Source: George S. Mack of The Life Sciences Report (12/17/13)
The cell therapy industry has been mired in phase 1 and 2 studies for what seems like a lifetime. But 2014 is shaping up to be a banner year for share-moving phase 2 data and pivotal phase 3 activity. Jason Kolbert, managing director for biotechnology research at Maxim Group, leverages his deep understanding of the stem cell space to uncover viable therapies that double as excellent business models. In this interview with The Life Sciences Report, Kolbert guides investors to regenerative medicine companies that have evolved beyond great science projects into businesses capable of generating huge margins and disrupting the paradigm of medical practice.
The Life Sciences Report: Let me start you off with news from Japan. You’ve lived and worked there; you have special perspective on Japanese culture, healthcare and the country’s regulatory environment because you were with a big pharma there. The Japanese Diet (parliament) passed new regenerative medicine legislation on Nov. 20. The Japanese Pharmaceutical Affairs Law is now the Pharmaceuticals and Medical Devices Act, creating a Regenerative Medicine Products division. Now, the primary endpoint for proposed cell therapies in phase 2 will be safety, not efficacy. These programs have been, in essence, put on a fast track. What is your take on this?
Jason Kolbert: Japan is probably the fastest aging society in the world, and the Japanese government understands the huge cost of chronic disease in a nation with an excellent healthcare system. It’s a gigantic burden. The government has also scrutinized where economic value lies in that healthcare system, and has taken a look at new therapeutic modalities. Contrary to what some might think, new drugs lower the cost of healthcare. If a viable therapy can restore your health, so you can return home or to work, that’s a huge value. On the other hand, if there is no viable treatment, you know you will be dead in six months to five years, and all that can be done is alleviate your suffering, your viability as a productive member of society is dramatically reduced. Japan is dealing with this problem ahead of the rest of the world, and an outgrowth of this exercise has been to take a look at where the cost burdens in the society are.
TLSR: Jason, tie that in to regenerative medicine and loosening the regulatory environment.
JK: Japan has the highest incidence of stroke of any First World nation. It is probably is diet-related. A lot of salt and soy sauce is used in Japan today, which correlates to a lot of hypertension. These factors may tie in to the high incidence of stroke. But the incidence of cardiovascular disease is very low—although it’s rising with the westernization of the Japanese diet. There is a need for viable therapies for stroke beyond just palliative medicine.
If you have an ischemic stroke, you only have a few hours to receive tissue plasminogen activator (tPA), which can dissolve the clot and alleviate the blockage. But the reality is that because of the brief window, only 5% of stroke patients get tPA therapy. About 25% of patients will recover on their own. The balance have a poor outcome, and go on to have a very compromised quality of life. A high percentage of stroke patients are put into nursing homes. If they stay at home, a huge burden is placed on the family members who take care of them. The patient’s productivity in society is reduced.
When the Japanese government looks at cell therapy, and observes that a company like Athersys Inc. (ATHX:NASDAQ) has a phase 2 trial in ischemic stroke, you can bet that attracts its interest. The government has looked at the pragmatic side of cell therapy, and is saying, “If you can emphatically demonstrate safety and can show efficacy with a modest study—a bridging study done in Japanese patients—then we will essentially give you fast-track approval.”
Think of the new Japanese regulations as being similar to the breakthrough designation status that was recently created here in the U.S., but with an even faster accelerated pathway. Certainly, a company must have very clear safety data and a very strong scientific rationale for expected efficacy, and that must be proven in the Japanese patients. But if safety and efficacy can be shown in a relatively small number of patients, the Japanese government will allow a company to start commercializing its product with a combination of restraints that we would expect, like post-marketing surveillance.
I think the need for this legislation was borne out of economics: The Japanese government realized that this would be a method to attract products that can alleviate the cost burden of an aging population. The pathway might attract companies like Athersys, Pluristem Therapeutics Inc. (PSTI:NASDAQ) andMesoblast Ltd. (MSB:ASE; MBLTY:OTCPK) to Japan and, in fact, we know that Mesoblast and Athersys are rapidly moving to get more deeply involved in that country.
TLSR: Clearly, cell therapy for stroke falls into the category of need in an aging society. What else?
JK: Yes, stroke clearly falls into that category. So does cardiovascular disease. Mesoblast and Teva Pharmaceutical Industries Ltd. (TEVA:NASDAQ) are initiating a 1,700-patient phase 3 trial in chronic congestive heart failure (CHF) this month with Revascor (immunoselected, culture-expanded, nucleated, allogeneic adult mesenchymal precursor cells).
