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Do The Math: Ram Selvaraju On The Appeal Of Biotechs In Orphan Diseases

|Includes: ACOR, BMRN, CPRX, GALT, Gilead Sciences, Inc. (GILD), ICPT, PFE, SNY

To cast a spotlight on disruptive biotechnology stocks, Raghuram "Ram" Selvaraju of Aegis Capital Corp. taps his experience as a molecular biologist, preclinical investigator and sellside analyst. In this, the last of his three interviews with The Life Sciences Report, Selvaraju highlights micro-, small- and mid-cap biotech names with therapies that may add years to patients' lives and liftoff to investor portfolios.

The Life Sciences Report: Ram, we've seen some recent weakness in biotech stocks. Is it time for a pullback, or is there something else putting pressure on these stocks?

Ram Selvaraju: All this furor over Congressman Henry Waxman and his allies firing off a salvo to Gilead Sciences Inc. (NASDAQ:GILD) about the pricing of its hepatitis C [HCV] drug Sovaldi [sofosbuvir] probably hasn't escaped anyone's attention. I don't believe that Congressman Waxman, with all due respect, has a leg to stand on. Everyone knows that drug manufacturers customarily provide access to therapies for patients who are indigent, or who don't have adequate coverage from existing private insurance plans, via compassionate access or expanded use programs. Congressman Waxman's concern for HCV patients in disadvantaged communities is, in my view, misguided.

That doesn't even begin to factor in the simple economic argument that Sovaldi, priced at $84,000/patient [$84K] over 12 weeks, is actually saving the healthcare system money because existing HCV regimens must be used for longer periods, such as 48 weeks. Cure is a word we don't see often with respect to serious disease, but we've seen Sovaldi, in fact, cure patients in fewer than 12 weeks. For Congressman Waxman to question the pricing of Gilead's drug is wrongheaded. The fact that he did that publicly is, in my view, a fundamental reason why the biotech sector was under pressure in March.

Gilead has never publicized its response to Waxman's letter. It is our belief that the company will stand firm on Sovaldi pricing in the U.S., as it has done on multiple prior occasions when the pricing of its anti-HIV drugs was questioned.

TLSR: I'd like to talk about orphan disease indications. It seems counterintuitive to invest in drug development addressing rare disorders. You can't expect people to deploy risk capital where there's no upside, but recent experience teaches us that money can be made. Generally speaking, what's the value proposition in putting money into development of therapies for rare diseases? Why not just stay in oncology stocks?

RS: I think the principal reason the rare disease space has gotten so much traction with investors, and has been the focus of assiduous effort in drug development, is that the economics are actually very attractive. That attractiveness is driven by two fundamental principles. First, because the patient populations are so small, sales and marketing efforts are likely to be significantly less onerous and less expensive than the mass marketing needed for a primary care-targeted drug. Second, again because of that small number of patients, companies can charge a large amount per patient without getting significant pushback from reimbursement agencies. Keep in mind that every drug's price, at least in the U.S., is set through a discussion between reimbursement agencies and the purveyors of said drugs.

TLSR: Explain why the market-or payers, in this case-supports large reimbursements for rare disease drugs.

RS: Reimbursement agencies don't fight high prices because they can spread the aggregate cost of high-priced drugs across their entire subscriber base. For the larger reimbursement agencies, that base represents many millions of people. If all those people are paying their health insurance premiums every year and only 1 in 10,000 or 20,000-or maybe even 1 in 100,000-insured patients is in need of a rare disease drug, the cost of that drug is spread over the very large population of covered lives. The reimbursement agencies will happily agree to that because if they don't provide some incentive, nobody is going to provide drugs for these diseases, many of which are chronic in nature and are underserved by existing therapies.

You suggested investors might stay in the oncology market. A number of rare cancers have cropped up over the course of the past several decades. Many of them are in the domain of hematologic oncology-the blood cancers. Particularly notorious among these are hairy cell leukemia, natural killer-cell lymphoma, peripheral/cutaneous T-cell lymphoma, blastic plasmacytoid dendritic cell neoplasm [BPDCN] and the like. As a large number of these rare cancers afflict very small patient populations, cancers are not exempt from the rare disease category.

