Biotech Investors Should Look For Turnaround Opportunities

The Life Sciences Report  |

The biotech bull market is not over. That's the judgment of Reni Benjamin of H.C. Wainwright & Co., who predicts high quality data from a broad range of small- and mid-cap biotechs will move shares higher during the summer and especially in the fall. In this interview with The Life Sciences Report, Benjamin showcases names with powerful platforms and market winds to their backs, which he believes could vigorously multiply investor capital over the next 12–18 months.

The Life Sciences Report: Do you have thoughts on what might move the biotech market over the remainder of the summer and through the early fall?

Reni Benjamin: The biotech market was on a tear through the beginning of 2014, but due to a variety of factors it began a healthy correction at the end of February/beginning of March. One issue was drug-pricing concerns regarding Gilead Sciences Inc.'s (GILD) Sovaldi (sofosbuvir), which was approved last December for the treatment of chronic hepatitis C virus (HCV) infection. Since just before the American Society of Clinical Oncology (ASCO) conference, which took place at the end of May/early June, investors started getting their heads around those pricing concerns, and the biotech market began to heat up again. Then, at ASCO, investors got a significant data dump that highlighted how strong the drug development market is for both pharmaceuticals and biotech.

There appears to be a resumption of interest in biotech, and investors should concentrate on several factors before we move into fall. Summer is a good time to do homework because there is not much news flow during this period, and news flow drives biotech. Starting in September, when a lot of medical conferences gear up, many of the companies we cover will present new data. In fact, investors will get access to the latest data at both investment bank conferences and medical conferences.

TLSR: Ren, we recently saw Pfizer Inc. (PFE) attempt to acquire AstraZeneca Plc (AZN) , and we are hearing about smaller deals in the works too. It's pretty obvious that pharmas need to combine and acquire. Is this kind of activity a factor in market strength? Will it continue?

RB: The merger and acquisition (M&A) activity we've seen continues to heat up, and will be another driver of biotechnology going forward. Investors need to understand that many pharmas have jettisoned or significantly curtailed their research and development (R&D) divisions. With existing branded products going generic over the next five years or so, pharmas need to license or acquire outright the products that biotech companies are developing.

A perfect example of this is the deal announced on June 9, with Merck & Co. Inc. (MRK) acquiring Idenix Pharmaceuticals Inc. (IDIX) for its HCV pipeline. Merck is paying $3.8 billion ($3.8B), a 200% premium to Idenix's value before the deal announcement, to get Idenix's Phase 2 NS5A inhibitor samatasvir, as well as two uridine nucleotide analogs, IDX21437 (also in Phase 2) and IDX21459 (in Phase 1). This deal will help Merck compete with Gilead potentially.

We believe two other things will set the stage for movement in biotech this summer and into the fall: sales numbers for Gilead and Sovaldi, and ramp-up for Pharmacyclics Inc. (PCYC) , which recently won approval of its hematology/oncology product Imbruvica (ibrutinib). The uptake of these products will be of great interest to biotechnology investors as we move into fall.

Finally, the pace of regulatory approvals and breakthrough therapy designations should continue to drive interest in the sector, both fundamentally and technically.

TLSR: You mentioned breakthrough therapy designations, which are granted by the U.S. Food and Drug Administration (FDA) to allow for expedited product development. It's only been eight months since the first breakthrough designated drug was approved, Roche Holding AG (RHHBY) /Genentech's Gazyva (obinutuzumab) for chronic lymphocytic leukemia. The second breakthrough product was Imbruvica, approved in mid-November 2013. Do you anticipate breakthrough designation will continue as an add-on driver to the pace of drug approvals? Or have we just seen pent-up demand burst out with these new products?

RB: At least at this particular juncture, breakthrough designation seems to be an add-on driver to drug approvals. We've gone through this kind of thing in the past. I've lived through the advent of Novartis AG's (NVS) acute heart-failure drug serelaxin, rejected by the FDA. If that tide turns and we begin seeing breakthrough-designated products rejected, we could see the designation fall by the wayside or have less impact.

TLSR: Could you go ahead and talk about a stock?

RB: One of the first names I would like to mention is RXi Pharmaceuticals Corp. (RXII) . This is one of several companies using RNA interference (RNAi) as a platform, and trying to develop therapies for indications not being addressed by competitors. In the RNAi space, the 800-pound gorilla is Alnylam Pharmaceuticals Inc. (ALNY) , but several other companies are following suit, including Arrowhead Research Corp. (ARWR) and Tekmira Pharmaceuticals Inc. (TKMR) ($TKM:CA).

