Significant Upside Potential For Ophthotech Before Phase 3 Fovista Readout

| About: Ophthotech Corporation (OPHT)

Summary

The price pullback following Regeneron’s failed anti-platelet-derived growth factor (PDGF) + anti-vascular endothelial growth factor (VEGF) combination trial provides a good entry point to buy.

Key differentiators between Fovista (anti-PDGF) + Lucentis (anti-VEGF) and rinucumab (anti-PDGF) + Eylea (anti-VEGF) trials suggest the combination therapy is not dead.

Consistent and robust Ph2b data on Fovista + Lucentis combination therapy supports a Ph3 success.

Tremendous upside potential if there is a positive readout.

Ophthotech (NASDAQ:OPHT) is a clinical-stage biopharmaceutical company focused on treating age-related eye diseases. It is currently priced at around $35, close to the bottom of its 52-week range ($30-80) with a market cap of $1.23B. The pullback was largely due to the disappointing news from Regeneron's (NASDAQ:REGN) Ph2 trial testing anti-PEGF agent co-formulated with anti-VEGF agent combination therapy in patients with neovascular age-related macular degeneration (wet AMD). The failure dampened investors' confidence in the success probability of OPHT's Ph3 trial of Fovista + Lucentis combination therapy in wet AMD patients targeting the same pathways and thus created a chance to buy in right before the readout within a month.

With a top-line readout of the Ph3 trial coming up by the end of the year, I view now is a good time to buy the stock given its depressed price and a more-likely-than-not possibility of a positive outcome. Even though there are similarities between REGN's and OPHT's combination trials, key differentiators including specific targets or trial duration cannot be ignored and can explain why Fovista can still work. Additionally, based on the published data in October, Ph2b trial of Fovista + Lucentis combination therapy showed robust efficacy profile without serious safety issues, suggesting a relatively de-risked outlook for Ph3 trial.

The pullback of OPHT's stock provides a good entry point to buy before the upcoming catalyst event

Regeneron announced on Sept. 30, 2016, that its Ph2 CAPELLA study evaluating Eylea (aflibercept, an anti-VEGF agent) co-formulated with rinucumab (an anti-PEGF-beta receptor antibody) has failed to show superiority over Eylea injection monotherapy at 12 weeks. Patients in both combination Eylea/rinucumab groups showed a 5.8 letter improvement in best corrected visual acuity (BCVA) vs. patients treated with Eylea alone who showed a 7.5 letter improvement. Following the that day, OPHT's stock took a hit and fell from the previous day's ~$57 to ~$47, a 18% decrease signaling doubts from investors of its ongoing Ph3 trial, which was testing a similar anti-PDGF + anti-VEGF combination therapy in wet AMD patients. Since then, the price has been trending downwards to the current level of ~$35.

The failure of REGN's anti-PEFG + anti-VEGF efforts also solidified OPHT's market advantage if there is a favorable Ph3 outcome by eliminating a major competitor with a similar mechanism of action and a more convenient formulation (co-formulation rather than separate injections).

There are key differentiators between Fovista and rinucumab combination trials

To start with, Fovista is a 32-merpegylated DNA aptamer that binds to PDGF-BB and PDGF-AB homodimers and heterodimers and disrupts the interactions with their tyrosine kinase receptors such as PDGFR-αα, PDGFR-αβ or PDGFR-ββ, which are commonly expressed on pericytes.[1] On the other hand, rinucumab is an antibody that selectively targets PDGFR-β. Because Fovista targets the PDGF ligand itself rather than targeting a subset of PDGF receptors like rinucumab, it is a more potent anti-PDGF agent. As OPHT repeatedly pointed out, its anti-PDGF drug is the first-in-class and best-in-class by targeting the ligand directly rather than the receptors.

"I think that there are other -- as we previously stated, we continue to believe, we are first in class and best in class; that's something we've always self advocate. We also believe that targeting the ligand is definitely more beneficial than targeting the receptor. I think we've talked about that previously as well." - Seeking Alpha, Ophthotech CEO Dr. David Guyer on Q3 2016 Results - Earnings Call Transcript

Second of all, the co-formulation might introduce risk into the Eylea + rinucumab combination therapy whereas Fovista + Lucentis injections are given separately. The fact that the combination treatment group did worse than Eylea monotherapy group suggests that there might be issues over co-formulation weakening Eylea's efficacy. Additionally, some experts pointed out that the worse outcome from the combination arms might be due to the sequence homology between rinucumab, VEGFR2 or Eylea and rinucumab might interfere with the anti-VEGF pathway (Figure 1).

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Figure 1. Sequence homology between PGFRB and VEGR2

Furthermore, the primary endpoint for Eylea + rinucumab in Ph2 was 12 weeks vs. 24 weeks for Fovista + Lucentis. And in Ph3, the primary endpoint is extended to 12 months. In Ph2b, 1.5mg Fovista combination arm already showed significant superiority over monotherapy at week 12 and the upward/divergent trend at week 24 continued, pointing to a potential greater efficacy magnitude given longer time (Figure 2).

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Figure 2. Graph showing the mean change in visual acuity (VA) from baseline over time. (Source: Company publication)

Caution should be taken to compare between drugs and trials directly because there are many variables. Even targeting the same pathway, there are many reasons (dosage, formulation or specific targets) why one drug works and the other fails. In my view, these key differentiators explain why Fovista can still work, but the prediction is rooted strongly in the totality of its Ph2b data.

