Bristol-Myers Top NASH Contenders

| About: Bristol-Myers Squibb (BMY)

Summary

$9 billion cash for license or acquisition deal.

Fibrotic disease pipeline not in NASH race.

Acquisition target checklist - phase 2 and indications of efficacy.

Ideal candidate surfaces.

There were whispers in the marketplace that Bristol Myers-Squibb (BMY) was still looking to beef up their pipeline in NASH, but Dealreporter broke the news that the BMY's business development chief Paul Biondi is "actively looking for acquisition or license opportunities in fibrotic diseases." After this speculation broke out, it buoyed the valuations of the some of the NASH players. Keep in mind this was on the heels of Madrigal's (MDGL) favorable clinical trial announcement. In this article, we are going to explore BMY's pipeline and possible acquisition candidates. Analysis is going to look at phase 2 candidates that have some signs of efficacy.

Capacity for Deal Making

While BMY can publicly say they want a deal, it's important in the analysis to make sure they have the capacity to actually move forward. Based on their most recent 10-Q, they have approximately $9 billion in cash equivalents and marketable securities. The company is earning about $1.5 billion per quarter, including the 6% royalty from Merck (MRK) for Keytruda sales, which works out about $100 mil/quarter. They could potentially pledge this stream of payments to get an additional ~$3.0 billion. With Keytruda doing $1.5 billion/quarter, it's a safe bet for a financier. If there is a must-have acquisition target, they have the capacity to raise an additional $5.0 billion via a debt offering based on conservative cash flow estimates and suspending its dividends. This sets the stage for a significant acquisition of less than $17 billion to take place.

Bristol Meyers Existing Pipeline

The pipeline can be broken down into 3 subsets of cardiovascular, immunoscience, and fibrotic disease. BMY is most known for its role in the Immuno-Oncology (I-O) market. It's also important for investors to understand that BMY gets a 6% royalty on sales of Keytruda. Keytruda is marketed by BMY's rival Merck. Since the I-O is so important to the overall strategy, we are going to discuss recent transactions in that subset, as well as NASH, to get a sense of direction that BMY is pursuing.

Immuno-Oncology

Author's Slide

BMY is clearly focused on expanding the number of indications in I-O. Right now, they have 8 Indications with Opdivo, or in combination with their lead drug, and have an additional 8 more indications in the pipeline based on the latest 10-Q. In comparison to Keytruda sales, Opdivo's market share has matured, while Keytruda continues its nearly exponential growth. On a quarterly comparison of sales, notice how the blue sales lines are increasing at a decreasing rate and how the green sales lines are increasing at an increasing rate. Most investors should see this trend as a sign of trouble to come.

At the last ASCO conference, CEO Giovanni Caforio remarked that BMY was "broadening the use of Opdivo in earlier lines of therapy" to increase the impact. They also emphasized the use of biomarkers like the Tumor Mutational Burden (TMB) to better predict whether which patients would be more likely to respond to I-O treatment. BMY continues to use biomarkers to define patient populations to optimize treatment since cancer is really a heterogeneous disease. This means the disease mutates often and underscores the underlying problem I-O resistance when dealing with lung cancer. They also have designs of stimulating T-Cells while having Treg cells in the periphery. That is a fancy way of saying we want to stimulate T-Cells close to the tumor and the excess T-Cells that make their way out of the tumor microenvironment get regulated.

To the untrained eye, these all sound like plausible ideas that are advancing the research of cancer, but, in reality, these are just crafty methods that the drug companies are forced to use in order to get better penetration for more indications. The FDA, through its guidelines, has forced big pharma to design clinical trials around indications of cancer. Drugs that work in concert with the immune system are likely to work across all indications because cancer is essentially a mutation that our immune system was unable to stop. This is precisely what investors have seen as Merck and Bristol-Myers rack up indication after indication of cancer. In I-O, there really aren't any lines between indications. It should be no surprise that the checkpoint blockade is going to have a beneficial impact in all forms of cancer. This isn't the future of I-O, and investors should not be fooled into thinking that this is progress.