RXi is relatively new in this space. It is targeting the processes involved in scarring and fibrosis. We feel the company has largely been ignored by investors, but has potential. As I mentioned earlier, data drives valuations, and RXi has Phase 2a data coming out in Q3/14 that would validate its platform, its agent RXI-109, and its gene target CTGF (which expresses the protein connective tissue growth factor [CTGF]).

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Scarring is a multibillion-dollar market, primarily in the hypertrophic scarring and keloid areas. Just to remind investors, Pfizer acquired a private company called Excaliard Pharmaceuticals Inc. for what we estimate to be $350–500 million ($350–500M) in cash, primarily for its platform targeting the very same CTGF gene that RXi is targeting, and for the very same indication. The initial RXi data should give us enough information to ascertain whether the product can move forward, and whether or not RXi could be a potential acquisition target. These data, if positive, should lead to some significant valuation increase.

I would expect data to be released closer to the September timeframe. Also, investors should understand that these are preliminary data, from just a handful of patients. But these data should give us a good sense as to the level of efficacy.

TLSR: Is this trial ahead of RXi's Phase 2a trial for keloid, in which overexpression of the CTGF protein also occurs?

RB: Yes, it is. We wouldn't expect to hear results from the keloid trial until later on, probably in Q4/14.

TLSR: Is the hypertrophic scarring indication the real value driver for this stock currently?

RB: Yes, I believe so.

TLSR: You said hypertrophic scarring could be a multibillion-dollar market. Is this a largely cosmetic indication, where patients will be responsible for procedures out of pocket?

RB: Yes. The bottom line is that you're not going to die of a hypertrophic scar. This will be driven by out-of-pocket monies. That being said, approximately 170 thousand (170K) patients, based on our research, receive scar revision surgery annually. Based on fees for these types of therapies, we think the market is worth north of $1.5 billion ($1.5B) annually, targeting just those patients. What we use as a metric is Allergan Inc.'s (AGN) Botox (onabotulinumtoxinA). Botox has been generating north of $1B, of which at least half is in the cosmetic wrinkles market, and that would be people paying out of pocket as well. RXI-109 would clearly fall into that kind of market opportunity.

TLSR: Could you move on to another company please?

RB: We also have Celsion Corp. (CLSN) under coverage. Celsion is a small biotechnology company trading a bit above its cash position. At the time we initiated coverage, it was trading at a $0 enterprise value. Celsion is higher now due to a recent acquisition.

By way of background, Celsion conducted the HEAT study, a pivotal Phase 3 study of its heat-activated agent ThermoDox (liposome-encapsulated doxorubicin) in hepatocellular carcinoma (HCC). This was a worldwide study, with more than 700 patients, but at the end of January 2013 the company reported negative Phase 3 trial results. The trial failed.

However, the company did find a subset of patients that appeared to benefit from ThermoDox over standard of care. The company is conducting a second Phase 3 trial called OPTIMA, which Celsion feels is strategically derisked because it has isolated the patients who could potentially benefit from the therapy. This will likely be a large trial and will last quite a long time—five years to enroll and see final data.

Investors should realize that while we view the data from this subset of patients with cautious optimism, it is a retrospective analysis, and the results must be reaffirmed in a new Phase 3 trial. Retrospective, or selected subset data, cannot be used for marketing approval. While interim data could be announced along the way, the timeline for this trial is likely too long for most biotech investors.

TLSR: You mentioned an acquisition; tell me about that.

RB: Sure. The reason we consider Celsion interesting is because we've known for quite some time that, with cash on hand, the company was looking at various M&A opportunities. The company announced the acquisition of a privately held oncology company called EGEN Inc. on June 20. EGEN has a very interesting delivery platform that can get various types of nucleic acids, including RNAi or plasmid-based therapeutics, into cells. EGEN has developed data for its lead candidate, EGEN-001 (IL-12 plasmid-formulated with PEG-PEI-cholesterol lipopolymer), which encodes for interleukin-12 (IL-12). The compound is being tested in cancer—in particular, ovarian cancer—where it has shown promising, yet early, results.

