What Students Struggle With Most When Analyzing Stocks in the Biotech Space

The Life Sciences Report |

Combining academic discipline with methodical due diligence, Alan Leong of BioWatch News undertakes a regimented review of each biotech and medtech stock he investigates. In some cases he will follow a company's clinical development program and data for years before he pulls the trigger and recommends a name. In this interview with The Life Sciences Report, Leong presents a number of names for investors' consideration. Many won't be mentioned in his usual write-ups: It's an early look at what's on his watch list and in his inbox. Each company carries its own risks, but every stock has a special growth story that could propel huge gains if data fall into place.

The Life Sciences Report: Alan, you're a stock analyst, but you also teach entrepreneurship to students at the University of Washington Foster School of Business in Seattle. Tell us about your courses. Do they include labs, field studies, externships, writing business plans?

Alan Leong: It's all of the above. Entrepreneurship is very much hands-on, and there's a lot of interaction among students, professionals and alumni. It's really a wonderful thing. I've seen a number of students, even undergraduates, start amazing, boundary-breaking businesses.

TLSR: Are your students realistic in how much capital they think they will need to start a business? Do they tend to underestimate?

AL: Frankly, they are all over the map. Innovation requires a lot of heterogeneity, and that's the wonderful thing we see in the classroom. Watching students, I have come to the conclusion that if they knew all the supposed "rules of business" to start with, they probably would not start a business in the first place.

TLSR: You also teach fund management. What is the most difficult thing for the student to learn about due diligence in picking publicly traded stocks?

AL: The student's assumed role in fund management is that of an associate at an early-stage fund. As such, the student tries to conduct the screening process, and also to assign an initial valuation to a company. The students are guided by actual fund managers or venture associates from local funds.

The hardest thing for the student to do in analyzing a public company is something we all struggle with. We say: Here are your guidelines, and here is a checklist of crucial things you must understand in the screening process. You now must grapple with company management. The student associate must make his or her own call on what constitutes a viable management team. All the soft stuff is really the hard stuff.

TLSR: Let's talk about some companies. Go ahead with the first name.

AL: Resverlogix Corp. (RVX:TSX) is a company I've watched for a decade or more, and it caught my attention with its next step. It is finally moving into a pivotal clinical trial with its epigenetic inhibitor RVX-208 (apabetalone), developed to increase levels of apolipoprotein A1 (ApoA1), a component of high-density lipoprotein (HDL), the "good" cholesterol. HDL is key to the idea of reverse lipid transport, where bad cholesterol is ferried out of the bloodstream and, in some instances, even coronary arterial plaque is reduced. This trial will contain more than 2,400 high-risk cardiovascular patients with coronary artery disease and type 2 diabetes. The primary endpoint will be time to first occurrence of a major adverse cardiovascular event (MACE), which could be a non-fatal myocardial infarction, stroke or death. RVX-208 inhibits the bromodomain extraterminal domain (BET), and so they are calling the trial BETonMACE.

TLSR: When you and I spoke about a year ago, you mentioned a company called Esperion Therapeutics, which was doing something similar. It was acquired by Pfizer Inc. (PFE:NYSE) years ago.

AL: There was a lot of attention on Esperion; Pfizer paid $1.3 billion ($1.3B) to get it in 2004. There was some indication that Esperion's version of ApoA1 might actually reverse coronary artery plaque in those who had severe atherosclerosis. That really set off excitement in the field. But that version of ApoA1 was very tough and expensive to synthesize. One company with a shot is Immusoft Corp. (private), which has an inexpensive production technology but is years away, and that company's primary focus is currently on other indications. Resverlogix's technology seeks to raise endogenous levels by allowing the ApoA1 gene to express the protein.

TLSR: How have the earlier-stage studies turned out with RVX-208?

AL: Resverlogix had some interesting results with RVX-208 in its smaller proof-of-concept trials. In a couple of its more recent studies, it has gotten equivocal results. The company needs this defining trial. Results should be available in Q2/18, which sounds like a long time, but it's not when you're talking about a cardiovascular outcomes trial.