Clues from Past Acquisitions Set Overall Strategy

The future of BMY's I-O strategy can be gleaned from its recent acquisitions. The most notable is its December 2017 license deal with ONO Pharmaceutical to commercialize its immuno-suppressive drug ONO-4578. Prostaglandin E2 (PGE2) is a major immunosuppressive factor in the tumor microenvironment, believed to suppress tumor immunity and promote tumor progression. Certain tumor types have high expression of PGE2, and the blockade presents an opportunity. BMY is looking intently at what goes on in the tumor microenvironment.

PsiOxus's licensing agreement with BMY is set to use the adenovirus to replicate in the cancer cells to stimulate an inflammatory response in the tumor microenvironment. The NG-348 virus uses PsiOxus's proprietary Tumor-Specific immuno-gene Therapy (T-SIGn) platform to "arm" the virus with two additional immuno-therapeutic transgenes.

CytomX's (CTMX) $200 million license deal with BMY is trying to target PD-L1 Probody. CytomX is focused on reinventing therapeutic antibodies, targeting the tumor microenvironment, including CTLA-4. They are trying to use antibodies covered up with protease enzymes that unmask when they come in contact with a target cancer cell. The idea is that they only go after cancer cells instead of attaching to healthy cells. This means less drug is needed and lessen the side effects.

Halozyme has a drug delivery license with BMY. This drug is also in combination with Tecentriq. It enables subcutaneous drug delivery by degrading hyaluronan, which results in the removal of the natural water in the region. This creates an increase in the flow of fluids, and, at the injection site, that means that rapid subcutaneous injections up to 20 ml can occur. This optimizes subcutaneous drug delivery, making existing treatment more efficient thereby using less drug which in turn lowers the side effects.

IFM Therapeutics acquisition is all about developing another pillar in BMY's oncology pipeline. The innate immune response against cancer is another vector to treat cancer. It hopes to reduce the innate immunity of cancer. This company has promise but is still in the preclinical phase.

Tumor Microenvironment - BMY

The bold font really tells the story of BMY's true direction in I-O going forward. They are focused on the tumor microenvironment and trying to finetune the drugs to work in this environment. Most of the focus is on T-Cells, which represent the adaptive immune system. The innate immune systems are comprised of Natural Killers cells which are the first responders to any type of invasion of the body foreign or domestic. BMY's I-O website really does a great job of breaking down all the different pathways they are looking to target in the future. They have quite an arsenal of weapons but they are missing one key ingredient that will be talked about later.

Fibrotic Disease

BMY's lead pre-cirrhotic NASH compound is pegylated analogue of human fibroblast growth factor 21 (PEG-FGF21). The study is targeting fibrosis stage 1 -3 patients with confirmed NASH. The primary endpoint of the study was a reduction of fat in the liver versus placebo. The FDA guidance for recommended endpoint for pre cirrhotic NASH is >= 2 points reduction in NAFLD Nash Activity Score (NAS) which translates to at least a 1 point reduction in either lobular inflammation or hepatocellular ballooning AND no worsening of fibrosis stage. The endpoint of the study is not even close to what the FDA would accept to move on to a phase 3, so this drug candidate is essentially in permanent stasis. It's a non-contender. BMY's other drug candidate is HSP47 which is in a Phase 1 study for the treatment of advanced liver fibrosis. HSP47 is a small molecule drug designed to inhibit the formation of collagen. Collagen formation leads to fibrosis and eventually NASH, but the endpoints of this study don't translate to NASH. All they are trying to do is come up with a treatment that slows the progression of the fibrotic disease.

