosed multiple myeloma patients. Kyprolis, combined with melphalan and prednisone, failed to significantly top a cocktail of melphalan, prednisone and Johnson & Johnson (NYSE:JNJ) and Takeda's Velcade at improving progression-free survival or overall survival, a secondary endpoint.

Interestingly, Ligand Pharmaceuticals (NASDAQ:LGND) fell more than 10% on the news on Tuesday as well. The company receives sales-based royalties from 1.5 - 3.0% from Kyprolis In the most recent four quarters, Amgen booked just over $600 million in sales for the drug which translated to a 2.5% royalty for Ligand or ~$15 million, over 20% of the company's revenues over the same time frame. This seems to be a little bit of an overreaction and I plan to pick up shares in Ligand at the $100 level today.

The stock of Pain Therapeutics (NASDAQ:PTIE) lost some two thirds of its value in trading Monday after the company announced it had received a Complete Response Letter (CRL) from the FDA regarding its New Drug Application (NDA) seeking approval of its abuse-deterrent oxycodone capsules by the brand name Remoxy ER. Specially the CRL outlined additional actions and data that are required for approval. Management says the actions will take about a year to complete and could cost $5 million.

Pain Therapeutics is another excellent example of the "Ten Year Rule" in that one should rarely invest in a small biotech/biopharma company that has been public for over a decade and still has not delivered a commercial success.

In the abuse deterrent space, Egalet's (NASDAQ:EGLT) ARYMO ER seems to have a much better chance of approval given its Ad Comm panel voted 18 to 1 to recommend approval in early August. That compound has a PDUFA date of October 14th. Egalet came public in early 2014.

Ending this section on a positive note, Kite Pharma (NASDAQ:KITE) rose nicely yesterday on trial results. The company disclosed interim analysis of Phase II CAR-T data the company believes are strong enough to support regulatory approval. The CAR-T triggered complete remissions in 47% of patients with an aggressive form of non-Hodgkin lymphoma {NHL}. It should be noted there was a dropoff in the number of responders over the first three months that could raise questions about durability as noted in an article yesterday on SeekingAlpha.

Not surprisingly given important trial results, Kite Pharma and Amgen dominated analyst commentary over the past 24 hours. Kite was reiterated as a Buy by my count at six analyst firms including Jefferies and RBC Capital with price targets proferred in the narrow range of of $72 to $78. Barclays was the lone dissenter with a Hold rating and $65 price target.

The view on Amgen is a bit more mixed with five analyst firms reissuing Buy ratings including Credit Suisse and Cowen & Co. Price targets from these analysts range from $190 to $206. JP Morgan and Leerink Swann say Amgen is a Hold for the time being.

Prothena (NASDAQ:PRTA) which was our Spotlight feature on September 9th sees its first analyst commentary in over a month this week. Credit Suisse reiterates its Buy rating on Monday, interestingly with a price target of just $65 a share, just above where the shares are currently trading. RBC Capital reissues it Buy rating yesterday calling the CEO's recent departure for a medical leave a mild positive.

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Not surprisingly after its lead product candidate GR-MD-02 for the treatment of patients with nonalcoholic steatohepatitis {NASH} with advanced fibrosis failed to achieve its primary and secondary endpoints on Tuesday, Galectin Therapeutics (NASDAQ:GALT) is downgraded to Sell today over at Roth Capital. NASH continues to have many failures to date, but myriad companies will continue to pursue treatment options given the potential size of the space.

Note: New analyst ratings are a great place to start due diligence, but nothing substitutes for deeper individual research in this very volatile sector of the market. Many of the small-cap names highlighted in the "Analyst Insight" will eventually appear in the "Spotlight" section, where we do deeper dives on this type of promising but speculative small-cap concern.

For our Wednesday Spotlight feature we highlight ADMA Biologics (NASDAQ:ADMA), which has moved up nicely since being included in the Insiders Forum portfolio in August but further upside seems likely provided the company can navigate a recent obstacle.