TLSR: Alan, Resverlogix's shares have almost quadrupled in Canadian dollars over the last 52 weeks. In U.S. dollars it has almost tripled—up 189% during the same period. That's very different from most any other biotech stock you might look at today. Do you think there's still a lot of upside?

AL: Resverlogix has had a powerful run-up, but keep in mind that its U.S. dollar valuation is still only ~$162 million ($162M). If RVX-208 is successful, there is a lot of upside left. It is running down a path similar to that of Esperion before it was acquired. You have to give kudos to the management team for committing to a large clinical outcomes trial.

TLSR: How about another name?

AL: We have been watching ContraVir Pharmaceuticals Inc. (CTRV:NASDAQ) for three reasons. First, you have a pivotal Phase 3 trial coming up with its orally bioavailable nucleoside analog, FV-100. It's a prodrug that is readily absorbed, an antiviral for preventing and treating shingles-related pain (acute herpes zoster), called postherpetic neuralgia (PHN).

Currently we peg FV-100 as a $100–150M/year drug. Some have scoffed at our conservative estimate, but we're awaiting more data. This drug also has to displace well-known incumbents, one of which is valacyclovir (Valtrex), which shortens the duration of PHN. But FV-100 compares well in early trials. If it works as it should, there should be a fast sales ramp-up. We see FV-100 as low-hanging fruit, which is something we always look for in small biotechs.

Second, there is CMX157, a lipid acrylic nucleoside phosphonate and a Phase 2-ready hepatitis B candidate. It's a potent analog of Gilead Sciences Inc.'s (GILD:NASDAQ) tenofovir (Viread). CMX157 is another way the company can go big. Tenofovir is a blockbuster antiviral, but with some dose-limiting toxicity. That bodes well for CMX157, which is designed to be an improved version. Proof-of-concept results are currently scheduled for Q3/16, and that is certainly a valuation driver. If this drug can successfully get through clinical trials, we expect that it will take market share from tenofovir. CMX157 is positioned as an improved formulation of an already approved drug, and this mitigates risk.

TLSR: You mentioned there was a third reason you were watching this name. What else do you like about ContraVir?

AL: We like the new management. The CEO, James Sapirstein, a pharmacist by training and background, led the global marketing strategy for some of the antiviral products at Gilead, and he understands the antiviral market quite well. He has a strong background, and he is definitely a strong person to lead a company like ContraVir. We like the team, and we like the products.

TLSR: Another name, please.

AL: Rexahn Pharmaceuticals Inc. (RNN:NYSE.MKT) has our attention. After releasing early data from its three drugs, which are now in the clinic, the company is in full swing.

We saw some interesting data from the company's Phase 2 study of Archexin in renal cell carcinoma. Archexin is an antisense oligonucleotide inhibitor of the cancer cell signaling protein Akt-1. It operates at the RNA level to prevent expression of that protein. First off, it showed a good safety profile, and there were some really interesting signals of efficacy.

But the company has two other drugs that we'll see in clinical trials in 2016, which is going to be an interesting year for Rexahn.

TLSR: There is a lot of activity in this company, which only has a ~$57M market valuation. How does Rexahn, as a small company, move forward to develop these candidates?

AL: Management has signaled that it should be making some headway on business development activities—a partnership or deal. That remains an option for bringing in cash to fund development. A partnering deal should be the signal for paying attention.

TLSR: Sometimes you take a hard look at companies that have taken a hit, don't you?

AL: Yes. Sunesis Pharmaceuticals Inc. (SNSS:NASDAQ) has been beaten up. The company is developing a candidate for acute myelogenous leukemia (AML). It had a Phase 3 trial with vosaroxin in AML, but failed to meet its primary endpoint. Now Sunesis has about a $74M market cap.