Candidly both of BMY's drugs in NASH have a marginal chance of approval given the FDA's guidance on NASH. The most important components in NASH are liver fat known as steatohepatitis, ballooning, and fibrosis. The FDA is pretty clear that drug companies need to focus on all three if they want registration. These drugs are BMY's feeble attempt to draw a line in the sand and say there are serious about NASH. The only issue is that BMY's pipeline is essentially empty which is why they are scurrying to fill the void. They aren't even at the starting line and the race for NASH has already started. To get in the game, they are going to need to buy or license a technology that is in Phase 2 and has already shown some efficacy. There two different indications, early stage NASH and NASH Cirrhosis. NASH Cirrhosis offers the most promise.

Potential Partners/Takeover Candidates

1) Intercept Pharmaceuticals (ICPT)

Intercept is developing OCA, an FXR agonist, for NASH stages 1-3. OCA essentially regulates bile acid synthesis and helps metabolize glucose and lipids. Since OCA is not a fibrosis regulator, ICPT is targeting earlier stages of NASH, where patients would be given preventative treatment in order to not develop fat, rather than waiting to treat full blown NASH cirrhosis. However, since NASH is largely devoid of symptoms until cirrhosis develops, this would be an extremely cost inefficient treatment. Therefore, OCA might eventually be most useful in combination treatment with other NASH related targets for people who truly need treatment, the stage 4 cirrhosis patients, even though it has shown treatment benefit in stages 1-3.

On the news of BMY's desire to acquire an advanced NASH candidate to go along with their existing candidates, ICPT rose significantly on the theory that they indeed have the most advanced candidate in NASH which currently has no treatment. To fill this need, a drug or drugs would need to demonstrate beneficial anti-inflammatory as well as metabolic effects while at the same time also delivering anti-fibrotic effects on the liver. That's essentially the definition of NASH. ICPT's candidate OCALIVA came into prominence when it won FDA approval for another liver disease. They won orphan status of Primary Biliary Cholangitis (PBC) as an add-on to ursodeoxycholic acid last year. In their PBC trials, there were significant concerns due to significant pruritis leading to discontinuation, and this was at much lower doses than was needed to treat NASH. Once approved and used on more patients, other red flags arose.

The FDA announced last year that 19 patients died while taking OCA. This was partially walked back when it was discovered that 7 of these patients were taking the drug more than the label recommended. At this time, the FDA also reported that OCA may be associated with liver damage even when taken at the proper dosage in 11 other cases. In the same time period, a young upstart CymaBay (CBAY) released phase 2 data also for PBC that was just as efficacious and far safer with no instances of pruritis. The point is that OCA might not be the best option for early NASH. Even though ICPT is further ahead in the regulatory process what biotech wants to invest in a company with such a large part of its future revenue stream in jeopardy.

The one benefit ICPT has is that they have run 2 successful phase 2's with OCA for NASH, where they did indeed show significant improvement. But again, red flags emerged, leaving OCA in question. OCA showed no diagnostic resolution of the disease. Although treatable, the pruritis side effects weigh on the minds of patients who see little benefit, but more importantly saw an increase in LDL cholesterol. With so many red flags, it's hard to fathom that any suitor wants to inherit these problems.

Despite all of these issues, Intercept Pharmaceuticals is still considered a commercial stage NASH contender, with a market cap of $2.2 billion and enterprise value of about $2 billion, and cash of about $260 million. They have yet to prove benefit in Phase 3 trials, which should yield top-line results in 1H 2019. Intercept is making $140.8 million annualized revenues from OCA for PBC, meaning its NASH prospects are being valued at a healthy percentage of that $2.2 billion market cap. An acquirer would have to dish out billions for a NASH candidate that could damage the liver of those whose livers are in such poor condition, and a PBC revenue stream that may decrease as competitions enter the marketplace. Although this NASH candidate has shown efficacy, its prospects as a top NASH treatment are severely diminished because of safety issues and lack of disease resolution.

