The Art of Valuing Biotech Stocks

The Life Sciences Report |

In the past five years, development of new therapies has aimed for true disease modification and actual cures. Many novel ideas are now in the clinic, and have opened up fresh opportunities for dramatic industry growth, especially in the gene and cellular therapy realm. In this interview with The Life Sciences Report, David Nierengarten of Wedbush Securities brings a handful of select names to investors' attention, including a couple of companies with technologies that could revolutionize medicine.

The Life Sciences Report: You are a molecular and cell biologist, but you've been in the world of finance now for about a dozen years. What attracted you to finance?

David Nierengarten: I came straight to finance from grad school. You'll recall what the stock market was doing back in 1998 and 1999; I was working on my Ph.D. at the time, but that's when I caught the finance bug. As I was finishing my Ph.D. dissertation, I started cold-calling people in the finance industry to see if they had a position open, and landed my first job, with Research Corporation Technologies, a venture capital firm, right out of grad school. I was there for a couple of years and worked on about a half a dozen deals. Then I moved on to sellside equity research.

TLSR: Was it difficult to bridge the gap between understanding the biotechnology as a doctor and assigning a valuation to that technology?

DN: Not particularly. If you look at past valuations and where investors have come in and gotten out of biotechnology, it has been surprisingly consistent. Of course, there's a bit of art in valuing a technology, but I do enjoy history. By looking at how the markets have valued technologies and biotechnologies over the years, you can assign valuations and work your way back in terms of determining the valuation you are willing to pay for shares, or the valuation at which you should sell a company's shares. People don't have an appreciation for that. A lot of analysts on Wall Street are only around for two to four years, then they lose their jobs or get different jobs and move on, so there's no institutional memory.

TLSR: When you were a venture capitalist, you performed due diligence from the ground up. In startup private equity, there are no U.S. Securities and Exchange Commission (SEC) forms that you can look at to see if companies are filing on time and if commitments and promises to investors are being kept. How did that experience in raw, original research shape your thinking as a sellside analyst, where you have press releases, 8-Ks, 10-Qs and 10-Ks to look at?

DN: As a venture capitalist you actually have more access. You sign a confidentiality agreement. But you have to know everything about that company, and so you have to ask everything. If management is not forthcoming, you just don't invest. Companies that need capital know that. Startups know they can tell you everything about their financial plans, their internal models and their data from all the lab bench experiments, the preclinical models and any clinical data they have.

A public company doesn't tell you that. Public companies have a limit to what they can tell you. Obviously, they have official guidance that they want to provide, and they don't want to deviate from that for various legal reasons. Honestly, I think it's a bit easier to do full diligence on private companies.

But, from a sellside analyst's point of view, my experience as a venture capitalist does help me to fill in the blanks. With regard to management's guidance, in biotech especially, there may be a bit of guidance by omission. Companies may not announce certain things, but an analyst can fill in the blanks and make predictions appropriately. Knowing that has been useful in chatting with companies on the public side, having an idea of what they're not saying and what it means.

TLSR: Let's go ahead and talk about companies.

DN: Let's start with Sunesis Pharmaceuticals Inc. (SNSS) . The company has been through a couple of life cycles now. It had a couple of programs in the early 2000s that didn't progress in the clinic, and so it reorganized, retooled and brought forward its Qinprezo (vosaroxin) compound in acute myeloid leukemia (AML). It got all the way through Phase 3 with its VALOR trial, and got negative topline results, unfortunately.

I will give the company credit; it does have a path forward in Europe, where it has a shot at approval. But in the U.S., it will need to do another Phase 3 study for Qinprezo. Europeans are more flexible on their approval pathways, so this compound, if it gets approved in Europe, could help Sunesis bounce back from its current levels.

TLSR: David, I did not quite understand the results of Sunesis' pivotal Phase 3 VALOR trial of Qinprezo + cytarabine. I understood originally that the trial showed a statistically significant benefit "censored for transplant" in AML. What does that mean?

