Global Blood Therapeutics: Can The Rally Continue?

Summary

• Today, we revisit Global Blood Therapeutics. Like most small biotech stocks, the shares have had a roller-coaster ride lately.
• However, the company recently posted encouraging trial results and is picking up considerable and positive analyst support.
• We circle back and provide an update on Global Blood Therapeutics in the paragraphs below.
• Looking for a portfolio of ideas like this one? Members of The Biotech Forum get exclusive access to our model portfolio. Get started today »

"In chaos, there is fertility." - Anais Nin

Today, we revisit Global Blood Therapeutics (GBT). This stock has had an up and down year as can be seen from the chart below.

The shares have recently been on an upswing despite the current horrid sentiment in the market. The company just posted encouraging late-stage trial results, has potential catalysts on the horizon, and is seeing a big uptick in positive analyst commentary. We revisit this promising small-cap concern in the paragraphs below.

Company Overview

Global Blood Therapeutics is a San Francisco-based "Tier 4" biotech concern that is focused on developing treatments for underserved patient communities. The company came public late in 2015 and currently sports a market capitalization of approximately $2.4 billion.

Recent Results & Pipeline

The company basically has just one significant asset in its pipeline at this time. That is the compound voxelotor. This candidate was previously known as GBT440. Voxelotor is an oral, once-daily therapy for patients with sickle cell disease (SCD). Voxelotor has been designed to work by helping hemoglobin hold onto more oxygen as the red blood cells travel through the body. This should keep red blood cells in their normal shape and help stop sickling.

On Dec. 3, the company announced very encouraging results from a critical Phase 3 trial named HOPE at the huge ASH conference in San Diego. This caused the shares to rocket up almost 50% on the day. This study is ongoing and scheduled to conclude in June of next year. If data continues to be positive, the company should file a NDA in mid-year 2019.

As importantly, the company also disclosed this data had landed it accelerated approval from the FDA for voxelotor. This means the firm will not need to conduct a clinical trial that proves voxelotor reduces strokes until after the drug is approved.

This could be a major drug if approved, as between 70,000 and 100,000 people in the U.S. have sickle cell disease. Another 60,000 suffered from the affliction. One recent study estimated that in the United States, the average annual cost for the care of an adult patient with the most common genotype of SCD exceeds $200,000.

Analyst Commentary & Balance Sheet

Since these results were disclosed, five analyst firms have reiterated Buy ratings, most with raised price targets. Two analyst firms have assigned new Buy ratings. Price targets proffered range from $73 a share all the way up to $150 a share.

Here is the commentary from Oppenheimer which reiterated its Outperform rating this week and $82 price target:

"Monday, Global Blood announced that it has reached an agreement with the FDA regarding a proposed accelerated approval pathway for voxelotor. Following extensive discussions, the Agency has agreed to consider accelerated approval based on hemoglobin response, the primary endpoint of the company's ongoing Phase 3 HOPE trial. We believe the agreement puts GBT on track to file accelerated approval in mid-2019. The FDA agreed that transcranial Doppler (TCD) flow velocity, a validated indicator of stroke risk, could be an acceptable primary endpoint in a post- approval confirmatory trial. We view this news positively, as it dispels much of the remaining uncertainty surrounding voxelotor's development timeline, and we expect GBT shares to trade sharply higher today. We reiterate our Outperform rating and $82 PT."

The company ended Q3 with approximately $195 million of cash on its balance sheet after posting a loss of $43 million for the quarter. The company announced that it had priced a $150 million capital raise which will address its near- and medium-term funding needs.

Verdict

Global Blood Therapeutics is not a "core" position in my portfolio simply because it lacks the "shots on goal" I generally like to see before establishing a significant position in any developmental concern. That said, I do hold a smaller position as voxelotor has great promise and the risk/reward profile looks attractive on a longer term basis. A view that is currently echoed by analysts.

Option Strategy

One way to add exposure to this name after today's dip due to its secondary offering is via a Buy-Write option strategy. Using the June $45 call strikes, fashion a Buy-Write order with a net debit in the $35.50 to $35.80 range (net stock price - option premium). This mitigates some downside risk and sets up a more than solid potential return for its approximate seven-and-a-half-month hold period. Option liquidity is decent in this strike price.

"Invention, it must be humbly admitted, does not consist in creating out of void but out of chaos." - Mary Shelly

Bret Jensen is the Founder and author of articles on The Biotech Forum, The Busted IPO Forum, and The Insiders Forum.

Analyst’s Disclosure: I am/we are long GBT. 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.

Comments

[chicagomary]

I listened to the jp morgan presentation yesterday by the CEO. He did a pretty good job,but sounded a bit nervous. Wish he had more to say about the new purchase of rx.