Company Overview:

ADMA Biologics is a New Jersey-based late-stage biopharmaceutical company that develops, manufactures, and intends to market specialty plasma-based biologics for the treatment and prevention of infectious diseases. ADMA Biologics was founded in 2004 and came public in late 2013. The stock sports just under a $100 million market capitalization and a stock price of just over $7 a share.

RI-002:

The company primary and only drug candidate is RI-002 which is a plasma-derived, polyclonal immune globulin intravenous for the treatment of primary immune deficiency disease. RI-002 demonstrated positive Phase III results and successfully achieved its primary endpoint of preventing serious bacterial infections such as bacterial pneumonia, osteomyelitis and bacterial sepsis in immune compromised Primary Immunodeficiency Diseases {PIDD} patients. RI-002 contains standardized, high levels of antibodies to respiratory syncytial virus {RSV} in addition to naturally occurring polyclonal antibodies RI-002 is intended to prevent infections in a subset of patients diagnosed with PIDD. RI-002 for a target population range of approximately 10,000 to 15,000 patients primarily suffering from PIDD presentations and may also have some off label uses such as use with solid organ implants.

The FDA accepted the company's Biologic License Application {BLA} in September of last year. The company also operates two, FDA-licensed, GHA, MFDS-certified source plasma collection facilities, at our ADMA BioCenters located in Georgia, which provide a portion of blood plasma for the manufacturing of our lead product candidate RI-002.

Complete Response Letter:

On July 29th, the FDA issued a Complete Response Letter {CRL} to the Company's BLA for RI-002. The company clarified immediately that "The CRL did not cite any concerns with the clinical safety and efficacy data for RI-002 submitted by ADMA in the BLA, nor has the FDA requested any additional clinical studies be conducted prior to FDA approval of RI-002 for PIDD.

The FDA identified in the CRL certain outstanding inspection issues and deficiencies at ADMA's third-party contract manufacturers, including its contract drug substance and product manufacturer, its contract fill and finisher and compliance issues with a third-party contract testing laboratory, and requested documentation of corrections for a number of those issues"

The stock fell some 20% in one day in response to the announcement around the CRL. I expect the company to address all the issues in the CRL by end of the year at the latest. When it does, I expect the stock to recapture all the losses from the CRL if not gain further as the product has significant potential given the small size of the company.

Balance Sheet & Insider Buying:

The company raised some $14 million in May to aid in the rollout of R1-002. Impressively, insiders bought over $1.6 million of that secondary offering. In addition, numerous insiders have been making small purchases of shares every few months since the company came public in 2013. I see over 50 buy transactions over that time and not a single share sold. In addition, almost all of these purchases happened at higher prices than where the stock is currently selling at in the market. The company had over $11 million in net cash on the books at the end of the first quarter. With the proceeds from the secondary offering, the company has almost a third of its market capitalization in cash and well-funded to roll out R1-002 successfully

Outlook:

I think analyst firm Ladenberg Thalman has the right bead on ADMA within a Buy rating they put out in early August. While they did lower their price target from $17.50 to $12.50 on the delay due to the CRL, they also noted the "Complete Response Letter received by ADMA Biologics as creating a buying opportunity. We continue to believe RI-002 has the potential to become standard of care for adult Primary Humoral Immunodeficiency Disease."

There was a very in depth and technical article on R1-002 in early August right after the CRL was issued. It goes into why based on trial results the compound will get approved once the manufacturing issues are addressed to the satisfaction of the FDA. Revenue estimates for FY2017 before this CRL had a wide range with a high of $65 million. That optimistic sales level probably is now out to FY2018 as the CRL will slow the rollout, but shows the potential for this compound. Insiders seem to believe in the long term story of the company and I have thrown in my lot with that vote of confidence and have a small stake in ADMA.

Thank You and Happy Hunting,

Bret Jensen, Founder, Biotech Forum

Disclosure: I am/we are long ADMA, AGN,AMGN, ARDX, CARA, EGLT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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