Using the EGEN platform on top of Celsion's existing heat-activated liposomal encapsulation platform provides Celsion with multiple shots on goal, with the ability to advance several therapeutics at once in a variety of indications with large unmet needs. We are hopeful, given the current valuation of the company, that data from this new acquisition could drive shares higher within the next 12 months or so.

TLSR: IL-12 is an immune activator. Does the plasmid that encodes for IL-12 also encode for any specific antigens, like Inovio Pharmaceuticals Inc.'s (INO) plasmids?

RB: No, it does not. EGEN-001 is given as an intratumoral injection. IL-12, a cytokine, draws in and activates the immune system to a robust level by bringing in both T cells and NK cells. The destruction of the tumor cells is due to the immune response, which presumably provides the antigens, if you will, in the local area.

Several companies are looking at this same cytokine and figuring out different ways to inject it into tumors. Ziopharm Oncology Inc. (ZIOP) , which we do not cover, is using a viral delivery, or vector methodology, to transport IL-12 into tumors. OncoSec Medical Inc. (ONCS) , another company we cover, has several programs evaluating plasmid-encoded IL-12. OncoSec utilizes electroporation to efficiently transfect IL-12 into patients with injectable tumors including melanoma, Merkel cell carcinoma, and cutaneous T-cell lymphoma. At the 2014 ASCO meeting, OncoSec reported positive interim results from a Phase 2 melanoma trial that included three complete responses (11% complete response rate). In addition, preclinical studies have demonstrated synergistic efficacy when combined with CTLA-4 or PD-1 inhibitors, a combination that will likely be evaluated in the clinic in 2014. Inovio is very similar to OncoSec, but is evaluating other cytokines, not necessarily IL-12.

All the players in this space are trying to enhance not just the delivery, but also the efficacy of this therapy, and seeking to provide a good safety profile for patients.

TLSR: Celsion had a market cap of somewhere around $600M before its HEAT trial failed. Now its valuation is about $55M. We rarely see great turnaround stories, but could this be one?

RB: Yes, it could be a great turnaround story. The company has multiple shots on goal.

TLSR: Could you mention another name?

RB: Speaking of turnarounds, another interesting name is CTI BioPharma (CTIC) , formerly Cell Therapeutics Inc. This has been a turnaround story in the making for quite some time. The company has had multiple successes in the biotechnology space, as well as some failures, and we believe it has finally reached an inflection point, at the cusp of generating significant shareholder value.

CTI BioPharma is developing a novel Janus-associated kinase 2 (JAK2)/FLT-3 tyrosine kinase inhibitor called pacritinib, which is currently in two Phase 3 trials for myelofibrosis. The 800-pound gorilla in the myelofibrosis space is Incyte Corp. (INCY) , which is already marketing its lead drug, Jakafi (ruxolitinib), a JAK1 and JAK2 inhibitor, in the U.S. Jakafi is marketed in Europe by Incyte's partner, Novartis. We believe Jakafi's full-year sales to be in the range of $315–350M.

CTI BioPharma's pacritinib seems to have a differentiated profile. Pacritinib appears to provide the same sort of efficacy as Jakafi in terms of improving constitutional symptoms. But pacritinib appears to have a different side effect/tolerability profile, in that it does not cause thrombocytopenia, a decrease in platelets. For patients who have myelofibrosis and a low platelet count, this could become the drug of choice. Clinicians can keep the dose of this drug at a therapeutic level versus Jakafi, which must be lowered in dose to maintain proper platelet levels. From a marketing perspective, we think pacritinib has the ability to carve out its own niche.

In November 2013 CTI secured a partner in Baxter International Inc. (BAX) , which paid about $60M upfront for the worldwide rights of pacritinib. The hurdle that remains is efficacy data from the two trials. If they're positive, we believe CTI can generate significant sales and compete in this market. If the trials fail, the company will have to fall back on its pipeline products, which are in an earlier stage of development, as well as its non-Hodgkin lymphoma product Pixuvri (pixantrone), which is generating revenue right now in Europe.

Given the molecular mechanism with pacritinib, the data we've seen so far in Phase 2 studies and the study design on the ongoing Phase 3 trials, we believe the trials have a greater-than-average chance of succeeding. The first study should report by the end of this year or early next year.

TLSR: Could pacritinib be developed in leukemias as well as myelofibrosis?

RB: Yes. Because of its mechanism of action and its ability to inhibit FLT3, pacritinib is being evaluated in indications such as FLT3-mutant acute myeloid leukemia (AML). While still early, there is a chance, based on scientific rationale, that this product could be used in indications outside of myelofibrosis.