DN: It means that, if you essentially remove the patients who received hematopoietic stem cell transplants from the equation, the drug provided a benefit in the subset of patients that remains. The difficulty with that analysis is that often a goal of treating AML is to get to the transplant. That makes it difficult, especially for the FDA, to accept that analysis, because if the drug ultimately doesn't provide a survival benefit to transplant patients, you could ask, what's the point?

TLSR: What about patients who, for one reason or another, are not able to have a hematopoietic stem cell transplant? Why not approve the drug for that indication?

DN: You could argue that not every AML patient qualifies for transplant, and that Qinprezo should be targeted at that subset of patients and approved for them. That argument has never worked with the FDA. The agency wants the company to run another Phase 3.

However, in Europe, it's a little bit different. Again, we saw Dacogen (decitabine; Astex Pharmaceuticals Inc.; acquired by Otsuka Holdings Co. Ltd. [$OTSKF]) approved in Europe for AML despite not demonstrating a statistically significant benefit in overall survival, although it did show a strong trend. Of course, Dacogen had already been approved in myelodysplastic syndromes (MDS) in Europe. Qinprezo has a higher bar in Europe because it's not already approved in any indication. But the precedent for approval across the pond with a subset of Qinprezo data, censored for stem cell transplant in AML, does exist.

TLSR: Go to the next name, please.

DN: Cidara Therapeutics Inc. ($CDTX) is working on a long-acting antifungal of the echinocandin class called biafungin (CD101). The company is entering the clinic with that compound in immunocompromised individuals with candidemia (bloodstream yeast infection); these immunesuppressed patients typically have had a bone marrow transplant or something similar.

The company is also working on a topical formulation of the compound, which would be the only topical echinocandin on the market for recurrent yeast infections in women.

There is an under-recognized value here in terms of risk/reward, because this is a known class of antifungals. CD101 has a long half-life, and the company wants to formulate the product to meet the desired specification, which would be a once-weekly intravenous dosing in immunocompromised patients, and a topical use for recurrent yeast infections. If Cidara can achieve these goals, there should be very low risk to eventual approval.

TLSR: What is the risk of CD101 not being approved?

DN: Typically antifungals fail due to safety concerns. As long as adverse events or other side effects don't occur, the preclinical models are predictive of antifungal activity and so, with the full clinical data, lead to eventual approval. The echinocandins have historically been a very safe class of molecules, which is another reason why our risk/reward thesis is quite attractive.

TLSR: I understand the company is doing a Phase 1, double-blind, safety trial of 32 healthy male subjects. The company is proposing to begin the Phase 1 trial for recurrent yeast infections (vulvovaginal candidiasis; VVC) in H1/16. Why does Cidara want to wait until H1/16 for the VVC trial? Couldn't it do an open-label pilot study of a handful of patients to start?

DN: The company is working to optimize the topical formulation to meet its target product profile for a commercial application, but Cidara knows it can formulate CD101 in an off-the-shelf gel.

TLSR: How large is this market? How many women are not responsive to the older antifungal agents like tioconazole (Monistat), which has been around for five or more decades?

DN: That's a very good question, and a somewhat difficult question. Obviously, millions of women have occasional yeast infections that are not classified as recurrent. The question is, what's going on? Does the treatment actually work, or is it that their natural immune systems clear the infections, and the drug is really just a placebo? The number of patients affected is a tricky number to get to. What we do know is that recurrent infections hit 4–5 million (4–5M) women—typically women of childbearing age—in the U.S. each year. Recurrent is defined as four or more infections in a year. Those are the numbers we're looking at.

TLSR: Can you address another company?

DN: bluebird bio Inc. (BLUE) is one of my favorite names. The company had a very favorable response from the FDA in terms of what pivotal trials with gene therapies will look like for its beta thalassemia and sickle cell anemia indications. It already has a $4.3 billion market cap, but there are a couple of growth propositions here.

