Source: George S. Mack of The Life Sciences Report (9/13/12)
Biotech has a breeze to its back, and successful progression through the phases of drug development also help propel the industry forward. In this exclusive interview with The Life Sciences Report, George Zavoico, senior analyst and managing director with MLV & Co., describes solid milestones by which investors can tick off success in the biotech space, and suggests a number of innovative biotech companies whose success will blow profits into investors' pockets.
The Life Sciences Report: George, we spoke almost exactly six months ago. You said that biotech stocks had a breeze to their backs. I've just looked at an unweighted index of your coverage list: It is up 30% since that time, and up 67% from 12 months ago. You have done well. Investors are always in a bottom-up market to a great degree, but does this market have long and strong legs from here, with a continued breeze?
George Zavoico: From a fundamental standpoint, in terms of science and clinical trial milestones, yes. The biotech market has long and strong legs from here. Quite a few companies are projecting announcement of top-line results of proof-of-concept or phase 3 trials before year-end, either by press release and/or at clinical conferences. The summer is relatively quiet with regard to clinical conferences, so the fact that valuations of many companies held up or increased during the past two or three months is a good sign. However, unrelated national and global geopolitical events that negatively impact market and economic perceptions can quickly reverse any such positive trend and upset the fundamental value of biotech companies.
Having said that, before the year ends I am expecting key clinical trial results from several companies. I think Agenus Inc.'s (AGEN:NASDAQ) partner, GlaxoSmithKline (GSK:NYSE), could report results from one or more of its phase 3 trials of Agenus' novel QS-21 Stimulon vaccine adjuvant, the first for malaria, followed by one or two cancer vaccines next year. Peregrine Pharmaceuticals Inc. (PPHM:NASDAQ) is likely to report overall survival results from its front-line open-label phase 2b trial of bavituximab in combination with carboplatin and paclitaxel in non-small cell lung cancer. ArQule Inc. (ARQL:NASDAQ) has guided to reporting interim results from its pivotal phase 3 trial, called MARQUEE and conducted in partnership with Daiichi Sankyo Co. (DSKYL:OTCPK), of tivantinib + erlotinib (Tarceva, produced by Roche Holding AG [RHHBY:OTCQX]), in non-squamous non-small cell lung cancer. Keryx Biopharmaceuticals Inc. (KERX:NASDAQ) expects to announce results of its 58-week safety and efficacy phase 3 trial of Zerenex for the treatment of hyperphosphatemia (elevated serum phosphate levels in end-stage renal disease). Acadia Pharmaceuticals Inc. (ACAD:NASDAQ) has guided to reporting top-line results from its phase 3 trial of pimavanserin in the treatment of Parkinson's disease psychosis, and Threshold Pharmaceuticals (THLD:NASDAQ) is likely to report overall survival results from its phase 2 trial of TH-302 + gemcitabine in pancreatic cancer. It is also worth mentioning that the FDA scheduled an advisory committee meeting to discuss Dynavax Technologies Corp.'s (DVAX:NASDAQ) biologics license application (BLA) for Heplisav, its hepatitis B vaccine, in November, ahead of a February Prescription Drug User Fee Act (PDUFA) date.
With important milestones like these, which could add substantial value with positive results, you can see that the breeze, as you say, is continuing to back the biotech sector. Note that these examples are only a sampling from several companies the life sciences team here at MLV & Co. covers.
TLSR: I've had some natural resource investors tell me recently that they are moving into life sciences, particularly into biotech. When do you begin to see these kinds of moves as contrarian indicators?
GZ: I suspect investors are broadening their exposure into the sector because biotech company valuations are not dependent on fluctuations in commodity prices. Moreover, as you point out, not only have many biotech companies under coverage at MLV & Co. done rather well in over the past six months and one year, the two key biotech indices have also performed quite well, with the NYSE.Arca Biotechnology Index (BTK) and NASDAQ Biotechnology Index (NBI) up 26% and 45% from a year ago, respectively. Investors tend to move to better performing sectors, which could explain the renewed interest in biotech.
You also asked when these moves become contrarian. This is more difficult to judge, but the answer lies in looking at the stock price relative to valuations, according to our models. We may see recommendations moving from buys to holds based on overbuying and momentum, and not necessarily on company fundamentals. However, poor clinical trial results obviously change the fundamentals and are valid reasons for a downgrade.
TLSR: I meant to ask you, in our previous interview, about the process of your move from molecular translational research at big pharma and small biotech companies to a different kind of research, that being on the sellside at a boutique investment bank. You used to be on the team, but now you're the referee. What was the most difficult mental transition you had to make?