Consistent and robust Ph2 data supported a Ph3 trial success

Even with a successful Ph2 trial, the success rate for a Ph3 trial is generally around 60%. However, based on the strong efficacy data in Ph2, I assign a 70% of success probability to Fovista's Ph3 trial.

OPTH published its Ph2b data in the journal of Ophthalmology in October this year. A total of 449 wet AMD patients were randomized in 1:1:1 ratio into three treatment groups: 0.3mg Fovista + 0.5mg Lucentis, 1.5mg Fovista + 0.5mg Lucentis and sham + 0.5mg Lucentis. The patients were given monthly intravitreal injection according to their assigned dose group and the study was double-blinded and multi-centered. At 24 weeks, participants in the 1.5mg combotherapy arm had a statistical improvement in mean visual acuity (10.6 ETDRS letters) vs. monotherapy (6.5 ETDRS letters, P=0.019), a ~4 letter increase.

Two points stand out as I look at their data. One is the dose-response curve and the other is the consistency of the directionality across endpoints, both suggesting a strong efficacy profile.

Figure 2 clears shows the 0.3mg combo arm had an improvement trend over the mono arm, and the 1.5mg combo arm had an even bigger improvement over the 0.3mg group. I note that the efficacy curve of Lucentis monotherapy is in line with the MARINA study.

In terms of the key visual acuity endpoints, besides the primary endpoint mentioned above, there was also an increased percentage of patients achieving better visual outcome and a decreased percentage of patients with worse visual outcome among individual subgroups in the 1.5mg combo arm vs. monotherapy arm. In the subgroups divided according to the baseline lesion size, fluid or visio, the mean change in visual acuity also consistently favored 1.5mg combo arm (Figure 3). On top of that, other key anatomic endpoints showed favorable profile for 1.5mg combo group as well, including greater decrease in the choroidal neovascularization (CNV) area and less mean change in subretinal fibrosis severity (0.97 vs. 2.0; p=0.0003). The consistency and totality of the data suggests a real and meaningful improvement with Fovista + Lucentis combination therapy vs. Lucentis monotherapy and the Ph3 trial is relatively de-risked in my view.

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Figure 3. Bar graphs showing baseline variables and visual outcomes at 24 weeks. (Source: Company publication)

Some analysts argue that the imbalance of baseline lesion size can mask the efficacy seen in the Ph2 trial and the effect can be washed out in the Ph3. However, there is no established relationship between baseline lesion size and visual outcome as pointed out by the company. Also the differences in lesion size alone cannot explain the dose-response curve and the magnitude of change.

"So, just to give you some background, I don't know why someone would think that would affect it to that level in terms of one to one correlation with lesion size, nor are we aware of any uniform or constant consistent trend. So, if you look for example at the Anchor trial, if you look at three line gain in the 0.5 milligram, the largest lesion did not have the worst outcome, as you would expect. The 0.3 milligram, the smallest lesion in Anchor did not have the best vision as you would expect." - Seeking alpha, Ophthotech CEO Dr. David Guyer on Q3 2016 Results - Earnings Call Transcript

There is a tremendous upside for OPHT upon a positive readout

Prevalence of AMD - in 2004, 1.75 million in the US is expected to have some form of AMD, and by 2020, it is expected to be about 3 million. There is a highly unmet need in the treatment of wet AMD. Studies have shown the limitations of anti-VEGF monotherapy. 18% to 22% of patients lose VA despite continuous monthly dosing over one year and during the first four years of treatment or sooner, VA declines beyond baseline levels in most patients.[1] The ceiling of anti-VEGF therapy has already been reached with currently available agents which invites newcomers with novel mechanisms.

The annual global branded anti-VEGF sales are estimated to be around $7.1B in 2014. Roche's (OTCQX:RHHBY) Lucentis sales reached $1.7B in US sales in 2014 and Regeneron's Eylea sales in 2015 were $2.68B. If OPHT's Ph3 data turns out to be positive, the probability of success in other ongoing Ph3 trials evaluating Fovista in combination with Eylea and Avastin will boost, resulting in a bull scenario. It will also increase a buyout possibility by Novartis (NYSE:NVS) which is already a partner with OPHT.

Primary risk factors

The primary risk factor is the upcoming Ph3 result. If Fovista combination therapy fails to meet the primary endpoints or shows significant safety issue, the pipeline value will decrease dramatically given there is no commercial drugs on the market so far.

Cash position

OPHT currently has $321 million cash on the balance sheet including cash and available for sale securities. The quarterly cash burn is approximately $40-50 million and will be increased as the company carries out ongoing Ph3 trials and brings Fovista to the market if it gets approved. The company has sufficient cash to fund the operation for the next 12 months.

Conclusion

The significant pullback of OPHT's stock provides a good entry point right before the upcoming Ph3 top-line data by the end of the year. Given the consistent and robust data from Ph2 trial and key differentiators from Regeneron's failed anti-PDGF trial, I lean towards a successful Ph3 outcome and give it a 70% of success rate. The stock can easily double from this point upon good news.

Reference

[1]Dual Antagonism of PDGF and VEGF in Neovascular Age-Related Macular Degeneration. Ophthalmology 2016. Glenn J. Jaffe etc.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.