AVI BioPharma - Can They Deliver The World's First Treatment For Muscular Dystrophy?

| About: Sarepta Therapeutics, (SRPT)

It is usually faith healers and evangelical ministers that claim to get people out of wheelchairs and walking by way of celestial miracles. AVI BioPharma (AVII) is trying to do the same thing but with cutting edge science.

The company is developing ribonucleic acid (NASDAQ:RNA)-based therapeutics for both infectious and rare diseases. The goal of this type of therapy area is to fool the body into producing a protein that is not encoded within the DNA itself. However, several issues have hindered the clinical progress of some RNA-based drugs and have contributed to mixed results in clinical testing. RNA is potentially immunogenic, unstable, the protein produced may not be functionally active and often requires a vehicle for delivery to the targeted cells. Promising results from recent clinical trials suggest that these barriers may be overcome with improved synthetic delivery carriers and chemical modifications of the RNA therapeutics.

The lead product in AVI's pipeline is Eteplirsen, which is being developed as the first ever treatment for Duchenne Muscular Dystrophy (DMD). The disease is caused by a mutation in the gene that encodes the protein dystrophin, which is needed for the proper connection of muscle fibers. DMD is a nasty genetic disease that results in muscle deterioration over many years and eventually death normally before the age of 30 . In simple terms the goal of Eteplirsen therapy is to fool the body into producing dystrophin even though it does not have the DNA to produce it. It is like getting the body to produce a blue pigment for your eyes when your DNA determines your eyes are brown.

AVI have recently announced that Eteplirsen met the primary efficacy endpoint in a randomized, double-blind, placebo-controlled Phase IIb study in boys with DMD.

"This study represents a major advance in the field of DMD research as the results indicate that Eteplirsen is producing consistent levels of dystrophin, which is the essential protein that these patients need," said Jerry Mendell, M.D. Director of the Center for Gene Therapy and Muscular Dystrophy at Nationwide Children's Hospital and principal investigator of the Phase IIb study. Dr. Mendell added, "We anticipate that these levels of dystrophin could lead to significant clinical benefit if maintained over a longer course of treatment." (Click here for the full press release).

Eteplirsen administered once weekly over 24 weeks resulted in a statistically significant (p ≤ 0.002) increase in novel dystrophin (22.5% dystrophin - positive fibers as a percentage of normal) compared to no increase in the placebo group. There were no treatment related adverse events.

So you would expect that the stock rallied strongly on news that the primary end point was met right? Not exactly, the stock tanked quickly from $1.54 and is now languishing around $0.90. The market set high expectations anticipating a clinical improvement that was not observed in the six-minute walk test. The market was also disappointed that there was no significant increase in dystrophin over a 12 week period despite a higher drug dose (50mg/kg once weekly). Like most early stage high risk biotech companies both traders and investors want positive results on all fronts and they want them immediately. Fair enough, especially in the competitive world of emerging biotech companies, but if you're a longer term investor you should be aware that DMD is a slow degenerative muscle wasting disease whereby the muscle wastes away over many years. It may take some time to show any clinical benefit.

Whilst measuring increases in novel dystrophin is relatively straightforward, measuring the clinical benefits is very tricky. Due to the degenerative nature of the disease the patient groups will be at different stages in their disease progression. The six minute walk test is a recognised end point although some would argue that it is somewhat arbitrary, why not 4 minutes or 8 minutes? In a presentation at the American Academy of Neurology (ANA) annual meeting more details have emerged on the 6 minute walk test. In any rare disease taking a deep look at each patient case is essential. In an exploratory analysis of the 6 minute walk test 2 patients showed a rapidly progressing decline. These two patients were excluded from further analysis (this is not a pure statistical approach). Of the remaining 10 patients a small positive difference was observed.

The fact that proof of concept and indeed the primary end-point of the study has been met is still impressive. This provides some hope for patients affected by this devastating disease.

The stock was beaten down further recently due to Chief Scientific Officer, Peter Linsley leaving. The company provided no reason for the untimely exit. People move on for a variety of reasons so we will never know if the exit was in response to the trial results, personal reasons or for a more enticing opportunity elsewhere.

The real test for AVI is whether Eteplirsen can repeat or improve upon the 22.5% increase in dystrophin positive fibers in future trials, which can then be translated into a clinical benefit. As an increase in dystrophin has occurred already, then it is possible that an increase will be evident again in future trials over the longer treatment period. Assuming that with longer treatment a clinical end point can be met it is not unreasonable to expect an FDA filing. Given the severity, lack of any other therapy and rarity of this pediatric disease I would expect AVI to be able to make a strong case for an accelerated review.

AVI is not a one trick pony, it has 186 patents (foreign and domestic) issued or licensed and 192 pending patent applications (domestic and foreign) protecting their future technologies. Also in their pipeline they are developing AVI-6002 and AVI-6003, hemorrhagic fever virus therapeutic candidates for Ebola and Marburg viruses, respectively. AVI-6002 and AVI-6003 have demonstrated positive therapeutic effects, with high survival rates demonstrated in repeat preclinical studies in both the Ebola Zaire and Marburg Musoke viruses. There is currently no effective therapeutic for Ebola or Marburg viruses.

In July 2010 AVI were awarded a contract for up to $291 million with the U.S. Department of Defense that was structured into four segments. $80 million was immediately released with the remaining segments released upon hitting future milestones. Nice cash flow for a currently sub-$1 biotech stock.

AVI is also developing influenza therapies to treat H1N1 (pandemic flu), H5N1 (avian flu), H3N2 (seasonal flu) and Tamiflu™ resistant flu strains (Tamiflu™ is marketed by Genetech who were bought by Roche (OTCQX:RHHBY) in March 2009). The program is also funded by the U.S. Department of Defense under their Transformational Medical Technologies program (TMT) conducted in cooperation with the U.S. Defense Threat Reduction Agency (DTRA). AVI have received funding commitments up to approximately $20 million to advance the development of AVI-7100 through an IND and to preclinically evaluate therapeutic potential of these therapies. It is worth remembering that a combined $3bn in revenue was shared between Glaxo SmithKline (NYSE:GSK), Sanofi (NYSE:SNY) and Novartis (NYSE:NVS) in the last H1N1 pandemic. Any future influenza health scare will certainly send the stock rocketing upwards, even if only for a short period.

Insiders are buying the stock with an aggregate $375,000 in purchases made on April 6th. The CEO, Christopher Garabedian, bought $195,000 using his own money. Analysts are bullish on the stock with JMP Securities initiating coverage with a market outperform rating.

The mean price target for AVI Biopharma is $3.33 with a median target of $2.75 (based on six analysts covering the stock). The low target is $2 and the high target is $6. Out of the six analysts covering the stock three have buy recommendations and three have strong buy recommendations.

We will have to wait and see if the longer trial of Eteplirsen will continue to produce positive results and ultimately an FDA approval. If future trials of Eteplirsen do not show any clinical benefit the stock will no doubt smash through its $0.50 support. AVI is not for the faint-hearted or risk averse. But unlike many other emerging biotech companies the risk is somewhat spread due to its pipeline.

Ultimately the stock should be underpinned by the strong government interest and continuing finance commitments from the Department of Defense in its other therapeutic areas. This bodes well for the company's longer term future. But be aware, AVI is in its early stages and it will be a bumpy ride ahead, but at $0.90 per share AVI Biopharma is a compelling (and speculative) buy.

Disclosure: I am long AVII.