TLSR: The difference between rare hematologic cancers and other rare diseases is that the drugs useful for BPDCN and others might be useful in several hematologic diseases. The drug developer can get an approval in the rarest disease, and then begin doing clinical trials in the less rare disease categories, at the same time some physicians begin to use the agents on an off-label basis. I see a difference between the two categories that you mentioned. How do you see that?

RS: I would say that there are extremely rare niche indications everywhere. Some are metabolic in nature, some are oncology-focused and others are central nervous system [CNS]-related. Some diseases were considered rare a few years ago, but seem common today. A good example of that phenomenon is multiple sclerosis [MS]. About 15-20 years ago, MS was considered a rare disease, but its prevalence and incidence have been clarified to the point that now at least 500K people are living with the disease just in the U.S. That is clearly above the 200K-patient threshold, the figure used in the Orphan Drug Act to specify what should be classified an orphan disease. Cystic fibrosis is another disorder still well below the Orphan Drug Act's defined threshold, but it is not something that can be considered ultra-rare any more.

TLSR: What constitutes an ultra-rare disease today?

RS: To me, ultra-rare diseases represent a treatable patient pool of 10-15K individuals or less. There are some rare diseases that afflict only 500-1K patients. That's what I would call hyper-rare, and it's very difficult to make money with these because even if a company prices a drug high, it's going to be difficult to get enough patients to justify the expense associated with clinical development and launch.

It's also impractical to do expensive Phase 3 trials in hyper-rare indications because so few people have the diseases. That brings up another important question: Given so few people, how does an investigator really demonstrate the effectiveness of a drug? It's not possible to do a well-powered Phase 3 trial.

One case in point is Catalyst Pharmaceutical Partners Inc. (NASDAQ:CPRX), which we cover. Catalyst is developing Firdapse [amifampridine] for the treatment of an autoimmune neuromuscular disease called Lambert-Eaton myasthenic syndrome [LEMS]. The number of LEMS patients across the globe is only estimated at 3-4K. Catalyst is currently doing a Phase 3 trial, and announced on April 1 that it had completed its 36-patient enrollment in the study. It's a very small trial for a Phase 3, but that's the largest you can run in a very rare disease like this.

TLSR: Let's talk about Catalyst for a moment. Your target price is $6, which is more than a double but not quite a triple from current price levels. You have written that Firdapse is very derisked because this molecule has been used for many years in Europe for LEMS. Given that you see it as a derisked asset, why do you believe there's still so much upside?

RS: A lot of the issues surrounding Catalyst involve the firm's past. Back in 2009 it failed in Phase 2 with a drug called vigabatrin for the treatment of addiction. Since then the company has been on the comeback trail. Catalyst's new drug, Firdapse, as you said, has been marketed for quite some time in Europe, where it is the property of BioMarin Pharmaceuticals Inc. (NASDAQ:BMRN), which retains about a 13% ownership stake in Catalyst. BioMarin licensed Firdapse to Catalyst for North America.

While this drug will never be a blockbuster, our view is that it could easily generate around $100M in net sales for Catalyst in North America alone, and should represent a substantial and lucrative market opportunity for a company with a current market cap of just $134M. That's especially true when you consider that one of the key attractions of rare diseases is that companies don't need to spend a lot on sales and marketing. There is a named-patient registry for LEMS patients, and it is unlikely that Catalyst will need a sales force of 20-25 people to promote this drug-that is, if the company remains independent. I would argue that if Catalyst manages to secure marketing approval in the U.S. for Firdapse, BioMarin, a company with a $9 billion [$9B] market value, would at least entertain the thought of buying it.

Another reason I consider Catalyst risk-mitigated is that Firdapse is not the only drug the company possesses. Catalyst has a Phase 2 agent called CPP-115, which is a derivative of vigabatrin. Vigabatrin has since been brought to market successfully by Sanofi SA (NYSE:SNY) for other indications. CPP-115 was designed to specifically address some of the toxicities associated with vigabatrin, mainly visual field defects. But CPP-115 could be considered superior to vigabatrin in all the indications where vigabatrin is approved, or has been used successfully in the past. This includes a long line of indications such as epilepsy, infantile spasms, refractory complex partial seizures and the like.

