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How the Lack of R&D at Big Pharma Is Boosting Small Biotechs

The recent pullback in biotech shares has not changed the time-tested theory of investing in small-cap drug development companies. Good or bad data will continue to move shares. In this interview
The Life Sciences Report: Featuring investment ideas in biotechnology, pharmaceuticals, medical devices, tools and diagnostics in interviews with industry-sector experts–analysts, money managers and newsletter writers–backed by the latest research summaries, news and company profiles. It's a combination of information and insight investors can't get anywhere else.
The Life Sciences Report: Featuring investment ideas in biotechnology, pharmaceuticals, medical devices, tools and diagnostics in interviews with industry-sector experts–analysts, money managers and newsletter writers–backed by the latest research summaries, news and company profiles. It's a combination of information and insight investors can't get anywhere else.

The recent pullback in biotech shares has not changed the time-tested theory of investing in small-cap drug development companies. Good or bad data will continue to move shares. In this interview with The Life Sciences Report, ROTH Capital Partners' Senior Research Analyst Joseph Pantginis presents five biotech names with varying timeframes for market-moving data that could provide huge upside for investors willing to do some homework and understand the growth proposition.

The Life Sciences Report: Joe, since late May 2009, the New York Stock Exchange AMEX Biotechnology Index (BTK) is up by a factor of four, even with this fairly severe pullback in biotech stocks. Have we moved into a period of consolidation?

Joseph Pantginis: Absolutely not. I think we are still in the environment where biotech and healthcare stocks should do well overall. By November 2013, biotech stocks were getting frothy. That included some high-quality stocks that had very quick run-ups. We like to see steady growth out of these names over time. A healthy letting-off of steam is a good thing.

One thing that will continue to bolster biotech is that big pharma continues to struggle with its pipeline. Companies are constantly looking for merger and acquisition (M&A) activity, and they need to be able to generate ideas and new drugs. Their internal research and development (R&D) platforms are not doing that anymore. Big pharma is constantly looking at both smaller biotechs and larger companies to fill in the gaps generated by the lack of R&D productivity. That's why we saw Pfizer Inc. (PFE) looking at an M&A deal with AstraZeneca Plc (AZN) . In the end, biotech is still going to be a major driver going forward because it is generating the novel ideas and many of the new drugs.

TLSR: Small caps are in a more difficult environment now than they have been over the past few years. When we enter a more hesitant market, investors seem to take it out on smaller biotech companies. How do you think investors should approach small biotech stocks today?

JP: I think we are at a point now where the pendulum is swinging to this sector being oversold. It's similar to when the economy is frothy; there tends to be strong hiring to overhiring, and when things turn around, the pendulum swings the other direction and there tends to be overfiring of personnel. It's hard to find a happy medium.

Investors need to realize that the volatility factor in biotech is much more pronounced. For instance, if a Phase 3 trial works and the data are good, the stock could be up several-fold. If a trial fails, the stock is down 70% on the first tick. Investors get into biotech for the greater upside potential. They are looking for multibaggers, but they need to understand the downside potential for failed clinical trials. That's how they should approach smaller biotech companies.

TLSR: Prior to this biotech bull market, which began almost five years ago, investors were generally unable to make money on early-stage biotech stocks. Even good Phase 1 and Phase 2 data would not move stocks. What about now? Will statistically significant data continue to catalyze small biotechs and move their shares upward?

JP: The simple answer is yes. As you said, prior to the five-year run-up, it was hard to make money on earlier-stage Phase 1 or Phase 2 news. The problem is that investors need to be able to time these catalysts very carefully. A company with positive earlier-stage data could enter a quiet period or a dead zone for news flow, a period when the stock essentially moves up and down with the volatility in the biotech market. As an analyst making an investment case for a company, I focus on catalysts and milestones, which is what investors need to do to make money on these stocks.

TLSR: Stem cell/regenerative medicine companies seem to have lagged every other kind of biotech stock. Their collective performance represents a very long and frustrating battle for people who believe in the concept of cell therapies. We have proof of concept to show that some of these technologies are going to work in patients. Do you foresee cell therapy cycling into investor consciousness?

JP: Regenerative medicine and stem cells are among my favorite topics in the companies I look at. I've covered multiple companies in the space. I believe this sector will cycle into the investor consciousness. But, one of the things that has held this sector back is the lack of significant clinical data. The perception right now is that the stem-cell space—very broadly speaking—is still viewed as a "science experiment" and is lacking the real substantive clinical data sets. Just as in other sectors, investor acceptance is going to come down to good Phase 2 data, and not many of these companies have reached that stage yet.

