Source: George S. Mack of The Life Sciences Report (8/8/13)
The bull market in biotech stocks is coming up on its two-year anniversary, and large-cap and many small-cap names have flourished in that time. But can it last? Greg Wade, managing director of Wedbush Securities, wants investors to know there’s more to go, and that stocks are ready and willing to respond to good news from clinical trials and on the regulatory front. In this interview with The Life Sciences Report, Wade identifies six names that investors can take to the bank, one of which is still his favorite after two years.
The Life Sciences Report: Do you think the biotech market is getting a little frothy?
Gregory Wade: Some stocks have moved up quickly, and they’re going to need to have success in their pipelines to justify the valuations they have achieved. These rapid moves have probably occurred as a result of broad-based interest in the sector, which has done really well.
TLSR: Amgen Inc. (AMGN:NASDAQ) made a bid for cancer-focused Onyx Pharmaceuticals Inc. (ONXX:NASDAQ), and now other suitors’ names have surfaced—Pfizer Inc. (PFE:NYSE),AstraZeneca Plc (AZN:NYSE) and Novartis AG (NVS:NYSE). I’m wondering if you think this could be the beginning of something?
GW: Everyone has anticipated a wave of mergers and acquisitions, and this kind of activity might, in fact, be supporting the group. The existence of so many small companies with advanced programs and products creates a greater likelihood that there will be more activity, as bigger companies try to backfill their pipelines. The maturation of the industry is leading to more of these types of potential transactions.
TLSR: Do you think this activity makes the markets healthier, where stocks are more likely to react to catalysts?
GW: Yes, I do. The healthy level of financing activity has fundamentally created a favorable environment for investors, who can be relatively confident that their development-stage investments are actually going to get the financing they need to advance their programs.
TLSR: Are there therapeutic modalities or disease indications that are particularly compelling right now, generally speaking?
GW: It is tricky to invest across a therapeutic area; only a few failed studies can hurt that strategy. We are more focused on drugs, not on any particular indication causing excitement in the market.
TLSR: Let’s go ahead and talk about some companies. Do you have a favorite?
GW: We’ve had Pharmacyclics Inc. (PCYC:NASDAQ) on our best ideas list at Wedbush for almost two years now, and we have a $165/share price target on it, with the stock at the $100 level or a bit higher now. We’re anticipating the U.S. Food and Drug Administration (FDA) will act on its new drug application for ibrutinib (PCI-32765) shortly. Our research would suggest a potential timeframe of within 100–120 days to get an approval. That’s our best idea at the moment, and we would definitely focus investors’ attention on that. I think Pharmacyclics is a must-own stock. We’re expecting a lot of use of ibrutinib in chronic lymphocytic leukemia (CLL), and Waldenstrom’s macroglobulinemia as well, once the drug is approved.
TLSR: Pharmacyclics has doubled over the past year, and it’s still your best idea?
GW: Absolutely, yes.
TLSR: We’ve seen stocks sell off recently when their lead candidate gets approved. Do you think that’s a possibility with Pharmacyclics?
GW: I don’t. The stock is trading off some anticipation of what peak sales could be, and I don’t see the likelihood for the first two or three quarters of revenue to disappoint because the published numbers are quite low. I think there are enough regulatory catalysts and global commercialization activities to keep investors interested while ibrutinib is launched into the U.S. marketplace.
TLSR: The target of ibrutinib is Bruton’s tyrosine kinase (BTK), a newer target. Do you see other small molecules coming along as competitors target BTK?
GW: We’re aware of a direct competitor in Celgene Corp.’s (CELG:NASDAQ) program with Avila Therapeutics’ BTK inhibitor AVL-292 (now CC-292), which Celgene acquired in January 2012. But this is only in phase 1 trials. Then there’s a small private company in the Bay Area with a compound that’s not yet in the clinic.
Ibrutinib, though, is somewhat special. While it’s very selective for BTK, it also hits B lymphoid tyrosine kinase (BLK) and tyrosine-protein kinase (ITK). It’s potentially the ITK activity that’s leading to the differentiated depth and durability of response to the other BTK inhibitors and the p phosphoinositide-3-kinase (PI3K)-delta inhibitors that Infinity Pharmaceuticals Inc. (INFI:NASDAQ) has (IPI-145 in phase 2), along with Gilead Sciences Inc.’s (GILD:NASDAQ) idelalisib (formerly GS-1101; in phase 3).
That’s not all, though. We think once ibrutinib is approved in the U.S., it’s going to become increasingly challenging to do studies of other agents, at least in ibrutinib-sensitive patients. We think the drug is in a strong competitive position.
TLSR: In other words, there would be ethical considerations in doing head-to-head studies versus ibrutinib because it is so efficacious?
