Volatile Versartis May Have Significant Upside

| About: Versartis, Inc. (VSAR)


In June 2014, Versartis achieved a major corporate milestone with positive Phase 2a clinical results for VRS-317, confirming its potential to provide a new, long-acting growth hormone therapy.

Researchers also found that VRS-317 was safe and well-tolerated in the patient population tested.

The global market for Human Growth Hormone drugs is forecast to reach $4.7 billion by 2018.

Versartis, Inc., (NASDAQ:VSAR) is a $540M market cap biopharmaceutical company that is developing therapeutic proteins to treat metabolic diseases and endocrine disorders.

The company's most advanced product candidate is VRS-317, a human growth hormone. VRS-317 is a fusion protein consisting of recombinant human growth hormone (rhGH). VRS-317 has successfully completed a Phase 2 trial as a therapy for pediatric growth hormone deficiency, and is scheduled to begin a Phase 3 trial next year. The company plans to implement a Phase 2/Phase 3 trial to investigate VRS-317 as a treatment for adult growth hormone deficiency in 2015. Versartis researchers are also studying VRS-317 as a therapy for idiopathic short stature and Turner syndrome.

The company also has rights to a proprietary half-life extension technology known as XTEN, which is in-licensed from Amunix Operating, Inc., a privately held company based in Mountain View, California. By extending the half-life of a drug, Versartis hopes to develop a therapy that will require less frequent doing. Amunix has granted Versartis an exclusive license under its patents, and XTEN technology expertise to develop and commercialize up to four licensed products, including VRS-317. Other pharmaceutical companies developing growth therapy hormone products, such as Johnson and Johnson (NYSE:JNJ)/Janssen Biotech, Biogen Idec (NASDAQ:BIIB), and Pfizer (NYSE:PFE) have also signed research collaboration and licensing agreements for XTEN.


Until recently, the only way to acquire human growth hormone was by obtaining it through the pituitary glands of cadavers. In April 1985, pituitary-derived growth hormone was removed from distribution in the United States and many foreign countries, following the deaths of several young adults from Creutzfeldt-Jakob disease (CJD), also known as "mad cow disease." CJD is a rare disorder that may have been transmitted through the pituitary growth hormone they had received many years earlier.

The first biosynthetic growth hormone, which is produced using recombinant DNA technology, was in the final stages of testing, and was approved as safe and effective for use in growth hormone-deficient children by the Food and Drug Administration (FDA) in October 1985. Since this type of growth hormone is not derived from human beings, there is less potential for human diseases to be transmitted through it.

Although VRS-317 uses the same rhGH amino acid sequence that is in currently approved rhGH products, XTEN adds sequences of hydrophilic amino acids genetically fused to the rhGH protein to extend its half-life.

Other companies have unsuccessfully attempted to develop sustained release formulations of rhGH. Nutropin Depot, a long-acting form of rhGH developed by Genentech (Roche (OTCQX:RHHBY)) that used Alkermes' (NASDAQ:ALKS) ProLease injectable extended-release drug delivery system, was approved by the FDA in 1999, but withdrawn from the market in 2004 due to the significant resources required to continue manufacturing and commercializing the product.

Although the cause of growth hormone deficiency (GHD) is usually unknown, GHD occurs when the pituitary gland does not make enough growth hormone. About one in 3,500 children in the United States is diagnosed with GHD. According to a 2012 Global Industry Analysts report, the global market for Human Growth Hormone (hGH) drugs is forecast to reach $4.7 billion by 2018.

The current standard of care for growth therapies for patients in the United States involves daily injections of rhGH. The FDA has approved several daily rhGH therapies, including Novo Nordisk's (NYSE:NVO) Norditropin, Eli Lilly's (NYSE:LLY) Humatrope, Roche's/Genentech's Nutropin-AQ, Pfizer's Genotropin, Merck's (NYSE:MRK) and Serono's Saizen, Teva's (NYSE:TEVA) Tev-tropin, Novartis (NYSE:NVS)/Sandoz's Omnitrope (Sandoz GmbH) and LG Life Science's Valtropin.

New rGH therapies are being developed by Aileron Therapeutics, Althea Technologies (Ajinomoto Co. (TYO:2802)), Ambrx, Ascendis, Bioton S.A., Dong-A Socio Holdings (KS:000640), GeneScience Pharmaceuticals, HanmiPharm (KS:128940), LG Life Science (KS:068870) and OPKO Health (NYSEMKT:OPK) (via its Prolor acquisition).

On June 23, 2014, Versartis announced positive Phase 2a clinical trial data from its six-month clinical trial comprised of 64 children with growth hormone deficiency (GHD).

According to the company's news release, VRS-317, when administered monthly, semi-monthly and weekly in pediatric patients with GHD, was comparable to daily injections of human growth hormone at the highest approved dose of Novo Nordisk's Norditropin ((somatropin [rDNA origin] injection) (somatropin [rDNA origin] injection)) and Pfizer's Genotropin (somatropin [rDNA origin] injection), the current market-leading therapies for pediatric GHD.