2) Madrigal

With the recent release of their phase 2 study, MDGL could be considered the leader in early stage NASH. One of the most prominent thought leaders in NASH is their principal investigator. It's worth to mention that Dr. Stephen Harrison has some notoriety in the NASH circle and also happens to be the principal investigator for Galectin Therapeutics (GALT) and CBAY. Madrigal's phase 2 results showed a >30% reduction in liver fat at week 12 and then an improvement in the NASH histological response at week 36. Madrigal's drug MGL-3196 is a thyroid hormone receptor (THR) beta-selective agonist. The way it works is by enhancing the breakdown of fats in the liver. The CMO of Madrigal Becky Taub said the drug reduces fat by "stimulating mitochondrial biogenesis in the NASH liver [...] reducing lipotoxicity and improving liver function." What this mouthful of scientific jargon means is that the mitochondria, which are known to metabolize nutrients, in the cells get a boost from the THR-Beta drug. The thyroid, through the release of hormones, controls many organs in the human body. The THR-Beta agonist has shown that there is a selective uptake in the liver which is why the patients didn't lose overall weight and experienced a reduction in liver fat. The hormone has few side effects because it stays away from the THR-alpha binding site which could translate into cardiac issues.

Madrigal, like Intercept, is targeting the earlier stage NASH disease through metabolic approaches. Madrigal claims that liver fibrosis decreases with time after the NASH, or rather the fat in the liver, resolves. Therefore, MDGL has good prospects for treating early stage NASH patients, and their THR-Beta agonist could possibly be essential in a combination treatment for later stage NASH patients, as their studies so far have been very well tolerated and have shown to impressively reduce the amount of liver fat and decreased cardiovascular risk. The drug, MGL-3195, is getting ready for a phase 3. Given its extremely favorable safety profile, it might not need an excessive number of patients which bodes well for the trial design. The next catalyst is the Phase 3 trial design by the end of this year.

While this drug has clear and impressive benefits, there are some shortcomings. This is an early NASH drug, and it's not clear if BMY wants to fall in the trap of trying to get reimbursements to treat a disease that only one in 20 eventually becomes symptomatic. It's also worth noting that trial was designed almost a little too well when considering the baseline fat levels of the recruited patients were 20.7 which is over double the inclusion criteria. It's easier to lose fat on a heavier person. The same principle would apply here. An item that got lost in the headline is that on liver biopsy fibrosis was reduced by one point in 23% of placebo and 29% in treated patients. This finding was not statistically relevant and might represent an uphill battle for registration if there is the appearance that it only works on one of the pillars of NASH. The underlying positive of this drug is the effect it has on LDL in the liver. MGL-3196 is also being tested for the treatment of familial hypercholesterolemia, or genetically caused high LDL cholesterol. Dyslipidemia is a good market but not as large as NASH. The other issue for BMY might be market capitalization. Led by Goldman Sachs (NYSE:GS), the company raised $282.8 million in a secondary offering. After the offering, the company has roughly 15,242,290 shares outstanding and sports a $4.15 billion market cap which includes $310 million in cash. Given the incredible run up in share price, would the MDGL board support a buyout for all of BMY's cash? There is also the issue of the large investor Bay City Capital, LLC with approximately 35.3% of the outstanding stock. It's just unknown how these stakeholders would even react to a buyout offer.

In conclusion, Madrigal would be an ideal, yet expensive, acquisition target for any company looking to use combination therapy to treat NASH and dominate the NASH market, as Madrigal's THR agonist has multiple clinical benefits and is safe. However, it is important to note that Viking Therapeutics (NASDAQ:VKTX) also has a THR-Beta agonist, in phase 2 studies, targeting the same indications. Also, the risks of a phase 3 trial design would also weigh on a suitor because they don't know how many patients will be required until they have a meeting with the FDA. There simply is no call to action that requires BMY to move on MDGL now.

