Source: George S. Mack of The Life Sciences Report (11/26/13)
Investors are attracted to small- and micro-cap biotech stocks because their life cycles are filled with share-moving milestones. Michael Hay and Jocelyn August of Sagient Research handicap those milestones and calculate the probabilities that drugs in development will be approved and successful in the marketplace. In this interview with The Life Sciences Report, Hay and August set a table investors can be thankful for, naming companies with upcoming catalysts and real potential for upside.
The Life Sciences Report: Michael, do you see high-impact catalysts changing over time? Do you see trends where one type of catalyst is really hot, and then later on it’s not so hot?
Michael Hay: We do. Some catalysts are always hot. Clinical trial data is always hot because it is the basis for a drug being approved or not being approved.
The catalysts that change over time have to do with market expectations. There was a time, back from 2007 to 2010, when very few drugs were being approved, and Prescription Drug User Fee Act (PDUFA) dates actually became less important to investors. People came to expect that a drug was notgoing to be approved, so we actually saw less volatility to the downside. Investors did not want to trade those events because a lot of delays were occurring at the same time.
Then, as more and more drugs were approved in 2011ñ2012, there was a shift back to an interest in PDUFA dates. But upside volatility was a lot less because people had begun to expect the drugs would be approved. I guess the answer to your question is in two parts: It is not just whether there are changes in high-impact catalysts, but also about the direction of share price movement associated with those catalysts.
You see a lot of that with advisory committee (AdCom) panels as well. It used to be that everyone took an advisory panel decisionóyes or noóas a harbinger of what the U.S. Food and Drug Administration (FDA) would do. However, investors have come to realize there is a lot more to the FDA’s final decision than the advisory panel’s up or down vote. While AdComs still remain high impact, investors are reading more into what’s actually said during the panel meeting, and trying to gauge how the FDA will interpret that.
Those are the major high-impact catalystsóthe regulatory aspect and the trial dataóbut you also see shifts within disease groups on those high-impact catalysts. For example, hepatitis C (HCV) drugs are expected to work, so you see less and less excitement about positive data in that sector than you would have two or three years ago. Also, HCV has become a very crowded landscape. The large number of drugs in development makes it less interesting.
There are trends, and right now the data for orphan drugs are very important. Once an orphan disease company has delivered good data, investors assume the path to approval is easy. Investors think the pricing power is there, and so they have shifted to orphan drug data. Typically, in an orphan disease, you’re looking to materially impact the course of the disease, and so results can be staggering. It’s not that you’re improving survival by two or three months; you may actually be allowing children or adults to live full lives rather than suffer and die early.
TLSR: Aside from clinical trial data, what are the current highest-impact catalysts in the biotech space?
MH: One of the largest-impact catalysts is an announcement from the Data and Safety Monitoring Board (DSMB). During the course of a clinical trial, the DSMB looks to make sure a drug is not causing significant harm to patients. Usually the trials continue as planned, many times with no announcement whatsoever. On the other hand, an announcement from the DSMB that there is a problem can be quite severe for companies. The trials are often terminated. If a hold is placed on the trial, the drug is left in doubt, and you see a very large stock drop because of that.
Any time a surprise event occurs, it’s going to have a very large impact. Sometimes it is on the positive side. A trial might be stopped early because the efficacy data are so overwhelmingly positive that it’s clear the drug is working, and that there will be a major advance in the approval process. That would be surprising to the market.
TLSR: Michael, you assign a numerical percentage for likelihood of approval (LOA) to drugs in development. What factors go into your probability number? Would you just give me a couple of the highlights, please?
MH: Sure, glad to. The LOA is based on the clinical profile of the drug. We look at two measures when we adjust the likelihood of approval: efficacy and safety. The primary factor that makes us adjust the likelihood of approval is clinical trial data, which, again, has the greatest impact on whether a drug will be approved. We look at clinical trial data in real time, the same day they come out, and as they come out we do an analysis and try to quantify the qualitative assessment of the data. Is the trial meeting the clinical endpoints that it is designed to? How does the drug compare to other drugs on the market or in development? Will it be successful competing with them? Efficacyómeeting the primary endpointóis the main thing we’re looking at. It’s what the FDA wants to see. We also look at the secondary endpoints to see how well a drug will compete commercially.
