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Rocky spent time with Pfizer Global Research and Development and with Esperion Therapeutics before attending Columbia University to pursue a Ph.D. in organic chemistry. At Pfizer, Rocky worked in the Chemical Research and Development department working on early scale-up of potential drug... More
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  • Delcath Systems: The Percutaneous Hepatic Perfusion Technology
     

    Delcath Systems (DCTH) rocketed upward yesterday as rumors that the company was being courted by Bristol-Myers Squibb made their way around the web. While I’m skeptical that the buyout will materialize, I own Delcath shares and believe that their chemotherapy delivery technology will be a major advancement to the way cancer is treated - at least in a small subgroup of patients. With buyout rumors swirling and a probable NDA submission within the next month, I wanted to take this opportunity to give a brief introduction to chemotherapy in general and the Delcath platform specifically.

    Chemotherapy

    Chemotherapy is the treatment of cancer by chemical means. In its most general sense, it’s just employing a particularly nasty molecule to kill cells. It’s poison plain and simple. While a number of other mechanisms of action exist, most chemotherapy treatments are molecules that have proven successful at killing cells by rendering cellular DNA inactive.

    Most generally, the molecules irreversibly bind to DNA through a distinct chemical reaction. The simplest form of chemotherapy was actually derived from mustard gas. You can see the similarity in the chemical structures below along with Melphalan - the molecule used in Delcath's system. The chlorides (the Cl in the drawings) are where the business takes place. Certain parts of DNA are able to displace the chlorides resulting in a permanent chemical bond between the DNA and drug molecule. The DNA is then unable to carry out its normal day-to-day functioning and the cell dies.

    However, the toxic payload usually isn’t intrinsically selective for cancer cells. The only selectivity we can gain is by treating the body as a whole and hoping to wipe out just the cells that are dividing quickly – a subset of cells in which cancer would belong. Unfortunately, so do cells in the bone marrow, digestive tract, and hair follicles. This leads to a nasty set of side effects including myelosuppression (decreased production of blood cells), mucositis (inflammation of the lining of the digestive tract), and alopecia (hair loss). The fact that the selectivity problem has been completely solved isn’t for lack of trying. The issue lies in the fact that cancer cells are almost identical to healthy cells – often the only difference is that they are multiplying out of control when they shouldn’t be.

    Delcath’s Percutaneous Hepatic Perfusion

    The selectivity issue was tackled by Delcath in a rather simple way. Rather than tune the selectivity of chemotherapeutic agents through molecular modification, the percutaneous hepatic perfusion (PHP) technique simply isolates the organ of interest and applies the chemotherapy locally.

    This is done by injecting a series of tubes into three major veins and arteries – one in the neck and one in each leg. A balloon is inflated to divert blood flow around the organ – the liver in this case – and Melphalan is then delivered to the desired organ only. After the chemo passes from the organ, the blood is filtered to remove the poisonous molecules and then returned to the body. What’s more, due to the isolation technique, chemotherapy can be delivered in concentrations several times higher than traditional chemo. If you're interested in more of the specifics are very cool video is available through the company's website.

    The PHP system offers a tremendous advantage over traditional therapy. Not only are side effects lessened – and these side effects can be rather serious – the treatment is more effective. Traditional chemotherapy concentrations have to be carefully controlled to kill quickly reproducing cells while not killing slowly reproducing healthy cells. The Delcath system allows the concentration to be very high in the affected organ but very low elsewhere.

    The science is extremely cool and worth getting to know, in my opinion. Investing, however, requires a look at much more than the underlying science. The main questions facing Delcath are going to be how well it can get hospitals to adopt the technology and how well it can get insurance companies to cover the cost – and of course whether or not the buyout will materialize. Those questions are for another post.

    Disclosure: Long DCTH. I have an October covered call at $9 on the entirety of my holding so I’m unlikely to make any money on any additional upward price movement.

