2 Must-Have Biotechs For The Approaching 2nd Quarter

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Includes: ACAD, NEOS, PGNX, RDHL
by: Bret Jensen

Summary

We are fast approaching the end of the first quarter of the year. Biotech is off to a nice start so far in 2017.

The two stocks I profiled in an article in January entitled "Two Must Own Biotech Stocks For 2017" have done well and I believe will continue to do so.

Today we look at two attractive small cap names with approaching catalysts that should be 'must own' names in the sector heading into the second quarter of the year.

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-Cormac McCarthy

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In January I penned an article about two small cap biotech stocks that I believe had big things ahead of them in the New Year 'humbly' entitled "2 Must Own Biotech Stocks For 2017". Both stocks profiled, Acadia Pharmaceuticals (NASDAQ:ACAD) and Progenics Pharmaceuticals (NASDAQ:PGNX) are off to good starts so far in the first quarter of the year. I think both names will continue to perform well. I continue to believe Acadia will be purchased by a larger player by the end of the year as I articulated in a recent article. Progenics should also have trial data coming out from its trials on Azedra any day now.

Biotech has also turned from a laggard in 2016 to a strong performing sector this year thanks to a boost in M&A activity, the election outcome and hopes for tax & regulatory reform. I think this part of equities will continue to outperform the overall market in 2017.

Given this, today I am offering up two more undervalued small cap biotech stocks with approaching catalysts that I think should do well as we head into the second quarter of the year.

Let's start with Neos Therapeutics (NASDAQ:NEOS) develops treatments utilizing its proprietary extended release {XR} and orally dissolving tablet {ODT} drug delivery technology platform. This is what I call a classic 'Busted IPO'. NEOS has a market capitalization of approximately million and its stock sells for around $6.75 a share.

Many drugs have to be administered multiple times daily to achieve desired efficacy resulting in suboptimal durations and blood spike levels that sometimes have undesired side effects. Many of these medications are extremely bitter tasting and have to be taken with water, which can be an issue with children and adults who don't want to swallow pills. Neos' drug delivery technology not only allows for once a day dosing, but also across multiple dosage forms such as orally disintegrating tablets and liquid suspension dosage with the bitter taste masked.

So far the company has been focused on the treatment of ADHD, with one approved remedy and two other potential products for which NDA filings were submitted in late last year. These could be catalysts for capital appreciation in the months & quarters ahead.

Product Portfolio:

Neos' three compounds are all focused on the much larger stimulant side of the ADHD market ledger and they are all patent protected through 2032.

Adzenys (XR-ODT) (amphetamine):

This first and only orally dissolvable tablet, once-a-day FDA-approved product was launched in May 2016 and has made promising progress throughout 2016. The company has seen 9% week over week growth in prescriptions since the end of June through November resulting in a total of 22,797 scripts written though Dec 2, 2016. Given that in the past 12 months ending Sept 30, 2016, 43.4 million amphetamine scripts were written for ADHD, there is significant opportunity to continue or increase this growth rate for the foreseeable future. To that end, Adzenys has managed care coverage with approximately 83% of lives covered by commercial payers.

Amphetamine (XR-Oral Suspension) (NT-0201):

This once-a-day is essentially the liquid suspension form of Adzenys orally disintegrating tablets. In Phase 3 trials, NT-0201 has demonstrated bioequivalence verses Adderall XR capsules. It is essentially a "throw it in the salesperson's bag" add-on to Adzenys. An NDA was submitted on November 15, 2016.

Cotempla (XR-ODT) (methylphenidate):

Neos received a CRL from the FDA in November 2015 asking for a study demonstrating bioequivalence between the clinical trials and the to-be-marketed material. Those studies have been completed and a Class 2 (six-month) resubmission was actuated on December 20, 2016. This methylphenidate will give Neos complete coverage of the stimulant space. The company hopes to launch both products in 2H17.

The company also markets generic Tussionex (a cough suppressant) which should account for approximately $5.5 million to $6 million of overall 2016 revenues. To market Adzenys, generic Tussionex, and hopefully two more products in 2017, Neos has so far decided to go it alone with a sales force of 125.

