Source: George S. Mack of The Life Sciences Report (5/15/14)
New perspectives on well-followed biotech stocks are greatly appreciated. That’s what we get here from Managing Director and Senior Biotechnology Analyst Christopher S. James M.D. of Brinson Patrick Securities. Something else that’s treasured is discovering a brand-new biotech stock that no other analyst is covering. In this interview with The Life Sciences Report, James ushers readers to the head of the line to look at a new and exciting name with an extraordinary technology and phenomenal prospects for growth.
The Life Sciences Report: Chris, you are a sellside analyst today, but you were trained as a neurosurgeon at Weill Cornell Medical College and Memorial Sloan Kettering Cancer Center, correct?
Chris James: That is correct. Neurosurgery has a rigorous seven-year residency obligation; the first year is a general surgery internship.
TLSR: With your background, I can’t help but think you’d be interested in the exciting new areas in medicine—specifically the stem cell space—where we might see real progress in reversing traumatic, ischemic, hemorrhagic or neurodegenerative disease, whether acute or chronic. Most of the companies in this space are small- and micro-cap, and could easily fit into your current growth-focused universe. The absence of any of these stocks in your coverage seems to stand out, given your specific expertise. Why haven’t you picked up any stem cell companies?
CJ: Let me step back for a moment in answering that question. Since joining Brinson Patrick I have launched coverage on seven companies beginning in late March 2014. My current focus is on small- to mid-cap life sciences companies with strong growth potential. My plan is to rapidly ramp up coverage. A part of that ramping effort will include some of the more interesting types of therapies you’ve mentioned.
My background runs deep in the area of cell therapy and regenerative medicine. At Weill Cornell Medical College I was focused on general neurosurgery, and we did a significant amount of work taking care of very sick patients with both brain and spinal cord injuries. That included a ton of operating experience in some of the conditions you just mentioned, including very serious brain tumors. I’ve also done a lot of research in the area of actual cell transplantation, which is what got me into my neurosurgical residency. Back when I was a medical student at Yale, my thesis was on remyelination of the central nervous system (CNS) after transplantation of olfactory-ensheathing bulb cells into traumatic spinal cord lesions. So I definitely have that background, and am looking into picking up interesting companies in that space.
TLSR: Chris, could we talk about some companies in your coverage? Go ahead and pick one to start.
CJ: Let’s start with Opexa Therapeutics Inc. (OPXA:NASDAQ). This is a very interesting company that is pursuing a novel personalized T-cell approach for a specific type of multiple sclerosis (MS) called secondary progressive MS (SPMS).
There are about 500,000–550,000 (500–550K) patients in North America with MS, and about 85% of those patients are initially diagnosed with relapsing-remitting MS (RRMS). About 50% of those patients progress to SPMS. Opexa’s lead candidate is a therapeutic vaccine approach. We are all familiar with a virus being attenuated and injected back into a patient to mount a tailored and specific immune response. Opexa’s lead drug candidate, Tcelna (imilecleucel-T), is created using attenuated T cells, not viruses, harvested from a MS patient’s own blood. The cells are expanded ex vivo and irradiated to keep them from proliferating, and they are reintroduced via a subcutaneous injection to trigger a therapeutic immune response. The proposed schedule is to treat patients with a new five-dose series of Tcelna each year, based on the patient’s evolving immune profile. The idea is to lessen the activity of specific myelin-reactive T cells that attack the myelin sheath. Tcelna is now in a Phase 2b trial called Abili-T. The primary endpoint is reduction in whole brain atrophy.
TLSR: The market seems to hate this company, and I’m not sure I understand why. You model a peak sales potential for the MS class of $18 billion ($18B) globally by 2019. There are 213K SPMS patients in the U.S. alone, and the company has a $42 million ($42M) market cap. Some of the companies in your coverage have doubled, tripled and quadrupled over the past 52 weeks, but Opexa is down 8% during that same period. Its relative strength is very weak.
CJ: I see what you’re getting at, but I wouldn’t say the market hates this company. I would point out two factors that may have affected the valuation. Prior to our initiation of coverage in March, there were no other analysts covering the stock. Our coverage should help to increase the visibility going forward. The fact that the top-line data readout is fairly far in the future—in mid-2016—is probably the biggest issue with investors who are near-term catalyst-driven.
