Bio Tuesday's  Instablog

No, we’re not talking about the north coast of Maui but rather a new research platform from long-time biotech analyst David Martin of Dundee Securities.

“If I’m going to recommend that investors own a basket of biotech stocks, it makes sense that I ought to initiate on a basket of stocks rather than make one-off initiations,” Mr. Martin says in an exclusive interview with BioTuesday.ca.

Taking that advice to heart, his first Next Wave is a collection of mini-initiation reports, highlighting five companies which represent, in his opinion, “compelling risk/reward investment opportunities”.  In most cases, they have been largely overlooked by investors, perhaps not unexpectedly, since they are small or microcap Canadian biotechs, he points out.

His quintet of “buys” includes Resverlogix (TSX:RVX), which has a decent shot at a blockbuster drug; Novadaq Technologies (TSX:NDQ) and Bioniche Life Sciences (TSX:BNC), which both offer “compelling upside potential, with downside protection provided by a base business”; and Spectral Diagnostics (TSX:SDI) and iCo Therapeutics (TSX-V:ICO), which offer “very low valuations with reasonable expectations for eventual success”.

“Substantial due diligence has gone into the mini-initiations, and there is a high level of relevant information, but we’ve cut out the fat, and what’s left is the meat and bones,” he says.  As these companies achieve key upcoming milestones, he intends to launch fuller coverage of them.  For now, he hasn’t put any price targets on the five stocks.

Mr. Martin says that for investors who may be looking for a new sector to put risk capital to work, what better place than companies with solid prospects for cancer, cardiovascular disease, sepsis and blindness.  The need for medical innovation hasn’t stopped, and companies with excellent risk/reward profiles exist in the Canadian biotech sector.  He says, “We view the recent bout of market weakness as a good opportunity to buy Dundee’s Next Wavenames that may become tomorrow’s Biochem Pharma, ID Biomedical, Anormed or Arius.”

Over the next six to 18 months, Resverlogix expects to reach two clinical milestones for its lead RVX-208 drug: Phase 2b ASSERT trial results in the third quarter of this year; and Phase 2b ASSURE trial results in the third quarter of 2011.

The blockbuster potential of RVX-208 revolves around increasing HDL “good” cholesterol, shrinking arterial plaque and reducing cardiovascular risk.  “While it remains to be proven that interventional HDL elevation results in improved outcomes, the rationale to raise HDL is sound and correlative evidence is highly suggestive of benefit,” Mr. Martin contends.

“Unfortunately, while ASSERT enrolled patients much faster than expected, ASSURE, because of strict enrolment criteria, fell well behind schedule,” he points out.  Resverlogix recently moved to relax patient inclusion criteria for the trial.

As a result, he says the ASSURE delay creates a “buying opportunity”.  The stock has traded off sharply since the delay was announced on May 12, because ASSURE was expected to be the “next big catalyst” for Resverlogix. It closed Friday at $3.06, down from $6.35 on May 11, with further weakness after a financing was unveiled at the beginning of June.  ASSURE’s delay may also impact the timelines of some, but not likely all, potential pharma partners, he adds.

“We think the time is right for Novadaq to shift focus to commercialization and business development initiatives that will capitalize on its class-leading SPY imaging technologies”,  because “there is a substantial body of evidence showing that use of SPY leads to improved clinical outcomes,” Mr. Martin suggests.

Visualization of blood flow using Novadaq’s SPY fluorescent  agent helps surgeons when blood circulation is being re-established and there is a need to verify proper blood flow, with no leaks or disruptions in cardiac by-pass or reconstructive surgery, for example.

Novadaq has completed development of three applications for SPY, and, he figures that, over the next three to nine months, the company is positioned to benefit from a number of key commercial milestones, including increased traction for the SPY plastic surgery application, the launch of Intuitive Surgical (ISRG 323.15 ↓0.47%)’s Da Vinci robotic surgery system incorporating SPY optics and the possible signing of commercialization agreements for the cardiac and plastic surgery markets.

“While the stock has been strong recently and may pull back in the near term, we like the long-term outlook based on the medical value of SPY technology and emerging signs of a strategy to exploit the company’s multiple opportunities,” Mr. Martin contends.

He expects SPY sales to exit the year with positive momentum based on the potential signing of two partnerships by year end and initial sales from the Intuitive Surgical collaboration.

Bioniche has three businesses with diversified risk/reward profiles: Animal Health, which is expected to generate around $28 million in sales in fiscal 2010; Human Health, with Phase 3 results expected in mid-2010 from lead product, Urocidin, testing for bladder cancer; and Food Safety, with Canadian approval and a conditional license pending in the U.S. of a vaccine for reducing E. coli 0157 in cattle feces, and a pipeline of other vaccines.