TLSR: Returning to Athersys, it has phase 2, 140-patient, double-blind trial ongoing for ischemic stroke, to demonstrate the anti-inflammatory action of its MultiStem (multipotent adult progenitor cells) product. The final data for this trial will be collected in or around June 2014. Then the company is probably faced with four more years of phase 3 studies under the U.S. Food and Drug Administration (FDA) before MultiStem can be marketed—that is, if it’s successful. With the data Athersys has accrued so far, and with the relationships it already has with regulators in Japan, is it possible to get conditional approval using data from the studies it’s already done in the U.S.?
JK: That’s a good question. The short answer is yes. The longer answer is, how good will the phase 2 data be? If the phase 2 data show a compelling result—and so far MultiStem has had zero safety signals—then what do the Japanese regulators have to lose?
What Japanese regulators are looking for is a small bridging study demonstrating that the results carry across in Japanese nationals. Too often there have been instances—more often in lines of traditional small molecule drugs—of variations in efficacy based on genotype, phenotype or race. The Japanese government is going to insist on a study that includes Japanese patients for that reason. Whether Athersys might be able to open up its phase 2 trial to include Japanese sites is a key question. I believe that if management could enroll a handful of Japanese patients, and they could be part of the current phase 2 trial, that could create an accelerated pathway to the marketplace. Based on phase 2 results that include Japanese nationals, which could be reported, let’s say, at the end of 2014, a product could potentially be commercialized in Japan in 2015.
TLSR: Jason, if a cell therapy is developed under the auspices of the Ministry of Health, Labor and Welfare in Japan, one could think of phase 2 studies as “late-stage,” considering that a product could possibly get conditional approval based on safety. Could this have an immediate effect on valuation, when companies start announcing their plans in Japan?
JK: I would like to believe that’s true. It may not be, however, as U.S. analysts and investors are still hesitant to factor in Japan because they just don’t understand the opportunity there. We all want to see well-controlled pivotal studies, with accepted endpoints and statistical significance, so we clearly know that these products actually work.
In other words, what the industry lacks right now is pivotal studies. I have referenced Mesoblast, which is going to begin the largest phase 3 pivotal program in cell therapy for heart failure that we have ever seen. The data from that program will be very telling. However, we have to make a decision on Athersys based on a phase 2 program with MultiStem in stroke and a phase 2 program that it is running with Pfizer Inc. (PFE:NYSE) in ulcerative colitis. NeoStem Inc. (NBS:NASDAQ) will have phase 2 results from its ST-elevated myocardial infarction (STEMI) U.S. trial with AMR-001 (autologous bone marrow-derived CD34+/CXCR4+ enriched cells). I very much believe the results of that trial will be positive—and that will be positive for Mesoblast and for Cytori Therapeutics Inc. (CYTX:NASDAQ), which is also in a chronic myocardial ischemia phase 2 trial. Cytori operates its own subsidiary in Japan, and probably has the largest presence of any cell therapy company in that country.
But I don’t think U.S. investors are willing to acknowledge the commercial viability of cell therapies and ascribe valuation based on phase 2 data. By the way, that is not a new trend. That’s been in place in the world of biotech for a long time, because we’ve had too many surprises. Too often good phase 2 data fails to translate into phase 3 results.
TLSR: So you don’t think approval in Japan based on phase 2 studies will elevate share prices, even with conditional approval available?
JK: The real valuation shift has to be data-driven. We have to look toward what clinical data we will have in six, 12 or 24 months. We know that six months from now, Mesoblast will be in multiple pivotal trials, in everything from spinal fusion and degenerative disk disease to CHF. We know that the company will be reporting phase 3 results in Crohn’s disease using Prochymal (adult human mesenchymal stem cells), which it acquired from Osiris Therapeutics Inc. (OSIR:NASDAQ). We know Mesoblast will report phase 2 data from its STEMI trial, which Teva has expanded and which is being run in Australia. Data drives valuation.
TLSR: What should investors be looking for in the way of milestones in the cell therapy industry over the next year?
JK: I believe, as an analyst, that the way you bring the most value is by identifying a paradigm shift, and I believe that cell therapy represents such a shift. I’ll give you some highlights.