Vosaroxin was interesting because it is in a class of drugs that had never been used before as a cancer therapy. The company is hoping for a path forward. We think another Phase 2b would be required for the FDA, but management has submitted an application to the European Medicines Agency, and is trying to get approval in the European Union (EU) for a prespecified population—patients over 60 years of age. It's frankly a bit of a Hail Mary, but management is making the case for approval in the EU, and the company has shown investors that it has a shot.

TLSR: Looking at the pipeline, I know Sunesis has another shot on goal. Tell me about that.

AL: Sunesis has other products in the pipeline, including a partnered deal with Millennium Pharmaceuticals (a unit of Takeda Pharmaceutical Co. Ltd. [TKPYY:OTCMKTS; 4502:TYO]) for MLN2480, a small-molecule tyrosine kinase inhibitor for solid tumors and melanoma. The candidate is orally bioavailable. It's a pan-RAF inhibitor. There are some other, earlier-stage programs in the pipeline as well. That aside, we're keeping our eyes on what happens with Europe. An approval would be the surprise upside to monitor.

TLSR: Alan, you pay some attention to Canadian companies. Resverlogix is based in Calgary, Ontario. You have some others that you keep your eye on, don't you?

AL: Yes. Cipher Pharmaceuticals Inc. (CPHR:NASDAQ; CPH:TSX) is another Ontario company, this one in Mississauga. It's traded on the Toronto Stock Exchange but also trades on the NASDAQ, and it has gotten some attention from investment banks in the U.S. over the past couple months.

Cipher sells a number of dermatology and other products, and hopes to bring in $200M or more in revenue within a few short years. It has a set of products selling now in Canada, and others that are going through regulatory review. It has another set in the U.S. There are many products in its pipeline and portfolio. The company is generating revenue from these products.

Cipher is trying to build a good margin, and with each slate of acquisitions, I get a sense it is trying to get larger products that will bring a higher gross margin to the income statement. The next set of products it will focus on is for skin problems associated with severe psoriasis, lupus and melanoma. It is trying to move up the margin chain as it acquires new products. It's not there yet for us, but it's moving in the right direction.

TLSR: It's been weak over the past year, but Cipher has had some tremendous success on the stock appreciation side. Even though investors have taken some profits off the table, they have demonstrated they like this name. What about the next leg up?

AL: Moving products through the regulatory review process in Canada is ongoing. As each product gets approved for sale, it's an incremental uptick for the company. It's going to develop the capacity to do what a few other acquisitive companies have done with this type of business model. Cipher is a long-term story for value investors as the company improves its revenue and margins. There's also the possibility that Cipher will put its small-product line up for acquisition as it decides to go to a larger product market. The bottom line is that this story is not completely written yet. Whichever way it goes, Cipher is an interesting position.

TLSR: You also follow some medtech names. Could you mention one of those, please?

AL: Hansen Medical Inc. (HNSN:NASDAQ) is a surgical robotics company.It has a line of surgical systems that aid physicians with a number of endovascular procedures. It is nearing the interim analysis for its ARTISAN study, using its system for properly introducing catheters in the treatment of patients with paroxysmal atrial fibrillation. As with most surgical robotic systems, Hansen's systems should increase the precision and safety of the surgical procedures.

The company is currently searching for "strategic alternatives," which gets to the heart of the matter for Hansen. It last reported about $35M in cash at the end of September 2015. It was burning about $10M per quarter and has implemented a cost reduction program. It brings $3–4M in sales per quarter. Can it obtain reasonable financing to take care of its short-term horizon? And then can it secure a longer-term source until it can achieve widespread adoption? Its current market cap of ~$27M reflects this risk.

TLSR: Hospitals aren't going to own a lot of surgical robotics systems. There won't be one for every operating suite, but they must be available to attract surgeons who want to use them. Hospitals also must have staff to maintain the devices. These systems are capital expenditures, and there are also competitors. How does Hansen grow sales of this kind of product line?

