Straight Talk From Allon Therapeutics CEO Gordon McCauley

| About: Allon Therapeutics (NPCUF)
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As I recently pointed out, Allon Therapeutics (OTC:NPCUF) is a company those of you in the biotech sector will want to investigate. It is expected to announce the results of a pivotal phase 2/3 trial in Q4 2012. The trial is for a drug called Davunetide, which is targeted to treat a neurodegenerative disease called Progressive Supranuclear Palsy (PSP). Since PSP shares similar pathology with Alzheimer's Disease, this drug has the potential to be a real game-changer. Depending on the results of the trial, Allon's stock prices will move in a huge way.

I recently had the opportunity to interview the CEO of Allon Therapeutics, Gordon McCauley. Here are some key excerpts from my interview:

Sam: Gordon, thanks for taking the time to speak with me today.

Gordon: Thank you, Sam, for talking with me.

Sam: Let's get straight to it. You have a date with destiny coming up soon. Are you excited? How are you preparing for the event?

Gordon: This is the largest trial ever run in the PSP population, and we have strong scientific data to back the study. We are focused on 3 areas that we can control.

  1. We are thinking through potential outcome scenarios and considering what we would do in each one of them. We are preparing carefully for what the regulatory path will look like based on the data.
  2. We are working with the various PSP advocacy groups to continue to create awareness of Davunetide and to discuss what options we will have for PSP patients depending on the data.
  3. We are actively dialoguing with potential partners and candidly discussing the different outcome scenarios.

We want to do our homework and be prepared for all possible options.

Sam: Terrific! What about communications with the FDA?

Gordon: The regulatory path is laid out in Special Protocol Assessment (SPA) and, of course, we do have an ongoing safety obligation to the FDA for the patients. The independent Data Safety and Monitoring Board (DSMB) has met 4 times and deemed the trial is safe to continue to completion.

Sam: Your drug does look promising, but we all know of recent promising drugs that failed. What do those high profile Beta Amyloid failures in the neurodegenerative space mean?

Gordon: Everyone has to look at the Beta Amyloid failures with an open mind. Before the results, people said that these were the definitive answer for the Beta Amyloid theory. Now the same people say, "Well, we may not have treated the patients early enough." The results tell us we need to think openly. An obvious place to look is the tau pathway, and ours is the most advanced tau therapy in the world. That puts us in a very attractive position with respect to partners.

Sam: Let's talk more about your partnership discussion. You and your Venture Capitalist company have a significant stake in the outcome here, don't you? How are you preparing for the downside scenario?

Gordon: NDI owns approximately 25% of the company as a result of consistent investment over about 8 years.

Sam: So you eat your own cooking! (laughing)

Gordon: Yes, we do. I am very much a believer in creating shareholder value. We have a lot of active discussions with prospective partners. The right deal will obviously depend on economics. We are not going to do a deal for the sake of doing a deal if it does not maximize shareholder value. We're certainly interested in creative partnership structures that minimize or eliminate post data financing needs. I should also say if we were concerned about the downside too much, we could have done a deal a long time ago that would have undervalued the company. Given how far we've come, we won't take the first offer, but we will take the best offer.

Sam: A question I got on Seeking Alpha was that if a Big Pharma could buy you as a rounding error, why have they not done that?

Gordon: The truth is actually the opposite of that. Big Pharma prefers to see data and to pay up rather than to make speculative bets. Pharma buying for rounding error is an exception. Our track record is to consistently do what we say we will do. We want to move forward in a responsible manner with the partnership discussions we are having. A lot of these deals are like eating candy--it tastes good and gives you a temporary sugar high in the market or with short-term needs, but it's ultimately not good for you. We want to do a deal for our shareholders that gets them the best value possible for this asset, not just some short-term kick.

Sam: Fair enough. Let's get to PSP and the patient population. What made you pick this disease and why a pivotal Phase 2/3 trial?

Gordon: Everything we've seen with Davunetide tells us it works on the tau pathway. We looked at pure tau pathology diseases and realized that PSP would be the best place to show the potential of Davunetide. Here are several reasons:

  1. The only pathology that PSP patients have is the tau pathology on which our drug appears to work.
  2. The patient profile is very young, typically 45-65 years. They have a tremendous amount of life still to live. Unfortunately, the average time from definitive diagnosis to death is about 3.5 years.
  3. This is a completely unmet medical need with no FDA approved or marketed treatment.
  4. Diagnosis is well understood by movement disorder specialists like those treating Parkinson's.
  5. The PSP rating scale is well understood, and the FDA accepts that it measures clinically relevant endpoints.
  6. A large body of pre-clinical and clinical work supports the impact on the tau pathway. We know our drug works in stabilizing microtubules in the brain, and that helps neurons work the way they are supposed to work.
  7. While being fully respectful of the FDA's responsibility, and certainly not pre-judging their feedback or advice, we believe that this kind of indication and this kind of study meet the criteria for single study approval if the data support it.

