Source: Peter Byrne of The Life Sciences Report (7/11/13)
http://www.thelifesciencesreport.com/pub/na/15433
When should investors jump on a junior biotech stock with a promising product in the pipeline? That’s a tricky question, one that analyst Pooya Hemami of Edison Investment Research considers carefully as he tracks astonishing epigenetic-based and orphan drugs with novel applications. In this interview with The Life Sciences Report, Hemami describes how he assesses the viability of a junior firm and gives the nod to several well-positioned names in Planet Biotech.
The Life Sciences Report: Given the ups and downs in the stock markets, what is the best capital-seeking strategy for a life science company?
Pooya Hemami: It all comes down to smart risk management and the practicalities of internal fund allocation. Biotechs should focus research and development spending on the most advanced assets in their product pipelines, the items that can more quickly reach value-enhancing milestones and attract partnerships.
Some firms make the mistake of spending resources on multiple projects and, consequently, they find themselves with a sudden need to raise cash—without having sufficiently advanced a single key program. Smart developers look to raise money when they are solvent, not when they are strapped for cash.
TLSR: What impact will rising interest rates have on biotech?
PH: Biotech companies tend to raise equity as opposed to taking on interest-bearing debt, so changing interest rates will not have a drastic effect. But if the rates rise too quickly, and the overall market slows, raising cash for research could become a bit more difficult. As long as we stay clear of a recession, though, the appetite for biotech will grow.
TLSR: What is the importance of epigenetics to pharmaceutical research? Do you have any names in that space?
PH: Epigenetics is a promising new field in which gene activity can be regulated without altering nucleic acid or DNA sequences. Methods include modifying histones (the primary proteins found in chromatin) or methylating DNA (adding methyl groups to DNA bases). It’s interesting to note that last year there were two key deals in the epigenetics space. Epizyme Inc. (EPZM:NASDAQ) received $90 million ($90M) from Celgene Corp. (CELG:NASDAQ) for an option on ex-U.S. rights to its histone methyltransferase inhibitor program. In addition, Constellation Pharmaceuticals Inc. (private) received $95M up front from Genentech/Roche Holding AG (RHHBY:OTCQX) as both parties entered into a collaboration to develop therapies using Constellation’s epigenetics platform.
One of the really interesting opportunities in this field concerns bromodomain and extra terminal domain inhibition, whereby a protein domain product can be designed to upregulate or downregulate specific genes. In some cases, the product can be dosed orally, without injection or approaches that one normally sees with antisense or RNA interference (RNAi) treatments for genetic disorders. GlaxoSmithKline (GSK:NYSE) has an intriguing phase 1 product in NUT midline carcinoma; Oncoethix SA (private) has started a study in hematological malignancies, and Constellation Pharmaceuticals Inc. and Tensha Therapeutics Inc. (private) are also playing in the space.
TLSR: Generally speaking, what are the regulatory obstacles for epigenetic applications?
PH: There is always potential for regulatory scrutiny of a product candidate with a novel mechanism of action. Reviewers at the regulatory agencies often ask for more in-depth work on long-term toxicology studies. Studying the safety of a drug with a mode of action that has never been used in or marketed for humans before can delay approval. Of course, a company with large funding resources will be able to engage in the more in-depth studies and multicenter trials, and move things forward faster than a firm with fewer resources.
Investors looking at drug candidates need to keep track of the regulatory timelines associated with the individual candidate. They should also look at the size of the population under treatment. If a drug has an antibacterial indication, for example, the regulatory timeline could be significantly shorter than for a drug with an oncological indication. If the drug addresses an orphan indication, it is harder to recruit patients. Vaccines can be approved after very short study periods, depending on the target.
TLSR: What is the worldwide market situation for orphan drugs—drugs that treat very rare diseases affecting relatively small populations of people?
PH: There are a lot of positive incentives for orphan drug developers in the U.S., where the Orphan Drug Act allows for seven years of market exclusivity. And there are, of course, lower marketing costs involved in targeting small populations of patients. In fact, the compound annual growth rate for orphan drug designations over the past decade is about 10%. New molecular entities that are not orphan drugs have experienced a flat growth rate. An increasing proportion of the new drugs now being approved are orphan drugs.
TLSR: Are you following any junior firms that are developing orphan drugs?