GW: Yes. Once ibrutinib is in the marketplace, especially if it gets approved broadly in CLL, I think it will become the standard of care. It would be my sense that most patients would have to fail a cycle of ibrutinib prior to being potentially suitable for investigational agents.
TLSR: Could I hear another name?
GW: We’ve been focusing on Endocyte Inc. (ECYT:NASDAQ) as well. This company is developing small molecule drug conjugates, and its lead program, vintafolide (EC145), is targeting the overexpression of the folic acid transporter. We have good randomized data in ovarian cancer that suggests that the companion imaging test with etarfolatide (EC20), which the company has developed, can identify the patients most likely to benefit from therapy with this molecule. The data also show that there is activity in heavily pretreated, advanced solid tumor ovarian cancer patients, and that the addition of vintafolide to the standard of care doesn’t result in increased toxicity. These data will likely support an accelerated approval of vintafolide in Europe, potentially before the end of the year.
TLSR: Vintafolide is a small molecule. Does that mean it can be given orally, or will it be given parenterally—intravenously or intramuscularly?
GW: It’s an intravenous medicine. This one won’t be oral.
TLSR: I note that vintafolide is in at least four clinical trials, and it is partnered with a big pharma.
GW: Yes, it is partnered with Merck & Co. Inc. (MRK:NYSE) on a global basis. Merck has committed to a wide variety of additional clinical studies in several other cancers. The partnership came with a substantial amount of cash, so the company is well financed, potentially to profitability. We will see additional data in the company’s lung cancer study before long, and that is a much larger opportunity than the lead indication in ovarian cancer. The lung cancer results could be the first in which three chemotherapies are used together, producing incrementally positive results for patients. Historically, triplet chemotherapy in lung cancer hasn’t improved overall survival.
On an enterprise value basis, the company is still reasonably valued. It has a market cap of $611 million ($611M), with close to $200M in cash and an almost-approved product in Europe. Investors should pay close attention here. The stock moved up following a positive reception from its analyst day. With approval in Europe, some success in the lung cancer setting and with pipeline progress, I don’t see why this stock might not be up by a factor of four of five in two to three years.
TLSR: The next catalyst is European approval?
GW: Yes, potential European approval.
TLSR: Another idea?
GW: I would highlight PTC Therapeutics Inc. (PTCT:NASDAQ). PTC is developing ataluren (formerly PTC124), a small molecule drug that helps patients with very specific gene mutations. The lead program is in Duchenne muscular dystrophy (DMD). It is in phase 3. Ataluren is also in a study, in phase 3, for cystic fibrosis (CF). The company also is expecting a decision on a potential European accelerated approval before the end of the year.
This is not an antisense drug, like Sarepta Therapeutics Inc.’s (SRPT:NASDAQ) exon-skipping eteplirsen molecule. A lot of strategies allow for a more appropriate expression of the dystrophin protein. Prosensa Therapeutics B.V. (RNA:NASDAQ) also has an antisense compound that induces exon skipping. These are for a different set of mutations.
TLSR: Is there a subpopulation of DMD patients with the mutation for which ataluren might be effective? If so, what percentage?
GW: A 10–15% range of DMD patients have this specific type of mutation. Gene sequencing is necessary to identify patients who have an inappropriate stop codon that terminates protein synthesis from DNA. We’re in a fortunate time in medicine now, where many patients with rare diseases have the gene of interest sequenced, so most know if they have this appropriate nonsense mutation.
TLSR: What catalysts should we be looking for?
GW: The European approval for ataluren in the DMD setting could come before year-end. PTC will also be filing for accelerated approval in the CF setting before the end of the year. Then it’s about the DMD data for the FDA, which we’re expecting in the latter part of 2014.
TLSR: Are there other companies you want to talk about?
GW: Novavax Inc. (NVAX:NASDAQ) is a vaccine platform company. It has had good success with the clinical development of both its pandemic and seasonal flu products, both of which the U.S. government is supporting, as well as a respiratory syncytial virus (RSV) vaccine candidate that it is developing on its own.
Some novel pandemic flu strains have popped up recently. The avian influenza A virus, H7N9, was in the news when there was an outbreak in China that was reported by the World Health Organization in early April. The U.S. government has just published a prenotification that it will be seeking suppliers of various different flu products, and something more formal will come out about this on July 31. In the near term, we think that Novavax could be the recipient of additional funding for its H7N9 vaccine product.
We’re also expecting Novavax to outline the path forward for licensure of its RSV vaccine. RSV is a fairly common respiratory pathogen that is responsible for a significant portion of hospitalizations of infants and young children, as well as the elderly. It’s one of the few common pathogens for which we don’t have a vaccination strategy. Novavax has had some positive data in a variety of different volunteer populations. Later this year we’re expecting an update from the company, and it will be describing the program forward and the pathway to registration for the RSV immunization.