Sam: It seems like you have been ultra strict on patient profile for the study. Explain, please.

Gordon: We were. Thanks for noticing. We had a lot of PSP patients, as well as patients with other types of fronto-temporal dementia and Alzheimer's, request to join the trial. It broke our hearts to say no to people who did not meet the inclusion/exclusion criteria. However, the best thing for all PSP patients is to show that this drug works in a well controlled, well executed, robust study. Since the decline of the PSP patient is rapid, we wanted to include only patients early in the disease process. As we've seen in so many neurodegenerative studies, like the beta amyloid failures you asked about, patients can be past a notional point of no return. We made a total of exactly zero inclusion/exclusion waivers. Candidly, that was tough. It's hard to say no to a patient who is in desperate need. We just did not want to compromise the integrity of the trial. This discipline is a good example of the tremendous effort of my colleagues to make sure there was a consistency of trial execution and compliance.

Sam: That takes me to an excellent hire you made last year--Dr. Michael Gold. Do you care to comment on how that happened?

Gordon: Thanks. Mike is a widely respected leader in CNS trials at GSK/J&J/BMS. His hire was the result of a long relationship where we got to know and respect each other. We spent a lot of time on FTD clinical round tables and some pharma interactions. We got to know each other over a long period of time. It just happened that he was looking to do something innovative, and there we were. We are very happy to have Mike on our team. He is a great leader who has made a great impact.

Sam: Do you feel vindicated that tau is now a part of the dialogue with Beta Amyloid, since in 2004 you must have felt lonely?

Gordon: This is not about us but PSP patients and their families. Our overriding mantra is, "There is so much we can't control in this business; we had better do a good job with things we can control." One of the wisest things I ever learned about the biotech business is to "just follow the data." Our journey to this point is a result of looking at our previous pre-clinical and clinical data and understanding it regardless of the prevailing dogma in the community. Until recently, no one else cared about tau except us and a minority in the Alzheimer's community. But the data pointed to a strong rationale for tau, and we just followed the data. Recent scientific papers continue to validate and expand what has been known for a long time.

Sam: Traders want to know if we will get a tighter timeline for data release. Will we? Catalyst traders love a tight timeline for data release.

Gordon: Our current guidance is that data will be in Q4, 2012. Look for a press release in the future to see if we update and further clarify this guidance.

Sam: Are you confident of a commercial success if Davunetide makes it to the market?

Gordon: Through third parties, we have interviewed 125 clinicians and spoken with about a dozen payers. Clinicians told us that Davunetide is "clinically appropriate" for 86% of their patients if it works the way we have described to them and is approved.

We have had candid discussion on pricing with the payers and looked at pricing on some recent CNS approvals. If we took the minimum pricing for these drugs, we would conservatively be looking at a $700MM+ market size. We've also seen Big Pharma validate those numbers.

Sam: You have all the ingredients to be a Blockbuster Biotech company

  1. Orphan disease in US/EU
  2. Unmet need, no current drug therapy for patients
  3. Special Protocol Assessment with FDA
  4. Fast Track with FDA
  5. Neurodegenerative diseases being hot space

Yet you are a penny stock! Why did traders and investors miss the story?

Gordon: (Laughs) There are lots of good examples of orphan drug blockbuster companies today that used to be little like us, and I am sure they felt left out by traders and investors. When data pans out, it cures all ills, and valuation takes care of itself.

Sam: Indeed, sir! Well put. Good luck to you this year. We will keep our eyes out for company news releases.

My thoughts for the traders

I continue to be impressed by Gordon and his pragmatic approach to running Allon Therapeutics. He has a lot at stake financially and that bodes well for all shareholders.

There are 3 distinct catalysts here for the stock to continue to move up towards my lower end target for stock to be at $0.98 before data.

  1. Potential Big Pharma catalyst before data--this should be seen as a clear validation for tau pathology and Allon. Stock could soar on the news.
  2. Potential clarity of clear data release date--Let's carefully watch the news releases. This should bring in the momentum "run-up" traders, immensely increasing daily stock volume traded and increasing the share price.
  3. Actual data release in Q4, which will be the "mother of all binary events" -- stock could be up 15x or down to cash value plus IP.

There are significant risks associated when trading or investing in micro-cap stocks. These risks include liquidity risk, violent price moves, stock manipulation by dishonest traders, etc.

With respect to Allon Therapeutics specifically, we have a significant clinical risk upon which the company will have a valuation adjustment in Q4, 2012. There is definitely a chance that trial could fail outright and stock drops to cash plus IP level. Be risk-conscious, and read my earlier reports on all the risks you will be exposed to. The stock continues to remain undervalued at current levels! Trade smart.

Disclosure: I am long OTC:NPCUF. I may add to or reduce my position at any time. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. I am not a certified financial adviser and you should consult with your personal financial adviser before making any investment decisions. All investments carry risk, including total loss of capital. Trade based on your own risk tolerance.