Thursday, November 20, 2014

Investment Banker Dick Huebner on How to Uncover Micro-Cap Biotechs that Deliver on Promises

Source: George S. Mack of The Life Sciences Report (11/20/14)

http://www.thelifesciencesreport.com/pub/na/how-to-uncover-micro-cap-biotechs-that-deliver-on-promises-richard-huebner

Micro-cap stocks suffer from all sorts of ills. They are often illiquid, and companies can be unable to raise new funds under reasonable terms, if at all. Investing in these equities requires extraordinary expertise and experience, and that is where micro-cap investment banker Richard "Dick" Huebner excels. In this interview with The Life Sciences Report, Huebner, a senior managing partner with Denver-based GVC Capital, discusses the downside and the upside of micro-cap biotech investment, and the desirable characteristics risk takers should be looking for in very small companies.

The Life Sciences Report: GVC Capital is a licensed broker/dealer focused on investment banking for smaller capitalized public companies. You are a member of the GVC commitment committee, which means you have to sign off on banking deals. In some ways, that makes you the ultimate analyst, because as a banker you must be well aware of risk. Speaking from an investor viewpoint, and aside from the obvious strategy of diversification, how does an investor mitigate some of the risk of investing in micro-cap companies?

Richard Huebner: It's not an easy question to answer, but I'll give it my best shot. I think it's important to properly evaluate both the risk and the opportunity. In evaluating both, you try to find balance: If you're taking greater risk, you would like to have a commensurate amount of opportunity on the upside.

Sometimes we do deals, such as nursing home notes, that are secured by a second mortgage placed on the nursing home, and we get a small ownership stake in the deal. That has a lesser degree of risk than if we were to do a straight equity deal in a new biotech company. In the case of a nursing home deal, we may be willing to take an overall projected return of 20–30%, whereas if we're looking at a biotech deal, where there's the possibility of a 0% return and loss of all principal, we'd like to have the opportunity to make a 20–30x return. By quantifying the risk and potential reward, you can mitigate risk by investing less money in a riskier opportunity.

Some investors have firsthand knowledge of a specific biotech service, technology or product—for example, a doctor or a researcher may have some greater knowledge in a particular field—and that may help them evaluate the risk. Other investors, like us, may rely on outside parties within the field to evaluate opportunity and risk.

Here at GVC, we're contemplating using a technology that was developed at the University of Tennessee for evaluating the ability of individuals—CEOs or founders or a management team—to do what they represented they would do in executing a business plan. The analysis is based on three fairly short tests, and gives you a three-dimensional profile of the individual. It has been used for hiring extensively in the past. Art Boulay, the CEO at Strategic Talent Management, utilizes the technology to give him the information he needs to build confidence in an individual's ability to execute.

TLSR: Your firm prefers to do secondary offerings versus initial offerings because investors can see the liquidity, or at least marketability, of a company's shares. In addition, there would be ongoing transparency via quarterly filings, the Security and Exchange Commission's (SEC's) 10-Qs and the annual 10-K. Can you tell me what red flags investors should look for in 10-Qs? More specifically, what subtle red-flag tip-offs have you been able to pick up over the three decades you've been in the securities industry?

DH: It's not complicated. I look for whether expenses and revenues are as the company forecasted or stated in investor presentations. Largely, it's about holding management accountable for having deployed the capital provided in a financing as directed when soliciting the funds. Was the capital used or spent as had been represented? Also, I look to see if management executed and attained the results it sought with those funds.

Many times, promises aren't spelled out in the 10-Q, but are in an investor presentation. Many of those presentations are now filed with the SEC in Form 8-Ks.

TLSR: You obviously have longstanding relationships with buyside people, whether small-cap mutual fund managers or small hedge fund managers. Sophisticated small- and micro-cap investors expect to be diluted with secondary offerings. Do these investors generally follow on with new investment, or does dilution scare them off?

DH: It's not so much about whether dilution scares them off. Deciding whether to do a follow-on investment depends on several factors. Primarily, for these managers, it comes down to whether management teams have delivered on what was promised, and whether the expectations of the money manager were met. Each subsequent financing is viewed as a new investment opportunity. A subsequent investment decision may be influenced by a portfolio's size, the size of position within the portfolio, exposure to an industry with other portfolio holdings, and the expectation for the company going forward. Managers also evaluate liquidity in the shares before committing new investment capital. It's our belief that, in most of these instances, if a company performs, then market awareness will become greater and shares will become more liquid over time.

TLSR: How do you get a handle on how much money you can raise for a banking client? Are you able to get indications of interest from investors ahead of time?

DH: We have sometimes used company presentations as a way to gauge potential interest prior to structuring a deal. Also, we might want to get feedback from interested parties as far as deal structure, existing issues within the company, its management, its corporate governance and its policies and procedures. Feedback from potential investors also helps with development or maturation of the business plan and the structure of a financing.