GZ: The transition was not that quick, as I formed and ran my own biotech consultancy and medical writing company for a few years in between. Since I was pretty much in the laboratory or managing a lab before going into consulting, this step exposed me to aspects of the business that I had not experienced in the lab-notably clinical and regulatory affairs, financial due diligence and company management issues. One can't look at a biotech and just look at the science; many other factors come into play that may determine how successful a company may be in the long run.
TLSR: Last time we spoke you said you had a special interest in molecular diagnostics. Aren't these susceptible to commoditization? A competitor can maneuver around another company's IP and devalue the originator's idea. Of course, that can be done with drugs too, but not in 18-36 months, which is plausible for developing a biomarker. How do you perform due diligence around this possibility?
GZ: There are two aspects to molecular diagnostics. You can get a snapshot of a patient, just as you would with typical lab tests, with regard to electrolytes, oxygen saturation, blood cell counts etc. But in this case you are measuring the presence or absence of a particular enzyme or mutation. These kinds of tests are more likely to become "commoditized," as you say. They add value by helping to more accurately evaluate a patient's prognosis.
The other type of molecular diagnostic is predictive-determining the likelihood that a particular drug or treatment regimen will actually provide clinical benefit. Typically, these diagnostics don't measure a single parameter, but a gene expression profile. Moreover, more rigorous clinical trials are needed to show the correlation between treatment choice and benefit. These types of tests are more difficult to commoditize, especially since the ability of a company to conduct these trials, publish the results to validate the correlation, convince physicians and patients to use the product, and obtain reimbursement from third-party payers is not a trivial matter. We think these types of diagnostics will be much more difficult to commoditize. Genomic Health Inc. (GHDX:NASDAQ) has taken this approach and no real competitors have emerged.
TLSR: Because of your training as a working research scientist, I wanted to get your take on why more biomarkers/diagnostics are not developed as targets for inhibitors or agonists (chemical triggers for stimulating cellular responses). Are they generally too far downstream of effective targets? Why don't we see small diagnostics companies licensing out targets and ligands related to reagents?
GZ: I think you've largely answered your own question. Biomarkers are the relatively stable products of one or more upstream reactions, one of which would be the drug target. Moreover, diagnostics companies typically don't have the research and development expertise or infrastructure to support validation and patenting of potential targets, which leads to ownership and the capability of out-licensing.
TLSR: George, Resverlogix Corp. (RVX:TSX) is performing well, but is the cholesterol-modulating space getting crowded?
GZ: There is a very large potential market in this space, despite the continuing widespread use of statins, which explains the high level of interest. Even with improved control over cholesterol levels with statins, many people still suffer or die from acute coronary events or strokes. Resverlogix has a product with a unique mechanism of action that makes it stand out, in my view. And with notable failures in the high density lipoprotein (HDL)-raising space, RVX-208 is beginning to attract attention, especially with recent news showing that its phase 2b SUSTAIN trial of RVX-208 significantly increased levels of HDL-C and Apo A-1.
TLSR: Because of all the companies and products squeezing in to this space, will the hurdles for RVX-208 be very high?
GZ: The hurdles are high primarily because trials of drugs for atherosclerosis must be large to account for patient variation and event rates. While reductions in major adverse cardiac events (MACEs) are typically the key primary endpoint the FDA likes to see, others can serve as surrogate endpoints and this translates into smaller, more cost-effective, signal-seeking trials. Resverlogix chose plaque regression, measured by intravascular ultrasound (IVUS), as its primary endpoint in another signal-seeking trial, called ASSURE. This endpoint could also serve to validate its mechanism of action. We think this validated endpoint would be evident before many MACE events would occur.
TLSR: Does the fact that RVX-208 is an agonist rather than an inhibitor make it more appealing? Could there be fewer off-target effects?
GZ: It's actually a bit more complicated than that. RVX-208 is an inhibitor of a bromodomain and extra-terminal, or BET, protein involved in the transcription of Apo A-1, an apolipoprotein component of HDL that transports cholesterol out of plaques. Thus, while it's an inhibitor, it increases circulating levels of Apo A-1, hence some confusion about it being an agonist or inhibitor. In my mind, it doesn't matter if it's an agonist or inhibitor, as long as it works to reduce atherosclerotic plaque burden. We should learn whether RVX-208 does this when top-line results from ASSURE are reported, most likely before the middle of next year.
TLSR: Moving on to a different issue, development of Aastrom Biosciences Inc.'s (ASTM:NASDAQ) ixmyelocel-T for critical limb ischemia (NYSE:CLI) feels like it's taking forever. Is the primary endpoint limb sparing at 12 months?
