Reni Benjamin of Raymond James has watched biotechnology move into a new era in which cells and genes can be manipulated to produce true disease-modifying results. In this interview with The Life Sciences Report, Benjamin outlines the groundbreaking work being done by a number of companies with the potential to return multiples on investment over the next two to three years.
The Life Sciences Report: When we last spoke, in early July 2014, the biotech sector was in a raging bull market. In mid-July of this year, biotech shares took a breather. All market indices are weak right now, but the relative strength of biotech stocks is currently much weaker than that of the Standard & Poor's 500. Is this a technical issue? Or are fundamental issues troubling biotech?
Reni Benjamin: Biotech has had a monstrous run over the last four years or so. In 2014, the indices were up 35% and 48%, depending on which biotech index you tracked. This outperformance of the general markets was driven primarily by a new product innovation cycle, increasing merger and acquisition (M&A) activity, a robust funding cycle, and the fact that the FDA is willing to acknowledge—and frankly, even embrace—novel therapies that seem to show a benefit for patients with very limited, if any, options. The bottom line is that we continue to believe the underlying fundamentals of the space remain quite strong.
Now, with biotech companies at, or 10-20% above, their 52-week lows, it may not seem like the fundamentals are strong, but you and your readers know that biotech is marred with volatility and, like many sectors, it is greatly impacted by sentiment. Unfortunately, the broad sentiment appears to be negative, and the technical indicators do appear to be broken, especially since we're just getting into the 2016 election cycle, where the mere mention of "drug pricing" appears to result in a massive selloff in the space.
A big part of this run has involved generalist investors chasing growth after the devastating financial crisis that began in 2009 and lasted until nearly 2012. You could make an argument right now that biotech price:earnings multiples are low based on historical comparisons, which should result in increased M&As that should continue to drive growth in the sector. But the part of the equation that is tough to gauge is sentiment, and sentiment affects the technicals of the sector. The biotech market may be technically broken right now, and that is sentiment-driven, as evidenced by the generalists rotating out of the sector and chasing growth elsewhere. But we continue to believe that, as part of any individual's portfolio, a mix of large-, mid- and small-cap biotechnology names is a necessity, and this is a great time to go shopping.
TLSR: Ren, you said that fundamentals are strong. Explain that, please.
RB: First, there have been a significant number of drug approvals. According to our records, 2014 set a record 16-year high, with the FDA approving 41 drugs. Anyone who thinks the FDA is not trying to help industry bring needed medications to the U.S. public is either smoking something, or is trying to push a lackluster product, or is skimping on the correct clinical trial.
Another factor contributing to the strong fundamentals is that the vast majority of companies that have benefited from this multiyear run have raised more than enough capital to fund development of their pipelines through any near-term downturn we can foresee. With more funding than ever, biotech companies are running better clinical trials, allowing the FDA to approve drugs, sometimes with less data than what has been historically required.
Another factor contributing to the fundamentals? Pharmas continue to worry about their bottom lines, and the first thing they do in a situation like this is cut back on expenses. That typically comes in the form of downsizing personnel from research and development (R&D) departments, leaving what we consider a large black hole of innovation that can only be filled by acquiring drugs and companies outright.
We are seeing this trend in the larger-cap biotechs as well, but not necessarily on the expense side. What you see is larger biotechs, like Celgene Corp. (CELG) and Alexion Pharmaceuticals Inc. (ALXN), acquiring smaller but soon-to-be revenue-generating companies, such as Receptos Inc. (RCPT) and Synageva BioPharma Corp. (GEVA) for billions and billions of dollars.
If we saw small- or mid-cap biotechnology companies, or even large biotechnology companies, cutting back on R&D, that would worry me, because we feel that biotechs are the future R&D engines that will run the pharma industry. They will be the lifeblood for pharma companies that have pretty much completed all their megamergers (even in the face of generic entry), and must now grow organically by acquiring marketed products or by acquiring pipelines.
The future of biotech fundamentally continues to be quite bright, regardless of what biotech indices are telling us now. It's really biotech that pushes the boundaries of innovation, and then larger companies come along and pay a premium for the value developed at these smaller companies. This is great for biotech, and it's even better for the shareholders who invest in the small companies at a time when share prices are depressed.