PH: BELLUS Health Inc. (BLU:TSX; BLUSF:OTCPK) is currently developing Kiacta for AA amyloidosis, a chronic inflammatory disease affecting up to 50,000 (50K) patients worldwide. The disease affects the kidneys, and patients often require dialysis. There is no approved treatment for the condition. BELLUS has completed a phase 2/3 study and achieved a p-value of 0.06 separation between the drug and placebo arms. It has set up a special protocol assessment (SPA) for its ongoing pivotal phase 3 study. The regulators have basically indicated that if the SPA is met with a p-value below 0.05, then the drug would meet the conditions necessary for approval. The chance of this study meeting the U.S. Food and Drug Administration (FDA)-mandated endpoint of 0.05 is good, particularly because the sample size has been largely increased in this second study. The first Kiacta study had a p-value of 0.06 on 62 events, and the second study will have 120 events, which will increase the likelihood of meeting the statistical SPA specification. We predict a 60% probability of success in meeting this goal.
TLSR: What is a p-value?
PH: A p-value is a probability assessment of a drug’s efficacy. For example, a p-value of 0.05 refers to a 95% probability that the results shown in the study are due to the treatment, and are not random. The lower the p-value, the higher the statistical probability that a studied drug has had a stronger effect than a placebo. For approval, most drugs need a p-value of less than 0.05.
TLSR: How are orphan drugs priced for profitability?
PH: The variables affecting price include assessing the current pricing regimes for other orphan indications with similar prevalence rates, and the cost savings afforded by the therapy if it is successful. There is a range of economic benefits. We believe that Kiacta, for instance, could prolong the time period during which a patient would not need dialysis by two to three years, and dialysis costs up to $80K/year.
TLSR: Do you have any names that are breaking ground on the vaccine front?
PH: Medicago Inc. (MDG:TSX; MDCGF:OTCPK) is an emerging play in the avian flu space. It has a novel, plant-based protein manufacturing platform that can produce seasonal or pandemic flu vaccine candidates in as little as four weeks following the identification of the particular strain causing the flu. This compares to 4–6 months for conventional egg or cell culture vaccine development methods. Medicago’s quicker response timeline would be very beneficial in a pandemic scenario.
In May, Medicago announced that it was the first company to develop a vaccine candidate against H7N9 avian flu, which is responsible for the recent influenza outbreak in China. In June, it announced positive clinical data and responses with high antibody titers after only one dose in a mouse model, which we think is a very promising early result. Vaccine companies need to pass a number of trials for regulatory approval. But Medicago’s data looks promising.
TLSR: As an expert investor, how do you decide when to invest and when to wait until the clinical trial period for a vaccine is more advanced?
PH: Seasonal flu vaccines require large-scale phase 3 studies that potentially involve thousands of patients, which can take two years or longer to complete. In most Western countries large segments of the population, such as the elderly, receive a seasonal flu vaccine to protect against the upcoming seasonal flu strain. Recruiting patients from this large population is not difficult or time-consuming. Testing for an urgent vaccine scenario, such as for a pandemic, does not require recruiting as many patients, so a phase 3 study can be completed in less than a year.
In certain scenarios, the U.S. government may even agree to purchase a stockpile of a pandemic vaccine as a preventative measure ahead of a phase 3 study result. A few years ago, the U.S. bought its initial order of H5N1 flu stockpile from Sanofi SA (SNY:NYSE) when only phase 2 data was available. Hence, it is possible for a non-phase 3 pandemic flu vaccine to land a stockpile order. That is a bit of upside to consider.
TLSR: Do you have any other names in the vaccine space?
PH: We like Novavax Inc. (NVAX:NASDAQ). It turns out that both Medicago and Novavax are working with viruslike particle platforms. Novavax uses an insect cell culture; Medicago’s form is plant-based. Medicago’s technology is scalable, inexpensive and can be applied to manufacturing other types of proteins. Companies like Novavax and Medicago tend to attract licensing partnerships, which can generate reasonable upfront payments.
TLSR: Let’s look at the realm of psychopharmaceutical drugs. Do you have anything new to report in treatments for schizophrenia, depression or bipolar disease?
PH: We are looking at Alexza Pharmaceuticals Inc. (ALXA:NASDAQ). It has a new product called Adasuve, a newly developed formulation of loxapine. This drug has the potential to be a real breakthrough for reducing agitation in schizophrenic and bipolar patients—making it very useful in the psychiatric and hospital markets.
Many schizophrenic and bipolar patients experience up to 10 agitation episodes per year, and half of those episodes may require hospital stays. With some agitated patients, orally administered drugs do not act quickly enough, and the patients require injections to get the required treatment effect. Naturally, many of these patients are uncomfortable with injections. The time-to-effect of Adasuve, which is an inhaled powder, is very competitive with injectables, so it can provide more friendly, effective treatment for an agitated patient.
TLSR: When will Adasuve be available?