GZ: Yes. To use the clinical term, the endpoint is amputation-free survival. Once there's an amputation, the quality of life of a patient diminishes substantially, while the cost and effort needed to provide sufficient care rises. The key to the design of this trial, called REVIVE-CLI, is targeting patients who are most likely to experience an event within the one-year time frame of the trial. It would be counterproductive and reduce the likelihood of success to enroll patients not likely to experience an amputation event within a year, or to enroll patients who are so far along in their disease process that they would require an amputation regardless of therapy. Aastrom spent a lot of time in determining patient inclusion and exclusion criteria, which identifies patients at risk of an amputation event within a year and, therefore, would be most likely to benefit from ixmyelocel-T therapy. The screening protocol takes time and we expect that a number of patients initially deemed eligible by their treating physicians will not meet the criteria as adjudicated by the central review committee of the trial.
TLSR: Is the company not able to move this proposed therapy into patients at an earlier disease stage? Or, must it be tested in patients who are sure to lose the limb unless they receive a dramatic therapy?
GZ: They could redefine the criteria, but it would be a much larger, longer, and therefore far more expensive trial. REVIVE-CLI is enrolling patients with no other options for treatment. By addressing an unmet clinical need, we think it is the fastest path to market.
TLSR: With regard to Threshold Pharmaceuticals, given the unmet need in pancreatic cancer and the exciting data from the phase 2b study in February, I wonder if there is any possibility of an accelerated approval of TH-302?
GZ: Definitely, but for an upcoming phase 3 trial. The phase 2b trial by itself was not designed as a pivotal trial since overall survival was a secondary endpoint. I envision a phase 3 trial of similar design, and most likely involving one of the two TH-302 doses evaluated in the phase 2b. If you've got success in phase 2b, typically there is no reason to make big changes to the trial design.
TLSR: Do we know yet if TH-302 has demonstrated any benefit in overall survival? Could it be approved based only on progression-free survival (NYSE:PFS), assuming that quality of life is improved?
GZ: We are still awaiting median overall survival (mOS) results and, as I mentioned before, those are expected before year-end. Conservatively, a phase 3 trial will be required. Recall that the primary endpoint of this trial was median PFS, so typical of phase 2b trials, this one was not powered to show a statistically significant difference in mOS. But as you point out, in indications with clear unmet clinical needs, where a prolongation of survival would make a big difference, exceptions can be made. I suspect if the mOS results show a statistically significant difference between the two arms, as we hope they will, Threshold will request a meeting with the U.S. Food and Drug Administration (FDA) to determine its options, one of which could be submission of a new drug application based on the phase 2b trial.
TLSR: I'd like to ask you to discuss Prana Biotechnology Ltd. (PBT:ASX), an Australian company targeting very difficult indications, including Alzheimer's disease and other neurodegenerative diseases. Have they been chasing a wild goose in targeting beta amyloid?
GZ: I would argue that specifically targeting beta amyloid, but not how it gets there in the first place, is the wild goose chase. Recently we have had two high-profile phase 3 failures in Alzheimer's disease: Pfizer Inc. (PFE:NYSE) and Johnson & Johnson's (JNJ:NYSE) bapineuzumab and Eli Lilly and Co.'s (LLY:NYSE) solanezumab did not meet their primary endpoints. Both are antibodies designed to reduce the beta amyloid plaque burden without addressing the underlying pathology that got the plaques there in the first place.
In the past several years a new hypothesis has emerged as to how the beta amyloid plaques begin to form and, perhaps even more important, how another neuronal protein, tau, is hyperphosphorylated, enabling it to form neurofibrillary tangles. The key event is age-related dysfunction in the control of transition metal levels in neuronal synapses. Metals like zinc, copper and iron have a number of important biologic functions, most notably in the function of numerous enzymes and receptors. Zinc, in particular, binds to beta amyloid, leading to its aggregation and, ultimately, plaque formation. In preclinical studies, Prana's lead drug candidate, PBT2, has been shown to redistribute zinc and other transition metals, preventing beta amyloid aggregation and even inducing its disaggregation. Sequestration of zinc in beta amyloid plaques reduces zinc levels inside the neuron, which can lead to its hyperphosphorylation. The metals hypothesis appears to unify the pathology underlying both amyloid plaque and neurofibrillary tangle formation, which makes this approach so compelling, in my mind.
TLSR: How many companies are approaching central nervous system diseases from the metallic equilibrium perspective? Is Prana alone in this?
GZ: I don't know of any other company as far along in this approach as Prana. They have two phase 2 trials ongoing, one in Alzheimer's disease, the other in Huntington's disease. Top-line results are expected by the end of next year.
TLSR: It would be amazing if both Alzheimer's and Parkinson's had a common etiology. Could one agent actually manage ionic equilibrium in neurons?