We have just seen results in oncology from ImmunoCellular Therapeutics Ltd.’s (IMUC:OTCBB)phase 2 glioblastoma trial with its therapeutic vaccine ICT-107 (autologous dendritic cells pulsed with immunogenic peptides from tumor antigens). Those results were disappointing to investors, who were hoping, myself included, for a dramatic result. The result was incremental. ICT-107 showed a two- to three-month advantage over standard of care, with p-value in progression-free survival but not in overall survival. The trial was originally powered for a nine-month advantage. A phase 3 will be powered for two- to three-months’ advantage. ICT-107 looks like an approvable drug, and we are excited for patients, but we recognize there are very rarely shortcuts in drug development.
In exactly the same light, we are watching for results from Agenus Inc.’s (AGEN:NASDAQ) andNorthwest Biotherapeutics Inc.’s (NWBO:OTC) respective glioblastoma trials. These companies represent second-generation and even third-generation therapies, using cells and cell-based medicine to treat cancer. The platforms and products are head and shoulders beyond where Dendreon Corp.’s (DNDN:NASDAQ) Provenge (sipuleucel-T; autologous cellular immunotherapy) is today. On the immunology side, Mesoblast is clearly making a huge bet with the acquisition of Prochymal. The company is saying Prochymal works, and that if it runs the proper clinical trials, Prochymal is an approvable product in the U.S. for graft-versus-host disease (GvHD). Athersys has been working on GvHD for years and is close to a phase 2/3 trial for prevention.
What I’m saying is that we are beginning to see a real race in the marketplace around multiple indications. What makes it difficult for investors is just how big some of these indications are, such as CHF, diabetes or degenerative disc disease. The dry age-related macular degeneration market is 10 times the size of the wet macular degeneration market, and we seeStemCells Inc. (STEM:NASDAQ) and Advanced Cell Technology Inc. (ACTC:OTCBB) in a race in the dry macular degeneration space. Remember, it was macular degeneration that put Regeneron Pharmaceuticals Inc. (REGN:NASDAQ) back on the map.
I think a major paradigm shift is going to be led by those companies that have good balance sheets, although there are very few of those currently in this space. It will also be led by companies that have partners with viable business models. Pluristem has a great partner in United Therapeutics Corp. (UTHR:NASDAQ). Mesoblast has Teva. Athersys has Pfizer. And in all cases, the business models of cells in a bottle, like pills in a bottle, are going to look attractive to big pharma.
TLSR: You’ve spoken to me previously about—and have written extensively in your research about—the differences in the business models of cell therapy companies. Generally, the allogeneic (cells or tissue from a donor of the same species), off-the-shelf or pills-in-a-bottle business models seem to make the most sense. The autologous (patient donates his/her own cells or tissues) models look to be much less profitable. Could you touch on this, please?
JK: The autologous model is not attractive, generally. If you’re going to be in the autologous setting, you need to have dramatic efficacy to justify the added complexity and costs. There are exceptions, such as the Cytori process on the regenerative side, where we have an autologous model with an allogeneic-like cost structure. We believe that to be the case for the dendritic approaches in cancer as well, such as ImmunoCellular’s ICT-107 and the Northwest Biotherapeutics’ approach, as well as Agenus’ heat shock protein, which is produced from the patient’s own tumor tissue. The latter three are in development for glioblastoma.
We do not believe that’s the case for all autologous companies. While I absolutely believe that NeoStem andBaxter International Inc.’s (BAX:NYSE) autologous cell therapy product, NeoStem’s AMR-001, is viable and will work, I don’t know that the business model is viable. The cells have to be harvested from the patient’s own bone marrow, processed, enriched and readministered to the patient within 24–72 hours. That’s a lot to put somebody through who’s just had a heart attack, versus administering a therapy that’s off-the-shelf, readily available. In the case of Dendreon’s Provenge, you have to do an apheresis (draw blood and then extract cells from the blood) for the patient every time he’s treated. That’s an arduous, difficult process, and an inconvenience for the patient as well. However, the technologies of ImmunoCellular and Northwest Biotherapeutics, even though they are autologous, allow cells to be cryopreserved, and therefore multiple doses can be made from a single apheresis.
TLSR: You like the autologous model on the oncology side because of the medical need and improving economics. Dendreon’s Provenge for prostate cancer is autologous, and you’re not that impressed with it. Is it more than just the patient’s convenience factor and cost?