PH: The drug was FDA-approved last December. In May, Alexza landed a U.S. licensing deal with Teva Pharmaceutical Industries Ltd. (TEVA:NASDAQ). We believe that Teva will launch Adasuve in the U.S. before the end of the year. The company also has a licensing partner in Europe, and it is signed with Ferrer Internacional SA (private) in Latin America. We view the U.S. and Europe as the largest market opportunities for this product, but certainly there are growth opportunities in the developing markets as well.
TLSR: Do you have any other companies in your scope?
PH: Paladin Labs Inc. (PLB:TSX) is a Canadian company with a good track record of licensing drugs and bringing them to fruition in the Canadian market; it is now entering Latin America. The company is profitable and generating strong returns for shareholders.
One of the more speculative names that investors should consider is Tekmira Pharmaceuticals Inc. (TKMR:NASDAQ; TKM:TSX). Headquartered near Vancouver, Canada, it has an RNAi platform and a cancer drug, TKM-PLK1. Importantly, it also has a lipid nanoparticle (LNP) drug delivery platform, which is currently the most advanced method for administering RNAi drugs. Alnylam Pharmaceuticals Inc. (ALNY:NASDAQ) has licensed Tekmira’s delivery technology for many of its RNAi candidates. Recently, ALN-TTR02, which is a drug for transthyretin (TTR)-mediated amyloidosis (a buildup of amyloid proteins leading to organ damage) and uses Tekmira’s technology, generated positive phase 2 results, and the drug is going into phase 3. With its strong, underlying intellectual property in the LNP space, Tekmira is poised to benefit from the advancements of other products that use the LNP platform.
TLSR: When you’re looking at junior firms, do you tend to value them as acquisition targets?
PH: We look at investments on a firm-by-firm basis. We look at the quality of management, the company’s targets, and its capital balance—how much money it has on hand. We are interested in the proven professionalism of a company’s research and development teams, and the level of experience of its employees company-wide. Most important, we want to know if the company’s prime assets are close to the market, or whether these assets need additional investment. How much further does the product need to be developed before it can be commercialized? Will the asset require a large pharma partner to ensure optimal sales reach?
Some companies do not need partners. If they have a niche and are reasonably advanced in their pipelines, they are able to reach sales targets on their own. On the other hand, a company going after a target with a long clinical pipeline or broad global market—such as in cardiovascular disease or in oncology—may need a very strong marketing partner to ensure proper reach of its drug.
When I value a company, I do not assume a takeout. But I do assess present value in terms of whether or not the firm gets a royalty or transfer price arrangement on the assets. Obviously, an acquisition is an ideal scenario for investors if there is a reasonable premium, but it is very difficult to predict the timing of an acquisition. Investors should not get into a story just because of that potential. They should invest in companies that have attractive pipelines and solid management teams. An acquisition is, obviously, a bonus, but it cannot be timed.
Smart investors make sure that a company’s underlying fundamentals are solid. It is important to weigh the financing scenarios, to look at whether or not the company needs to raise cash soon. Investors must pay attention to that, because dilutions can occur suddenly in the biotech space.
TLSR: I was looking at your bio, and I noticed that you are a licensed optometrist. How did an eye doctor end up as an investment specialist?
PH: I trained as an optometrist, and I maintain my license, but I really enjoy working in the capital markets and maintaining good relationships with the life science players. In particular, I have a keen eye for some life sciences firms involved in the vision space. Namely, NovaBay Pharmaceuticals Inc. (NBY:NYSE) has a phase 2 asset in adenoviral conjunctivitis, which is one of the leading causes of pink eye. There is no approved therapy, and while pink eye resolves on its own in most cases, without lasting complications, an approved and effective therapeutic could meaningfully reduce patient discomfort and lower the need for patients to take time away from work.
iCo Therapeutics (ICO:CVE) is advancing an antisense-based therapeutic for diabetic macular edema, a significant cause of central vision loss in patients with diabetes, and recently completed enrollment for a phase 2 study. Some privately held clinical-stage companies with interesting candidates in macular degeneration and/or neovascular-related eye diseases include Gene Signal, Acucela Inc., and MacuCLEAR Inc.
TLSR: Sounds good, Pooya.
PH: Until next time, Peter.
Pooya Hemami is a licensed optometrist with more than five years of experience in life sciences equity research. Prior to joining Edison Investment Research, he covered the Canadian healthcare sector as a research analyst at Desjardins Capital Markets. He holds a doctor of optometry degree from the University of Montreal, and a master’s degree in business administration (finance concentration) from McGill University. He received his CFA charter in 2011.
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DISCLOSURE:
1) Peter Byrne conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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3) Pooya Hemami: I or my family own shares of the following companies mentioned in this interview: Paladin Labs Inc. 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: BELLUS Health Inc. 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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