GZ: Yes. Parkinson's, as well as Huntington's disease, are characterized by misfolded proteins that aggregate, ultimately leading to nerve cell injury and death. In Parkinson's, it is a protein called alpha-synuclein, and in Huntington's, it is a different protein called Huntingtin protein. Notably, this pathologic protein aggregation appears to be driven by the abnormal distribution of the metals. PBT2 is the first "metal-protein attenuation compound," as Prana calls it, to enter the clinic for these neurodegenerative disease indications. If the metals hypothesis holds up, then it is possible that one agent could restore metal ion homeostasis in neurons.
TLSR: I would like you to discuss BioCryst Pharmaceuticals Inc. (BCRX:NASDAQ). It's hard to look at preclinical compounds as having value, but BCX5191 for hepatitis C (HCV) is starting to look like a smart development project. Given the recent issues with nucleotides, and with less pharmacokinetic activity required for drug activity, do you think BCX5191, a nucleoside, will be monetized soon? Does this look like an asset someone would pay for?
GZ: The fact that BCX5191 is a nucleoside could be an important advantage. It is not a prodrug (an inactive drug that is activated in the body by normal metabolic processes), as are the nucleotides, and it has shown high potency, as well as no notable toxicity, in preclinical studies. BioCryst has guided to filing an investigational new drug application and starting a phase 1 trial before the end of the year. I agree that this looks like a smart development project, as it is a new approach in this space. But as far as monetizing this asset, I think it is too early right now. There's no clinical data, so its value is low. In my view, BioCryst would be giving it away if they out-licensed the therapy now. Its value could increase substantially with positive phase 1 or 2 results.
I should add that the key value driver for BioCryst right now is its gout drug, ulodesine. A 52-week study demonstrated that ulodesine, in combination with the current standard of care, allopurinol, was safe and more effective than allopurinol alone. The proportion of patients who reached the therapeutic goal of achieving and maintaining serum uric acid levels below the target level was double with the combination therapy, as opposed to treatment with allopurinol alone. We expect BioCryst to announce a partnership deal for this asset long before it does so with BCX5191.
GZ: I believe it is. In 2011, Allos reported $50.5 million (NYSE:M) in net sales of its only marketed product, Folotyn (pralatrexate), which is indicated for the treatment of relapsed or refractory peripheral T-cell lymphoma (PTCL). Net Folotyn sales have been about $20.7M so far this year. In 2012, Spectrum guided to pro forma revenue of $300M, about $40¬¬-45 million more than we projected for the company. In our view, by acquiring Allos, Spectrum purchased future revenue without any taking on any substantial burden in new operating expenses. We think the company can integrate Folotyn sales and marketing within its existing infrastructure for Fusilev (levoleucovorin) and Zevalin (ibritumomab tiuxetan) at minimal cost.
Evidence shows Folotyn is more effective than methotrexate, a generic analog. Nevertheless, it is associated with a high incidence of mucositis. One of the intriguing aspects of this acquisition is figuring out how to use Folotyn more effectively, since an approved indication for Fusilev, one of Spectrum's other marketed products, is to diminish methrotrexate toxicity. I think we'll see a number of new trials exploring combinations of Folotyn and Fusilev to determine if there are any synergies in improving efficacy and safety. If so, then both drugs should see increased market penetration. If not, Spectrum should be able to grow the Folotyn PTCL market and collect north of $50M in revenue every year.
TLSR: Thank you for sharing your insights.
GZ: Thank you, my pleasure.
George B. Zavoico, Ph.D., has more than seven years of experience as a life sciences analyst writing research on publicly traded equities. Prior to joining MLV & Co, he worked at Westport Capital Markets LLC and Cantor Fitzgerald in their research departments. He received The Financial Times/Starmine Award two years in a row for being among the top-ranked earnings estimators in the biotechnology sector. His principal focus is on biotechnology, biopharmaceutical, specialty pharmaceutical and molecular diagnostics companies engaged in discovering, developing and marketing drugs and value-added diagnostics for the diagnosis and treatment of cancer and cardiovascular, inflammatory/immune and central nervous system diseases and disorders. Prior to working as an analyst, Zavoico established his own consulting company, serving the biotech and pharmaceutical industries by providing competitive intelligence and marketing research, due diligence services and guidance in regulatory affairs. He also wrote extensively on healthcare and the biotech and pharmaceutical industries for periodicals targeting the general public and industry executives. Zavoico began his career as a senior research scientist at Bristol-Myers Squibb Co., moving on to management positions at Alexion Pharmaceuticals Inc. and T Cell Sciences Inc. (now Celldex Therapeutics Inc.). He has a bachelor's degree in biology from St. Lawrence University and doctorate in physiology from the University of Virginia.
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1) George S. Mack conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Resverlogix Corp. Johnson & Johnson is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) George Zavoico: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
4) Disclosures for MLV & Co. can be found here.
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