Gemphire - Update To Thesis: The Runup Continues

Summary

• Thesis appeared broken when CEO left
• Interim CEO is managing director at Excel Venture Management, which owns over 5% of outstanding stock
• Data from COBALT-1 trial in patients with HoFH was quite promising and indicates a higher probability that readouts in successive trials could be positive
• Management projects cash runway into late 2018, but in the absence of partnership I'd expect dilution late this year or early 2018
• NASH indication could come into spotlight as AZURE-1 trial is initiated

Shares of Gemphire Therapeutics (NASDAQ:GEMP) have increased 30% since my initial writeup, in which I suggested shares could runup into multiple data events.

GEMP data by YCharts

To remind readers, their principal asset is gemcabene,a first-in-class once-daily oral drug candidate licensed from Pfizer that has been shown to lower cholesterol, fat, and inflammation. Our thesis was predicated on a runup into data readouts from three phase 2b trials in dyslipidemia patients in the second half of the year, as well as the initiation of a phase 2 trial, dubbed "AZURE-1", in the lucrative NASH indication.

Figure 2: Gemcabene differentiation as a dyslipidemia treatment (source: corporate presentation)

What's Happened Since:

CEO Departure

It's rarely a good sign when the CEO of a company steps down, and when Mina Smooch resigned for personal reasons the stock dipped over 15% and I was beginning to question whether the thesis was still intact, as pessimism generated from such an event could nullify the runup. In all honesty, I believed it was broken.

Interestingly enough, board member Dr. Steven Gullans was named Interim President and Chief Executive Officer. I chose "interesting" as the operative wording due to the fact that he is managing director at Excel Venture Management, which owns over 5% of the company's outstanding stock.

Promising HoFH Data

On June 28th it was announced that gemcabene achieved the primary endpoint in the phase 2b COBALT-1 trial, which evaluated the drug candidate in homozygous familial hypercholesterolemia (HoFH) patients who were on stable maximally tolerated lipid-lowering therapies.

Patients enrolled were clinically or genetically diagnosed as HoFH and on a several standard therapies including high doses of statins and/or ezetimibe and/or PCSK9 inhibitors.

Gemcabene 300 mg lowered LDL-C by a mean of 25% (p=0.0063), while the midrange dose of 600mg lowered LDL-C by a mean of 30% and the highest dose of 900mg lowered LDL-C by a mean of 29%. No serious adverse events were observed.

It should also be mentioned that three patients who had negative LDL-receptor activity responded to gemcabene but to a lesser degree (10% mean decrease LDL-C for low dose, 15% mean decrease for mid-dose, and 12% decrease for high dose)

Analysis of six patients who met the EAS (European Atherosclerosis Society) Consensus Panel diagnosis of HoFH, which is more narrow, demonstrated 18%, 23% and 21% mean decreases in LDL-C in the low, mid, and high doses respectively.

Readers should remember that data for the ROYAL-1 phase 2b trial in patients with HeFH is due in the third quarter, while data in severe hypertriglyceridemia (SHTG) patients is expected in the fourth quarter. Logic would dictate that positive results in the COBALT-1 trial indicate a higher probability of success in successive studies.

Analyst Confirmation

Canaccord raised their price target to $22 following positive data from the COBALT-1 study, with analyst John Newman raising his probability of approval to 40%. Piper has a $30 price target on the stock, while the average price target of $23.50 represents greater than 75% upside from present levels.

Final Thoughts

With a market capitalization of around $130 million and a cash position of $29.3 million, management projects a cash runway into late 2018 to continue operations. As the golden rule in biotech is to raise funds when you can and not when you need them, even after the firm's March private placement I wouldn't be surprised to see them tap capital markets again by the end of the year.

While data from the latter two trials for gemcabene is the primary focus, the stock should gain visibility as a NASH play when the phase 2 AZURE-1 trial gets underway. Management believes that gemcabene's ability to lower triglycerides and inflammation while also reducing the progression of fibrosis through multiple mechanisms could garner it a position in the space. Another near to medium term catalyst could be the possibility of a partnership in this indication.

Risks to the story include disappointing data in HeFH and SHTG indications, as well as previously mentioned dilution which I believe could come sooner than expected. As with all biotech companies, regulatory risk is a concern and the firm's reliance on a single product candidate means that any clinical or other setbacks would adversely affect share price to a significant degree. Delay of the AZURE-2 trial, as well as increasing competition in the NASH space from larger companies with significantly more resources, are also of concern.

Figure 3: Gemcabene differentiated profile as a NASH asset (source: company presentation)

For investors who bought after this first article and already have experienced a decent gain, consider taking partial profits if the runup into third quarter data continues.

For readers interested in the story who've done their due diligence, even after the first round of positive data I believe the stock has further upside. An aggressive action would be to establish a pilot position this week, while those who wish to play it more conservatively could wait for a pullback into the $12 range. Again, in the event of a significant runup I would take at least partial profits.

GEMP data by YCharts

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.