That being said, I think the market is underappreciating a significant clinical catalyst that is fast approaching. In a few weeks, Opexa will complete enrollment in its 180-patient Phase 2b study in SPMS. This very important milestone may not be on the radar of many investors. At the end of February the trial was more than 80% enrolled, and it is enrolling almost three patients per week. Once the study is fully enrolled, we expect the stock to gain momentum. We also point out the trial was started in September 2012, so several patients will be over the one-year mark as we move into the fourth quarter.
Opexa is truly undervalued, as you point out, and its enterprise value is about $20M. With that kind of valuation we think there’s strong potential for the shares to rise two to three times in the next year. Our one-year target price is $6, and when we consider the option value of the Merck Serono (Merck KGaA (MKGAY:OTCPK) deal, which is not priced in, we’re really excited about this stock. This is a licensing agreement that Opexa and Merck Serono entered into in February 2013, which grants Merck Serono an option to pick up development rights to Tcelna. We point out that payments from this deal could reach $220M, and Opexa gets a royalty on net sales of Tcelna of between 8–15%. Merck Serono would be responsible for all development costs if it opts in.
Opexa truly has very little downside and tremendous upside potential if you’re willing to own the stock for one to two years. This stock is trading at a fraction of our $6/share target price, which implies a valuation of less than $200M. There are many examples of biotech companies trading well above $200M, $400M, even $500M that are in Phase 2 development. One of those examples is Receptos Inc. (RCPT:NASDAQ), which has a lead compound in Phase 2 development for relapsing MS and a $735M market cap. If you’re willing to hold on to the stock for one to two years, this is the play for you.
TLSR: It’s interesting that Opexa’s lead product already has a trade name, given it is still very early stage status. Tell me why you like Tcelna as a potential therapeutic vaccine.
CJ: Tcelna was previously studied in a Phase 2b trial with 150 RRMS patients. It has a great safety profile, and the efficacy was established in the TERMS study. We’ve seen compelling evidence of both in subpopulations of patients with SPMS in the earlier studies. It demonstrated a 55% reduction in the annualized relapse rate compared to placebo, and an 88% reduction in whole brain atrophy. The reduction in whole brain atrophy is very important because that’s the primary endpoint for the Phase 2b study.
I think the safety is there, and the efficacy is extraordinarily compelling for continued development. From an investment perspective, we like the SPMS patient population because it’s relatively small and lacks competition. The only other drug approved for SPMS is mitoxantrone, but cardiotoxicities limits its use. SPMS teeters on being an orphan indication, and therefore you can really have tremendous pricing power.
TLSR: Will we get an interim look at the Phase 2b Abili-T trial before the top-line readout in H1/16?
CJ: The Data and Safety Monitoring Board (DSMB) evaluates the study periodically. We should get some indication that no major safety issues exist when the DSMB recommends continuation of the study at those evaluations. The last DSMB meeting was on April 9, 2014. The problem with an interim look is that it reduces the statistical powering. Unfortunately, there is no plan for an interim look.
TLSR: I know you cover BioCryst Pharmaceuticals Inc. (BCRX:NASDAQ). Go ahead with that, please.
CJ: We have BioCryst rated Market Outperform with a $15 price target. We think this is another great example of a company with a small molecule drug platform and an orphan disease strategy. This name is well covered by the Street, and is approaching a major catalyst in June, when we will get a readout for the company’s kallikrein inhibitor, BCX4161. This drug is in a Phase 2a study called OPuS-1 for prevention of hereditary angioedema (HAE), which manifests in attacks of painful swelling. The swelling can be anywhere on the body, but typically involves the extremities.
TLSR: Should these data be meaningful to the stock? Do you expect share price movement?
CJ: This will be extraordinarily meaningful. There is a competitive agent out there called Cinryze (C1 esterase inhibitor [human]; Shire Plc [SHPGY:NASDAQ; SHP:LSE]) to prevent HAE, but it is injectable. BCX4161 is an oral drug, and there is a tremendous value for an oral versus an intravenous infusion, for obvious reasons.