TLSR: Can biotech companies capitalize themselves to complete clinical trials in a period like this?
RB: The answer is yes. There are quite a few factors involved when trying to secure funds. Obviously, the stage of the asset is a major factor. Is it in an early- or preclinical stage of development, versus a late-stage product in Phase 2b or Phase 3? Is it getting in front of the regulatory body? These factors influence investors' mindsets as to near-term and long-term opportunities, so they can gauge returns.
But the bottom line is that regardless of when a downturn occurs, and even in the previous downturn, companies have been able to secure funds, whether a private company going back to its original venture capital investors or a public company securing funds from stock market investors.
TLSR: A company may have to absorb significant dilution in a depressed market, but it can get the money it needs. Is that what you're saying?
RB: Well, we have a saying: A biotechnology company never dies because of dilution. You can still fund even in horrendous markets. The terms may not be great. There may be significant dilution. However, if you believe in the product, and the clinical trials turn out positive, these are all problems that can be corrected quite easily via corporate restructuring or reverse splits. And if the company gets acquired in the meantime, we think it's a high-class problem to have.
TLSR: Are there preferred categories, disease indications or technologies that you like at this particular time?
RB: I have always been a huge fan of novel therapies addressing oncology indications, and probably one of the most exciting areas is the field of immunotherapy, where very significant steps are being made to change the trajectory of cancer progression.
Checkpoint inhibitors have captured investor attention because they have the ability to harness a patient's own immune system to combat cancer. This is not necessarily a new idea, but this is the first time agents—in this case monoclonal antibodies—have been used to ramp up a patient's immune system and have shown clinically significant benefits in not just tumor response, but also in overall survival. This capability has led to the approval of several checkpoint inhibitors, which are making a difference in patients' lives and in the marketplace today.
I am also a huge fan of novel therapies such as gene therapy and regenerative medicine. Gene therapy has seen quite the resurgence. You have seen shares of bluebird bio Inc. (BLUE) trading initially at $20 or $30 and going up to $200, and shares of other gene therapy companies riding that wave. This resurgence has been driven by companies generating solid clinical data, even though the number of patients has been small. Those data have shown functional cures in several genetically driven diseases and really showcase the power of these new therapies. Now the trick is to manufacture the products cost effectively, design pivotal studies that concretely demonstrate the therapeutic benefit, and price the therapies so that reimbursement is not an issue—and so that shareholders are rewarded for the risk they took in funding these companies.
Unfortunately, regenerative medicine as a focus area has not performed well, either from a stock perspective—with a negative 30% return over the past year—or in the clinic. The early data seem to suggest that stem cells have the ability to manufacture not just one drug but multiple drugs, since the cells can pump out multiple proteins and growth factors at any given time. We continue to like the space because of its potential, but the harnessing of that potential has taken much longer than expected.
TLSR: Ren, do you see the complexity of cell therapies as having made the technology hard to unlock?
RB: Yes. I think that's why it's important for your readers to know that while we believe there is potential, there will likely be the need for significant further investment. Just like in the gene therapy space, investment needs to pour into the field, which means fundraising and dilution for smaller companies.
But it also means partnering with larger companies willing to put in capital for a share of the smaller company. Investors need to realize that this is part and parcel of moving these novel therapeutic platforms forward. We think, eventually, regenerative medicine will be used to treat a wide variety of illnesses and do it differently than what's currently out in the market place. From a stock perspective, your readers should know that these regenerative medicine companies represent trading opportunities for the time being.
TLSR: Ren, you have a few Strong Buy-rated stocks in your coverage. Could I hear your growth theory on these names?
RB: We can start off with ADMA Biologics Inc. (ADMA), one of our Strong Buy-rated companies. I consider it to be relatively low risk. It has completed a Phase 3 pivotal trial developing RI-002 (human plasma-derived, polyclonal, immune globulin intravenous [IVIg]).
The IVIg market is huge—several billion dollars worldwide. In the U.S., the IVIg products being used for primary immune deficiency diseases (PIDDs) make up $1.2–1.8 billion ($1.2–1.8B) in revenues on an annual basis. PIDDs are a group of more than 200 rare diseases in which the immune system is deficient or missing.