At this juncture, Catalyst is trading at a market valuation that has not accorded any value whatsoever to CPP-115. This is surprising from our perspective, because clearly vigabatrin works. Its derivative, CPP-115, is closely related in mechanism of action and was designed by Richard Silverman, a professor emeritus of chemistry at Northwestern University who was responsible for the design of two blockbuster drugs in the CNS space, Neurontin [gabapentin; Pfizer Inc. (NYSE:PFE)] and Lyrica [pregabalin; Pfizer]. Both Neurontin and Lyrica secured peak sales of multiple billions of dollars in the U.S.

To me, not only is Catalyst a risk-mitigated value proposition, but there is significant potential for upside. We believe that our price target price could potentially underestimate the company's overall long-term prospects.

TLSR: Just to be clear, Firdapse is the primary driver of Catalyst Pharmaceutical at this point, and it's where the company is directing its capital resources. Is that right?

RS: That is correct. Catalyst has enough capital on hand to complete its Phase 3 trial with Firdapse, report results and file the new drug application [NDA], which we anticipate will occur at the end of Q1/15. But it would need more capital to continue operations through to approval and launch of Firdapse.

TLSR: Is Catalyst still on track for a H1/16 launch of Firdapse?

RS: I would anticipate so, yes. That might well wind up being conservative, because this drug has breakthrough therapy designation, which typically implies faster review times at the FDA. Assuming Catalyst can get the drug filed at the FDA by the end of Q1/15, Firdapse has a substantial possibility of being approved before the end of 2015, which means it could be on the market before the end of 2015, at the earliest. All of these timelines bode well for an investor in Catalyst.

TLSR: The last time we spoke, you brought up Acorda Therapeutics Inc. (NASDAQ:ACOR), which you recommended when it was just $2/share. Could you talk about your value proposition for Acorda?

RS: Yes. I've followed Acorda Therapeutics for a lengthy period of time, and I know its CEO Ron Cohen very well. He is a physician, and has always been focused on meeting the needs of patients. Acorda has been a groundbreaking company, and I think it's been one of the most underrated stocks in the biotech sector for a long time. The company currently markets Ampyra [dalfampridine], which is the world's only MS drug approved for use across the entire spectrum of MS, a disease for which there is no cure.

Initially MS manifests itself as a series of attacks, in which patients can't get out of bed in the morning. They find it difficult to walk, they suddenly fall down, things like that. Existing drugs reduce the extent to which those attacks occur, and their severity, but over time every patient progresses and winds up with long-term disability.

Acorda's Ampyra is the only agent specifically aimed at improving walking ability in MS patients. It was a groundbreaking therapy when it was approved in January 2010. In my estimation, Ampyra still represents good value for the money because many MS drugs have dramatically increased in price, and Ampyra costs less than $20K/year/patient-a bargain when you consider other agents are in the $50-$60K/year/patient range, even though they are not useful in progressive forms of the disease, whereas Acorda's drug is.

What I think makes Acorda particularly compelling is that it is developing Ampyra as a treatment for post-stroke deficit. There are 7M people in the U.S. alone with some form of post-stroke cognitive or neurological deficit, such as in the ability to walk, in hand strength, in manual dexterity. The idea is that Ampyra would have the same efficacy in stroke patients that it does in patients with MS. The MS population is, at maximum, only 700K people; the post-stroke deficit market is at least 10 times as large. You can go ahead and do the math.

Acorda is starting a Phase 2b/3 study this year in post-stroke patients, which should read out early next year. If that study is positive, we anticipate that Acorda could get approval in this indication. Acorda is trying to get Ampyra approved in post-stroke deficit on a once-daily basis, where it would have entirely new IP protecting the drug until beyond 2030. It currently has issued IP on Ampyra in MS that goes out to 2027.

TLSR: Is the market ascribing enough value to Ampyra, especially considering the much larger market in post-stroke deficit?

RS: I don't believe that the market is currently valuing Acorda correctly. Investors appear to think that Ampyra will face generic competition in MS before 2027. And I don't believe the market is adequately valuing the importance of the post-stroke deficit indication, which is a greenfield opportunity. Like ALS, there is nothing currently approved that can address these disorders, and affected patients are begging for therapy.