One proposition is that bluebird's LentiGlobin will be on the market relatively quickly for these indications, especially in Europe, which is a decent-size market, especially for beta thalassemia. It's smaller for sickle cell than the U.S. But there is definitely a real market for a gene therapy for beta thalassemia.

The other proposition that I don't think bluebird has gotten much credit for from the market is its chimeric antigen receptor (CAR)-T cell programs. The company has a partnership for two different programs. One is with Celgene Corp. (CELG) for its B-cell maturation antigen (BCMA)-directed CAR-T in multiple myeloma, and the other is with Kite Pharma ($KITE) for HPV-16 E6 TCR, which hits human papilloma virus-driven cancers. With the company and its collaborators entering the clinic with those two programs in 2016, I think investors will be paying a lot more attention, and we might see some appreciation based on those prospects.

TLSR: David, bluebird has given back about 20% of its valuation over the past four weeks. To be fair, it's still up more than 200% over the past 12 months, but why this rather sharp pullback in such a short period of time?

DN: I think the main reason for the pullback is worries about potential alternative treatments for sickle cell disease. The prospect of potential competition in that market probably contributed to bluebird's decline.

TLSR: Given the pullback, investors will want to know why they should invest now. What catalysts might we have coming up for bluebird?

DN: The main thing in the near term is additional data to be presented at the annual American Society of Hematology meeting in early December in Orlando. Bluebird should have updates on all its currently treated patients, plus initial data on an adult sickle cell patient treated in the U.S. That will be pretty interesting, because I think people are underestimating the potential in the adult sickle cell market. There is a bit of an open question with regard to the myeloablation (suppression of bone marrow activity that results in lower red cell, white cell and platelet counts) required for treating patients with bluebird's gene therapy. We've seen adult beta thalassemia patients treated successfully, but there is still some question about sickle cell patients—do they respond as well to myeloablation when they're a little bit older? You'll recall that the first sickle cell patient investigators treated is doing wonderfully, but he was a 13-year-old boy.

TLSR: No more transfusions for him, right?

DN: No more transfusions for him. He actually hasn't had a sickle-related incident since the commencement of treatment.

TLSR: Beta thalassemia and sickle cell are different genetic diseases, but they will both respond to expression of new hemoglobin. That's why the same gene therapy can be used, right?

DN: Yes. The fundamental difference is that a beta thalassemia patient, especially a severely affected beta thalassemia patient, doesn't produce enough useful hemoglobin and requires transfusions. Sickle cell patients do produce hemoglobin, but they produce the wrong hemoglobin—the sickle hemoglobin—so the goal of transfusions in these patients is to dilute and hopefully reduce the sickling propensity of the cells. In both instances, severely affected patients require transfusions, but for different reasons.

TLSR: Europe is a major focus for bluebird, isn't it?

DN: It is. Different geographies have different prevalences, of course. Beta thalassemia is most prevalent in southern Europe, the Middle East and South Asia, whereas sickle cell is most prevalent in populations descended from or living in sub-Saharan Africa.

TLSR: We've already spoken about the more permissive regulatory environment in Europe, and it's interesting to note that we have already seen a gene therapy approved there. How long before we see a gene therapy approved in the U.S.?

DN: uniQure N.V.'s (QURE) Glybera (alipogene tiparvovec) has been approved in Europe for lipoprotein lipase deficiency (LPLD), a very rare genetic disease. I expect approval for bluebird's LentiGlobin in two to three years now from. But the company still needs to run its confirmatory Phase 3 trial.

TLSR: One more name?

DN: Applied Genetic Technologies Corp. ($AGTC) has a great ticker symbol. I give it credit for getting that approved by the SEC and NASDAQ. AGTC is an interesting story in gene therapy in the rare eye disease space. We've seen mixed results from other companies and other efforts in this space, but Applied Genetic Technologies is differentiated from those other efforts. This is an example of how important disease indication choice can be.