Versartis plans to meet with the FDA and the European Medicines Agency (NYSEMKT:EMA) later this year for an end of Phase 2 meeting, and subsequently move VRS-317 into a Phase 3 clinical trial. Versartis will meet with Japanese authorities to discuss a clinical program for VRS-317 in Japanese children with GHD. The company's goal is to initiate the clinical program in Japan for VRS-317 in 2015.


On August 5, 2014, Versartis announced financial results for the second quarter ended June 30, 2014. The company reported a net loss of approximately $8.6 million, compared to a net loss of $3.7 million for the second quarter ended June 30, 2013.

Total operating expenses for the quarter were $8.5 million, as compared to $4 million for the quarter ended June 30, 2013. Research and development (R&D) expenses for the second quarter of 2014 were $5.6 million, compared to $3.3 million for the second quarter of 2013. The increase in R&D expenses was primarily due to an increase in manufacturing costs as Versartis prepares for its potential Phase 3 trial, as well as costs associated with the Phase 2a clinical trial for VRS-317.

Versartis reported cash, cash equivalents and short-term investments totaling $192.8 million as of June 30, 2014. The company believes that it has sufficient funds to sustain operations for at least the next 12 months, based on its current business plan. If Phase 3 clinical trials for VRS-317 are successful, Versartis will need to raise additional capital, and the risk of shareholder dilution is substantial.


On March 21, 2014, Versartis completed its initial public offering (NYSEARCA:IPO) of shares of 6.9 million shares of common stock for approximately $132.2 million, after underwriting discounts, commissions and offering expenses.

Analysts covering Versartis are quite optimistic about the stock. On June 17, 2014, Canaccord Genuity lifted their price target on shares of Versartis from $36 to $45. The firm has a "Buy" rating on the stock. Zacks initiated coverage on shares of Versartis on April 23, 2014 with a "Hold" rating on the stock. On April 15, Cowen and Company initiated coverage on shares of Versartis with an "Outperform" rating and a $45 price target on the stock, Morgan Stanley initiated coverage on Versartis with an Overweight rating and a price target of $79, and Citigroup initiated coverage Versartis with a "Buy" rating and a $60 price target on the stock.

Versartis management has significant experience and expertise. The company is led by co-founder Jeffrey L. Cleland, PhD, who has served as chief executive officer since May 2009. Cleland has over 20 years of industry experience in research and development, including more than a decade at Genentech, where he helped launch two products, Herceptin and Nutropin Depot.

In June 2014, Versartis announced that the company hired Bert Bakker, MD, PhD, as senior vice president, Medical Affairs. Bakker previously served as global brand medical director, Global Medical Affairs at Novartis Oncology, where he led and developed the global medical affairs strategy for the use of two somatostatin analogs in neuro-endocrine tumors, and oversaw a number of early clinical development studies. He was previously vice president, Medical Affairs at Ipsen (OTCPK:IPSEY), where he led the US Endocrine Medical Affairs group, which scientifically supported the company's products. While at Genentech, Bakker was a medical director in the Clinical Development group, where he covered all four stages of drug development, from early clinical development to post-marketing studies for products including human growth hormone, anti CD-20 and anti-VEGF. Prior to Genentech, he was medical director, Worldwide Medical, Endocrine Care at Pfizer.

In June 2014, Versartis achieved a major corporate milestone with positive Phase 2a clinical results for VRS-317, confirming its potential to provide a new, long-acting growth hormone therapy. Researchers also found that VRS-317 was safe and well-tolerated in the patient population tested

Although there are seven marketed rhGH products in the United States for the treatment of GHD, a key limitation of these products is the burden of daily injections, which can compromise compliance and lead to suboptimal treatment outcomes. Despite the competition, VRS-317 could be a big winner, because it is designed to reduce the burden of daily injection therapy by requiring significantly fewer injections, potentially improving compliance and treatment outcomes. A less frequently dosed growth hormone therapy could improve patient compliance and convenience, and could take significant market share from current daily growth hormone therapy products.

Versartis is using XTEN technology to design new compounds that may show great promise to improve therapeutic outcomes such as enhanced efficacy, fewer side effects, prolonged half-life, as well as low-cost production and enhanced stability.

Although there many positive aspects to Versartis, investing in this company is a high-risk/high-reward opportunity. All investments involve risk, but investing in small-cap biopharma companies like Versartis is risky. These stocks are often extremely volatile. Versartis shares reached a 52-week high of $36.86 on June 13, 2014 and a low of $16.15 on August 15, 2014. Currently trading in the $23 range, the stock is trading above its 200-day moving average in the $21.50 range, but below its 50-day average in the $26.50 range. If you decide to invest in Versartis, it may be best to remember the volatility of the stock and buy during a pullback.

Versartis, Inc. is based in Menlo Park, California. The company was founded in 2008.

Disclosure: The author is long VSAR, MRK.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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