Mr. Martin points out that Urocidin provides the “biggest upside potential” for Bioniche investors.  His initial diligence suggests that Urocidin has a “relatively high overall probability of approval,” even though the first of two planned Phase 3 trials has a moderate level of risk, as the refractory patients enrolled in the trial are a “tougher-to-treat” population than was enrolled in the Phase 2 trial, he says.

Mitigating the risk somewhat is the 20% “complete response” hurdle required for Phase 3.  That compares with the company’s Phase 2 results, where patients achieved a 46.4% CR rate at 26 weeks in a population that was mainly relapsed but also included a few patients being treated for the first time.

A second planned Phase 3 trial will test Urocidin head-to-head against the current standard of care, baccilus Calmette-Guerin (BCG) in first-line treatment, “where we expect Urocidin to demonstrate better efficacy, based on prior data, and superior safety and tolerability,” he predicts.

In 2009, Bioniche licensed Urocidin’s U.S. commercial rights to Endo Pharmaceuticals (ENDP 20.49 ↓1.35%)(NASDAQ:ENDP).  Based on incidence of bladder cancer and possible pricing, he figures the global market opportunity for Urocidin in the refractory population could be $800 million.  If the second Phase 3 trial expands the Urocidin label to first-line treatment, the market opportunity could grow to an estimated $2 billion.

“Twenty-five percent penetration of this market would represent $500 million in annual sales and an estimated $112.5 million in gross profit for Bioniche,” Mr. Martin says.

Spectral Diagnostics bills itself as a leader in the battle against sepsis, with its Endotoxin Activity Assay being the only FDA-cleared assay for the measurement of endotoxin, a major cause of sepsis, which can cause organs in the body to fail.  The only problem is there’s no FDA-approved therapy for endotoxin.

So, last year, the company in-licensed the rights to Toraymyxin, which removes up to 90% of endotoxin from blood, from Japan’s Toray Industries.  Developed by Toray, the treatment has been sold in Japan since 1994 and more recently entered the European market.

Spectral’s pivotal trial with Toraymyxin is expected to enrol some 360 patients at 15 sites in the U.S. and will have a primary end point of 28-day mortality.  An interim analysis is expected in the fourth quarter of 2011, with final results expected a year later.

Mr. Martin points out that there is “solid support for Toraymyxin efficacy.”  It has been used in more than 70,000 patients outside of the U.S. and has been tested in at least 50 studies with “consistent indications of clinical benefit.”

While he points out that sepsis is a “graveyard indication” with numerous drug failures in the past, the reward side of the risk/reward profile has plenty going for it.  Among other things, Spectral has the money to complete the trial, unless it is sized-up substantially, and the company’s market capitalization is very low, so success in the Phase 3 trial could lead to “multi-fold gains”.  Based on incidence of the disease and possible pricing of the therapy, the U.S. target market opportunity at 100% penetration would be $1.25 billion, he estimates.

Mr. Martin calls iCo Therapeutics’ lead ophthalmology drug, iCo-007, potentially “game changing”, and, with a multi-product pipeline, he figures iCo offers “VC-like potential returns with a level of protection on the downside if iCo-007 is not successful.”

iCo-007 is being developed to treat diabetic macular edema, one of the leading causes of blindness.  While a number of competitors are developing drugs that target vascular endothelial growth factor (VEGF) and advancing steroids, “iCo stands alone with its c-raf targeted antisense drug, iCo-007,” he points out.

Noting the drug’s attractive pharmacokinetics, he says that, among novel drugs in development for DME, only iCo-007 offers the potential for two to three, or fewer, intravitreal injections a year, compared with most competitors that require monthly or bi-monthly injections.

The market opportunity for the leading DME drug would be at least $450 million to $900 million, matching Eli Lilly (LLY 32.58 ↑0.65%)’s earlier estimates for its now sidelined drug, Arxxant.  Upside to that range would be realized if iCo taps into the larger wet AMD market.  “The mechanism of action of iCo-007 suggests this may be possible, with potential for iC0-007 to be used as an adjunct to existing therapies, with the goal of maintaining clinical benefit while reducing treatment frequency,” he contends.

“We believe there is a good chance that iCo may attract a regional license deal,” based  on the size of the DME and AMD markets, the potential dosing benefit with iCo-007 and the positive safety and efficacy signals coming out of Phase 1, he says, adding that iCo will likely retain the U.S. rights until after Phase 2.  With $3.9 million cash at the end of 2009, and a low base burn rate that would allow almost two years of runway, “iCo has the time to negotiate a good regional deal.”