One company that has been able to get that far is Aastrom Biosciences Inc. (ASTM) , a company I used to cover. It had very nice randomized Phase 2b data in critical limb ischemia (CLI). But the company then came up against roadblocks enrolling patients in its Phase 3 REVIVE trial. Aastrom cancelled that program in March 2013, and the stock took a hit. But it was one of the earlier companies that actually developed solid Phase 2 data.

Today, a lot of stem cell companies in the clinic are still in the anecdotal stage, because the patient numbers are very small. Companies are doing spinal cord injury studies, but we're not going to see what a lot of investors would have liked to have seen years ago, which is that these patients would start walking again. This is a very long process.

Another reason the stem cell space has lagged is that companies have experienced a much longer and more arduous regulatory process with the U.S. Food and Drug Administration (FDA). The FDA has required more information on the safety of the cells. For instance, when you put live cells into a patient, could they turn into teratomas, or a tumor? Investors still view this space as a science experiment, and clinical data will be the ultimate key driver that gets investor interest.

I do see a positive trend. I don't want to call it a sea change, but cash is starting to move back into the stem-cell space from the investor front. We are also starting to see significant grant money from places such as the California Institute of Regenerative Medicine (CIRM), which is giving out major grants—sums like $20 million ($20M) for particular disease indications. I think the increased flow of funds is another encouraging indicator for stem cells coming into investors' minds.

TLSR: Could you tell us about some companies in the stem-cell space?

JP: I follow Cytori Therapeutics Inc. (CYTX) ; I have a $10 price target on the stock and rate it a Buy. The company has a multipronged business strategy. Its president, Marc Hedrick, has just moved up to the CEO position, and the company is looking to focus its operations. Cytori has been selling its Celution System, which produces autologous (a patient's own) adipose-derived stem and regenerative cells (ADRCs). These cells can have many uses, including treatment of heart disease. The company has been selling this product for quite some time now ex-U.S. It's not a real revenue generator at the moment, but Cytori is going to be growing the ex-U.S. business through data generated by investigator-sponsored clinical studies. Ultimately, clinical data will drive interest in the product, and generate increasing revenues. That's prong No. 1.

The second prong, which will be absolutely critical for the company, is a later-stage program in heart failure, or chronic myocardial ischemia, which is currently in a Phase 2 study called ATHENA. In an earlier-stage Phase 1 study called PRECISE, with just 27 patients, Cytori showed that it can increase the mVO2, or peak or maximum oxygen consumption during a treadmill test. It also showed there were clinical benefits for these heart failure patients, versus those who received standard of care. The PRECISE study bucked the trend of the expected clinical course of these patients.

Even though it was a small study, it was double-blind—in this case blind to subject or patient, the caregiver, investigator and the outcomes assessor. Because we saw the opposite of what would be expected with standard of care, I think it is pretty promising. Data from the ATHENA study, which is larger than the PRECISE trial, are expected around mid-2015. This is what I consider the lead catalyst for Cytori. If positive, these results put the company firmly on the map with validated clinical data. The most important aspect of what will change the investment case dramatically for Cytori is the readout from ATHENA.

The third prong is that Cytori has an ongoing relationship with the U.S. government, the Biomedical Advanced Research and Development Authority (BARDA), where it has been developing the Celution technology for radiation and thermal burns. The risk from a radiological attack has been in the news since September 11, 2001, but it also applies to more typical soldier injuries. The company has been making good progress on the development contract where it did the Phase 1 requirements. Now, it's going to be meeting with BARDA on June 10.

The company believes it has hit the points on the checklist of all the things it was supposed to do to move to the next option of the study, which could be worth up to $35M to Cytori. The company is generating the potential for what I would call a long-term annuity. Once it delivers on all these different options to BARDA, it could receive a procurement contract where the government would order a certain amount of the product to either stockpile, or to put in various hospitals or burn centers. We've seen this happen already for different therapeutic areas, including radiation and smallpox.

TLSR: Cytori has harmonized ATHENA I and ATHENA II, and enrollment should be complete by Q1/15. Will full enrollment in ATHENA be the catalyst that will move these shares?

JP: Ultimately, it's the data from ATHENA that will lead to the most prominent share-price movement, either to the up- or downside, depending on how the data pan out. The visibility enabled by completing enrollment could be helpful for this stock. The company has pushed out timelines, so there have been some visibility issues. Full enrollment won't be as prominent as the ultimate clinical data, but once investors see that the study is fully enrolled, they will be able to place more definitive timing on the data catalysts.

