Infectious Disease Technologies Could Open Investment Opportunities In 2012: Stephen Dunn

Feb. 17, 2012 1:51 AM ET
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Infectious Disease Technologies Could Open Investment Opportunities in 2012: Stephen Dunn

Source: George S. Mack of The Life Sciences Report (2/16/12)

Investors have avoided infectious disease companies like the plague, but LifeTech Capital President and Senior Managing Director of Research Stephen Dunn doesn't agree, and he has staked out some ideas in this space that could make you financially better off. In this exclusive interview with The Life Sciences Report, Dunn explains the rationale and delivers the names of bug-fighting companies that use the newest technologies to overcome old barriers to success.

The Life Sciences Report: Why is there such a disproportionate amount of effort and resources targeting oncology versus infectious disease?

Stephen Dunn: Most people don't realize that globally more people die from infectious diseases than from cancer. We currently think of cancer as a terminal disease of the developed world while we believe infectious diseases are a third-world problem and are treatable if only they had proper access to medical care. The fact of the matter is that increasing human population density combined with cheaper global travel between poor and developed regions has magnified the risk of infectious disease outbreaks in the developed world. Even now, our community and healthcare facilities are seeing all sorts of new strains of infections. In addition, human encroachment with wildlife and increasing contamination in the water and food chain have caused a number of deaths and triggered multiple food recalls.

Infectious diseases require a significant expenditure of drug developer time and money. As a result, oncology drug development appears more attractive. The development and regulatory hurdles are usually much lower for oncology drug development since most cancers affect fewer than 200,000 people a year, qualifying them as orphan drugs requiring just a single Phase 3 trial with a shorter review period.

Today, approximately 60% of new biotechnology companies are focused on oncology and they attract almost 70% of the venture capital and public market capital for biotech. However, the U.S. National Institutes of Health (NIH) is expected to fund $15 billion (B) for infectious diseases, excluding HIV, during 2012 versus only $8B for cancer. While Wall Street has been somewhat ambivalent, the U.S. government clearly sees the growing threat and is funding significant research for infectious diseases. We expect investor sentiment to grow during 2012 as we are beginning to see more and more pathogens that are resistant to current vaccines and antibiotics.

TLSR: What about profitability? How do you make money in the infectious disease space when most, even viral diseases nowadays, are not chronic diseases once they are treated? Even hepatitis C (HCV) is curable.

SD: Profitability is certainly an issue for those routine vaccines such as the seasonal influenza shot that you can get at the drugstore for $30 or the normal childhood vaccination regimens. But investors know there are multibillion-dollar markets as we've seen with the prophylactic vaccines for the human papilloma virus (HPV). The increasing threat from emerging infectious diseases, some with significantly higher transmissibility and mortality, can drive the economics closer to the oncology space. For example, the headlines over the past few years have brought increasing investor awareness to the MRSA (methicillin-resistant Staphylococcus aureus) threat in the healthcare and community settings. Savvy investors are also aware that MRSA is mutating into even more lethal strains.

There are over 300 infectious diseases with only 15% of them having an effective prophylactic therapy. However, since it is usually not financially practical to develop prophylactics, most of the industry and investors have turned to post-infection therapeutic treatments. For example, we have seen both medical and financial success in HIV and in HCV therapies to the point where they could be considered chronic conditions. But these infections require human blood-to-blood transmission, which is relatively difficult.

We believe the best investments will be in the emerging infectious disease space where the transmission vector is faster along with rapidly mutating pathogens that develop drug resistance. For example, Tuberculosis is spread via coughing and sneezing and is so easy to catch that it is believed 30% of the global population carries the latent form. It also has a 50% mortality rate if it becomes active and is left untreated. Due to the prevalence of this infection, Tuberculosis has now mutated from drug-resistant to multi-drug resistant to extremely drug-resistant strains. I expect this resistance pattern to be seen across a number of infectious diseases in the future and the financial opportunities are increasing along with them.

