Mitigating Risks in Biotechs

The Life Sciences Report  |

Griffin Securities has assembled a biotech portfolio weighted toward companies pursuing high-science therapeutic approaches. However, as analyst Keith Markey explains, through a combination of pipeline diversification, positive clinical data and low-cost research and development strategies, many companies are able to mitigate the risk inherent in their technologies. In this interview with The Life Sciences Report, Markey discusses near-term catalysts for some of the names he follows.

The Life Sciences Report: Keith, Griffin Securities' portfolio seems weighted toward high-science, but high-risk, therapeutic ideas. How would you describe your investment philosophy?

Keith Markey: We look for truly innovative products. These products come with a certain level of risk, but we believe they offer the greatest potential returns on investments. The risks associated with the stocks we follow are somewhat mitigated by diversification within a company's portfolio, as is the case with Soligenix Inc. (SNGX) , or by the nature of the products, such as Unilife Corp. (UNIS) drug delivery platforms.

TLSR: How do you mitigate risk for those of your portfolio companies pursuing unprecedented therapeutic modalities, such as RNA interference (RNAi) and synthetic biology products?

KM: In the case of a company like RXi Pharmaceuticals Corp. (RXII) , for example, I think the risk is mitigated by the fact that the company has done extensive clinical trials and/or extensive research both at preclinical and clinical levels with its lead molecule, which targets a growth factor called connective tissue growth factor (CTGF) that plays a central role in the formation of scars.

The other thing that RXi Pharmaceuticals is doing, unlike many of the companies in the field of RNAi therapeutics, is developing products that are relatively easy to administer to the specific areas that need to be treated. By that I mean dermatological indications, which are very easily accessible, and also the eye, for ophthalmic diseases. That's the company's way of mitigating some of the risk from the delivery point of view. Its molecules also are designed specifically to facilitate the uptake of their therapeutic payload, so that's not an issue that has to be considered separately.

As for synthetic biology, I follow Intrexon Corp. (XON) , the leader in this field. The company happens to be associated, through collaborations, with a number of smaller companies that I follow as well, including Fibrocell Science Inc. (FCSC) . I don't look at Intrexon as very risky for a couple of reasons. For one, the company's work is specifically applied to developing a rather wide range of products, including medicines, chemicals and energy-related molecules that have a genetic basis, or where a genetic basis has been worked out for them.

Synthetic biology has a long way to go to realize its full potential. But part of the story for Intrexon is that it can apply a number of different technologies to this specific field, to not only develop the right genetic basis for the therapies or the molecules it is creating, but also to develop the ability to work with various types of cells—to identify those cells and to harvest them specifically.

TLSR: Let's start with RNAi and RXi Pharmaceuticals. At a recent investor conference, the company reported what appeared to be lackluster interim Phase 2 results for its lead candidate, RXI-109, in the treatment of dermal scarring. Are you still bullish on the drug? Do you think that the interim look may have been premature, and that significant improvement in scarring could emerge over a greater period of time?

KM: It's quite possible that something would evolve that would show the benefit of its drug more. But I think what CEO Geert Cauwenbergh was trying to tell people was that these were results from early scars that the company had treated, and that RXi was still working out the opportune moment to administer the drug for this particular type of scarring. It had been following a protocol that had been worked out in a Phase 1 clinical trial. This is a Phase 2 clinical trial, and it was looking at patients prone to hypertrophic scars, which are nasty, rather large scars that don't form immediately after an insult, but in a delayed manner.

The company's pictures showed both a nontreated side and a treated side of a wound. But the pictures were shown prior to Geert's presentation, on the Internet, which was not expected. People who didn't have the benefit of listening to the presentation and looking at the slides at the same time may have seen no benefit, which isn't what the story was all about. The trial was designed to optimize the treatment regimen, and the one-month data did just that—the first interim analysis showed that a delayed administration of RXI-109 yielded better results than injection near the time of the surgery.

TLSR: What near-term catalysts do you think investors should be looking for in RXi's programs?