TLSR: How many patients must there be in a pivotal Phase 3 trial with ADRCs in myocardial ischemia? How long do you think the Phase 3 will take?

JP: You would easily see 200–300 patients in a Phase 3 heart failure study, because these are pretty advanced-stage disease patients. Allotting time for both enrollment and data readout, we're probably looking at a two- to three-year timeframe.

TLSR: What primary endpoints would we be looking at in a Phase 3 pivotal trial for heart failure?

JP: We need to look at major adverse cardiac events (MACE), and at things like rehospitalization rates. Do you have the ability to improve the class of the patient's heart failure? The Class III or Class IV heart failure patient is worse off; can you transition someone from Class IV to Class III? The endpoints have to be definitive, like overall survival in oncology.

TLSR: If Cytori's ADRCs can prolong lives for a year or more, or if they just improve quality of life in patients, that would be a success. However, these cells are autologous—coming from the same patient to whom they will be administered, and therefore have the same genotype as the patient. That identical genotype could ultimately give rise to the disease phenotype that enabled the development of heart failure. You are a molecular biologist: I wonder if you think about that? Going further, do you wonder whether, in the future, we might want to use allogeneic (from same species) therapies, with cells that have a clean ancestral history of myocardial disease?

JP: That's possible. The potential for allogeneic cells needs to be monitored. With allogeneic cells you have to worry about immune rejection. You could go down the embryonic cell path, because these cells are obviously immune privileged. But to your overall point about the underlying genetics, it would depend on whether the heart disease was caused by the genetics of the cells you were born with. If you have heart failure, it's more likely the result of the course of the patient's life—long-term smoking, long-term fatty diets, long-term unhealthy habits, etc. Your genetics could make you more prone to, let's say, high cholesterol. If it's an underlying genetic disorder, then maybe there could be a potential issue in using an autologous therapy.

TLSR: Would you talk about early-stage companies that you have under coverage?

JP: One is Rexahn Pharmaceuticals Inc. (RNN) , which is also a Buy-rated stock. I have a $3 price target on it. Originally it was not solely focused on oncology. The company had a drug on the neurological front called Serdaxin, a serotonin and dopamine release enhancer, which was in later-stage development but failed in major depressive disorder. The company had a major blow-up when this drug fell by the wayside. Today I view this company as going through a rebirth. It has brought on a new CEO, who says the company is going to be entirely focused on oncology.

As a side note, CEO Dr. Peter Suzdak made a comment that impressed me when I first met him. He said he was going to run randomized studies in early-stage development, meaning he is going to buck the trend of most oncology companies. You rarely see randomized Phase 2 studies in oncology on the biotech front. Investors want to see randomized data. The company's lead product, Archexin (RX-0201; Akt1 antisense oligonucleotide RNA inhibitor) is in a Phase 2a trial for metastatic renal cell carcinoma (RCC). The study is open-label because of how the drug is delivered, and the company is not able to blind it—but it is randomized, and that's important.

We have in hand important anecdotal clinical data. The company ran a Phase 2a study of Archexin with 31 patients in pancreatic cancer. It showed an improvement in survival of 9.1 months, versus 5.7 months with gemcitabine alone, and the safety profile was positive. Given how difficult the pancreatic tumor indication is, we have some proof of concept in hand. What other tumor indications can we look at that have potential unmet medical needs? Renal cell cancer would be one answer, which Rexahn has settled on as the company's lead indication. RCC is an unmet medical need, and it is promising that the company is running a randomized study.

TLSR: What will be the catalyst in this trial for RCC? When do we expect to see that?

JP: Right now, we're looking to get data from the safety component of the study in Q4/14, which will make sure the combination of two drugs—in this case, Archexin and Affinitor (everolimus)—shows itself to be safe. In this day and age, all oncology indications will use combinations in the real world. When you use a new drug with an existing drug, the company and FDA want to make sure that the combination is safe.

TLSR: One of the primary endpoints in this Phase 2a trial for RCC is progression-free survival. With only 39 patients in the study, would it be negative for the stock if we don't see an improvement in progression-free survival?

JP: The simple answer is yes. The gold standard is survival in oncology studies, whether it's progression-free or overall survival. Depending on the indication, investors will look right at the primary endpoint. Did it increase survival? Yes or no.

TLSR: Because this is an antisense drug, it does not inhibit the Akt1 protein, but rather it inhibits its synthesis at the gene level. Antisense developer Isis Pharmaceuticals Inc. (ISIS) has shown that it has been difficult to target disease with oligonucleotides because it's hard for them to reach the target. Do we have any evidence to support Archexin reaching its RNA target?