TLSR: Just addressing viral and bacterial disease for a moment, how can we keep pace with drug resistance? It takes 10-15 years to develop an antibiotic or antiviral. Then, the developer of an antibiotic could be asked by the FDA to hold the antibiotic back as second- or third-line use to delay resistance. How is a developer incentivized to expend the resources for such a project?

SD: During the relatively short history of antibiotics, we typically see resistance develop in humans within four or five years and turn into a significant problem within 10 years. This is a result of the multiple pathways for resistance to form. For example, research just published in the New England Journal of Medicine on gonorrhea, which became resistant to sulfanilamide in the 1940s, penicillin and tetracycline in the 1980s and fluoroquinolone by 2007, is now showing resistance to third-generation cephalosporin. Unfortunately, this antibiotic-resistance issue also means that drug developers are not incentivized to develop new antibiotics. The risk/reward for developing an antibiotic, even if it is successful, is unfavorable as the drug might be held in reserve by prescribing physicians to reduce developing resistance. This makes it a risky area for investors.

TLSR: Relatively few new antibiotics have come along recently. Is there a play here for investors?

SD: One of the few recent success stories was Optimer Pharmaceuticals Inc. (OPTR:NASDAQ) where DIFICID (fidaxomicin) was shown to have a longer clinical response over the antibiotic vancomycin inClostridium difficile-associated diarrhea and was approved by the FDA last year. However, even today, there is still a lingering risk that vancomycin will be prescribed first by some physicians who will keep DIFICID in reserve despite its effectiveness. The bottom line is that antibiotic development is not an attractive space to most drug developers, nor is it to most investors.

TLSR: Steve, what about alternatives to antibiotics? Can you escape the lock-and-key mechanism to bypass resistance?

SD: Development of alternatives to antibiotics is very attractive to investors. However, there are relatively few publicly-traded companies specializing in this field. One of them, NovaBay Pharmaceuticals Inc. (NBY:NYSE.A) is developing a new drug class called Aganocides that mimic the human body's way of killing pathogens. When white blood cells, called neutrophils, encounter foreign bacteria, they surround it and generate an oxidative burst process, which destroys it. The oxidative burst creates hypochlorous acid molecules, which are highly reactive and kill bacteria. Aganocides are stable versions of this chemistry, which does not cause resistance in pathogens. We know resistance is unlikely, otherwise human neutrophils would have been rendered useless a long time ago.

Also in the antibiotic alternative space is a private company worth keeping your eye on called AvidBiotics Corporation (private). It uses antibacterial proteins, specifically re-engineered defensive proteins called bacteriocins, which are employed in nature by Pseudomonas aeruginosa to kill other strains of bacteria by piercing their cell envelopes. This could represent a new class of highly targeted, narrow spectrum antibacterial agents.

TLSR: Since antibiotics on only work on bacterial targets, what about the viral target space?

SD: Traditional vaccine technology consists of an antigen that teaches the immune system to recognize a specific virus. It can be combined with an adjuvant (an assist molecule) that can boost the immune response making it more effective. In fact adjuvants have been called "immunology's dirty little secret" and may be more important than the antigen (a protein that challenges the immune system to create antibodies) itself in eliciting an effective clinical immune response.

TLSR: I'll bet you have a play on adjuvants.

SD: A company that is currently under the radar in this area is Stellar Biotechnologies Inc. (KLH:TSX.V) which is the world leader in keyhole limpet hemocyanin (KLH) production for use as an adjuvant and protein carrier. KLH is produced by Megathura crenulata (great keyhole limpet, a marine animal), and it is such a large and complex molecule that it cannot be synthesized. This represents a high barrier to competitive entry especially for production of cGMP (current good manufacturing practices)-grade KLH, for which Stellar is partnered with Sigma-Aldrich Corporation (SIAL:NASDAQ). Currently KLH is being used as either an adjuvant or protein carrier in over 30 active human clinical trials in various indications. It is important to note that KLH is considered so important to medical research that Stellar receives government funding to ensure that it can maintain a sustainable supply and even develop a KLH-based immunogenicity assay.