Outlook:

If Adzenys and Cotempla can command just 2% of the over $9 billion ADHD stimulant market, NEOS's stock price is going to look awfully cheap. On the Adzenys side of the ledger, it would achieve 2% market share of the amphetamine ADHD market if it continued its 9% week over week growth rate until mid-2017. This is somewhat unrealistic, but keep in mind that only 28% of the sales force's targeted 12,500 physicians have prescribed Adzenys to date. That leaves plenty of room for continued week-over-week growth. When Cotempla is approved, the launch should be quick and relatively seamless considering Neos' sales force has already developed relationships with prescribing physicians.

Given the catalysts of further data from Adzenys' launch and Cotempla's likely approval, NEOS stock price seems to have bottomed in the $5.00 to $6.00 a share territory recently and is poised to head north over the course of 2017. The stock is not well-sponsored institutionally (34% ownership). This could work out favorably as institutions increasingly discover this "off the radar" play as sales ramp up considerably in the quarters ahead. Although sparsely covered, the current median analyst price target by the four analyst firms I can find covered the stock is $13.50 a share. Insiders also made some small buys in the stock during May through August of last year at higher prices.

Next up is RedHill Biopharma Ltd. (NASDAQ:RDHL) which is an Israeli based specialty biopharmaceutical concern focused on the development of orally-administered drugs for the treatment of GI and inflammatory diseases and cancer. More specifically, RedHill is a drug delivery and drug improvement company utilizing the 505(b)(2) regulatory pathway, which reduces development risk and speeds up time to market. Despite the fact that it is "combining" existing therapies, the company owns over 360 patents and over 100 patent applications.

Although the company has yet to have a drug approved, it is developing a 30-person sales force to market Donnatal, an oral drug used with other drugs in the treatment of Irritable Bowel Syndrome {IBS} and acute enterocolitis. This is the result of a three-year co-promotional agreement with Concordia International Corp, signed in December 2016. This compact gives RedHill an excuse to start building a sales force and a GI drug for that sales force to cut its teeth on while it awaits the anticipated approval of its late stage GI products.

Pipeline:

RedHill's pipeline portfolio is extensive and promising. We will take a look at three of the more than half dozen compounds in development that has upcoming trial milestones that could move the stock as well as another drug candidate that should be resubmitted for approval in the United States in coming quarters.

1. RHB-104. This compound is a combination of three generic antibiotics: clarithromycin, clofazimine, and rifabutin.

Indications: A. Crohn's Disease. Crohn's is a severe inflammatory disease of the gastrointestinal tract. The worldwide market exceeded $7.6 billion in 2016. RHB-104 treats mycobacterium avium paratuberculosis (MAP) infections prevalent in Crohn's disease. Two recent studies suggest that ~90% of Crohn's patients have MAP infections and that there may be a causal relationship, meaning that MAP may trigger most cases of Crohn's. This development is significant because existing treatments only address symptoms and not the (suspected) root cause of the disease. Additionally, the current options have limited efficacy, numerous side-effects, and high costs.

RedHill is currently conducting a Phase 3 study. The company has received a unanimous recommendation to continue the study as planned in a December 2016 meeting with the Defense Medical Standardization Board. A second meeting is planned in 2Q17 to review interim efficacy and safety, with an option of early-stop for success for overwhelming efficacy. Completion of patient enrollment is expected by the end of 2017. RHB-104 has also received Orphan Drug Designation for pediatric patients. It is safe to say that RHB-104 for Crohn's has blockbuster potential.

B. Multiple Sclerosis {MS}. MS is a disease in which the immune system eats away at the protective nerve sheath. The worldwide market for MS is estimated at $18 billion ($12 billion in the U.S.). In a Phase 2a 48-week study on 18 subjects RHB-104 demonstrated an annualized relapse rate {ARR} of .288, which compared favorably with previous studies evaluating beta-1a therapies Avonex (.67) and Rebif (.87). Only five relapses where observed in the study, four of which occurred in a single patient. Other measurements indicated: 1. that the disease was stable with no increase in disease burden in any patients; 2. a reduction in T2 lesion volume.

For both indications, RHB-104 was found to be well tolerated with no serious adverse events.

Before proceeding with next steps for MS, RedHill is going to await the results of the Crohn's study.

C. Other indications. The company is also in the process of pursuing other indications for RHB-104. They include Rheumatoid Arthritis ($20 billion + market); Lupus Erythematosus ($1.5 billion); Type I Diabetes ($10 billion); and Psoriasis ($5 billion).