Safety is very important. We might weight more for the efficacy, but not increase the likelihood of approval too much if we’re concerned about the safety. And a lot of times, safety information is not reported publicly until you reach an AdCom.
The last measure that we look at is what other drugs in the class have done, not just from a competitive landscape but also to see if a similar drug reports positive data. That may increase the likelihood of approval across all the drugs within that class.
TLSR: When you factor in efficacy and safety, you’re really talking about something called the therapeutic index for the drug. Do you attempt to convert that into a numerical figure that you use internally for your probabilities?
MH: We do. We keep an internal matrix when we’re adjusting the LOA. We have an in-house guide that our analysts follow. If a drug is at 0ñ5%, that means one thing to us. If it’s 5ñ10% above average, it means another, depending on the phase of the study that the therapy is inóand a lot of times this is related to the efficacy and safety balance.
TLSR: Looking at your data sheets, I note that another catalyst you use is partnering. A small biotech company partnering with a large pharma is a very important factor, not just because of the financial and intellectual support but also because the large pharma is, in effect, validating that technology platform or approach for investors. But sometimes, after a partnership announcement, we see a selloff. Why?
MH: This is an interesting dilemma. Small companies need new money, and an upfront payment from a pharma is a nice way of monetizing some of their assets. A partnership also validates the product or platform, and gives the biotech security. To your question: Many times the large pharmaceutical company requires so much in a dealósuch as a high percentage of future revenuesóthat if an investor uses a discounted cash flow (DCF) model, the value of the small biotech shrinks based on that partnership split. While an upfront payment will be nice for the company and nice for management and operations, it does not compute into a very high present value as compared to what those future revenues would have been without splitting them.
TLSR: Partnering is one more form of dilution, isn’t it?
MH: Yes, it is. I’ve heard this from investors and I’ve heard it from smaller companies: A lot of times they don’t like to see partnership deals done the way they are. They’d rather see companies raise money in the marketplace because they give away too much to the pharmaceutical companies on future royalty streams.
I also think many investors do not take future partnership splits into account enough when they’re valuing a company. When we at Sagient look at a company’s pipeline and put a valuation on its drugs, we try to assume what its future royalty agreements will be. A lot of times a small biotech only gets 20%, and that could really reduce the value in a DCF model. If you’re only getting a 20% royalty, you need a billion-dollar drug to make up a decent valuation for yourself.
I think investors would rather see companies raise money in the marketplace, bring their drugs to a later stage of development (closer to approval) and then sell themselves outright to a pharmaceutical company, rather than give away a lot of the rights to a product. The proof of that is you do see quite high multiples on merger-and-acquisition deals.
TLSR: Sometimes phase 2 studies are just intended to determine the right population of patients and the design of a phase 3 trial, and the data are otherwise unimportant. How does an investor know when phase 2 trial data are highly material?
MH: There are many different types of phase 2 trials. Depending on the disease indication, one phase 2 study can be much more informative as to a phase 3 outcome than another.
In phase 2, the goal is to figure out which patients to put in the phase 3 study. In oncology, you really need phase 3 trial results, such as overall survival, which may dictate the approval. But there are drugs in infectious diseases, such as hepatitis C (HCV), or in diabetes, where you have a very good early surrogate marker. In HCV, it’s viral load. In diabetes it’s glucose levels. If you’re reducing these levels in phase 2, you’re almost always going to see a similar or greater reduction in phase 3. So the phase 2 result is, in some cases, indicative of the phase 3 outcome.
TLSR: Could we go ahead and talk about some companies and their catalysts?
MH: It’s a very interesting time in the marketplace now for stem cell therapies. We are hoping to see some of these drugs advance because, similar to some orphan drugs, they look to be more curative for the diseases they target because they get closer to the root cause of the problem.