KM: We should learn more about its CTGF treatment by the middle of next year. In the meantime, the company is doing some work to prepare for clinical development of other dermatological drugs, one targeting tyrosinase and the second one targeting collagenase. Collagenase is known to break down the tissue as we age, so it's going to be of cosmetic benefit. The tyrosinase product could help in lightening dark spots that have formed, café au lait-type spots that occur with aging as well. Those are interesting opportunities to look at from a dermatological perspective, and the startup of those clinical trials will hopefully get investors' attention.

In addition, RXi has a number of different products under development for ophthalmic applications. Probably the furthest along, although it hasn't yet gone into a clinical trial, is its CTGF drug, formulated somewhat differently than for the dermatological applications. It could go into a clinical trial next year. The drug has promise against some back-of-the-eye diseases, but also for scarring that can occur in the cornea—in the front of the eye—following the removal of cataracts.

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Another source of potential interest-generating events will be possibly partnering some of its drugs for areas, such as oncology and fibrotic diseases, outside of its primary areas of interest—dermatology and ophthalmology.

TLSR: In synthetic biology, you mentioned Fibrocell. Can you address this company?

KM: In the medical field, Intrexon is working with Fibrocell to develop a novel treatment for individuals born with a devastating dermatological condition called recessive dystrophic epidermolysis bullosa (RDEB). The therapy replaces a particular gene with one that is normal; it works by producing a type of collagen called collagen type VII, which binds the two layers of our skin together—the epidermis and the dermis. Without that, children—infants really—are born with skin so fragile that a slight abrasion will cause extremely painful blistering.

TLSR: Why might investors want to pay particular attention to this company's RDEB program?

KM: I think the RDEB program will give people a first glimpse at how effective genetic correction therapies might be, and how Intrexon's synthetic biology capabilities can be applied to that particular type of genetic disorder. We'll have to see what the duration of the response is, and how strong the response is to this particular gene correction therapy.

TLSR: Fibrocell specializes in autologous cell therapy—fibroblast therapy. There are a few competing products on the market. There is Carticel (autologous cultured chondrocytes/developed to restore knee function), a Genzyme product that was sold off to Aastrom Biosciences Inc. (ASTM) . It's had disappointing sales. And there's also Dendreon Corp. (DNDN) Provenge (sipuleucel-T), which has had problems in the competitive market for metastatic castration-resistant prostate cancer. In addition, autologous therapy requires a lot of physician training, and there are issues with transportation, packaging and so forth. Do you think that puts autologous cell therapy at a disadvantage? Are investors looking at these issues and holding off on investing in companies like Fibrocell?

KM: I don't think so. Autologous cells do come with tradeoffs, yes. There has to be a tracking mechanism in place to ensure that the patient gets back the same cells that were taken from his/her body. But Fibrocell has worked out that tracking process, and talked about it with the U.S. Food and Drug Administration (FDA).

Do investors look at other alternative therapies? All the time, I would imagine. The benefits of an autologous cell therapy, though, are that you don't have to worry about side effects you might see with allogeneic cells, or the inability of the drug to reach the appropriate target.

In the cases of autologous cells being used for vocal cord therapy or burn therapy, which are also Fibrocell targets, I think administration of the cells will be fairly streamlined. I spoke with one of the experts involved with vocal cord scarring, who presented at the Fibrocell R&D Day recently. He said it wasn't a difficult procedure, and that a fairly large number of otolaryngologists either already perform that kind of procedure, or are at least familiar with the technique. He didn't think it would be a hurdle for the physician. In fact, cell therapy of the vocal cords could actually be carried out under localized anesthesia in an office visit. That makes it minimally stressful for the patient too, who might be an older person experiencing a loss of voice because of age.

TLSR: Can you talk about other Fibrocell products?

KM: Fibrocell has Laviv (azficel-T) on the market for cosmetic applications. However, the company is not actively marketing Laviv, because it is dedicating virtually all its capacity to the clinical trials to develop cellular therapies.