    Tags: DCTH
    Oct 08 2:46 PM | Link | 4 Comments
  • Three Problems with Questcor’s Acthar IS Approval

    Questcor’s (QCOR) H.P. Acthar Gel faces potential approval by the FDA for the treatment of infantile spasms(IS) in the near future. While approval appears likely after an overwhelming vote of confidence by the FDA advisory committee in the spring, the approval may not bring a healthy boost to the company’s fundamentals in the long term. I’d like to address three reasons why you should not believe the hype on Acthar and why I will be shorting into any approval spike associated with the forthcoming FDA decision.

    The new indication has little impact on the company’s bottom-line

    Traditionally, an approval for a new indication means increased market size as new clinical information is validated and the company is allowed to market the drug directly to the new indication. Additionally, the FDA grants market exclusivity of three to seven years depending on the market size of the new indication (the orphan designation gives seven years in this case). An FDA approval for a new indication is, therefore, typically a pretty big deal for the company and the underlying share price. In Questcor’s case, however, the impact of the approval for IS should be minimal.

    First, the market size as a whole. Infantile spasms affects some 1 in 3,200 to 3,500 births. In the U.S., the total number of births stands at 4.3 million as of 2007. That puts the total number of IS cases at approximately 1,300 cases per annum. This small market size is also exactly why Questcor received orphan designation for this new indication for Acthar. Even by charging an exorbitantly high price of approximately $100,000 per patient for a course of treatment, this caps the total amount of revenues at about $130 million if every case of IS in the U.S. is treated with Acthar.

    You may be thinking that with a net profit margin of 33% the company may look to realize a sizable chunk of new cash flows regardless of the rarity of the disease. While the company has stated that marketing directly to pediatric neurologists should increase Acthar sales, the problem lies in the fact that Acthar is already the first-line treatment for IS and has been so for approximately 50 years. In addition, Acthar reportedly already has ~40% of the IS market and is the recommended treatment for IS by the American Academy of Neurology. Acthar isn’t exactly a treatment that would benefit from additional exposure for the treatment of IS. Additionally, with other lower cost treatments available such as vigabatrin (on-label) and prednisone (off-label), Questcor’s bottom-line will not largely benefit from the new indication.

    Acthar’s market size stands on shaky ground

    Even though corticotropin, the generic name for Acthar, has been used for over 50 years, Questcor has yet to face generic competition. This is likely due to the fact that, until recently, producing and selling the drug has been largely unprofitable. The Acthar franchise was sold by Aventis to Questcor for the low price of $100,000 in 2001 after failing to realize significant profits with the hormone. At the time, the cost for treatment was around $1,600 per vial. In 2007, Questcor increased the cost per vial of Acthar to $23,000, an increase of over 1,300%. At that time, Questcor turned the compound into a highly profitable franchise.

    While Questcor seemed to do well on its $100,000 initial investment, with the increase of profitability also comes the real risk of generic competition. Questcor’s current Acthar sales stand around $90 million per year – not exactly a blockbuster – but if the company does realize significantly improved sales figures, especially in the multiple sclerosis and nephrotic syndrome markets, it runs the risk of a generic competitor biting into those sales. Questcor’s CEO has stated that isolation of the hormone from pig pituitary glands is a trade secret process, and therefore should allow the company to operate free of generic competition. If Momenta’s ability to produce and gain generic approval for enoxaparin – a biosimilar also isolated from pig organs – is any indication, Questcor’s trade secret may not hold forever. And if generic competition enters the scene for Acthar, the company has no pipeline to fall back on when sales of Acthar for the non-protected indications plummet.

    In addition, due to the exceedingly high cost of Acthar, the therapeutic area remains extremely attractive for new IS treatments. In addition to vigabatrin, which is already approved for IS, the syndrome has been treated off-label by prednisone, topiramate, lamotrigine, and others. If any of these treatments, or a new treatment altogether, gets its own orphan designation and approval from the FDA, the resulting loss of market share of Acthar could be catastrophic.