With one set of programs fully funded by the government, good phase 1/2 data in RSV and the potential for an additional set of monies from the government for a new flu vaccine, we think this is a very interesting stock.
TLSR: Greg, I know you like government biodefense programs because they offer nondilutive funding of programs. You follow some other companies that have accessed that kind of financing.
GW: Absolutely. It’s an exceptionally positive way to build up your infrastructure and have it paid for.
TLSR: Would you talk about another idea?
GW: Avanir Pharmaceuticals Inc. (AVNR:NASDAQ) has seen a tremendous response to its direct consumer efforts that were undertaken in the early part of the year. It has seen strong week-over-week demand growth for Nuedexta (dextromethorphan + quinidine) for pseudobulbar affect, which is a condition characterized by sudden outburst of emotion—laughing, crying—in patients who have had brain injury.
A Paragraph IV trial challenge to its Nuedexta patents is coming up. We think the company has strong intellectual property (IP), and we expect a favorable outcome from that challenge. The trial week is Sept. 9. Then, before the end of the year, we’ll get data on the potential for the Nuedexta combination in patients with pain and multiple sclerosis. In the middle of next year, the same combination is being tested in an Alzheimer’s disease agitation setting. We have four events that we think could be drivers for the stock—the improving revenue picture for Nuedexta, the lifting of the IP overhang as a result of success in the courts and then two important clinical results releases. All of these, we think, will see the stock continue to move up.
TLSR: Just looking at the stock action, up 60% over the past 12 weeks and up 11% over the past month, that Paragraph IV trial does not seem to be an overhang at all.
GW: No, it has not held the stock back.
TLSR: You and I have discussed Oncolytics Biotech Inc. (ONCY:NASDAQ; ONC:TSX) twice before, once last summer and more recently this past February. The company is addressing several very tough oncology indications with its Reolysin (human reovirus serotype 3—Dearing strain) therapeutic agent. Would you update me on the upcoming catalysts?
GW: There are quite a few catalysts in the latter half of this year for Oncolytics. The phase 3 head-and-neck cancer data are going to read out in Q3/13. The company has a pancreatic cancer study going on, and we might see some early data in that before the end of the year. With each of these studies we’re going to start to see the first randomized data that will help us to get a view on how Reolysin is really doing.
TLSR: The first readout will be data from the squamous cell carcinoma of the head-and-neck trial, is that right?
GW: Yes. The head-and-neck is going to read out first. Then there should be some pancreatic cancer data as well.
TLSR: Although this stock was very strong in June, it’s been weak over the last two years. Do you detect that investors just don’t have a lot of faith in Reolysin? What has been the issue here?
GW: I think a lot of investors have taken a disciplined approach with this stock, preferring to wait to see randomized data prior to embracing the reovirus approach. That, combined with peers doing well, has led investors to sell the one that’s not going up and buy the others. With these upcoming data, which we expect will be positive, Oncolytics will have the opportunity to work for investors.
TLSR: Do you believe that Oncolytics is going to have to find specific genotypes for each indication?
GW: I don’t think so. That’s because most malignancies have the Ras pathway activated, and that shuts off expression of the PKR protein, the normal cell’s antiviral response, which would usually neutralize a virus. However, in tumor cells with the Ras pathway activated, the reovirus, Reolysin, is able to replicate itself inside the tumor cell, causing its death. The cell dies and millions of reovirus particles are free to enter other tumor cells. The theory is that this cycle of infection and cell death would be repeated in all the tumor cells, and they all will die. Most cancer cells are already targets.
TLSR: Back on March 28, you applied a $7/share target price to Oncolytics. That would be more than a double from here. Is that still your target?
GW: Yes, and that’s a 12-month target price.
TLSR: Which of the catalysts you’ve discussed will be the most powerful?
GW: I think the head-and-neck cancer study—the larger randomized trial—is the most powerful. Positive data there would be very well received. But the pancreatic cancer study is also randomized. Both could be meaningful.
TLSR: Thank you for your insights. I’ve enjoyed this very much, as always.
GW: I have, too. Thank you.
Greg Wade, managing director and senior analyst with Wedbush Securities, has worked on the sellside since early 2000, first at Pacific Growth Equities and subsequently at Wedbush PacGrow LifeSciences, where he was promoted to managing director in 2011. Wade’s coverage of emerging biopharmaceutical companies is supported by analyst team members David Nierengarten and Chris Marai. Wade earned an undergraduate degree with honors in medical biophysics and a doctorate in physiology from the University of Western Ontario in London, Canada.
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