[grok42]

If you are talking about Ted Love, he always sounds kind of nervous. I think it is some kind of issue with his voice rather than actual nerves, but don't actually know.

[relee]

Thanks.

[grok42]

Personally I am a little surprised there has been no interest in GBT from the larger biotech firms. You would think there would be some interest by them in GBT.

[relee]

How does news today of breakthrough status for Novartis drug for sickle cell affect GBT??

[biogenius]

@relee
BTS is for prevention of VOC. The once monthly infusion has not been shown to reduce anemia or improve quality of life. The original phase II trial was published Feb 2017. It is almost as though nvs just woke up and decide to do something about it. My guess is that the impact on gbt is minimal.

[johnberchick]

Looks like some bumps with the issuance? Just a guess as I see stock down premarket.

[Fernando1984]

Insane to see that the stock price is still under 60$ after the FDA decision. It just makes the people crazy....

[User 48755127]

Agree, it is amazing how inefficient biotech markets are. US markets are the spotlight of the world markets, and biotech is bigger in the US than anywhere else. With all the great minds, there is still enough inefficiency for someone without a degree to make a good living. (Yes, I'm referring to myself.)

[grok42]

Hi DA and Osmium,

This discussion has been really helpful. The comments on why TCD was chosen as the confirmatory trial end point makes a lot of sense - fairly direct indicator of stroke risk, straightforward to measure, unambiguous, and relates to one of the most serious problems with SCD, eg stroke.

The one thing that continues to bother me a little is why the stock is not a lot higher. It now seems more like than not that GBT will get the accelerated approval. If so, why is the stock not above its previous high where the approval was less likely? Perhaps it is just the crappy market combined with the small secondary.

Grok42

[nigercapital]

Price often times does not reflect value in the short term. In the longterm it will.

[Decision Analytics]

I agree this is a great discussion @grok42 and @Osmium Research

I believe TCD was selected because 1) there is very convincing evidence that it is a predictor of stroke risk across a number of well-run studies. 2) It is easy to measure and becoming more commonplace to measure in younger patients so the data could be generated quickly. 3) The study would not have to be that long and could be done in a subset of patients without much concern that the data wouldn't be attributable to a larger population. In the ASH regulatory conf call Q&A they talk more about the specific studies that prove the validity of TCD and also what study might be the best preliminary model for the confirmatory study.

For your question about why they didn't use a measure of RBC sickling, I think you are referring to the ISC (Irreversibly Sickled Cells) analysis which GBT did in some prior studies. It's a good question, and I am not entirely sure of the answer, but I suspect your supposition is mostly correct (I.e. it is difficult to measure because it is done under a microscope and there are sources of error in the counting methodology). I also think that even if they get a precise ISC number / change, there isn't much evidence tying it to specific negative patient outcomes in large studies (probably also because it is hard to use as a measure and very labor intensive for a large population).

I would also like to stress that although I have done hundreds of hours of due diligence on GBT and SCD, I am not a hematologist so my answers should be taken with a grain of salt.

[Osmium Research]

Roche introduced an instrument that was called Bloodhound when it was in development and is now named cobas m 511 integrated hematology analyzer. The instrument was developed at Kollsman Diagnostics Systems.
diagnostics.roche.com/...

The instrument creates a thin layer of whole blood cells, takes high and low image photographs of the cells, and then processes the images to identify the different types of cells. Probably too new to use for these trials but it might be an interesting tool to use in future studies.

[bilo_sellhi]

Seems like a lot hinges on the definition of ‘demonstrates improved TCD flow’. I have seen limited data on this characteristic for voxelotor. In one study 1 individual with TCD in conditional range (>170 cm/sec) showed improvement after 12 weeks Others in study had normal TCD with no mention in the source I saw of change in TCD other than all 12 remained at normal midpoint. In Hope phase 3 study it looks like 6 of 7 ‘Hb responders’ showed a modest level of decrease in TCD through 24 weeks, but all were in normal range. For Non Hb responders TCD appears to increase. Is there more data out there re the impact of voxelotor on TCD?

[grok42]

It is a little confusing that GBT is in the low $40s. The FDA agreed to the accelerated approval process for Voxelotor without any further trials beyond the ones in progress. They will require a confirmatory trial with TCD as the endpoint, but that happens after the approval to go ahead and sell the drug.

Given the FDA based their decision to grant the accelerated approval process to GBT based on existing trial outcomes, it seems highly unlikely they would not grant the actual approval in H2 2019 as much of the trial data is already available and it is unlikely we will see some sudden change in the outcomes.

So why is the market not valuing GBT closer to the targets of $80 to $150? Is there another risk in the background holding back the stock price? Or is this just a huge opportunity that is being missed by investors for some weird reason?