    Questcor’s troubling valuation

    With the profitability of Acthar, Questcor has managed to make the important biotech leap from cash burning to cash generating. The company has even been able to initiate some share buybacks and currently has a healthy cash position. Questcor, however, lacks a traditional pipeline in order to continue to grow its business. The CEO has stated that the Acthar franchise is a pipeline in and of itself. This is already suspect for the competition reasons stated above, but sounds especially fishy when examining the company’s recent annual and quarterly reports. Net income (of which Acthar sales contributions make up an overwhelming majority) are effectively flat from the most recent quarter to that of a year ago at $9.3 million per quarter. Sales have increased by ~10%, but those revenues have been eaten up by increased SG&A expenses. At this point it’s hard to consider potential earnings growth into the value of the company.

    And if the company’s earnings aren’t growing, it’s largely a value question if the share price is accurate. The current P/E ratio (ttm) of the firm is at 23.77. This means the company’s earnings are more costly than those of other mature revenue generating biotech companies (whose revenues are likely much more protected)like Biogen Idec (BIIB) at 14.32, Gilead (GILD) at 10.31, and Amgen (AMGN) at 11.24. Questcor needs to start realizing additional Acthar sales in its IS, multiple sclerosis, and nephrotic syndrome markets to justify it’s valuation – a task that it has largely failed at accomplishing over the past year.

    Summary

    While I largely expect Acthar to gain approval for the IS indication – and the seven years of market exclusivity that comes along with it – I don’t think the approval has a tremendous impact on the company’s fundamentals. While I may be on the more negative side on the company’s prospects – the analysts covering Questcor gives it much higher marks – don’t buy into the hype of the new indication approval. I think there will be a good opportunity to make some money on a short play if the market overreacts to this approval.

    Disclosure: No positions. Planning to short an approval spike that seems excessive (>10% or so).

    Also, I found the following story especially informative. 
    Tags: QCOR
    Sep 10 4:25 PM | Link | Comment!
  • Swing/Day Trading FDA Panel Notes
     Tomorrow the information-starved market gets its crack at the FDA panel notes on Jazz’s new treatment for fibromyalgia, as yet known as JZP-6. There are lots of methods out there as far as playing biotech binary events goes, but I feel there’s very little associated with the note release to panel period. I wanted to share a method I occasionally use to make a little extra cash flow with the increased volatility surrounding the release of these notes. I feel like 5% is a realistic goal for this strategy, which isn’t bad for a day or two of work.

    First, I’d like to summarize the general sentiments of the blogosphere regarding the content of the panel. The concern of the panel will likely not be over safety and efficacy – the drug appears to excel in these two areas – but rather with the potential illicit use of the drug’s main ingredient. The active ingredient in JZP-6 is sodium oxybate, a chemical that is basically gamma-hydroxybutyric acid, or GHB – a schedule 1 drug in the United States. While Jazz already markets the drug Xyrem for narcolepsy that is also basically GHB, the total market size for that drug is relatively puny. The market for fibromyalgia, however, is orders of magnitude larger than that of narcolepsy. With a whole lot more GHB floating around the potential for illicit use is much higher. There is already a REMS (Risk Evaluation and Mitigation Strategy) in place for Xyrem, and the consensus opinion seems to be that the panel will focus on whether that REMS will be adequate for the larger market. See my previous article for a more in depth analysis of my own viewpoint.

    Now, generally when the panel notes are released, if the notes reflect exactly what the market expects the price tends to go up. This is because the uncertainty of whether something really scary is in those notes evaporates. If, however, something unexpected creeps in the market can mash on the panic button and the price can swing in the opposite direction. Expect people to be especially paranoid about exact wording of statements. One constant in the market is that investors tend to be risk-averse and – given the potentially huge price swing associated with the panel – investors holding JAZZ will be especially on edge. As I understand it, the panel notes usually cause a downward trend in the stock price. You should, however, be ready for a price swing in either direction.