Athersys Inc. (ATHX:NASDAQ) has a product called MultiStem (multipotent adult progenitor cells) that is being tested in several indications, but has two lead indications. First, Athersys is doing a phase 2 ischemic stroke trial on its own, with no partner, and it is expected to have results by the end of this year. Given the small, $115 million ($115M) market cap, and the high-risk nature of both stem cells and stroke, I think these data are going to be very important for investors if the trial is positive for patients.
TLSR: This trial has 140 patients in it, and is randomized, double-blind and placebo-controlled. Is that powered well enough?
MH: Yes, 140 patients is sizable for stroke.
TLSR: Go ahead and address the other lead indication.
MH: The other indication for MultiStem is ulcerative colitis, and this has been partnered with Pfizer Inc. (PFE:NYSE). Pfizer is the lead of this program now, which does give some validation to it. I think Pfizer looked at the inflammatory bowel disease market because it is larger than the stroke market. Those results are also expected by the end of this year. This company is going to have some very pivotal, binary results that could make people very excited to see stem cells working. . .or say, “Oh, we’re not quite there yet.”
TLSR: Jocelyn, do you have a company you would like to mention?
Jocelyn August: On the device front, we are expecting an FDA approval of the 510(k) application thatSequenom Inc. (SQNM:NASDAQ) recently filed for its IMPACT Dx system, the clinical laboratory version of the MassARRAY instrument. If approved, we expect the IMPACT Dx system to contribute significant value to the company’s genetic analysis business segment, as the company is able to realize revenues from its MassARRAY system in the clinical diagnostics arena. We expect the FDA decision to occur either before year-end or early in 2014, based on the time of the 510(k) filing.
Additionally, we are expecting some near-term catalysts for Vascular Solutions Inc. (VASC:NASDAQ), with its GuideLiner technology in the treatment of venous reflux disease. First, Vascular Solutions is expecting approval from Japanese regulators in Q4/13 for its GuideLiner catheter. The GuideLiner is a specialty catheter designed to provide backup to the guide catheter in difficult coronary procedures. Vascular Solutions was the first company to enter the guiding catheter backup category in 2009. The GuiderLiner is producing a little more than $20M in annualized revenues. While Vascular Solutions is facing competition from Boston Scientific Corp. (BSX:NYSE) in the space, Japanese approval would go a long way toward improving GuideLiner’s market share in the face of that competition.
Vascular Solutions is also pursuing a first-in-human clinical trial for the Gel-Rope device, which offers a novel technique for treating venous reflux disease. Gel-Rope uses gelatin to extensively destroy the great saphenous vein. It is expected to be less painful than laser surgery and will not require anesthesia. The varicose vein market is currently estimated at $215M. Covidien Ltd. (COV:NYSE) currently controls $100M+ of the market. Revenues are not expected from Gel-Rope for at least another three years, but the first-in-human trials are expected to be underway in Q4/13.
TLSR: Michael, please go to the next one.
MH: BioDelivery Sciences International Inc. (BDSI:NASDAQ) is a quite interesting company. It is in the central nervous system (CNS) space, working with pain and drug addiction, and is working with reformulations of drugs using the 505(b)(2) regulatory pathway. These types of drugs typically have a higher likelihood of approval because their components are already on the market, and a lot is already known about their safety profiles and how they work. However, these drugs may have less commercial appeal because they are typically headed into a very genericized market, which may make it difficult to differentiate the products.
BioDelivery has a drug, Bunavail (buprenorphine/naloxone buccal soluble film), for opioid addiction. It is in registration (new drug application [NDA] filed with FDA), and the PDUFA date is June 7, 2014. The company hopes to have a partnership by the end of this year. Having already filed the NDA, this would represent a pretty late-stage partner, and the company could garner some nice royalty agreements with that.
The area of drug addiction has been a tough one for some investors to buy into. A lot of people need treatment for drug addiction, but this can be done through counseling therapy, which is the preferred route, rather than by taking drugs. There are a lot of pieces to the puzzle of successfully marketing a drug in this area.