The other thing that investors should keep in mind is the competitive landscape. Another drug in development, which is moving through Phase 3 at the same pace as pacritinib, is Gilead's momelotinib, a small molecule JAK inhibitor that Gilead acquired for $500M from YM Biosciences Inc. last year. That product appears to have the same sort of efficacy in terms of constitutional symptom benefit. It also appears to provide an anemia benefit. Most of these products cause anemia. In Gilead's case, momelotinib seems to maintain hemoglobin levels so patients don't need transfusions while undergoing therapy.

Sanofi SA (SNY) actually got out of the space. The company killed its entire program for a drug called fedratinib. Although Sanofi had completed Phase 3 trials, an unacceptable neurotoxicity was discovered, and the entire program was dropped. Geron Corp. (GERN) had its product imetelstat put on clinical hold in Q1/14 due to safety issues. It did announce in mid-June that the partial clinical hold had been lifted, at least at the investigator-sponsored study site, but the company's program is still on clinical hold.

TLSR: Ren, it sounds like investors have to thread the needle with the myelofibrosis indication and JAK targets, doesn't it?

RB: Correct. They really do.

TLSR: Could you mention another name?

RB: Sure. Ariad Pharmaceuticals Inc. (ARIA) is a turnaround story as well. Last year the company ran into a significant snag. Ariad had the distinct pleasure of not only successfully getting Iclusig (ponatinib) approved in mid-December 2012, a full three months ahead of its Prescription Drug User Fee Act (PDUFA) date, but it also achieved regulatory approval both in the U.S. and in Europe for the drug. Iclusig was approved for third-line use in chronic myelogenous leukemia (CML). Ariad was running a head-to-head Phase 3 study against Gleevec (imatinib) in an effort to move its product toward front-line use in CML, but due to an increasing side-effect profile, including serious arterial thrombotic events and cardiovascular toxicities, the FDA suspended the marketing of ponatinib in the U.S. That led to a significant decrease in shareholder value for the company.

Subsequently, the company worked with the FDA and was able to revise its label to a more restrictive patient population, getting the drug back on the market. Most investors look at the more restricted label and think a company with a market valuation of more than $1B and a restricted label is more than fairly valued. Given the lower peak revenue potential in the $100–150 million range ($100–150M), investors perceive Ariad as an overvalued stock trading at 10 times its peak revenue potential for Iclusig. But, in our opinion, this is where the opportunity lies.

What we believe investors are missing is that Ariad has an extremely active drug with ponatinib. We know that off-label sales are occurring in the second-line CML market right now, and as more physicians get comfortable with the side-effect profile, we believe the significant activity seen with ponatinib will help increase market share in other indications—even within CML. We believe Ariad is going to grow market share beyond the third-line and fourth-line CML market. In addition, the drug is being evaluated in several other solid tumor indications.

Ariad also has a pipeline of products, including a new anaplastic lymphoma kinase (ALK) inhibitor called AP26113, which reported outstanding data in advanced malignancies at ASCO. When you think ALK inhibitors, you probably think of the two major ones, Xalkori (crizotinib; Pfizer) or Novartis' Zykadia (ceritinib). A slew of other ALK inhibitors are in development, but AP26113 seems to have generated some differentiated data, which was presented at ASCO. The data differentiates AP26113 not just in its activity, which we believe is slightly better than Novartis' Zykadia, but we also believe the side effect profile is better. Ariad's pipeline sets the company up as one of the more interesting acquisition targets in the biotechnology space.

TLSR: Ren, although Gleevec is going to lose its patent protection/exclusivity soon in the U.S., it has been the standard of care in CML for a good while. Did you hear data at ASCO indicating Iclusig could be more efficacious in CML than Gleevec?

RB: We did, actually. Ariad presented data from its Phase 3 EPIC trial, where it was evaluating ponatinib head-to-head against Gleevec. Ariad's drug showed a significantly better response rate versus Gleevec. But what Gleevec has, besides being efficacious, is a very good side-effect profile.

The question is, in the face of Gleevec going generic and having a better side-effect profile, will anyone move ponatinib to the front-line setting. That's a tough hurdle to cross, and we are not factoring that into our models at all. The EPIC trial was halted due to the marketing halt of Iclusig in CML last October. If Ariad wants to go for front-line status, it would have to run a head-to-head Phase 3 trial all over again. The data show that ponatinib is much more active than Gleevec, but it's also more toxic. Patients responding to Gleevec will continue on Gleevec. Those who don't respond have a good shot at getting exposed to ponatinib in the second-line setting, where we already see ponatinib prescriptions. A second-line label in CML would represent a triumph for Iclusig.

