Seeking Alpha

Envelope Investing's  Instablog

Envelope Investing
Send Message
Back of the envelope analysis, reducing cognitive dissonance and the diminishing returns of due diligence.
View Envelope Investing's Instablogs on:
  • Still No Fear of the Emisphere

    Novartis, Emisphere's partner, disclosed in their quarterly earnings release that the EU trial for Oral Salmon Calcitonin missed the first of its 3 primary endpoints (you can infer from this that they hit their other 2).   So it turns out that I had it backwards in my last article; that they hit pain and function endpoints but missed Joint Space Narrowing (JSN).  I would argue that this is an even better scenario.  Novartis still has the chance of showing some difference in the structure with the MRI's as this is where the cartilage shows up, not on the X-ray.  Analysis of the JSN  with the X-ray's did not hit the primary endpoint but I have heard that X-rays can be tough to measure.  I am still convinced that calcitonin grows cartilage and modifies the OA disease and that it is not a question of efficacy on this endpoint but time to efficacy.

    The bottom line is that Oral Calcitonin improves pain and function for people suffering from the horrible disease of osteoarthritis and that the drug has no side effect to boot; this makes it a slam dunk for approval and a blockbuster drug.  Stay tuned the Emisphere story is heating up.

    Disclosure: Long EMIS
    Oct 21 10:27 AM | Link | 10 Comments
  • Don't Be Afraid of the Emisphere

    When the Data Monitoring Committee came out with a recommendation on July 23, 2010 that there was no need due to efficacy for Novaris (NYSE:NVS) to continue their Oral Salmon Calcitonin U.S. Phase III trial for Osteoarthritis it really sent Emiphere’s (OTCQB:EMIS) stock into a tailspin.  The stock has suffered a greater than 70% decline from the high set in June of 2010.  On the surface I totally understand the market reaction; the Calcitonin OA program was the huge home run potential for Emisphere; indeed some biotech experts thought that it could be one of the biggest grossing drugs of all time.  A positive nod from the DMC is a good sign for your Phase III trial (we got the green light from the DMC on the virtually identical EU Phase III Calcitonin for OA clinical trial last November); it definitely increases the odds of success but is not highly correlated with a successful outcome.  A negative recommendation from the DMC on the contrary is correlated very highly with a trial failure.  It means that you are not trending towards hitting your trial endpoint(s).  Most of the time a negative recommendation is met with a Roberto Duran style “No más.” from the trial sponsor.  Some very intelligent biotech investors in my network have even characterized the Calcitionin OA program to me as a “zero” after hearing of the DMC recommendation.   I understand the conclusion; it is based on logic and the history of negative DMC reports hanging a R.I.P. sign over a drug candidate.

    I am here to tell you today that the Oral Salmon Calcitonin for OA program is alive and well, and that I am convinced that Novartis will file for approval in EMEA in the next several months and file for approval in the U.S. in 2011 and that the drug will be approved in both EMEA and the U.S.  The EU trial has ended and Novartis should now be analyzing the data according to my timeline.  So you are asking yourself “How could you be so confident if no word has yet come out of Novartis as to the fate of the EU trial and with the U.S. trail still in progress?” You are also probably thinking that I am the type of investor who falls in love with his investments and who looks at the facts through rose colored glasses.  Well just give me a chance and I think that by the end of the article you may be a believer like me, or at the very least you will put the odds of success for Calcitonin for OA at significantly higher than “zero.”

    To understand my reason for enthusiasm about the OA program we have to start at the beginning, or at least at the beginning of the Phase III trials.  Here is a link to download a pdf of a FDA document entitled “Guidance for Industry; Clinical Development Programs for Drugs, Devices, and Biological Products Intended for the Treatment of Osteoarthritis”:

    It is the most comprehensive document that I have found that discusses the structuring of FDA trials for OA drugs and it is definitely worth a read for anyone interested in the Emisphere story.  Stumbling upon this document returned my conviction level in the success of the Calcitonin for OA program back to the high level that it was at before the DMC “no need to proceed for efficacy” announcement for the U.S. trial.   The document was published in 1999 but as far as I can tell there has not been any update in this guidance since.