Investors will also be looking at these data as being informative for BioCryst’s second-generation compounds. Let me say upfront that I don’t expect BCX4161 to show the same efficacy as Cinryze, which showed a 50% reduction in attack rates. But BioCryst’s backup compounds are truly optimized. They have much higher bioavailability, they are much more selective and specific, and they retain potency for a longer duration. There is great potential for stronger efficacy and a once-daily dosing regimen, versus three-times-a-day dosing with BCX4161.
TLSR: This company has an antiviral compound called peramivir for treatment of acute, uncomplicated influenza, for which a new drug application (NDA) has been submitted to the U.S. Food and Drug Administration (FDA). The Prescription Drug User Fee Act (PDUFA) date will be Dec. 23, 2014. Will this be a market-moving event for the company?
CJ: Yes. Peramivir is a fully funded program that would represent significant upside if approved. The upside would come from the potential for stockpiling from the U.S. government, but that scenario is very difficult to model. I do think, however, that the PDUFA date and the Phase 2a data coming in June are significant reasons to own BioCryst stock.
TLSR: Another company you’ve recently initiated on is Rexahn Pharmaceuticals Inc. (RNN:NYSE.MKT). Its platform is not to inhibit proteins, but to inhibit protein synthesis. Could you speak to that?
CJ: Rexahn is another interesting, undervalued company that’s developing multiple drugs for oncology. It is developing what I think could be a best-in-class inhibitor of Akt-1 called Archexin (Akt-1 antisense oligonucleotide inhibitor). There is tremendous science validating the Akt-1 target, and other companies are going after the target as well. We’ve seen Archexin, in combination with gemcitabine, demonstrate significant efficacy in a small Phase 2a study in patients with advanced metastatic pancreatic cancer. In this study, Archexin + gemcitabine provided a median survival of 9.1 months compared to the historical data of 5.7 months in patients with advanced pancreatic cancer.
TLSR: What is the next catalyst here?
CJ: The next catalyst with Rexahn’s Archexin would be completion of the safety component of a current Phase 2a study, expected in Q4/14. This study is in patients with metastatic renal cell carcinoma (mRCC), and was initiated in January 2014. In addition, we expect a corporate partnership for RX-3117 soon, and completion of the Phase 1 study with supinoxin in Q4/14.
TLSR: Do you have an estimate for market share, or how much Archexin could bring in?
CJ: We’re modeling sales in 2025 of approximately $830M in mRCC alone. There is tremendous potential in this specific indication for an Akt-1 inhibitor.
TLSR: Another name?
CJ: Let’s talk about one that’s also in my area of expertise, Corcept Therapeutics Inc. (CORT:NASDAQ). This company has a true orphan drug model, pursuing Cushing’s syndrome, which only affects about 20K patients in the U.S.
Cushing’s is near and dear to my heart. Pituitary adenomas cause most cases of Cushing’s syndrome. One of the reasons I became involved with this story several years ago while at another firm is that I’ve performed the neurosurgical procedure for a pituitary adenoma, where a surgeon essentially goes through the nose and directly into the pituitary gland to resect the tumor. It is called a transsphenoidal approach. I found it very interesting that there was a drug approach to this particular problem because surgery is not often curative.
Corcept’s drug is Korlym (mifepristone), which came on the market two years ago. I would say that approximately 10K of the 20K Cushing’s patients would be eligible for medical treatment. There is strong scientific rationale for this drug’s mechanism as a glucocorticoid and progesterone receptor antagonist. It binds to the receptors to control hyperglycemia associated with Cushing’s.
Here, again, is an undervalued story with a market cap of about $193M, and it’s one I believe has been overlooked. We have an $6 price target on Corcept shares. The drug is also being developed for triple-negative breast cancer, for which there is no treatment.
TLSR: Can you comment on the failed Phase 3 study in psychotic major depression?