AL: There are three aspects to growing this type of product line. Having good clinical data is a given. The first is to have a great key opinion leader who can get behind the product. Second, you need a great team that can train doctors. The third thing is, of course, making sure reimbursements are aligned with the cost to use this device. These address some of the major barriers to adoption.

TLSR: Alan, some hospitals advertise robotic surgeries—sometimes even using a brand name of equipment. Please address the competitive landscape in this space. Are there pressures on margins?

AL: Yes, I have noticed some advertisements by hospitals. And I would agree that margins can get pretty tough in the device space. We know these companies are going to be acquired—either at a premium, or on the cheap. We saw that play out in less-intensive surgical-assisted devices. Back in September 2011, Bayer HealthCare's (a unit of Bayer AG [BAYRY:OTCMKTS; BAYN:XETRA]) affiliate MedRad Inc. acquired Pathway Medical Technologies to expand its footprint in the vascular intervention space. It was a wonderful product, but the price wasn't disclosed. The journey to acquisition definitely had its peaks and valleys. It's pretty typical for devices.

TLSR: Do you have another name?

AL: RepliCel Life Sciences Inc. (RP:TSX.V; REPCF:OTCQB) is a Vancouver-based regenerative medicine company, and it greets the new year with new CEO, Lee Buckler, who's been involved as part of the executive team since late 2014. He's a terrific guy, and everyone in the regenerative medicine space thinks a lot of him. I also want to pay my respects to the prior CEO and cofounder David Hall. David shepherded this company from the very beginning to its first proof of concept and corporate partnership.

RepliCel's technology platform is based on the regenerative cells of the hair follicle, which is an interesting site for cells of all types. There is a review article out there that says it all: The Hair Follicle—A Stem Cell Zoo, by Jaks, Kasper and Toftgård. It was published in Experimental Cell Research in May 2010. It refers to the adult hair follicle as a "menagerie" of cells with regenerative characteristics.

RepliCel's platform is a sophisticated technology that deals with different parts of the hair follicle. The company's RCT-01 (autologous non-bulbar dermal sheath cells) is being developed for Achilles tendinosis. It's isolated from the patient's scalp with a single punch biopsy. This program is in a phase 1/2 trial with 28 patients—21 in the experimental arm and seven receiving placebo. Final data collection is scheduled for September 2016.

The RCH-01 (autologous dermal sheath cup cells) candidate is isolated from the bottom of the hair follicle and is a proposed therapy for androgenic alopecia—male pattern baldness. The company proposes a Phase 2 trial with 160 patients—132 experimental and 28 placebo.

The company's RCS-01 cell product is just starting a Phase 1 clinical study to rejuvenate aging skin. That trial will contain 30 patients—24 experimental and 6 placebo. Final data collection will occur in about February 2018.

TLSR: With regard to the RCH-01 study to treat alopecia, can you discuss the results from the Phase 1 trial?

AL: Yes, there was a successful proof of concept with restoring hair. Japan-based Shiseido Company Ltd. (4911:TYO) got interested and will be partnering in the Phase 2.

On a practical level, if you think about the hair transplants we do now, thousands of men subject themselves to it and pay for it. If you look at the RepliCel process and procedures, it is far less invasive than a hair transplant. The hair indication seems to capture so much attention. When I talk to my colleagues, many of them have asked when and where the trial will be conducted, and where they can sign up. This is only anecdotal, but I was amazed at the number of people who would want to do this. Cosmetic surgery is elective surgery, but it's also big business. Over 100,000 hair restoration procedures are performed annually in the United States alone.

TLSR: Obviously, the alopecia therapy is going to be an out-of-pocket expense for patients. Which is the growth driver for RepliCel? Is it the hair regeneration indication? Achilles tendinosis? Skin rejuvenation?

AL: It'll be a combination of them. There will be data coming back during 2016 and into 2017 for the skin and tendon trials.