JK: There are several reasons the autologous model is inefficient. From a business perspective you have to consider the cost of goods sold (COGS), which affects the income statement dramatically every quarter. Whenever you use an autologous process, costs tend to be 10–100 times higher than for an allogeneic process. In the case of Dendreon’s Provenge, we saw a true milestone in medicine. It’s a very successful product, running at between $300–400 million/year ($300–400M/year) in revenues. What’s wrong with the company then? Well, it has $600M in debt and no positive free cash flow; it’s spending a fortune promoting its product and the COGS is very high. Dendreon is emblematic of why I don’t like autologous products.
Autologous is also limited because it involves a lot of discomfort for patients, many of whom want to be treated, leave and not come back. Let me give you an example in cardiovascular medicine. A patient has a heart attack and goes to the emergency room. That patient may be revascularized with a stent placement where the blockage is, and that’s it. On the other hand, at the moment that the interventional cardiologist places the stent, he or she could screw a syringe onto the end of a catheter and administer the regenerative therapy at the same time the stent is placed. There is phenomenal value in this model, which could only be done with allogeneic cells. If that injection of allogeneic, off-the-shelf cells then prevents the progression to CHF, you’ve done a great service to society and, of course, to that patient. That’s why, in the Western world, it makes so much sense for cell therapy companies to be pursuing cardiovascular disease. That’s also why it makes so much sense for Athersys to be looking at stroke in Japan—because that’s the killer in Japan.
I’m not saying that autologous therapy as a business model is dead. If you have a glioblastoma patient with an expected survival time of 19 months, and a cell therapy can give that patient 24, 30 or 36 months of survival, you have a valuable product. If you can extend survival with one manufacturing process that yields 15 cryopreserved doses, which are used to vaccinate the patient every other month—and the therapy has no side effects—well, that’s a huge win for those patients.
Glioblastoma is an unmet medical need. That’s why I like ImmunoCellular, Northwest Biotherapeutics and Agenus. In the case of NeoStem, with its AMR-001, the problem is not that its therapy wouldn’t work, and not that it’s autologous, but that it puts the patient through additional procedures after a heart attack. But if NeoStem’s product works—and I believe it will—it suggests that Mesoblast’s and Athersys’ products work as well, and they are both allogeneic. They would be better business models.
TLSR: I see the value of the allogeneic model. Please compare its margins, versus autologous.
JK: If I’ve just had a massive heart attack, and I can get cells in a bottle delivered to me immediately—in one visit—that beats having to come back for a bone marrow aspirate, then having to come in two days later, after the cells are processed, for another procedure. If the COGS of the Mesoblast allogeneic product is $1,000/dose and the COGS of the NeoStem autologous product is $15,000/dose, and if both are charging $25,000/dose for their respective cells, then Mesoblast is pushing biotechlike margins of 95%, while NeoStem is at a 40% margin. Right out of the gate, if both therapies are equivalent on patient convenience and on COGS, allogeneic wins.
TLSR: Could you comment on DNA vaccines? These may offer greater advantages for some patients and investors.
JK: I’m glad you asked that question. There’s a connection. These DNA vaccines or plasmids—three-dimensional DNA circles with selected genes sequences engineered into them—are the ultimate cancer vaccine therapies. What’s Dendreon’s goal with Provenge? It’s to elicit a T-cell response that seeks and destroys the tumor cells. What are ImmunoCellular and Northwest doing? They are trying to create a T-cell response that will destroy the cancer. What is Agenus doing? It’s using heat shock proteins to train the immune system to fight the cancer. All of that makes perfect sense. But, what if you could elicit the desired immune response without having to involve the patient with a harvest of tissues or cells at all?
Inovio Pharmaceuticals Inc. (INO:NYSE.MKT) can manufacture a plasmid vaccine in the lab for literally a cost of pennies. This is devastating for the autologous cell model. This plasmid, combined with Inovio’s proprietary electroporation technology, allows the plasmid to pass through cell membranes and into cells, which then synthesize the antigens that create a T-cell response. With this technology, it may be possible to vaccinate people against cancer using a laboratory-engineered vector that costs pennies to produce and does not include expensive, time-consuming harvests of cells.