ADMA's RI-002 is super-enhanced with respiratory syncytial virus (RSV) antibodies, and represents an IVIg product that could be used for patients who are more susceptible to RSV. While this is a smaller niche of the entire marketplace, we think a 10% market share leads to about $100 million ($100M) or so in revenues in the U.S. if the product is approved. We've looked at the data, and they seem positive. The company has submitted its biologics license application (BLA) for approval, and the FDA has accepted it. Its Prescription Drug User Fee Act (PDUFA) date will be in Q3/16.
We consider the name relatively low risk from both a clinical development and a regulatory perspective. Now, it potentially becomes a commercial story. The way I see it unfolding is the company getting taken out by a larger player in the IVIg space that wants a differentiated product in its portfolio.
TLSR: The company has a European partner, Biotest AG (BIO:XETRA). Biotest is a plasma protein supplier. Is it a distributor, or is it actually a partner in RI-002?
RB: In Europe, Biotest is a real partner; it's going to be selling the drug, and ADMA gets a royalty. In the U.S., though, RI-002 is all ADMA's.
TLSR: The company's market cap is about $100M today, but a $100M top line should give the company a billion-dollar valuation. Is that the way you see it?
RB: Yes. If, over the next several years, RI-002 sells and is able to generate that kind of revenue stream, the concomitant valuation for the company would approach $1B. But even if we are wrong, and the company only generates a $50M revenue stream, we believe the stock will be well north of current levels. We currently have a $15/share, 12-month price target on ADMA, but that does not showcase a billion-dollar valuation because we haven't gotten approval or started marketing yet. We have to take the risk into account.
TLSR: Granted, biotech shares are depressed right now, but why is this company, with a potential multimillion-dollar-per-year product, suffering with such a low valuation?
RB: It's a combination of things, the most important being that ADMA only has 10.7M shares outstanding. One of the biggest owners, Aisling Capital, owns about 30% of the company, and it's not out there trading the stock. I don't think any of the investors are in ADMA to just capture a 10% or 20% gain. I think these major shareholders are there to realize the full potential of the company, whether that's through revenues or through an acquisition, so there's not much trading going on. When you don't have a liquid stock, you can have significant aberrations in the marketplace in terms of price, both to the upside and to the downside.
TLSR: Why won't clinicians look at RI-002 as just another IVIg? There are lots of them on the market. Is it just because of the associated RSV antibody?
RB: The majority of the marketplace is likely to be treated with standard IVIg therapeutics. However, some patients are at a significantly higher risk of infection, and our consultant believes RI-002 could prove quite beneficial, especially if it's priced appropriately, for that group of patients, which he thinks is about 20% of the market. We've given a further haircut to that estimate and are assuming just a 10% market penetration to achieve our expectations.
TLSR: What about reimbursement? How do you see the Centers for Medicare and Medicaid Services viewing this product?
RB: We don't see reimbursement being an issue, especially given the niche application that we expect it to be used in.
TLSR: Go ahead with your next Strong Buy-rated name.
RB: TG Therapeutics Inc. (TGTX) is an interesting name because it has both a PI3K delta inhibitor, TGR-1202, a small molecule that is orally bioavailable, as well as an anti-CD20 monoclonal antibody TG-1101 (ublituximab), both of which are for hematopoietic malignancies. These two targets already have approved drugs on the market and selling: An anti-CD20 called rituximab (Rituxan) developed by Genentech (a unit of Roche Holding AG [RHHBY]), and a PI3K inhibitor called idelalisib (Zydelig), developed by Gilead Sciences Inc. (GILD).
The PI3K space has gotten quite heated. In September 2014, Infinity Pharmaceuticals Inc. (INFI) made a deal with AbbVie Inc. (ABBV) for the rights to IPI-145 (duvelisib), a PI3K delta and gamma inhibitor, for an upfront payment of $275M and as much as another $530M in milestones. The regulatory bar has been cleared with idelalisib on the market, so the question is trying to find other PI3K delta and gamma inhibitors that are differentiated by efficacy or safety.
TLSR: How is TG Therapeutics differentiating itself?