More important are the business development or partnering activities that will be enabled by the results from the trials. Any such partnership would provide validation to investors. If the company can maneuver this successfully—and I know there are some ifs on this—it should then navigate onto one of the U.S. stock exchanges or onto the NASDAQ. It has a bit of a journey ahead.

TLSR: Interesting that Shiseido is involved. Regenerative medicine is a major focus right now in Japan. As you know, back in November 2013 the Japanese Diet (legislature) approved a law enabling regenerative medicine therapies. The act directs the Ministry of Health, Labour and Welfare to approve new fast-track measures and regulations to hasten development of regenerative medicine and cell therapies. How does this affect regenerative medicine companies developing products in Japan?

AL: Japan's new regenerative medicine law should be seen as a signpost for any company in the regenerative space. Like we've had the war on cancer and the war on HIV, Japan has mandated that regenerative medicine will be its area of focus. Japan is investing money in this area because its demographics make it an emergency. The country knows all too well that if it can't deal with the fundamentals of chronic diseases, it will be paying a stiff healthcare bill.

TLSR: Alan, you wanted to briefly address four larger companies that investors should be looking at and doing diligence on. Would you offer a few thoughts on them?

AL: Sure. Let's start with Sorrento Therapeutics Inc. (SRNE:NASDAQ). Only three years ago, we thought of Sorrento as a small biotech. It now has a breathtaking portfolio, over $100M in cash on the balance sheet, and a large group of scientists. 2016 and 2017 are about execution. Watch for clinical trials in H2/16, and partnering in 2017.

With Kyndrisa (drisapersen) being rejected by the FDA, BioMarin Pharmaceuticals Inc. (BMRN:NASDAQ) has suffered an apparent setback. Even during BioMarin's "Kyndrisa journey," we have been really fond of BioMarin for its five other late-stage or recently approved products. With these five products marching to approval, especially pegvaliase for treating phenylketonuria (PKU), we finally see BioMarin as becoming a serious acquisition target.

Prothena Corp. (PRTA:NASDAQ) has two important sets of clinical results slated for 2016. First, new data from its Phase 2 trial of NEOD001 in amyloidosis should arrive in Q2/16. Second, the Phase 1b results from PRX002 to treat Parkinson's patients will arrive in 2016, probably H2/16. If good, these results will boost the inherent value of Prothena and the PRX002 program.

Finally, ContraFect Corp. (CFRX:NASDAQ) employs lysins, which are highly evolved enzymes used by viruses to perforate the cell walls of bacteria. These are precise and extraordinarily potent killers, and the animal data confirms that. The company recently completed a successful Phase 1 study with CF-301 in healthy volunteers, and detailed results are forthcoming. With lysins, we felt that safety was a very prominent issue to overcome.

TLSR: Thank you.

Alan Leong is the cofounder and president of BioWatch LLC. The company's services and monthly journal, BioWatch News, are for those who invest and have a fascination with seeing what's next in the biotech industry. It features individual companies and also introduces readers to edgy topics and sectors. Past issues featured alopecia, metabolic syndrome, the future of biotech and pet meds. Before BioWatch, Leong was cofounder of Biotech Stock Research (BSR), a boutique service for life science investors. He published more than 1,500 pages for BSR and wrote more than 45 main feature stories, plus numerous alerts, company updates and annual reviews. Leong has also been an award-winning instructor within the University of Washington system, teaching courses in entrepreneurship, technology forecasting and early-stage investing.

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: Resverlogix Corp., ContraVir Pharmaceuticals Inc., Rexahn Pharmaceuticals Inc., Sunesis Pharmaceuticals Inc., Cipher Pharmaceuticals Inc., Hansen Medical Inc. and RepliCel Life Sciences 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) Alan Leong: I own, or my family owns, shares of the following companies mentioned in this interview: Resverlogix Corp., Sorrento Therapeutics, BioMarin Pharmaceutical Inc., Prothena Corp., ContraFect 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: None. 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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