    The guidance given in the document is that trials should track both the symptoms of the disease (Pain and Function) and the structure of the disease (Joint Space Narrowing, or JSN).   The EU trial and the U.S. trial are both structured in accordance with the guidance (EMA officials must echo this guidance) as you can see  at by clicking on the following links:

    EU Trial

    U.S. Trial

    (The trials differ slightly in their endpoints with the measure of function in the EU trial being a primary endpoint but it being a secondary endpoint in the U.S.) 


    So far the document just validates the structure of the trials, so why even bring it up?  The answer to that question can be found in the following text from page 6:

    “A claim of slowing JSN (i.e., showing structural improvement) might plausibly be dissociated from other claims when the mechanism of action of the product, and/or the size of the effect on slowing of JSN, are suggestive of future clinical benefits. In general, products will not be considered for approval or for separate claims if

    (1) they are not anticipated to have different effects on these parameters, or (2) they show only small improvements in JSN without demonstrated effects in symptoms.”


    Wait a second; it sounds as if a drug that slows JSN might be considered for approval regardless of the effect on the symptoms??!! It gets even better:

    “A hierarchy of claims for structural outcomes is shown here.

    1. Normalize the x-ray. An x-ray that shows a normalization of JSN is possible, at

    least in principle, and it would be the most convincing outcome of an improvement in structural integrity. But given our current understanding of OA, this outcome does not seem attainable for any currently studied class of products.

    2. Improve the x-ray. An x-ray that shows a reversal in the JSN (i.e., a widening of

    the joint space) at endpoint compared to baseline would reflect new or regrown cartilage (and not the cartilage hypertrophy sometimes seen early in OA). This outcome would be convincing and require no formal parallel evidence of improvement in clinical outcomes. (emphasis added)”


    When I read this I just about fell out of my chair.  The symptom outcomes need to be included in the trial but if the drug slows the Joint Space Narrowing and especially if it widens the joint space through re-growth of cartilage then the drug is approvable based solely on the JSN data regardless of the symptom outcomes.  As I have written in previous articles we are just starting to see the proof of what Nordic and Novartis have known for years; that calcitonin re-grows cartilage.  The following studies out of Nordic Bioscience (our other partner in the trials) show the effects of calcitonin on cartilage even in the very short term:



    We are re-growing cartilage and therefore we can get approval regardless of the other endpoints.  This is something that nobody else on the street has figured out.  The trials are alive and well and I am convinced that we will see a filing for approval in EMEA in the next several months.  Keep in mind that we were trending towards hitting all of our endpoints in this trial at the 1-year interim look, but even if the pain and function endpoints end up missing the mark we still have a drug.  Novartis and Nordic even included a second way of validating the claim of cartilage re-growth and thus joint space widening by including “Disease progression in the knee evaluated by MRI” as a secondary endpoint in both trials.  I am 100% convinced that we will be able to prove cartilage growth and widening of the bone gap and thus given the “Guidance for Industry” and the insanely safe profile for calcitonin (no side effects and never even reached a maximum tolerable dose) we are sitting on a blockbuster drug.


    Novartis has huge plans for Oral Salmon Calcitonin:

    1)   Blockbuster drug for treating osteoporosis.  We will soon hear from the DMC about the 2-year interim look for the OP trial.  We got the positive nod from the DMC at the 1-year mark and there is every reason to believe the trial will be a success at the 2-year mark and that Novartis will file for approval in both EMEA and the U.S. off the 2-year data and continue the trial for the 3rd year for marketing and labeling claims.  The primary endpoint of the trial is a reduction in new bone fractures, which would be absolutely huge if we are allowed to claim that Oral Salmon Calcitonin reduces bone fractures.  Studies are just starting to emerge that show that the most widely prescribed (sales of $4.6 billion in 2007) class of drugs to treat OP, bisphosphonates, actually increase the risk of bone fractures:

    Bisphosphonates have a lot of terrible side effects to boot.  Oral Salmon Calcitonin will win hands down with a claim of reducing fractures and with our extremely safe profile. 