RB: TG Therapeutics' two products differentiate themselves from the viewpoint of safety. There does not seem to be as much liver toxicity with TGR-1202 as with Gilead's idelalisib. It's in a Phase 3 trial now, and we think the study will bear this out. We expect the first data in Q4/16, and if we are right, TG Therapeutics won't be a standalone company for too much longer. If you are a Novartis AG (NVS), for example, it makes sense to acquire a product that's already gone through the development and regulatory challenges instead of developing one on your own, like AbbVie is doing.
We think TG Therapeutics is an interesting and compelling opportunity. The company has a significant amount of cash to get through the next value-driving events, the most important being the final data from the ongoing Phase 3 study by the end of next year.
TLSR: Go ahead to another name.
RB: We think Oncothyreon Inc. (ONTY) has significant potential. It is developing a small molecule, orally bioavailable breast cancer drug called ONT-380 that is a selective inhibitor of HER2, the only anti-HER2 small molecule drug currently in development. ONT-380 has the potential to compete with another small molecule, Puma Biotechnology Inc.'s (PBYI) neratinib, a pan-HER tyrosine kinase inhibitor. Puma's valuation has come down significantly, primarily based on the perception that the toxicity profile of neratinib could inhibit the commercial opportunity of the drug. ONT-380 is a very similar HER2 inhibitor, but without the gastrointestinal toxicities seen with competitors, and it is very promising in its clinical activity, especially in crossing the blood-brain barrier. We should also point out that Galena Biopharma Inc. (GALE), another name we cover, is targeting HER2, but from the perspective of creating a cancer vaccine that could be used in the adjuvant setting.
TLSR: Interesting that it can get into the brain via oral administration and from the blood. That's obviously why we are seeing ONT-380 being studied in metastatic breast cancer, isn't it?
RB: Correct. The brain is the primary site of metastasis from breast cancer, as well as several other cancers. We think a small molecule drug that's tolerable, active and can cross the blood-brain barrier has the perfect combination of activity, and could be recognized for its value in the not-so-distant future. Oncothyreon has data coming out at the end of this year, at the San Antonio Breast Cancer Symposium, and it's likely to start a pivotal study by the end of this year or early next year evaluating this drug in the end stage of breast cancer.
TLSR: Another name?
RB: I think it's important for your readers to know that, in biotech, not every idea is going to work. As a matter of fact, the vast majority of products don't work. They fail in clinical studies for a number of reasons. At least one of the reasons is that you are dealing with biology. You're not dealing with man-made engineered products. Biology varies from person to person. Lots of things can impact the biology of one person versus another.
That said, I'd like to talk about Verastem Inc. (VSTM). We made a bet on its molecule, VS-6063 (defactinib), a cancer stem cell inhibitor targeting focal adhesion kinase (FAK). We were quite certain that the trial would get through the interim analysis. But on Sept. 28 the company said its Phase 2 COMMAND trial with defactinib was futile in mesothelioma, and the stock lost 80% of its value.
TLSR: Does that mean this company is no longer a viable option for investors?
RB: No. Most biotech companies try not to be a one-trick pony. You try to have a pipeline of products, so if one fails, you can rely on other candidates in development.
Verastem has additional candidates. As a matter of fact, it has a PI3K/mTOR inhibitor—a dual inhibitor—in Phase 1 studies. But the most compelling notion for investment is the fact that the company is trading at half the cash that it holds, and this kind of dislocation is not seen in the marketplace for long periods of time. Biotechs are known to burn cash, but they generally trade anywhere from one to two times cash, especially if they have a pipeline. Verastem could be an interesting opportunity.
TLSR: Defactinib failed in mesothelioma, but it is also in a Phase 2 trial in KRAS-mutant non-small lung cancer. Is there any hope for this product targeting only KRAS-mutant cancers?
RB: That's exactly what the company wants to do.
As an analyst who follows the company, I have taken the entire revenue stream of defactinib out of my valuation, whether for non-small cell lung cancer, ovarian cancer or mesothelioma, and I'll tell you why. Drugs can work in one indication and not the other, and Avastin (bevacizumab; Genentech) is a perfect example of this. It failed in breast cancer and wound up working in ovarian cancer. On the other hand, based on the data so far, there were no signs of activity seen with defactinib. While I am the eternal optimist, I feel the mesothelioma study was large, randomized, and really did provide an answer. I'm happy to be wrong about this, but as a monotherapy, at least, defactinib likely does not have a path forward in any indication.