TLSR: Did you have one more company you wanted to mention?

RB: La Jolla Pharmaceutical Co. ($LJPC) is developing a small molecule inhibitor against galectin-3 called GCS-100. Galectins have been implicated in a variety of disease indications, and it appears that overproduction of galectin-3 leads to fibrosis in the kidney and liver. La Jolla is one of several companies addressing indications like chronic kidney disease.

What's interesting about La Jolla is that it has reported randomized control data showing a statistically significant benefit in estimated glomerular filtration rate (eGFR), which is a marker of kidney function. What the company was able to show was that GCS-100—in the lower doses, not the higher doses—seems to impact the eGFR in chronic kidney patients, and may delay the onset of dialysis. La Jolla's study involved more than 100 patients and was randomized and controlled, which should give investors more faith in the data. We're going to see the final data in all the subgroups in mid-November at the American Society of Nephrology meeting in Philadelphia. The data could be a significant driver for shares going forward.

TLSR: La Jolla is a micro cap, and on that basis alone it could give investors a healthy return. You're following another company, Keryx Biopharmaceuticals Inc. (KERX) , which also has a molecule, Zerenex (ferric citrate) for chronic kidney disease, that could launch this year. But the market valuation differential between these two companies is significant, with Keryx at about $1.4B, whereas La Jolla has a market cap of $65M. What justifies the vast differential in valuation between these two companies?

RB: The main difference is that Keryx has completed Phase 3 studies. Its drug is already approved in Japan and is selling as of this year; the company has a Japanese marketing partner. Keryx is currently awaiting regulatory approval in the U.S., and plans to start selling the drug by the end of the year. La Jolla has several years' worth of development left before seeking regulatory approval. The differential in market cap is primarily due to the difference in the development stages of these companies.

TLSR: Could Keryx's valuation portend something for La Jolla's valuation in the future?

RB: For now, at least, there's a better comparable. Galectin Therapeutics Inc. (GALT), which I do not cover, is a more reasonable comp for La Jolla, in that it is also in Phase 1 with its drug GR-MD-02, for a slightly different indication called nonalcoholic steatohepatitis (NASH; fatty liver disease). Galectin's market cap is around $270M, versus La Jolla's $65M.

Investors need to be aware that last year La Jolla did a significant financing. This is also true for RXi. There are a significant number of convertible shares outstanding on a fully diluted basis, and readers should know that is the case for both La Jolla and RXi. If these convertibles are executed, that would lead to a higher common share count. Our valuations for these two companies take these fully diluted shares into account. While it is true that La Jolla's market cap is currently $65M, investors should realize that biotech-savvy funds hold a significant portion of the equity. If they do, La Jolla's market cap is significantly higher, probably closer to $150 M.

TLSR: Thank you, Ren.

RB: Thank you very much for taking the time.

Dr. Reni Benjamin is a managing director and director of research at H.C. Wainwright & Co. His expertise and coverage is on companies in the oncology and stem cell sectors. Benjamin has been ranked among the top analysts for recommendation performance and earnings accuracy by StarMine, has been cited in a variety of sources including The Wall Street Journal, Bloomberg Businessweek, Financial Times and Smart Money, and has made appearances on Bloomberg television/radio and CNBC. He authored a chapter in “The Delivery of Regenerative Medicines and Their Impact on Healthcare,” has presented at various regional and international conferences, and has been published in peer-reviewed journals. He currently serves on the UAB School of Health Professions' Deans Advisory Board. Prior to joining H.C. Wainwright, Benjamin was a managing director and senior biotechnology analyst at both Burrill Securities and Rodman & Renshaw. He was also an associate analyst at Needham and Company. Benjamin earned his doctorate from the University of Alabama at Birmingham in biochemistry and molecular genetics by discovering and characterizing a novel gene implicated in germ cell development. He earned a bachelor's degree in biology from Allegheny College.

Source: George S. Mack of The Life Sciences Report

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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: RXi Pharmaceuticals Inc., Inovio Pharmaceuticals Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Reni Benjamin: 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: Celsion Corp. and OncoSec Medical 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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