TLSR: This stock has an interesting market cap, about $175M, considering that it is working with drugs that have been in the public domain for quite some time. There must be a high probability of success.
MH: Based on the clinical trial results, we believe the probability is 5% above average for approval. The product only needs to show noninferiority to what is already on the market. We expect Bunavail to be approved. A partner would be seen as a positive at this late stage of development, and would be a large catalyst for this company. But, as we discussed, if it’s not a good partnership deal, the stock would trade down.
TLSR: Are there other names?
JA: We expect FDA approval in the near termólikely by the end of the yearófor Oculus Innovative Sciences Inc.’s (OCLS:NASDAQ) scar treatment device. The device is Microcyn Hydrogel, for the treatment of hypertrophic scarring. The Microcyn technology is currently approved in the U.S. for diabetic foot ulcer treatment, general wound healing and eczema.
In the company’s recent earnings call, Oculus stated that the FDA has asked some additional questions on the scar approval indication, which has resulted in a delay in the product’s clearance. In addition, the company expects to announce topline results from its clinical trial on scar management shortly after the FDA decision.
MH: In the orphan disease space, Catalyst Pharmaceutical Partners Inc. (CPRX:NASDAQ) has a few programs in indications that are less crowded and do not have many successful treatment options. The first of those is Tourette’s syndrome, for which Catalyst has a drug, CPP-109 (vigabatrin), in phase 2. Again, this is not a new molecular entity. Catalyst is exploring new uses for this product as a “research surrogate,” and is expecting to see results by the end of this year in a small, 10-patient, phase 1/2 trial. I will say that Tourette’s syndrome is not a condition that you have a lot of patients to enroll for, and I wouldn’t expect to see a whole lot of data from this trial that would indicate the drug can be approved.
Catalyst also has CPP-115, an analog of CPP-109, for infantile spasms, which is a form of epilepsy, and for which it has received orphan drug status in both the U.S. and the European Union. This is a pretty severe disease that impacts children quite a bit. If Catalyst is able to show decent results in its phase 1a trial, it will be looking for a partnership by the end of this year, hopefully to start a phase 1b trial. There are definitely companies interested in this area of development.
One of the interesting things we see with reformulated drugsóthose in the 505(b)(2) pathwayóis that large pharma is not as interested in partnering. These drugs attract more of a specialty pharma player, because the patent life is typically not as long and the intellectual property is not as easy to defend as that of a new molecular entity. Usually, the commercial outlook for the drug is not as great either. So these drugs require a different type of partner in many instances.
TLSR: I’m noting that the company also has Firdapse (amifampridine phosphate) in phase 3 for Lambert-Eaton myasthenic syndrome (LEMS). What are the milestones ahead?
MH: Firdapse is in FDA phase 3, with orphan status, and it has been approved already in the European Union for LEMS. Back at the end of August, it was given breakthrough therapy designation by the FDA. This is quite an exciting drug. Catalyst expects to complete enrollment of its phase 3 trial by the end of this year, with data reported in Q2/14. Hopefully, the company can file an NDA in 2015.
The breakthrough therapy designation is something that’s been pretty hot in the marketplace lately, and we have seen companies accelerate development because of it. On Nov 13, Pharmacyclics Inc.’s (PCYC:NASDAQ) drug ibrutinib, now with the trade name Imbruvica, was approved for mantle cell lymphoma, a rare type of non-Hodgkin lymphoma. That drug had been given breakthrough designation, and Pharmacyclics has obviously done quite well. Imbruvica was just the second breakthrough-designated product to get approved.
TLSR: We’ve now seen the first two breakthrough-designated drugs approved, just in the past month. This is encouraging, isn’t it?
MH: It is. If you were to look back, those drugs have been approved more quickly than people expected. I don’t know if it’s a direct result of the breakthrough designation, but the read-through to other drugs that have received breakthrough status is an encouraging one. It does mean that the FDA is very keen on getting them on the market quickly.
Firdapse is a very interesting drug for Catalyst Pharmaceutical. I would say, though, that LEMS is a small orphan indication, with only 2,000 patients a year. It might be hard to drive a lot of revenue from that indication.