On top of everything else, Acorda is going to use what's called a "responder analysis" in its Phase 2b/3 trial in post-stroke deficit. This is the same clinical study design it used in MS, where both Phase 3 trials were positive. We're very bullish on Acorda's prospects; we think that this company could be a force in post-stroke deficit, and we believe the market is currently undervaluing its potential in both indications. Acorda also has a rich pipeline.

TLSR: I know you follow Galectin Therapeutics Inc. (NASDAQ:GALT). This company's shares are showing relative weakness even against a weak biotech market. What's your case for this company?

RS: Galectin is a very interesting case. It reported positive data on April 1 from the first cohort in a Phase 1 study of GR-MD-02 [galactoarabino-rhamnogalaturonate] in patients with nonalcoholic steatohepatitis [NASH], or fatty liver disease. This was not a plain-vanilla Phase 1 study in healthy volunteers, so I was surprised by the relatively negative, lukewarm market reaction.

Galectin's market cap is less than $300M, and this weakness has created a buying opportunity. The company's closest direct comparable, in my view, is a company called Intercept Pharmaceuticals Inc. (NASDAQ:ICPT), which is currently trading at a market cap of less than $5B. I do not believe that this huge discrepancy in valuation between Galectin and Intercept is in any way justified. I can tell you that the Intercept drug, obeticholic acid [OCA], is effective, and the company may be three to four years ahead of Galectin's GR-MD-02 in its development cycle. But OCA is not approved, and it has side effects, especially at higher doses. Patients on OCA have been shown to scratch themselves so severely that they bleed, and the drug has been associated with a higher incidence of elevated cholesterol and cardiovascular side effects. Not only does OCA have safety issues, it also cannot reverse liver fibrosis. It can attenuate the progression of liver fibrosis [i.e., slow it down], but it cannot reverse it, which is the target indication.

Our contention has always been that Galectin is potentially a best-in-class company because its drug, GR-MD-02, based on the company's proprietary galectin-inhibiting platform, has the ability not only to attenuate the progression of fibrosis, but to actually reverse it.

TLSR: Ram, I assume that you perceive GR-MD-02 to be low on side effects and toxicity.

RS: That's what we've seen from the initial cohort of patients. There were no significant treatment-emergent adverse events. The drug was safe and well tolerated, and it also demonstrated, most importantly, attenuation of both fibrosis markers and inflammation markers. Pro-inflammatory cytokines went down. Markers of liver injury went down. Markers of fibrosis went down. These were all assayed using serum biomarker endpoints. The company didn't actually take biopsies of tissue from the liver to observe the histopathology, but that's going to come in Phase 2.

One other thing: Since all of Galectin's drugs, including GR-MD-02, are based on very simple carbohydrate chemistry, they break down in the body to nothing more harmful than simple sugars and water. It is highly unlikely, in our view, that any of Galectin's drugs would ever show systemic toxicity, or any substantial side effects. All the indications are that Galectin could have a best-in-class drug, and I do not believe the market is adequately giving it credit.

TLSR: Thank you very much. A pleasure, as always.

RS: The pleasure was mine.

This interview was conducted by George S. Mack of The Life Sciences Report and can be read in its entirety here.

Raghuram "Ram" Selvaraju's professional career started at the Geneva-based biotech firm Serono in 2000, where he discovered the first novel protein candidate developed entirely within the company. He subsequently became the youngest recipient of the company's Inventorship Award for Exceptional Innovation and Creativity. Selvaraju started in the securities industry with Rodman & Renshaw as a biotechnology equity research analyst. He was the top-ranked [#1] biotech analyst in The Wall Street Journal's "Best on the Street" survey [2006] and went on to become head of healthcare equity research at Hapoalim Securities, the New York-based broker/dealer subsidiary of Bank Hapoalim B. M., Israel's largest financial services group. While at Hapoalim, Selvaraju was regularly featured in The Wall Street Journal, Barron's, BioWorld Today, and Reuters/AP. He was also a regular guest on the Bloomberg TV program "Taking Stock," appeared with Bloomberg TV's on-air correspondents Betty Liu and Gigi Stone and was a guest on CNBC's "Street Signs with Herb Greenberg." He is currently an analyst with Aegis Capital Corp.

1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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3) Raghuram Selvaraju: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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