Where to Look for Biotech Bargains

The Life Sciences Report  |

Every business day, Edison Investment Research Analyst Pooya Hemami scours the global markets for life science companies with upside flowing through their product pipelines. In this interview with The Life Sciences Report, Dr. Hemami tells us where to look for biotech bargains, including a few top-fliers and a handful of companies that have experienced temporary setbacks but are poised for blue sky.

The Life Sciences Report: The stocks of many solid small biotech firms traveled a rocky road during the first half of 2014. Is now a good time for investors to return to the life sciences?

Pooya Hemami: The biotech sector tends to follow the movements of the stock market as a whole, with a bit more volatility. Investors should be mindful that the 2013 returns were very strong for life sciences. If the broad markets take a pause, the life sciences sector will follow, with a higher beta. Corrections in the broader equity markets tend to disproportionately affect biotech and development-stage firms.

Life science investors need to carefully select individual securities: Perhaps more than in any other sector, individual security selection is key. Making a nonspecific investment in a biotech fund, or in an exchange-traded fund, will not necessarily provide a strong return. Investors should focus on finding well-funded companies with strong assets and intellectual property in their targeted areas, preferably in areas that already enjoy a lot of investor interest. These types of companies are more likely to withstand temporary market gyrations, and to deliver long-term value. Right now could also be a good time for those biotechs that have had a good run over the past year and a half to raise capital to strengthen their cash war chests, by the way.

TLSR: What types of life science products are most in demand right now?

PH: The hottest spaces are orphan drugs and immunotherapies for cancer. In orphan drugs, we cover BELLUS Health Inc. ($BLU:CA) ($BLUSF). Investors like BELLUS' prospects for Kiacta, which is under development for treating AA amyloidosis, which can lead to kidney failure, dialysis and death. That orphan drug is in a Phase 3 trial, with top-line data expected in 2016. Data from an earlier Phase 3 trial showed some promise. The current study has a larger patient base with more statistical power. It is more likely to reach the threshold of developing a positive outcome; investors are showing optimism for this program.

In immunotherapy, we follow a Canadian company called Trillium Therapeutics Inc. ($TR:CA), which was previously called Stem Cell Therapeutics. In late 2013, Trillium raised more than $30 million ($30M), which is very impressive for a preclinical company. It is developing a novel immunotherapy approach for acute myeloid leukemia (AML), and potentially for other cancers. The product is called SIRPaFc. Trillium has funding in place for completing the Phase 1 studies, which should start in the back half of 2015.

TLSR: How does Trillium's drug work?

PH: Certain cancer cells have a high expression of CD47, a protein that sends a "do not eat signal" to inhibit macrophage phagocytosis (the eating of cancer cells by the immune system). SIRPaFc is an antibody-like fusion protein. It tends to bind to CD47 and block the "do not eat" signal. This increases the immune reaction via an increase in macrophage attacks on tumor cells.

Trillium is meeting later this year with the U.S. Food and Drug Administration (FDA) to discuss the design of the SIRPaFc Phase 1 study. With cancers, one does not always know in advance if the accepted study will be a solid tumor trial or a hematology trial. Trillium's lead focus right now is on hematology, but the accepted indication in the coming Phase 1 trial will be determined in the FDA's investigational new drug process.

Trillium also has to finalize exactly which molecule it will be working on. There are a couple of variants on the lead compound, SIRPaFc. One variant might work better with combination therapy, another form may be more suited for individual cancer therapy.

TLSR: How is Trillium Therapeutics' stock performing?

PH: Without much news flow of late, the stock has been range-bound between $0.20–0.35/share. It will take a couple of years for Trillium get through the Phase 1 trial, and complete a Phase 2. It generally takes at least six years for such a pre-investigational new drug (IND)-stage cancer candidate to reach commercialization. Trillium is well positioned to complete the Phase 1 study. It will need additional capital to move into Phase 2 and additional studies. There could be a partnership along the way.

TLSR: What do you like in the chemotherapy arena?

PH: We are watching CytRx Corp. ($CYTR). It has an interesting cancer product, aldoxorubicin, in Phase 3 trials as a second-line therapy for soft tissue sarcoma (STS). The data read-out is expected in 2016.

TLSR: How is the CytRx Corp. stock performing?

PH: Late last year some good data came out of a Phase 2b trial underway for aldoxorubicin as a first-line therapy for STS, which caused the stock to jump up to about $7/share. More recently, CytRx Corp. has pulled back a bit. The stock is where it was late last year, at about $2.50/share. The company has enough cash to reach the end of the Phase 3 study. As the visibility of the Phase 3 program increases, so will investor interest.

TLSR: Who else has promising products in the pipeline?

PH: We follow Can-Fite Biopharma ($CANF), which is an Israel-based company. Its CF101 product is an oral drug that targets the A3 adenosine receptor prevalent in autoimmune diseases. Mainly, CF101 will treat psoriasis and rheumatoid arthritis. Data on the current Phase 2/3 study in psoriasis are expected in 2015. Can-Fite has completed a rheumatoid Phase 2 study for the drug as well. The key near-term driver is the psoriasis results.

