Biocryst Where To From Here?

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Summary

Rationalization of Hereditary AngioEdema program: Avoralstat dropped, BCX7353 moves to phase 2 trial.

BCX4430 broad spectrum antiviral phase 1 trial : safe and well tolerated.

BCX4430 funded by US Government for Ebola treatment.

BCX4430 may clear Zika virus, based on preliminary non-primate Zika model.

Sixth months ago I wrote about Biocryst (NASDAQ:BCRX) as its share price crashed to $1.78 (it went on to trade as low as $1.66) after its Phase 2 OPuS-2 clinical trial for treatment of Hereditary AngioEdema (NYSE:HAE) failed to meet its primary endpoint. I suggested that a brave investor entering at this time might do OK.

Today someone who took a stake at that time has more than doubled their money, with shares last trading at $4.19. The question is where to from here?

Investing in biotech companies that are early stage is a black art, because there is a lot of risk that comes in many forms. The primary risk is whether the target drugs actually work, then (or hopefully answered before one sets out!) comes whether there is a market, whether the market can be captured, whether the IP is secure, whether the team can execute, whether there are possible competitors, and finally whether the company has enough cash to get to where they hope to go (e.g. cash positive or acquisition by a bigger company).

So there are many reasons why one's investment might fail.

Biocryst has one approved product and two that they hope to get to market.

Rapivab an injectable flu treatment, has been effectively sold off (except for pandemic stockpiling with the US Government) to Seqirus, a subsidiary of CSL (OTCPK:CSLLY) to raise cash ($25 million received in Q2, 2015).

Two other major developments involve i) a new oral treatment for HAE and ii) a treatment for major untreatable viral diseases.

Biocryst's lead oral drugs prevent swelling in HAE

I indicated in my report in February that BCRX seemed to have found a class of kallikrein inhibitors that suppress bradykinin production, which controls acute swelling attacks in HAE patients. Hence the Biocryst drugs are likely to suppress HAE attacks involving disastrous swelling of various parts of the body (including hands, feet, faces and airways). HAE is a nasty, rare, genetic disease that is poorly managed to avoid episodes of swelling.

A once daily tablet to prevent the dramatic swelling episodes would be life changing for HAE sufferers. This is what Biocryst is developing. It has not been without drama, but hopefully the program is now on track for success.

Biocryst has been developing two new chemistries for kallikrein inhibition, Avoralstat and BCX7353.

Avoralstat was the most advanced program, but its failure to meet the primary phase 2 endpoint in February led to the share price crash. The key problem with Avoralstat is that it struggles to maintain a satisfactory level of kallikrein inhibition in plasma even for as long as 12 hours. This was clear from the February results and it seemed to me then that it was time to stop work on Avoralstat and focus on BCX7353.

In the last 6 months a lot of work (and I suspect money) has been dedicated on continued work to formulate Avoralstat to be able to be delivered in at least a twice daily dose. Results presented in the Q2 report show that this approach has failed. At last the company has decided to stop further work on Avoralstat to focus on BCX7353.

BCX7353 is at an earlier stage, but it is a more promising drug as it has a satisfactory half life for plasma kallikrein inhibition of 50-60 hours. Like Avoralstat, a phase 1 trial of BCX7353 indicated safety and absence of adverse events, so a phase 2 trial (APeX-1) is starting to enroll patients, with regulatory approval for the trial in Canada and several European countries. The goal is for year end reporting of results from part 1 of the APeX-1 trial.

The APeX-1 placebo-controlled phase 2 trial involves two parts, the first part being proof of concept involving 24 patients being treated with a high dose (350mg) of BCX7353 once daily, with interim analysis followed and an option for enrolling an additional 12 patients.

The second part involves testing lower doses on 14 patients: 6 treated with daily 250mg BCX7353, 6 with daily 125mg BCX7353 and 2 placebo.

In both parts of the trial, daily treatment is for 4 weeks. Endpoints are related to the number of HAE attacks weekly, in absolute terms and proportion of subjects with no attacks. Additional endpoints involve safety assessments and various tests. From the data on persistence presented, it looks like 125 mg dosing could be marginally effective.