JP: The preclinical models demonstrate clinical activity in pancreatic cancer. Mouse models showed significant reductions in tumor size and regressions.

TLSR: What else is interesting in the pipeline?

JP: Rexahn's RX-3117, a nucleoside analog that inhibits DNA and RNA synthesis, has potential to be a sleeper product candidate, we think. The company is not putting a lot of cash resources behind this drug at the moment, but it has generated enough data to potentially attract a partnership, which I believe the company wants to deliver on this year. I would almost call RX-3117 a next-generation gemcitabine. The drug has been shown to inhibit tumors that are gemcitabine-resistant. In addition, the drug is orally bioavailable, which gemcitabine is not. Orally bioavailability is a positive, because it implies a patient can be treated on a long-term basis with the cancer being treated as a chronic disease.

TLSR: Joe, Teva Pharmaceutical Industries Ltd. (TEVA) was partnered on RX-3117, and last year it returned all rights to the product back to Rexahn. Some investors took that as a negative. How do you see it?

JP: Any time a drug is returned by a partner, it's absolutely viewed as negative. The thinking is that perhaps Teva saw something it didn't like. But according to management, there weren't any issues with the drug. I think Teva's decision was based on strategic reasons. It is becoming more of a neurology and respiratory company, and RX-3117 was the fourth oncology collaboration it dropped in recent history. That's why investors need to know the backstory, to overcome those negative perceptions.

TLSR: Is there another company you might mention?

JP: I'd like to discuss Lion Biotechnologies Inc. ($LBIO). After the American Society of Clinical Oncology (ASCO) meeting last year, and at this year's ASCO (held May 30–June 3), the big, hot topic was and is immunotherapy. Coming out of ASCO 2013, the catchphrase was checkpoint inhibitors; now that ASCO 2014 has concluded, the same can be said with even greater emphasis. Checkpoint inhibitors are a major focus, with the anti-PD-1s (programmed cell death protein-1), such as MK-3475 from Merck & Co. Inc. (MRK) , and anti-CTLA-4s (cytotoxic T-lymphocyte antigen 4), such as Yervoy (ipilimumab) from Bristol-Myers Squibb Co. (BMY) . These targets are of major interest to pharmas, biotechs and investors. We're seeing that yet another company is looking to do a combination study with a PD-1 or CTLA-4 inhibitor nearly all the time.

Just as background, checkpoint inhibitors help modulate the immune system. An anti-CTLA-4 or an anti-PD-1 drug helps take the brakes off the immune system and modulate what are called T regulatory cells, which can stimulate, and sometimes quiet down or stop, the immune response. The ultimate goal with all of these checkpoint inhibitors and various immunotherapy approaches is to lift and boost T-cell responses. That's where Lion Biotechnologies comes in. Its technology is focused on using a patient's own T cells, or, in this case, tumor-infiltrating lymphocytes (TILs), to attack the tumor. I think of these TILs as the Navy SEALS of the immune system.

TLSR: Joe, here we are with another early-stage story. Are there anecdotal data that have gotten your attention?

JP: I'll give you some real numbers. There have been independent Phase 1/2 studies at four sites, including the National Cancer Institute (NCI), MD Anderson Cancer Center, Moffitt Cancer Center and at Sheba Hospital in Israel, where patients have been treated in a real-world setting. The consistency of the data among these sites is quite striking to us. The clinical data are evolving pretty much daily, but we're seeing about a 12% complete response rate with the TILs alone, with no combination drug, and we're seeing an overall or objective response rate in the 50% range—47% to 49% across the board. I would mention that overall response rates include complete response plus partial response.

TLSR: The fact that these data are so consistent among investigator- and company-sponsored studies goes against conventional wisdom, doesn't it?

JP: When oncology studies read out and when they are analyzed based on investigator assessments versus independent or central investigators, you'll normally see big deltas in the data. We would normally see a decent amount of variability among the various sites. That's why I see this consistency as being compelling. Yervoy was approved on a 10–11% objective response rate, and a 2% complete response rate. The rate of response, consistency and durability is key. There have been well over 136 patients at this point who have been treated with the therapy at these four different centers.

Another thing I might mention is that some investors view TIL technology as competitive with the checkpoint inhibitors, but I actually think the opposite. I think the technologies can be synergistic. There are combination studies being run currently, both at MD Anderson and the National Cancer Institute, combining the TIL technology with checkpoint inhibitors. In fact, some of the TIL-positive responses were in patients that were previously on a checkpoint inhibitor. There is a study going on at the Rosenberg Lab at the NCI in combination with Genentech/Roche Holding AG (RHHBY) Zelboraf (vemurafenib), a small molecule BRAF kinase inhibitor that was approved for melanoma almost three years ago.