TLSR: What choices has AGTC made to differentiate itself from others in this space?

DN: AGTC has chosen indications where there is less, or no, retinal cell death and degeneration in patients with rare causes of blindness. These patients have gene defects that cause or contribute to partial or total blindness, but they don't have a fundamental problem of degeneration. Gene therapy can do a lot of things, but we have yet to see it bring cells back from the dead.

This is an issue for companies looking at degenerative diseases, such as Spark Therapeutics Inc. with Leber's congenital amaurosis (LCA). AGTC did initial pilot studies in LCA, but doesn't consider it to be a commercially viable market. So AGTC moved on to other indications, which are X-linked juvenile retinoschisis (XLRS) and achromatopsia, now a couple of its lead indications. It opened up its investigational new drug application for XLRS, and hopefully we'll see some early preliminary data late this year or early in 2016. Ditto for achromatopsia.

AGTC just signed a deal with Biogen Inc. (BIIB) , where it out-licensed XLRS and X-linked retinitis pigmentosa (XLRP) but it keeps 100% of the rights to achromatopsia. Really, the company didn't get credit from the market for the Biogen deal, which I think is a fine deal. It gave AGTC $124M in upfront cash, and if one or the other of these products is eventually approved, AGTC will get royalties as well.

But the stock didn't react. It's been hit by other events in the space, such as the Avalanche Biotech (AAVL) clinical trial results in wet age-related macular degeneration (wet AMD), which again is a wholly different indication—wet AMD is not caused by a single gene defect; it's really more like heart failure for the eye. A person can have heart failure from smoking too much, and another person can have heart failure from a viral infection. We don't really know what causes wet AMD, except that maybe diabetics get it more often, maybe smokers get it more often. When you don't know the cause, treating a disease becomes that much more difficult, and that's what Avalanche found. But this should have no bearing whatsoever on AGTC.

We also already have approved treatments for wet AMD, whereas AGTC has no competitors. There are no viable or approved treatments for achromatopsia or XLRS, plus AGTC is pursuing eye diseases where the cells are not dying. I think this company has a better shot at success in gene therapy for these rare eye diseases than other companies in the other indications they are pursuing.

TLSR: David, thank you. It's been a pleasure.

David Nierengarten is an analyst with Wedbush Securities covering stocks in the biotechnology sector. His prior sellside research experience at Robert W. Baird & Co. covered biotechnology companies of all market capitalizations, with a focus on oncology and rare diseases. Dr. Nierengarten's prior early-stage venture capital investing experience helps him evaluate developmental-stage biotechnology companies that comprise his current major coverage focus. His experience on the other side of that equation, in a clinical-stage, venture-backed biotechnology company, provides him with additional insights into corporate operations. He received his bachelor's degree in biochemistry from the University of Wisconsin-Madison and his Ph.D. in molecular and cell biology from the University of California Berkeley.

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.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Sunesis Pharmaceuticals Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Dr. David Nierengarten: 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, Wedbush Securities, has a financial relationship with the following companies mentioned in this interview: bluebird bio Inc., Cidara Therapeutics Inc., Applied Genetic Technologies Corp. 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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Symbol Name Price Change % Volume
AGTC Applied Genetic Technologies Corporation 8.20 -0.05 -0.61 134,639
BIIB Biogen Inc. 290.78 0.13 0.04 1,088,383
BLUE bluebird bio Inc. 52.15 -1.45 -2.71 867,872
CDTX Cidara Therapeutics Inc. 10.15 0.07 0.69 84,515
CELG Celgene Corporation 98.07 -0.84 -0.85 4,154,623
KITE Kite Pharma Inc. 46.21 -0.80 -1.70 786,273
QURE uniQure N.V. 7.05 -0.15 -2.08 101,914
SNSS Sunesis Pharmaceuticals Inc. 3.99 -0.05 -1.24 139,057


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