CJ: We think the sell-off from psychotic depression represents a great opportunity to buy the stock. Although we were optimistic, we did not give the indication any value in our model. We think the Cushing’s business is solid, with $25—29M in sales for 2014, and we see plenty of upside in oncology. I would mention that strong Phase 1 data in triple-negative breast cancer were presented at the San Antonio Breast Cancer Symposium this past December. These were results from a small, investigator-sponsored study. Corcept recently initiated a Phase 1 study of mifepristone in combination with chemotherapy in patients with relapsed, metastatic, triple-negative breast cancer.
TLSR: Chris, I know you have a couple of other names you want to talk about. Go ahead with the next one.
CJ: I would briefly like to touch on Ligand Pharmaceuticals Inc. (LGND:NASDAQ). We really like this stock. It’s down 20% since mid-February, and we see a tremendous amount of upside in H2/14. We have a $98 price target on the shares.
One reason I, as an analyst, always have trouble with Ligand is that it has so much going on, but really that’s a good thing. The company has a tremendous portfolio of pharmaceutical royalties coming in, as well as those royalties expected to come on board by 2020. And the number expected in the future just keeps growing.
TLSR: I know this is a platform company. Tell me a little about that.
CJ: Sure. Ligand has a growing Captisol (modified cyclodextrin) business, which is an enabler for the creation of new therapies by improving stability, bioavailability and dosing properties. Investors are getting more and more interested in the Captisol platform, and the company has tremendous leverage from its low operating cost structure.
Ligand currently has seven products producing royalties. Amgen Inc. (AMGN:NASDAQ) purchased Onyx Pharmaceuticals Inc. for $10.4B last year primarily to acquire Kyprolis (carfilzomib) for multiple myeloma. Ligand gets a small, single-digit, tiered royalty for Kyprolis, and we are going to see additional Phase 3 data coming from that product soon. We’re modeling combined sales of Kyprolis and another product,GlaxoSmithKline’s (GSK:NYSE) Promacta (eltrombopag), for thrombocytopenia, in excess of $5B by 2020. We point out that Promacta is approved for chronic immune (idiopathic) thrombocytopenia and thrombocytopenia related to hepatitis C virus, and is awaiting approval for severe aplastic anemia, which has breakthrough therapy designation.
We see lots of near-term catalysts here. There was the recent launch of Duavee (conjugated estrogens/bazedoxifene), a Pfizer Inc. (PFE:NYSE)product. Duavee is a pretty interesting drug for treatment of hot flashes, which is a tremendous market. We think this adds about $9/share upside, and it’s not currently priced into Ligand’s shares at all. Ligand is a name where I see very little downside. The company currently has a market value of about $1.3B, but we think it is easily worth $2B.
TLSR: Ligand has low, single-digit royalties that flow from the top line to the bottom line, correct?
CJ: Royalties do drop to the bottom line—and that goes right to one of my points about Ligand’s leverage from its low operating costs.
TLSR: Is the company developing products for its own portfolio, for which it might derive more significant percentages of revenues?
CJ: Yes. We believe there’s real upside from the company’s proprietary compounds. One product that we are paying close attention to is LGD-6972, which is an oral glucagon receptor antagonist for the treatment of diabetes. We expect proof-of-concept data from a 56-patient Phase 1 study in both healthy individuals and patients with type 2 diabetes in June at the American Diabetes Association meeting. We like this study because it’s designed to provide an early look at efficacy.
Obviously, Ligand can partner one of these compounds for much bigger royalties, and that would be a true pharma partnering model. But I don’t think Ligand wants to do any sort of copromotion. It would rather take a smaller amount upfront for a larger piece of the backend economics.
TLSR: Chris, you have MannKind Corp. (MNKD:NASDAQ) under coverage. The company has developed an inhalable insulin product called Afrezza (human insulin of recombinant DNA origin delivered via Technosphere particles). This product was overwhelmingly accepted by the FDA’s Endocrinologic and Metabolic Drug Advisory Committee (AdCom) meeting on April 1; however, the FDA delayed the PDUFA date three months to July 15. Even with that surprise announcement, the stock has remained strong since the AdCom. Could you discuss this name?
CJ: MannKind is a great example of a stock that I think investors should be currently buying. We have a $12 price target on the shares. A lot of uncertainty has been flushed out of this story with the recent AdCom meeting, which was overwhelmingly positive. You mentioned that the stock is holding up fairly well in this environment, and I would agree that folks, including myself, did not view the PDUFA extension as truly a negative event.