3) Genfit

Genfit (OTCPK:GNFTF) is best known for failing its phase 2 trial because so many from the placebo group got better. When Genfit announced the GOLDEN-505 phase 2B trial results, the company said "due to the unexpected rate of resolution of NASH in patients randomized to placebo who had early NASH (NAS of 3, placebo response rate >57%)." This phenomenon actually highlights one of the major risks that investors take investing in an EARLY NASH drug candidate. The patients can get better with diet and exercise. Genfit also has a very active biomarker program and is using them as endpoints in their study. They call it a non-invasive In Vitro Diagnostic (IVD) test for NASH. What they are trying to do is prove a correlation to a specific sub-population that would benefit from use of their drug. It feels as if they are data mining the clinical trial before they have results. In the GOLDEN-505 trial, all they really learned about the drug was that it was well tolerated and safe and that the sicker group seems to respond better. The reason the trial was able to proceed to phase 3 was because the responders were given end of study biopsies that proved a beneficial effect of a >2 decrease in the NAS score which was the primary endpoint.

Elafibranor, the lead drug candidate is a dual peroxisome proliferator-activated receptor (PPAR) - alpha delta agonist. This drug class has been proven to show improved obesity-induced insulin resistance. It's a nuclear receptor that regulates lipid related genes, cholesterol metabolism, and lipid metabolism and transport. PPAR-alpha is expressed in the liver, heart, kidney, and muscle, and involved in metabolic functions. The PPAR-delta improves lipid homeostasis and insulin sensitivity. It's a common target for hyperlipidemia and type 2 diabetes. PPAR agonists have demonstrated improved glucose levels. The way it works is that is breaks down the transport of fatty acids that are targeting to the liver. It also plays a role in reducing inflammation. The drug is designed to work on multiple pillars of NASH working together to get resolution.

Genfit has 255.2 million Euros of cash and cash equivalents and a market capitalization of $750 million. They are in the midst of their phase 3 trial with an interim readout expected by Q3 2019. If BMY has cash to move now, investing in GNFTF won't yield a return until over a year from now. This doesn't appear to be an efficient use of capital for BMY. The other thing that might turn most suitors off is that the company is very promotional and has declared themselves the leader in NASH. Given all the marketing that they have put into this trial, it seems certain that they will get approval in the future. What is very uncertain for these early NASH candidates is whether or not insurance companies are willing to spend preventative dollars on this disease which may take up to 20 years to progress.

4) Conatus Pharmaceuticals (NASDAQ:CNAT)

In April 2018, the company reported top-line data of its phase 2b POLT-HCV-SRV trial. To the investing public interested only in headlines, the trial was a failure, but digging down into the data, their lead drug candidate Emricasan had a pronounced effect on fibrosis. The indication of the trial results was for liver transplants with fibrosis or cirrhosis. Patients that undergo a transplant are subjected to chronic immunosuppression which results in fibrosis and cirrhosis. The pathway of cirrhosis and fibrosis is the same in either disease. The cause is however different. The results showed a 95% response rate in the Ishak Fibrosis scores after 2 years of treatment versus 58.4% in the placebo arm. Trial was small but also included some Fibrosis 6 patients in the placebo group that responded for some reason that was just unexplained. Essentially 3 patient responses in the sickest group of patients through the results wildly off. To the trained analysts, this was very good data, and the 3 could be considered outliers. This was the first demonstration of the anti-fibrotic efficacy with Emricasan using a histology endpoint in patients with fibrosis. Consistent with the previous 16 clinical trials, Emricasan was generally well-tolerated in the POLT-HCV-SVR clinical trial, and the overall safety profile was similar in the emricasan and placebo groups.

CNAT has a partnership with Novartis (NVS), so it's very unlikely that BMY would want to get in the middle of that. Buying them would only be strengthening their competitor since they have the rights. Their current market capitalization is $133 million and $74 million is in cash and marketable securities. Roughly half the value is in cash and marketable securities. This one represents the best overall value, but it's unlikely BMY will look at it due to their partnerships with NVS.