    This is a relatively new understanding of the potential for Oral Calcitonin for OP for me, as I previously viewed us as having a nice market by supplanting the nasal calcitonin and growing that market by having the much more appealing pill as compared to the nasal spray.  I now realize that I dramatically underestimated the potential and I now see this as being a $2-3 billion product in 3 years as it quickly takes market share from bisphosphonates.

    2)   Blockbuster drug for treating osteoarthritis.  Sales could top $8 billion for this indication.  A disease modifying treatment for OA that re-grows cartilage and has no side effects.

    3)   Combination of Oral Salmon Calcitonin and Oral PTH into one pill for OP.  This is definitely further down the road, but a biotech expert friend insists that this has huge potential, as the 2 drugs are very symbiotic; one strengthens bones and prevents fractures and the other helps to heal fractures.  Interestingly Novartis has filed some patents on the combination.  Also of interest is that one of our other partners, Novo, has just demonstrated the ability to deliver two compounds in one pill using our Eligen technology.

    4)   Treatment for bone pain.  Some recent studies outside of Novartis and Nordic have shown calcitonin to be a useful treatment for bone pain.  I think that although Novartis is unlikely to do a study for this indication, Oral Salmon Calcitonin could be prescribed off label for this indication.

    It all adds up to over $10 billion in sales to Novartis and over $1 billion in pre-tax income to Emisphere and a greater than $100 stock price for Emisphere in 3-5 years.  What value is being currently given to these Oral Salmon Calcitionin programs?  Zero.  The fully diluted market cap of Emisphere, roughly $73 million as of me writing this, is in my opinion justified by our shot-replacement B12 pill (admittedly the board has taken more time to decide which way to go with the B12 than I anticipated, but I still believe that the future is very bright for this product).

    In the next week or so I anticipate writing about the huge potential of our GLP-1 program with Novo Nordisk and the potential for additional compounds with them.  Oral GLP-1 is early stage, but very exciting.  Stay tuned.








    Disclosure: Long EMIS
    Oct 12 10:08 AM | Link | 24 Comments
  • An Education for Your Portfolio

    I wanted to point out one of our holding, China Education Alliance, Inc. (CEU), which we believe offers investors a high return potential and a big margin of safety.  The company offers exam preparation materials and vocational training, both online and on-site.  We like the business model because as it offers high margins on very low cap ex and thus generates great free cash flow.  The industry is also attractive with both the government and parents placing great importance on education.


    The company recently announced impressive results for Q2 2010 with sales growth accelerating to 33.7% ($10.85 mm in Q2 2010 vs. $8.12 a year ago) and net income growth of 30.8% ($4.26 mm in Q2 2010 vs. $3.28 a year ago).  Management forecasted that the trend will continue and guided for 30% annual revenue growth for 2010 as a whole.  CEU is expanding geographically by opening new training centers in other provinces in order to bolster growth.  They are also actively looking for acquisitions but have a history of prudence in this regard having always patiently waited for great opportunities at low valuations.


    CEU closed the quarter with a huge cash balance of $74.7mm or $2.20 per share.   The stock currently trades at 7.2 times the 2010 earnings estimate (we believe these estimates are too low).  Backing out the cash the stock trades at only a 3.7 times 2010 estimates.  We view this as too low of a multiple and think that the stock could be worth 15x 2010 earnings, or above $9 per share.

    As a validation of our valuation target we would point to two of CEU's piers in the Chinese education industry;  New Oriental Education & Technology Group (NYSE:EDU) and ChinaCast Education Corporation (OTCPK:CAST).  EDU trades at 36 times earnings estimates for its fiscal year ending in May 2011 and CAST trades at 15.6 times 2010 earnings estimates.


    Disclosure: Long CEU.
    Aug 12 4:20 PM | Link | Comment!
Full index of posts »
Latest Followers

Latest Comments

Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.