Given the timing between the AdCom and the original PDUFA date, I don’t think the PDUFA delay was a surprise. The original date was just two weeks after the AdCom, and I think most people on the Street felt there was a possibility that the PDUFA could be pushed out, just because of that quick timeframe. That is one reason the stock has remained strong.
Second, I think the overwhelmingly positive AdCom vote surprised the FDA. I was at the panel, and it was very clear, within the first 30 minutes, that things were going in a positive direction—which was very different from the read I got from the briefing documents that were disseminated by the FDA a few days before the AdCom.
I also think the FDA needs additional time to discuss all the issues on subpopulations of patients. I think that’s the bear story now: that the label is going to be narrow, and that the company may not be able to sell Afrezza to a broad population of type 1 and type 2 diabetes patients. I don’t feel that will be the case at all. Given Afrezza’s attractive profile it will get wide adoption in the marketplace.
Furthermore, the delay gives the company more time to negotiate a better label. If MannKind had only two weeks, it would have had to accept any label that the FDA threw on it. It also allows more time for negotiating on the partnership side, so that the company can reach a more favorable deal with a marketing partner. The delay, combined with the very favorable vote at the AdCom meeting, has given MannKind greater leverage for negotiation with a pharma company.
Finally, approval can come much earlier than July 15. I doubt the FDA needs the entire 90 days to come to a decision to approve the product and figure out the final labeling. The FDA does not have unlimited manpower, and it probably wants to move on to other NDAs. I believe the FDA knows where it’s going with Afrezza and would like to get this wrapped up quickly.
TLSR: Were there issues discussed at the AdCom regarding pulmonary function and carcinogenicity?
CJ: Those were the biggest issues discussed on the safety side—the long-term pulmonary effects on patients with asthma, chronic obstructive pulmonary disease, effects in smokers and even effects in patients who previously smoked and have quit. But carcinogenicity is definitely a theoretical effect. There were two patients that the FDA was particularly concerned with, because they developed lung cancer and were not smokers. I thought the FDA would be much more concerned and restrictive on this end but, at the end of the day, the decision was that, outside of conducting a very large, 10-year study, we just don’t know if Afrezza is carcinogenic. That’s going to be a post-marketing commitment at most.
TLSR: Do you believe the FDA could exclude type 1 diabetes patients from this label?
CJ: I think the chance of that is as close to zero as you can get.
TLSR: Is MannKind a developing revenue story from here?
CJ: Absolutely—it’s going to be about execution. Here are the milestones: You’ve got the PDUFA date first, which could come earlier than July 15. I think a partnership will come around that time; maybe after the PDUFA date. The story is not about approval at this point; it is about getting a good partnership and selling the drug. What will the launch curve look like? We’re modeling the launch curve beginning in 2015, and that’s being conservative. Sales could come earlier. MannKind is evolving into an execution story.
TLSR: Chris, it’s been fun. Thank you.
Christopher S. James M.D. is a managing director and senior equity research analyst with Brinson Patrick Securities focusing on life sciences companies with strong growth potential and novel agents in development for serious diseases including cancer, infectious disease, neurological, inflammatory, metabolic and cardiovascular diseases. James was previously a senior equity research analyst at Rodman & Renshaw and MLV & Co. Prior to joining Brinson Patrick, James was the chief medical officer and senior vice president of medical affairs at Retrophin, a biotechnology company focused on developing therapeutics for rare and devastating diseases. James has prior buyside experience working at Trivium Capital Management and MSMB Capital Management. James, trained in neurological surgery at Cornell-New York Hospital and Memorial Sloan Kettering Cancer Center, brings a unique set of scientific, medical and clinical skills to his coverage of life sciences companies. He obtained a medical degree from Yale University School of Medicine and a bachelor’s degree in biology from Cornell University.
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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.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Rexahn Pharmaceuticals Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Christopher S. James: 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: MannKind Corp., Opexa Therapeutics Inc., Rexahn Pharmaceuticals Inc., Ligand Pharmaceuticals 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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