Inovio is currently working in cervical neoplasia caused by the human papillomavirus (HPV). When a woman has a Pap smear and it comes back from the pathology lab as cervical intraepithelial neoplasia grade II or III (CIN II/III), it’s showing that she is progressing toward cancer. Inovio’s idea is to vaccinate that patient with its engineered plasmid VGX-3100 (targeting E6 and E7 proteins of HPV subtypes 16 and 18) to elicit a T-cell response that would prevent that woman from progressing to full-blown cervical cancer. The primary endpoint of the ongoing phase 2 trial is for the CIN II/III lesion to regress to CIN 1 after nine months. That would be a huge value, because right now all we do is wait to see if the dysplasia progresses to cancer.
But what if you never let it get that far? It sounds futuristic, but we’re there now, and the reason we’re there is this little company, Inovio. By the way, Roche Holding AG (RHHBY:OTCQX) just signed a deal earning Inovio $10M upfront and $412M in potential milestones to develop plasmids that will target prostate cancer, as well as hepatitis B. This is an exciting time for Inovio.
TLSR: Jason, in mid-2014 we’re expecting to get a readout on Inovio’s phase 2 trial testing its VGX-3100 vaccine in 148 patients with cervical intraepithelial neoplasia. What will this event mean for investors?
JK: If those data are compelling, then investors will have to start valuing Inovio not just on the fact that Roche, a major global pharma, seems to be validating its science, but on the real commercial opportunity for its cervical cancer vaccine. The answer to your question is that it’s a very important event. Based on good data in summer 2014, there could be a bump up in valuation. In addition, I think the Roche partnership is probably the first of several to come, because what this little company has is a blueprint of how to manufacture antigens using plasmids. When you think about the number of opportunities that exist for a company like Inovio, it’s almost limitless.
TLSR: Preclinical development at Inovio is just a matter of engineering desired genes into plasmids to synthesize the antigens that will elicit the T-cell response you want. It’s a compact model compared to anything else we’ve seen, isn’t it?
JK: That’s all true. . .but remember, the company doesn’t “just engineer the plasmid.” You and I are taking a lifetime of work by Dr. Joseph Kim, the cofounder and CEO of Inovio, and boiling it down into a nutshell. Sure, if I gave you the recipe for the plasmid, you could go into the lab and make it. But Inovio has the recipe. It knows how to come up with the DNA sequence that will turn on the machinery of a cell to produce a specific antigen or antigens. The delivery platform, electroporation, is also a critical step for this therapy. OncoSec Medical Inc. (ONCS:OTCBB), which uses technology that was essentially spun out of Inovio’s, is reporting very strong data in melanoma. With the onset of checkpoint inhibitors and DNA vaccines, we may see new levels of efficacy and a complete paradigm shift in the way melanoma is treated.
TLSR: Do you have any summary thoughts?
JK: I think 2014 will be the year in which investors begin to focus on data and business models in the cell therapy space. We want to see great data from Athersys in stroke, from Athersys and Pfizer in ulcerative colitis and from Mesoblast with Prochymal in Crohn’s disease. We’d love to see Mesoblast launch a U.S. clinical trial with Prochymal in GvHD, where an approved therapy is so desperately needed. We want to see Teva initiate the 1,700-person clinical trial in CHF with Mesoblast’s Revascor. We want to see positive results from the NeoStem phase 2 PRESERVE trial for STEMI. If we get great data from Agenus’ heat shock protein vaccine, and great results from Northwest’s pivotal trial in GBM, the year will represent a milestone on the oncology side for cell therapy.
TLSR: Thank you very much.
JK: Great speaking with you, as always.
Jason Kolbert has worked extensively in the healthcare sector as product manager for a leading pharmaceutical company, as a fund manager and as an equity analyst. Prior to joining Maxim Group, where he is managing director, Kolbert spent seven years at Susquehanna International Group, where he managed a healthcare fund and founded SIG’s biotechnology team. Previously, Kolbert served as the healthcare strategist for Salomon Smith Barney. He is often quoted in the media and is a sought-out expert in the biotechnology field. Prior to beginning his Wall Street career, Kolbert served as a product manager for Schering-Plough in Osaka, Japan. He received a bachelor’s degree in chemistry from State University of New York, New Paltz, and a master’s degree in business administration from the University of New Haven.
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DISCLOSURE:
1) George S. Mack 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: Inovio Pharmaceuticals Inc.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Inovio Pharmaceuticals Inc., Cytori Therapeutics Inc., NeoStem Inc., Athersys Inc., Mesoblast Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Jason Kolbert: I or my family own 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: Mesoblast Ltd., ImmunoCellular Therapeutics Inc., Inovio Pharmaceuticals Inc., NeoStem Inc., Athersys 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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