Laviv was originally produced and approved back in the late 1990s, and it was on the market for a number of years. Then the FDA changed its regulatory environment, and suddenly the company had a product that was no longer approved, according to the new guidelines. As a result, Fibrocell had to pull Laviv from the market and start clinical trials all over again. Those studies underpinned FDA approval in 2011.

TLSR: The company doesn't seem to talk about Laviv much. How is it performing on the market?

KM: It hasn't been generating much in the way of sales. But I wouldn't be surprised if we see an increase in sales of Laviv over the course of 2015. I'm not looking for major increases though.

In addition, Fibrocell has been working with Intrexon to improve its cell culture techniques and its ability to harvest fibroblasts from punch biopsies and from cell cultures. In addition, Dr. James Byrne of the University of California, Los Angeles, who has been affiliated with the company, presented at the R&D Day meeting on a new cell culture medium that Fibrocell now has the intellectual property around, which improves the growth of all kinds of cells—fibroblasts, hepatocytes and, interestingly, inducible pluripotent stem cells.

TLSR: How are the company's financials?

KM: Fibrocell has about $50 million ($50M) on hand as of June 30. It's pretty comfortable at this point. Fibrocell is still relatively small, and will have a burn rate of $5–6M per quarter. Its cash position should support operations well into 2016.

TLSR: You also follow Synthetic Biologics Inc. (SYN) . I heard CEO Jeff Riley, on a recent earnings call, say he's moving full steam ahead on multiple fronts—multiple sclerosis, anti-infectives, irritable bowel syndrome, pertussis. However, he only has $6–7M in cash on hand. With research and development (R&D) set to ramp up, how will Synthetic Biologics press ahead?

KM: I would imagine we'll see the company return to the capital markets at some point. I don't know exactly when, but Synthetic Biologics works pretty efficiently, and some of its work isn't going to be that expensive. The balance will be how expensive and how long the clinical trials are going to be versus the number of trials underway at any given time.

The company's pertussis product will soon begin clinical development. Both Phase 1 and Phase 2 clinical trials are expected to be conducted in 2015, and they won't require huge numbers of patients. The trials also will be—at least the Phase 2—conducted internationally, where the cost will probably be relatively low because there are far more patients with pertussis outside of the U.S. Here in the U.S., pertussis is actually an orphan indication.

TLSR: What is the specific population that the pertussis candidate is going after?

KM: It's actually a therapeutic, not a vaccine. The vaccine, diphtheria, tetanus and pertussis vaccine (DTaP), has been around for a long time. One of the problems that developed countries are experiencing is that the bug has been mutating over the years, partly in response to the introduction of vaccines. As a result, vaccines are less effective than 20 to 30 years ago.

The company is testing a combination of two monoclonal antibodies developed through a collaboration with Intrexon. The monoclonal antibodies both bind to the pertussis toxin, but in different locations, to ensure they're capable of knocking out the toxin as quickly as possible and to avoid the potential for a single mutation to render the therapies ineffective.

The number of individuals who get pertussis is significantly greater outside of the U.S. Worldwide, it killed about 195,000 individuals, largely infants, out of about 16M who were infected in 2013, according to the Centers for Disease Control. This disease really hits developing nations, but it's a disease that could, if left untreated, take the lives of a fairly high number of patients in more developed countries. Synthetic Biologics has a very interesting combination, with an orphan drug here in the U.S., and a major drug in other countries.

TLSR: Synthetic Biologics has top-line Phase 2 data in hand for its multiple sclerosis (MS) drug, Trimesta (oral estriol). Do you know whether it has begun partnering discussions?

KM: It's a very competitive market. Players in the MS market, which include Biogen Idec Inc. (BIIB) , Teva Pharmaceutical Industries Ltd. (TEVA) , and Merck KGaA (MKGAY) , are the most likely to show an interest in any drug that's new for that particular disease.