One of the encouraging things about this molecule is its safety profile. Safety data on this molecule is promising as it has been studied in 1,200 patients with low severe adverse events. Because the CF101 product is an oral drug with an acceptable safety profile, it will probably be targeted as a therapy for less severe cases of rheumatoid arthritis or psoriasis, which is still a very large market. A lot of the current oral drugs on the market, such as Xeljanz (tofacitinib citrate; Pfizer), and legacy drugs such as methotrexate, have adverse side effects. The biologics have similarly negative side effects. If Can-Fite's product can show decent efficacy, while maintaining the reasonable safety profile shown thus far, it is positioned to do well.

TLSR: Anything catalyzing the mental health product space?

PH: We are constructive on Alexza Pharmaceuticals Inc. ($ALXA). Its Adasuve product was approved in 2012, and was launched earlier this year by Alexza's U.S. partner, Teva Pharmaceutical Industries Ltd. ($TEVA). Adasuve treats agitation associated with schizophrenia and bipolar disorder. In July 2013, the product was launched in the major European markets by Grupo Ferrer Internacional S.A. (private). It is now being readied for a Latin American debut.

TSLR: Is Adasuve a technological advance?

PH: The legacy standard of care for psychotic agitation is based on injection. Needle injections act quickly, but that method of delivery is disruptive. Sharp objects alter the trust relationship between physician and patient. Oral anti-agitation drugs, like Zyprexa (olanzapine) or Abilify (aripiprazole), work, but they take a long time to take effect. The patient might pace for an hour before the oral drug can reach proper levels in the bloodstream. The delay can be dangerous to staff and other patients, and clearly, it makes patient management more complicated, especially in an emergency ward.

TLSR: How does Adasuve work?

PH: Adasuve is a rapid inhaler delivery mechanism for the generic antipsychotic drug loxapine. The patented Adasuve delivery platform is quite rapid. Its "Tmax," or time to maximum concentration, is only two minutes. That is as fast as the intravenous drugs, and even quicker than intramuscular injections, but the mode of administration is much more patient-friendly. Adasuve calms the patient down quickly; it reduces risks to staff, patient, and property.

TLSR: How well has Adasuve been selling?

PH: The product launched at a fair price. The U.S. cost is around $140 per dose; in Europe it sells for about €70/dose. Adasuve is a good high-value driver, even though its sales to date have been a little slower than what the market had hoped. Alexza Pharmaceuticals' Q2/14 results reported peaks and valleys in shipping inventory to its partners. The market interpreted the undersupply of product negatively; the stock is now under $2.50/share, down from close to $5/share in July.

The sharpness of the correction is undeserved, however. Alexza has a good balance sheet. It can fund its own operations for at least another year, even without including the revenue from Adasuve sales. This drug could peak at $400M in annual sales during the next 5–6 years. Alexza also has a couple of other products in the pipeline. It remains a value proposition for investors.

TLSR: Can you quantify any risk involved?

PH: There is always a bit of a risk. If sales are slower to reach peak sales than expected, Alexza will probably need to raise more capital at a less-than-ideal stock price. We assess that the firm is likely to have good sales growth, which will likely prompt investors to respond positively.

TLSR: Are you watching any other undervalued companies?

PH: iCo Therapeutics ($ICO:CA) had an unsuccessful Phase 2 with iCo-007 in diabetic macular edema earlier this year. That has caused investor angst. The company is now trading below cash value. But its pipeline includes an oral formulation of an established antifungal, amphotericin B, for possible application in long-term HIV therapy. iCo Therapeutics also has the rights to bertilimumab, which is an antibody for anti-immune applications, specifically for ocular indications such as vernal keratoconjunctivitis.

In short, investors may want to take a second look at iCo Therapeutics. Once we do get more clarity on the firm's development strategy following the iCo-007 miss, there is likely to be more investor interest. It takes time for disappointments to settle, but iCo Therapeutics is funded for at least another year, which gives it time to exploit the latent value residing in its pipeline.

TSLR: Any other bargains?

PH: We watch Theratechnologies ($THER). The company has rights to Egrifta (tesamorelin for injection), the only U.S.-approved growth hormone releasing factor (GRF) for HIV-associated lipodystrophy. It regained full U.S. commercialization rights from EMD Serono, a division of Merck KGaA ($MKGAY), in May 2014. It was having a few issues keeping the drug on its manufacturing track, but Theratechnologies resolved those issues and resumed shipping in September. There will be a lot of potential to increase the U.S. sales once stakeholders regain confidence in the supply chain.

We also like GLG Life Tech ($GLG:CA), which is not specifically a biotech company. It markets stevia leaf, which is used as a natural food sweetener. The company had a challenging 2011 and 2012, but it has entered turnaround territory. Investors are becoming more interested in natural foods, and lower calorie consumption trends are emerging in different markets in the U.S. and abroad. A company that can produce a healthy product at an economical price can benefit from the wellness mania expanding worldwide.

TLSR: Thank you for your time.

Pooya Hemami is a licensed optometrist with more than five years of experience in life sciences equity research. Prior to joining Edison Investment Research, he covered the Canadian healthcare sector as a research analyst at Desjardins Capital Markets. He holds a doctor of optometry degree from the University of Montreal, and a master's degree in business administration (finance concentration) from McGill University. He received his CFA charter in 2011.

Source: Peter Byrne of The Life Sciences Report

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1) Peter Byrne 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) Pooya Hemami: I own, or my family owns, shares of the following companies mentioned in this interview: Theratechnologies. 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: Alexza Pharmaceuticals Inc., BELLUS Health Inc., Can-Fite Biopharma, CytRx Corp., GLG Life Tech, iCo Therapeutics, Trillium Therapeutics. 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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