    Trading the notes

    Basically, the market is going to quickly digest the notes and pick a direction. At this point you don’t even need to look at the notes. You want to wait long enough that a clear direction, up or down, has been decided upon and then either buy into the uptrend or short into the downtrend. Timing is key so you may not want to use this strategy if you aren’t near a computer all day. There are several ways to make sure you get in early. I generally follow the stock price and any big swings I check against the FDA panel website. You can also sign up for e-mail alerts from Biorunup.comand Gekkowire is usually on top of things as well (for Vivus’ panel Gekkowire was the first one I saw with the information). I’ll also publish the notes here as soon as I get word of their release. I call this price swing ‘Wave 1′. It’s made on very little real information as no one has read the release in it’s entirety; as far as I know someone mashes on the gas in a particular direction after a 15 second skim and everyone else followed.

    So you’re in, you don’t know what the notes actually say, and you’re adrenaline is pumping. At this point, I suggest doing your due diligence and reading the notes. You really should be alternating between reading the notes, checking the share price, and scanning for any news released with respect to those notes. While reading the notes, look for anything especially scary sounding. In the case of JZP-6, you want to scan for where the REMS and illicit use issue is brought up and make sure the wording doesn’t look especially inflammatory. Then, check safety and efficacy to make sure there’s nothing unexpected. Finally give it good run through, scanning for anything at all that looks suspicious. What you’re doing is trying to find what the bloggers and web journalists are going to point to when they publish an article stating their opinion on the release notes. Their comments will affect ‘Wave 2′ of any price swings. It doesn’t really matter if they know what they’re talking about or not, the first bit of synthesized information the market is going to eat up. Be prepared for this. Generally, it would appear that Wave 2 follows the same direction as Wave 2, but don’t count on it.

    As the day continues on, you want to keep checking the news via your favorite sites. The equity groups usually don’t issue an opinion so you’re just going to follow the main news sources. As much as I hate to say it, Adam Feuerstein will probably have a large impact on the price momentum whenever his article comes out (he will also be liveblogging, from what i understand). Try to get at it first. You may also want to use Twitter, if you don’t already, as new information tends to be tweeted and re-tweeted relatively fast. The stock will usually continue in the direction it chose in Wave 1 and 2 as day traders and late adopters pile on the trend and as long as no strong news to the contrary is released.

    At this point you want to formulate an exit strategy. It’s probably three to six hours after the notes went public and you’ve probably ridden the momentum of the market to a gain of a few percentage points. I like to look for a reversal in the upward trend before I get out. How large that reversal is will be entirely up to you. Maybe 1% down or up from a relative high or low at any given point is your cue to exit your position. I personally watch the chart and if I feel that the sentiment has changed at any time I promptly leave. Keep your goals modest, as greed can crush you here. The trend will often extend to the next day as people become more certain of the potential outcome of the panel, but there are no guarantees here.

    Summary

    In summary, this is a relatively high-risk trading opportunity and shouldn’t be for people who don’t have the cash to keep trading costs low or the time to watch your computer all day. There is, however, what I feel is a strong and predictable momentum that builds with the release of the FDA panel notes. Furthermore, even given the high risk associated with the day trading, it beats the much riskier trade of holding through the panel. With some good timing and a bit of luck you can make somewhere around 3-5% or more return in a day or two. It’s also a great exercise in reacting to the market to those who are more comfortable trading on fundamentals. I also want to reiterate my disclaimer and say that I make no guarantees that this works every time – but I do find it to be a reasonably high probability trade. Good luck!

    Also, feel free to share your own strategies in the comments. You don’t even need to leave an e-mail address if you don’t want.



    Disclosure: No positions.
    Tags: JAZZ
    Aug 17 5:59 PM | Link | Comment!
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