2. RHB-105. This oral, single capsule compound is comprised of three approved generics: omeprazole (a proton pump inhibitor), amoxicillin (antibiotic), and rifabutin (antibiotic).

Indication: H. pylori infection. This infection is the strongest risk factor for gastric cancer and peptic ulcer disease. It is also associated with iron and B12 deficiencies as well as drug malabsorption. The company estimates that the global market for H. pylori was $4.83 billion in 2015 (and $1.45 billion in the U.S.). With that said, over 100 million American are infected, yet only 3 million are being treated. Of those treated, ~30% don't respond to the current standard of care.

RedHill's first Phase 3 trial successfully met its primary endpoint with 89.4% success eradicating H. pylori. This backs up the results of a Phase 2 trial conducted in Australia that demonstrated 90.8% eradication in the lower dosage (96.6% in the higher dosage). RHB-105 was found to be safe and well-tolerated in both studies. The drug has received Qualified Infectious Disease Product (QIDP) designation for serious or life threatening infections, Priority Review, and eight years extended market exclusivity. These results could lead to broader indications than the current standard of care, which is only prescribed for duodenal ulcers. The company is pursuing first line treatment for eradication of H. pylori regardless of ulcer status.

A confirmatory Phase 3 study is set to initiate in 2Q17 and is expected to enroll 440 patients in the U.S.

3. RHB-102 (Bekinda). Bekinda is a 5HT-3 serotonin receptor inhibitor with several treatment indications. It is an oral, once-a-day tablet.

Indications: A. Acute Gastroenteritis and Gastritis. Bekinda treats nausea and vomiting associated with gastritis. The worldwide market is approximately $650 million. Phase 3 enrollments should be complete with top-line results expected in 2Q17. The expectation with the 24-hour oral therapy is that it will reduce dehydration (i.e. no IV fluids) and hospital visits and stays. RedHill is hopeful that Bekinda will only need one Phase 3 study contingent on achieving very positive results in this trial.

B. Diarrhea-Predominant IBS (IBS-D). Approximately 40% of all IBS cases are IBS-D. The market for this indication is approximately $830 million. Top-line readout for an ongoing Phase 2 trial is expected in mid-2017.

4. RHB-103 (Rizaport). Rizaport is an oral thin film formulation for the treatment of migraines. This delivery method means no swallowing and faster uptake. RedHill's target market is approximately $700 million, which is currently dominated by generics. Although approved in the EU, the company received a CRL stateside back in 2014 expressing concerns about the manufacturing process, packaging, and labeling. It is expected that an NDA re-submission will take place in 3Q17. If approved, the company can seek a marketing partner or have its new sales force market it. Upside is likely limited.

Balance Sheet and Analyst Commentary:

The company has a debt-free balance sheet and left last year with $66 million in cash and equivalents thanks to a public offering in December 2016 that raised $35.9 million. RedHill expects to burn $10 million per quarter which gives it a runway into mid-2018. The company doesn't generate any revenues, but that should change shortly, although not meaningfully, with the introduction of the marketing team. Four Wall Street analysts cover the company. Price targets range $24.00 a share to $33.00 a share. The low-price target represents just less than a 150% gain from current levels. Insiders hold a large stake in the company.

Outlook:

RedHill's three late stage 3 GI prospects have indications for markets totaling greater than $10 billion. Just being a minor play in this space could be quite lucrative. All have demonstrated significant efficacy without adverse side effects in clinical trials to date. RHB-104 and RHB-105 have significant potential. Also, the second quarter of this year will be replete with catalysts for these GI therapies including top-line results on Bekinda for gastroenteritis (phase 3) and ISB-D (Phase 2), initiation of a RHB-105 confirmatory Phase 3 study for H. pylori infection, and most importantly, the second DSMB meeting for RHB-104.

Given the potential upside of its vast pipeline, RedHill's current ~$170 million market value seems extremely low. In summary, the company has a very favorable risk/reward profile, upcoming catalysts, strong analyst support and is currently well-funded. In addition, Redhill is one of the few small caps in the sector that has not run up in the rally in biotech so far in 2017.

Author's note: To get these types of articles and Instablogs on attractive biotech and pharma stocks as soon as they are published, just click on my profile and hit the big orange "Follow" button and choose the real-time alerts option.

Thank you and happy hunting.

Disclosure: I am/we are long ACAD, NEOS, PGNX, RDHL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.