TLSR: I understand that you have just initiated on two new companies. Could you tell me about them?
RB: I'm interested in regenerative medicine, and on Oct. 5 we launched on two cellular therapy companies. One is Ocata Therapeutics Inc. (OCAT), formerly Advanced Cell Technology Inc. It is under new management, has changed its corporate structure, and has uplisted to NASDAQ. Here's a company that has really turned things around, gotten investors to put money in, and is initiating a new study in dry age-related macular degeneration (AMD) for its embryonic cellular therapy product, MA09-hRPE.
Recently Spark Therapeutics Inc. (ONCE), with its SPK-RPE65 gene therapy with an adeno-associated viral vector, had impacted visual lighting in a certain group of patients with Leber congenital amaurosis. This is a gene therapy, but as we discussed earlier, regenerative medicine has the ability to affect a multitude of genes. The preliminary data with Ocata's MA09-hRPE, used in about 30 patients, have shown that people with dry AMD who are on the way to blindness actually show improvement in visual acuity when they have had the subretinal injection/transplantation of these cells in their eyes.
The marketplace is huge. It's multiple billions of dollars bigger than wet AMD, where Regeneron Pharmaceuticals Inc.'s (REGN) Eylea (aflibercept) is currently selling billions of dollars on an annual basis. We think the Ocata data look promising, and the company has some very interesting prospects going forward.
TLSR: Go ahead and mention the other regenerative medicine company.
RB: I am actually loath to call Fate Therapeutics Inc. (FATE) regenerative medicine, although it could technically fit in there. The company is developing small molecules that can change the behavior of a variety of cell therapies, whether it's umbilical cord cells or hematopoietic stem cells. What this molecule appears to do is enhance the infection-fighting properties of cells as well as their engraftment properties, a benefit that's needed in patients undergoing transplant, of which there are about 50,000 or so worldwide.
Hematopoietic transplants literally provide a cure for many cancer patients, but what has held back the advancement of transplants has been the significant mortality and morbidity associated with the entire procedure. Deaths occur for a variety of reasons, one of which is infections. If you can enhance the engraftment potential of these cells, and decrease the level of infections, the level of cytomegalovirus reactivation and the like, you can give these patients a better opportunity with their transplants. That's exactly what Fate's lead program is trying to do.
TLSR: Ren, Fate sounds like a company that could enhance the therapeutic potential of a whole host of companies that utilize cell therapies.
RB: Actually, a number of companies have taken a look at Fate's platform and decided to partner with the company to figure out how to modify their own cell therapies. Probably the best known collaborator is Juno Therapeutics (JUNO), which is in the chimeric antigen receptor (CAR) T-cell space. CAR T cells are genetically modified. They are something of a cell therapy and gene therapy all in one. While we are seeing outstanding clinical activity, we would also like to tweak the persistence of the cells and induce memory phenotypes in them. Juno made an upfront payment of $5M to Fate, and purchased 1M shares at $8/share. Shares are trading just above $5/share now. Juno will be responsible for funding any collaborations between the two companies over the next four years. Fate could rake in some very nice milestone payments, as well as single-digit royalties on sales in the future, and it does not give up ownership of its technology.
TLSR: It's been a pleasure, Ren. Thank you.
Dr. Reni Benjamin is a senior biotechnology analyst at Raymond James. His expertise focuses 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 is a past member of the UAB School of Health Professions' Deans Advisory Board. Prior to joining Raymond James, Benjamin was a managing director and senior biotechnology analyst at H.C. Wainwright, Burrill Securities and Rodman & Renshaw. He was also an associate analyst at Needham & Co. 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) Dr. George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences 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.
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3) Reni Benjamin: I own, or my family owns, shares of the following companies mentioned in this interview: bluebird bio Inc., Celgene Corp. and Gilead Sciences Inc. 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: Raymond James & Associates lead-managed a follow-on offering of ADMA Biologics Inc. shares, Ocata Therapeutics Inc. shares and Galena Biopharma Inc. shares within the past 12 months. Raymond James & Associates makes a market in shares of ADMA Biologics Inc. and Galena Biopharma Inc. Raymond James & Associates received non-investment banking securities-related compensation from ADMA Biologics Inc. and Galena Biopharma Inc. within the past 12 months. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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