Am long GBT and it sure seems like a winner given the hard data around the dose response. Would have been better if the voc results were better, but I am beginning to suspect voc are more complex mechanisms than simply an overabundance of sickled RBCs.

[Decision Analytics]

@grok42 I always respect and appreciate your comments on GBT. I am similarly perplexed that we are not at least above 60 here, even with terrible biotech sentiment. It's trading at 1x peak sales (and I believe peak sales estimates are conservative), and they will have more than 12 years exclusivity and a very good competitive position. In a take out scenario 5x peak sales is not unreasonable IMO given huge cash flow generation potential.

The question around VOCs is a good one. I think (and this is some speculation based on what we've learned this year) it is possible immediate reduction in hemolysis contributes to reduction in VOC but then Hb increase can cause a temporary increase. Also patients have less fatigue and are more active causing more activity which can lead to more VOC. It seems that in the short term, VOCs can more easily be reduced by diminishing RBC "stickiness" with other drugs (like NVS drug) but these don't help other aspects of the disease, and they have side effects. Absent a reduction in RBC stickiness, VOCs may be in large part the result of organ damage that has accrued over time, so vox can stop organ damage from increasing, but it can not stop the damage that has been done, and so reductions in VOCs will take some time to be shown (placebo group curve should separate on VOCs more and more over time).

Although the VOC question will be a source of some controversy and interrogation for at least a little while, I think people will eventually realize it is actually a moot point. The more important question is does Vox halt organ damage through a dramatic reduction in polymerization. All evidence points to that, and FDA seems to agree, so why wouldn't you put all your patients on it if you were a clinician? It looks like is has an incredibly benign safety profile, so there is no real downside. Essentially your choice as a clinician is to 1) put them all on vox, or 2) go against significant weight of evidence (and FDA opinion) and not put patients on Vox despite the fact that there is no downside to doing so, risking that you are very likely to be exposing patients to more organ damage, strokes, deaths, anemia, and even VOCs. You would have to be crazy to do this, and only uninformed docs would go down that road I think.

This is why I am confident that, barring some unforeseen safety issue, this WILL become the standard of care, and fairly quickly. As a result, GBT remains my largest position, and I intend to hold the vast majority of it until GBT is well over 100 per share.

[Osmium Research]

DA/Grok,

Could you explain why preventing sickling and increasing Hb isn't an adequate endpoint? Why aren't these two parameters clinically significant?

[johnberchick]

DA, very informative post. Why I am looking to add once the dilution is behind us. Interesting that the drop Friday is larger than the full dilution impact. Things that can happen when overall market tanks.

[kiar97]

Thanks for an informative article, Bret.
Appreciate. The 45% jump on dec 3rd was more due to the FDA agreement rather than the data at ASH...

Also, the FDA in its recent ASH-FDA workshop on SCD has highlighted disease modifying agents as one of the sought after end points. And GBTs voxelator offers that agent. So, it’s highly derisked asset now.

So, I took up a bigger core position.
Jut my 2 cents...
Happy trading/investing !!

[nckadams]

When was that? I have only recently started following GBT.

[nckadams]

I think it is more reasonable to expect the offering price to set a floor for SP, rather than a cap, at least in short term. Underwriters typically set the offering price at a level that will allow a run-up, thus providing another profit opportunity for those who subscribed to the offering. This scenario is supported if the underwriters fully subscribed to the overallotment.

[Bret Jensen]

Would agree with that scenario provided overall market does not continue to tank...

[nsolot]

What is the offering price? I see the PR yesterday titled "Global Blood Therapeutics Prices a $150.0 Million Common Stock Public Offering"... maybe I need new reading glasses, but I can't find the price in that PR.

On GBT website I see SEC form 424B5 filed Dec 6, but it has blank space where the share price will appear in the final filing:

The underwriter has agreed to purchase our common stock from us at a price of $ per share which will result in approximately $ of
proceeds to us, before offering expenses, and assuming no exercise by the underwriters of the option described below.

[redoaks]

it's an open shelf offering, meaning the underwriters can offer to sell 150m from time to time so they won't know the final price until all the new stock is placed. it's the dilution of existing shareholders that cratered the price 8% yesterday.

[confusionwillbemyepitaph]

so to clarify you are saying the rally will continue ?

will the sp be capped by offering price ?

[Zizu_5]

Multiple shots on goal can also lead to lack of focus and prioritization of resource spend, like I saw in red hill for example.. I would say jargons like that or one trick pony are only as good as the assets and execution behind... Long gbt however, and agree with you summary!

[biogenius]

@Zizu_5 ,
I think the best 'multiple shots on goal' companies are those with de-risked platforms.