TLSR: That’s an intuitive view, but the counterintuitive view has prevailed with orphan drugs over the past two years. Those with a few thousand patients a year have been the big gainers for investors.
MH: I completely agree with you. When investigators are studying drugs in these areas, there are so few patients that the researchers actually know them. The investigators are able to do much of their premarket and commercial research during clinical development, and when the drug is approved, they are ready to go out and sell the product. They are quite successful, and it is quite profitable. I think investors, many times, underestimate how quickly the revenue will come on. This looks like a very interesting company to me.
TLSR: A last name, Jocelyn?
JA: We would also like to highlight a catalyst that we expect by the end of 2013 for Given Imaging Ltd. (GIVN:NASDAQ). In November 2012, Given filed an FDA application for regulatory approval of its PillCam COLON 2 capsule system through a direct, de novo pathway, which allows for an expedited regulatory approval process. The application is expected to be approved during Q4/13. The PillCam COLON 2 capsule endoscopy system is a complement to conventional colonoscopies, and provides an alternative for patients who are at higher risk of complications during a traditional procedure and for patients who received an incomplete and or inconclusive analysis. Additionally, the PillCam offers an alternative to colonoscopy for patients who find the traditional procedure uncomfortable.
TLSR: Michael, you have some data on Cytori Therapeutics Inc. (CYTX:NASDAQ). Could you comment?
MH: Cytori is another stem cell or cellular therapy company. It has a product, adipose-derived regenerative cells (ADRCs), that has been approved for breast reconstruction in Europe. In the U.S., the company is looking at treating heart disease with its ADRCsóboth acute coronary syndrome and coronary artery disease. This field has been advancing in the last few years because cardiovascular disease continues to be a major cause of death. There are preventive drugs, such as statins and antihypertensive agents, but once you have cardiovascular disease, or if you have heart failure, there are very few modalities on the market that are able to reverse it and help the heart repair the damage. This is the problem Cytori has been working on.
TLSR: When are data expected?
MH: Cardiovascular data are expected this year, from two different trials. One is the phase 2 ADVANCEtrial, for acute myocardial infarction, with only 23 patients. The phase 1 APOLLO trial, for the same indication, is supposed to publish results for 18-month data. These data should give us more of a gauge of the way these cells work, and how well they’re working.
TLSR: Michael and Jocelyn, it’s been a great pleasure.
Michael Hay has been with Sagient Research for more than seven years and has more than 11 years of experience in financial markets. He manages the BioMedTracker analyst team and serves as vice president at Sagient. He is also responsible for product development, corporate planning and sales and marketing. Hay has consulted for numerous top-tier pharmaceutical companies on strategic decisions, as well as worked closely with top healthcare investment firms, providing insight on investment and trading decisions. Hay’s career in financial markets began at Thomson Financial in 2000. He reached the position of manager, capital markets intelligence, and was directly responsible for corporate client relationships within the technology sector. At Thomson he consulted for senior management regarding shareholder composition, financial markets and competitive positioning. Hay received a bachelor’s degree in finance from University of Colorado, Boulder.
Jocelyn August is currently the senior analyst and product manager for CatalystTracker, a proprietary research product focused on identifying and analyzing the future events that will materially impact publicly traded companies. In her years at Sagient, she has developed expertise in the highly event-driven medical device and diagnostic sector. In addition, she spearheaded the development of a new Natural Resource Industry product within the CatalystTracker product line with the publication of the “Catalyst Impact Study: Natural Resources Sector.” Outside of Sagient, August was named the director of communications for the San Diego Professional Chapter of MBA Women International. August received a master’s degree in business administration from the Rady School of Management at University of California, San Diego, and graduated cum laude from the University of California, San Diego, with a bachelor’s degree in sociology.
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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: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report:Catalyst Pharmaceutical Partners, Cytori Therapeutics Inc., BioDelivery Sciences International Inc., Athersys Inc., Oculus Innovative Sciences Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Michael Hay: 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.
4) Jocelyn August: 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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