5. Galectin Therapeutics (NASDAQ:GALT)

In December 2017, GALT released phase 2 trial results of GR-MD-02 for NASH Cirrhosis. They showed statistically relevant reduction in HVPG (hepatic venous pressure gradient) in patients without esophageal varices. CEO of GALT said "we believe this is the first large, randomized clinical trial of any drug to demonstrate a clinically meaningful improvement in portal hypertension or liver biopsy in patients with NASH cirrhosis without varices." FDA guidance in NASH Cirrhosis has suggested that HVPG is a surrogate endpoint. The responders to the therapy showed > 2mmHG of HVPG from baseline or a > 20% reduction of HVPG from the baseline. 44% of responders had an absolute change of > 2 mmHG drop in HVPG versus only 15% of the placebo group. There was a 29% differential reduction in HVPG from the responders over the placebo group. The population of NASH cirrhosis patients without esophageal varices is estimated to be 2.5 million patients. Since this is an unmet medical need and there are no treatment options for this patient population, it was widely expected that the FDA was going to grant GALT Breakthrough therapy designation. Although the point wasn't highlighted, the company had indicated the FDA was looking for more data before it would be able to give Breakthrough Therapy designation.

Recent corporate developments at GALT indicate that the company is for sale. Mr Uihlein was announced as the new Chairman of the Board and in an 8-K filing the company announced retention bonuses slated for the top 3 executives provided they close a buyout or licensing deal by the end of December 2018. This group of executives has extreme motivation to close a deal within that window since they would be entitled to 300% bonuses. The formula in the 8-K is 10% for each $50 million. Not only is there a clock on this bonus but they need to get to a $1.5 billion valuation to maximize their retention bonus. In an indirect way, the company is indicating they are for sale, and the starting bid is $1.5 billion, and bidding ends December 31, 2018.

GALT is currently designing its phase 3 trial. So, it's not a bad time for BMY to strike up a conversation regarding a partnership for a phase 3 or an outright buyout. There is however one major milestone that might accelerate matters and possibly complicate matters. In the next couple of months, the final cohort of the Phase 1B melanoma study is due to be announced. Investors who extrapolate trend data from the second cohort and noticed the dose dependency to the response rate might be speculating on exemplary results. In the second cohort, GR-MD-02, in combination with Merck's Keytruda, had an ORR of 62.5% vs Keytruda's historical ORR of 33%. In essence, in combination with Keytruda, GR-MD-02 makes Keytruda twice as effective in 1/8th the time frame.

What is so complicated about this situation is that MRK is probably waiting for the melanoma results and then the phase 2/3 trial design, but BMY is looking for a NASH drug now. The issue is that GR-MD-02 is a platform technology that not only works as a NASH drug is also a galectin blocker that could potentially be applied in combination with every cancer therapeutic since tumor immunity is a universal issue in cancer. Denying MRK of this critical combination therapy could be boom for BMY, but letting this technology fall in the hands of their bitter rival could prove disastrous. This conundrum may force BMY to act sooner versus later. BMY would have the first mover advantage because they are talking about NASH, but buying or acquiring the whole company also fills some mighty holes in I-O. They have a solid platform in I-O but adding the galectin blocking platform could make them untouchable in I-O for decades. There are some big stakes in play and GALT is definitely the perfect fit for BMY, but a bidding war is likely to follow, and it might even draw in Gilead (GILD)

GALT has a depressed market capitalization of around $250 million, and there are approximately 56 million shares fully diluted. They have $3.0 million in cash and a credit line of $10 million. They are in need of a partner, but they have 4 indications that they could license to bring in revenue in a non-dilutive manner to fund their upcoming trials.

Investment Summary

BMY really does need to acquire a NASH drug candidate if they want to continue to remain relevant. When they announced their intentions to pursue a NASH candidate the sector heated up. Through careful analysis, it appears the wrong stocks were bid up. In my opinion, the most eligible company is Galectin Therapeutics. Investors should be careful to remember that they should never buy a stock on speculation of a buyout. There have to be fundamentals behind these companies. For GALT, the valuations indicated by the retention bonuses show how remarkably undervalued they are. There are other viable acquisition and licensing candidates for BMY, but this list covers the most likely to make BMY relevant again. They could go after a small name early stage technology, but that hasn't worked.

Disclosure: I am/we are long GALT.

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.

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