TLSR: What about other technologies such as DNA vaccines?

SD: Development of DNA vaccines is another promising technology. These newer products in development can be considered third-generation vaccines, and they are made up of a small, circular piece of bacterial DNA called a plasmid, which is genetically engineered to produce specific proteins, antigens, for which there is a desired immune response. Once inside a cell, it translates the pathogenic (disease-causing) DNA and converts it into its respective proteins. Because the host cell recognizes these proteins as foreign, they are processed and displayed on the cell's surface. Consequently, the immune system is alerted, which then triggers a range of immune responses.

TLSR: What investing ideas do you have in the DNA vaccine space?

SD: A company to watch in this space is Vical Incorporated (VICL:NASDAQ), which has several DNA vaccine candidates in clinical trials. Another company to keep your eye on is Inovio Pharmaceuticals (Amex:INO), which uniquely combines DNA vaccines with electroporation so that small controlled pulses of electricity are able to temporarily increase the permeability of the cell membrane and increase the DNA vaccine uptake. One of the larger companies in the space is Dynavax Technologies Corporation (DVAX:NASDAQ), which uses short DNA sequences to activate the innate immune system, specifically targeting toll-like receptor 9 (TLR9), which is found on a specialized subset of immune cells to teach and stimulate the immune system. Finally, Novavax, Inc. (NVAX:NASDAQ) uses recombinant DNA (rDNA) technology to create virus-like particles (VLPs), molecular structures very similar to a virus, except that they are lacking the genetic material necessary to replicate. Genes coded for specific pathogenic antigens are integrated into the baculovirus, which then infects a cell culture from which the recombinant viral proteins are collected. When injected into the body, VLPs attach to cells and trigger an immune response against the virus for which the VLP was created.

TLSR: What about biomarkers and diagnostics in the infectious disease space? What are you looking at here?

SD: Diagnostics is an area in this space that is often overlooked by investors. A significant player in infectious disease diagnostics is Cepheid (CPHD:NASDAQ) with its Xpert line of in vitro diagnostics for acquired and critical infectious diseases along with its instruments and reagents. Another diagnostic company, Quidel Corporation (QDEL:NASDAQ), has the QuickVue line of rapid diagnostic tests along with its molecular diagnostics for nucleic acid testing, for which the company expects to significantly expand indications in the future. The infectious diseases space is very large but very fragmented, and there are relatively few publicly-traded companies, especially when one considers the huge potential markets. We believe investors would do well to enter the infectious disease space during 2012.

TLSR: Thank you, Steve. I enjoyed this.

SD: Thank you very much.

LifeTech Capital Senior Managing Director and President Stephen Dunn was previously the managing director of Life Sciences Research at Jesup & Lamont, as well as director of research for Dawson James Securities and director of Life Sciences at Cabot Adams venture capital group. He has held management positions in Business Development, Finance and Operations having worked in over 25 countries in North America, Europe and the Far East with biomedical companies including Beckman Coulter, Coulter, Cordis (Johnson & Johnson), Telectronics (St. Jude Medical) as well as several smaller companies. With over 25 years within the global biomedical industry, Mr. Dunn has negotiated numerous intellectual property licenses, product development agreements, venture funding, M&A and joint ventures. Dunn is a five-star biotechnology analyst on StarMine and has appeared in both the financial and scientific media such as The Wall Street Journal, CNN, Newsweek, Forbes, Nightly Business Report, Nature Biotechnology, The Scientist, BioWorld and many other media outlets. He is also a frequent speaker and panel member for many financial, medical and venture capital events.


1) George Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Life Sciences Report:Stellar Biotechnologies. Streetwise Reports does not accept stock in exchange for services.

3) Stephen Dunn: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story. LifeTech Capital has received investment banking compensation from NovaBay Pharmaceuticals in the previous 12 months and Stellar Biotechnologies is currently an advisory client of LifeTech Capital.

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