Success in the APeX-1 trial is very important as it will provide confidence for a definitive phase 3 trial leading to product registration, which all going well could be started late in 2017. Note that Biocryst has IP protection on BCX7353 until 2035.

BCX4430, a broad spectrum antiviral nucleoside analogue

The second project involves a largely US Government funded treatment for Ebola. This is making good progress. Note that while BCX4430 was identified as a possible treatment for Ebola virus infection, it has a broad spectrum of activity and may also be effective as a treatment for Zika virus.

BCX4430 is delivered via intramuscular injection. For the phase 1 trial, patients were first given a single dose and then a second group received daily injections over 7 days. The major complaint was pain at the site of injection, so a local anesthetic was introduced to ameliorate this pain, and this seems not to be a problem. Dose range of 0.3-10 mg BCX4430/kg was tested. This phase 1 study achieved its objectives, with doses up to 10mg BCX4430 being safe and well tolerated.

Reflecting that this program is still at an early stage the next step is animal studies in Ebola disease models to understand dosing better and also see what happens if treatment is delayed.

The interest in Zika relates to the possibility of eliminating the virus from infected individuals. Preliminary studies in a Zika infection model using non-human primates at MIT and the Harvard Center for Virology are encouraging and will be published.

Note that the pace of the BCX4430 program is dependent on BARDA and NIAID authorization as the program is funded by the US Government and other unnamed external sources.

Managing cash and strategic decisions

My biggest concern about Biocryst is about cash and how it is spent. My concern six months ago was money being spent on Avoralstat, which looked like its half-life in the plasma was too short to be effective with a practical dosing regime, and so I concluded that it wasn't going to make it. In Q2 management finally abandoned Avoralstat, after spending I dare not think how much cash playing with formulations to try to extend the half-life in plasma.

The point was (and still is) that Biocryst had another compound BCX7353, which, with once daily dosing provided adequate plasma levels for 24 h (half-life in plasma of 50-60 hours so plenty of room).

Of even more concern is the vagueness in calculating H2 2016 net operating cash.

H1 2016 net operating cash utilization was $37.9 million and guidance for 2016 is $55-75 million net operating cash utilization. That means second half is between $17 and 37 million… that is a $20 million spread in possible spend in the next 5 months (since Q2 report came after the first month of H2). If the spend is so uncertain, I can't help thinking that there isn't enough planning or discipline in cash allocation.

This isn't a trivial issue as with $64.3 million cash at June 30, 2016, a $17 million/half year cash burn gives almost 2 years runway, while a $37 million/half year cash burn means less than a year of cash. The presentation seems to indicate that the burn will be closer to $37 million in H2 (cash runway stated as Mid-2017).

Strangely there was only passing reference to this issue on the analyst call. The participants were pretty much solely focused on the two drug programs. In some respects this is how the US biotech industry operates, as burning very large amounts of cash is common. It surely is an adverse issue for investors as it means dilution.

The technology looks to be in good shape, but I worry about how they allocate cash. If the Avoralstat story is a guide, there doesn't seem to be hard nosed decision-making about cash allocation.

Conclusion

For investors who bought shares in BCRX after February of this year, the story is good. For those who invested in the heady days of $16/share, this is very painful.

What about investors contemplating investment, or indeed investors post-February who are contemplating whether to cash out or stay for the next phase?

The HAE product (BCX7353) looks good and may define the company, although there will be nervousness until the phase 2 APeX-1 results are reported. It is hard to get a handle on how profitable an Ebola treatment would be for Biocryst. The possibility of using it to treat Zika (eliminate virus) opens up the possibility that this broad spectrum antiviral product might work for other currently untreatable viruses. If this is how it pans out, BCX4430 could be interesting too, but it is still early days.

There remains upside from the flu product when the next flu epidemic arrives.

So what to do? Clearly you need to crunch some numbers and make decisions about potential setbacks. Mostly I'm worried about disciple on cash allocation to project expenditure (how could the range for H2 be so large?) and when cash is needed what impact this will have on existing shareholders.

It could work out well, but Biocryst is still not out of the woods yet.

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