TLSR: Lion Biotechnologies is not using an antigen-presenting cell technology like those being developed by Dendreon Corp. (DNDN) , which ROTH has Sell-rated, and ImmunoCellular Therapeutics Ltd. (IMUC) , which ROTH has Buy-rated, is it?

JP: With either Dendreon or ImmunoCellular, you're creating therapeutic cancer vaccines where you're presenting antigens to dendritic cells, which then "train" a T cell or B cell to recognize that antigen, then go find the antigen and kill the cell that's expressing the antigen. That's what these cancer vaccines are doing. What Lion is doing with its TIL technology is culturing tumor fragments after excision, then assaying T cells for tumor recognition, then selecting and expanding numbers of those cells and giving them back to the patient by infusion. They weren't present in significant quantities for a therapeutic effect before the technology was applied, and are now being selected and returned in therapeutic numbers to swarm the tumor.

TLSR: You've referenced checkpoint inhibitors and how important they seem to the investment community, and I'm noting that one such company, Celldex Therapeutics (CLDX) , is on your firm's Focus List. Celldex, a smaller-size mid-cap, has been hit pretty hard in this biotech pullback. Tell me about the company.

JP: We have Celldex on the Focus List because we believe it is true leader in the cancer immunotherapy arena. The company's two lead products are glembatumumab vedotin (CDX-011), which is in a pivotal Phase 2b for breast cancer, and rindopepimut, which is a cancer vaccine in Phase 3 and Phase 2 (potentially pivotal) for front-line and recurrent glioblastoma, respectively.

Especially coming out of this just-wrapped-up ASCO, I am excited about Celldex's version of a checkpoint inhibitor called varlilumab. I was excited about the product for a very long time, but really could not put investor focus on it because it was preclinical. In the latter part of 2013, we received the first look at first-in-human data in both solid and hematological tumors, and we were quite impressed. At ASCO 2014 we received an update on these patients, and based on the high level of prior treatment of the patients, the monotherapy data are impressive. A little perspective: While Yervoy and the anti-PD1s "take the brakes off" the immune system, varlilumab "presses the accelerator" on the immune system. The company has already started to sign collaborative agreements, including with Roche and Oncothyreon Inc. (ONTY) , for combination studies. With regard to the stock pullback, this name certainly falls into the category I mentioned earlier regarding quality names that have been oversold.

TLSR: I know you're also following GenVec Inc. (GNVC) , a true micro cap with just a $40M market cap. Could you give me a brief summary of your investment case for GenVec?

JP: GenVec has seen a bit of volatility in its time, but the underlying technology of adenovirus delivery and vaccine technology remains strong, in my belief. The company has been out of favor for quite some time due to the Phase 3 failure of TNFerade in pancreatic cancer, and investors were not ready to focus on the company's earlier-stage vaccine programs. In addition, GenVec had previously signed an exciting worldwide partnership with Novartis AG (NVS) for a gene therapy product for hearing loss and balance disorders. This was very exciting to us, but lack of visibility on when the investigational new drug application (IND) would be filed kept some pressure on the stock I believe. However, Novartis has filed the IND and is getting going with the Phase 1 program. Needless to say, hearing loss is a major global market, and any clinical benefit could be transformative for both GenVec and Novartis. In the meantime, GenVec is looking to out-license its various vaccine products, including respiratory syncytial virus and herpes simplex virus.

TLSR: Thank you for your time.

Joseph Pantginis, Ph.D., joined ROTH Capital Partners in 2009. Prior to joining ROTH, Pantginis was a senior biotech analyst at Merriman Curhan Ford (now Merriman Holdings Inc.). Pantginis was also a senior biotechnology analyst at Canaccord Adams, focusing on the oncology, inflammation and infectious disease spaces. Prior to Canaccord Adams he was a biotech analyst at several firms, including JbHanauer & Co., First Albany Corp., Commerce Capital Markets Inc. and Ladenburg Thalmann & Co. Inc. Prior to his tenure on Wall Street, Pantginis served as an associate manager/scientist of Regeneron Pharmaceuticals' Retrovirus Core Facility. Pantginis received a master's degree in business administration in finance from Pace University, a doctorate in molecular genetics and a master's degree from Albert Einstein College of Medicine, and a bachelor's degree from Fordham University.

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: Cytori Therapeutics Inc. and Rexahn Pharmaceuticals Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Joe Pantginis: 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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