But Synthetic Biologics has been talking lately about developing Trimesta internally through Phase 3, and then possibly out-licensing it to one of the major players for marketing purposes. I think it makes sense. It wouldn't take that much money to conduct the clinical trials, because Trimesta is not another drug for reducing the number of exacerbations that the MS patients suffer; it's a drug for protecting the positive function of patients who normally experience some decline in cognitive capabilities over time. That is one of the very interesting things that came out of the clinical trials.

TLSR: Keith, are there any other companies that you'd like to discuss?

KM: Soligenix is new to my coverage list, as of Sept. 15. The company is very interesting; it is doing some cutting-edge scientific work in the sense that it is developing a new drug that's an innate defense regulator. SGX94 (susquetide) alters the normal function of the innate immune system by dampening the inflammatory response of macrophages and slightly enhancing antimicrobial function.

Soligenix is developing that particular product for oral mucositis, because it's largely an inflammatory disease that starts with the innate immune system's response to either chemotherapy or to radiation. I like the company's approach to this particular problem because it is focused on one of the most difficult treatments for cancer, the combination of chemotherapy and radiation for head-and-neck cancer. Almost every single person treated for head-and-neck cancer has oral mucositis—which, by the way, can be a devastating condition because it can actually halt treatment, which lowers the opportunity for a favorable outcome.

Soligenix's particular molecule also has the ability to be used as an adjunct to chemotherapy or radiation, not just for preventing or addressing oral mucositis, but as a stimulant to enhance the activity of the anticancer therapy, since it does interact with the innate immune system and increase its activity.

In another side of its business, Soligenix has a simpler but interesting delivery technology for a tried-and-true steroid for pediatric Crohn's patients. That particular formulation, SGX203 (beclomethasone 17,21-dipropionate) delivers the steroid into the gut for local treatment. It's a type of steroid that is broken down very quickly by the liver once it's into the bloodstream. As a result, there are not as many systemic side effects as you see with other steroids. That particular drug, in that particular formulation, is also being developed for a biodefense application—gastrointestinal acute radiation syndrome.

That's the other part of the Soligenix story. It has vaccines, in addition to the steroid treatment, under development for biodefense applications. The two vaccines it is working on are RiVax, which is a ricin vaccine. As far as I know, it is the only corporate entity conducting trials of a ricin vaccine. And it has an anthrax vaccine. Both of those vaccines are formulated with a special adjuvant called ThermoVax, which is a heat-stabilizing form of aluminum that eliminates the need for the vaccine to be refrigerated. As such, vaccines formulated with this adjuvant may not only have biodefense applications, but also may be used for broad commercial uses, perhaps for preparing vaccines for Third World countries where thermal stability is more of a necessity.

TLSR: We covered a lot of ground. Thank you.

KM: It's been a pleasure.

Keith Markey has been an equities analyst for more than 25 years, specializing in the biotechnology, pharmaceutical, medical device and research tools sectors. He is currently the science director for Griffin Securities Inc., an investment bank where he follows emerging healthcare companies with novel technologies. He also works with privately owned companies, helping them restructure their operations, license products under development or near commercialization, and raise funds from venture capital and high net-worth investors. In addition, Markey serves on the board of directors of DS Healthcare Group, which specializes in products that address hair loss. Previously, he held various managerial positions in the Research Department of Value Line Inc., publisher of the Value Line Investment Survey and Value Line Select. Markey began his career as a biochemist, working in the fields of endocrinology and neuroscience at New York University Medical School and Weill Cornell Medical College. His research, which involved several international collaborations and resulted in more than 30 scientific publications, contributed to the understanding of regulatory biochemistry of the nervous system and stem cell plasticity. Markey received his doctorate in neurochemistry from the University of Connecticut and a master's degree in business administration and finance from the Leonard N. Stern School of Business at New York University.

Source: Michael Goodman of The Life Sciences Report

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1) Michael Goodman 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.
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3) Keith Markey: I own, or my family owns, shares of the following companies mentioned in this interview: Unilife Corp. 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: Fibrocell Science Inc., Intrexon Corp. and Synthetic Biologics Inc. 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 what 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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