I have a pretty good idea of what my investors' appetite for a deal will be, so we can usually give a company a minimum that we'll be able to raise. In more cases than not, we come up with a structure with a pretty wide range. We might structure a deal with a $1 million ($1M) minimum and a $2M maximum, because we don't know how much additional interest we'll get above the minimum. When determining a minimum level in a capital raise, we look at, and balance, the amount we believe we can raise and the needs of the company.

TLSR: Do you have to give out warrants with these secondary offerings?

DH: It strictly depends on the opportunity. We've been able to do many as straight equity. Sometimes you have to include warrants to entice investor interest. It really depends on how the opportunity is perceived, and how people perceive company management's ability to execute.

TLSR: Is it preferable to use a syndicate to get multiple broker/dealers involved?

DH: Certainly, larger deals frequently use syndicates. Unfortunately, in the micro-cap space, so many people have their own projects, and trust their own due diligence and not necessarily anyone else's, that they don't want to open their books to other dealers. There isn't as much collaboration or syndication of deals in the micro-cap space as we would like.

TLSR: Could you talk about some companies, please?

DH: Sure. We have not had a banking relationship with MusclePharm Corp. (MSLP:OTCPK) since the offering we discussed in our last interview, but I've kept current with the company. The stock price has moved up substantially since we did an offering in February 2013 at $4/share. The stock is now trading at just under $11/share. The company's public announcements have been good, and the revenues have continued to grow, with about $105M on the top line last year. The company has made progress toward profitability.

This year the company's top-line guidance is in the neighborhood of $175M. Personally, I had some concerns about that because MusclePharm started with a really good Q1/14 of about $50M, and had some marginal profitability associated with that. However, the company didn't change its guidance of $175M after Q1. It said it may have down quarters going forward from that level because it had experienced extraordinary new order growth for a new product line, which had Arnold Schwarzenegger's name on it. It didn't think that this would carry through in subsequent quarters. I was concerned about quarter-to-quarter profitability, and I'm not sure everybody appreciated whether that profitability would be sustainable.

The company has not uplisted from the bulletin board and pink sheets, but I suspect it would like to move to a larger market so it has greater investor awareness and acceptability.

MusclePharm has definitely proven itself a very capable marketing machine. It is very good at anticipating what products the market will be looking for, and it has been able to grow its sales. I know the company has done a substantial amount of work on corporate governance, and processes and procedures. I'm hopeful that MusclePharm will be able to attain sustained profitability in the near future.

TLSR: MusclePharm shares are up 91% over the past six months. Is that because of insider buying?

DH: When investors see that the people within management of a company believe in the opportunity and are willing to invest in the company, it's always a reassurance to the marketplace. But in this case, it's more that the company has been able to deliver on its quarter-over-quarter and year-over-year top-line growth guidance. Again, delivering on what you say you're going to do is something that investors look at favorably, and it gets reflected in your stock price. MusclePharm does need to get sustained profitability, and I think any down quarter could bring a loss. The company, in my opinion, still needs better cost controls.

TLSR: It seems the nutritional supplement business is very dependent on endorsements by famous people, athletes in particular. You mentioned Arnold Schwarzenegger. MusclePharm also has the deal with Colin Kaepernick, quarterback of the San Francisco 49ers. Is this business, in fact, dependent on these names?

DH: I think endorsements can have a substantial impact. Arnold Schwarzenegger's endorsement, and the product developed in his name, have been a substantial boon to the company. I'm not sure that Colin Kaepernick has had near the impact. The company has also announced a deal with Tiger Woods. Should Tiger be able to return to his prominence in golf, that might have a significant impact on sales. Additionally, the Ultimate Fighting Championship sponsorship has been of great value to the company in driving sales.

TLSR: Dick, how is MusclePharm differentiated from so many other nutritional products companies? Can you put your finger on something that stands out?

DH: CEO Brad Pyatt has always expressed a commitment to staying with those ingredients that are legal. This is where so many of these companies seem to trip up. A lot of companies have run into issues where they utilize a banned substance to keep one step ahead of the competition as far as the performance. Pyatt has made representations that the company will stay within the guidelines and use only those ingredients that are recognized as permissible by the U.S. Food and Drug Administration (FDA). I think that if the company does that, it can avoid a pitfall. The company has also devoted a fair amount of resources to the science behind the performance of its products. Pyatt is doing an excellent job of marketing.

TLSR: Could you go to the next name?

DH: We have done two private offerings for VolitionRx Ltd. (VNRX:OTCPK), one just recently, in September, at $2.50/share, and one in mid 2013 at $1.50/share. The company has performed, and management has done what it said it was going to do, which has given me the confidence to do the raises.

The company has a diagnostics platform based on the Nucleosomics technology. Nucleosomes are protein cores with DNA wrapped around them, like thread on a spool. Epigenetic marks on these structures can be thought of as signatures, which can be identified from a drop of blood. VolitionRx has shown us, in the lab and in a recent human blood sample trial, that it can detect cancer in patients from a tiny sample of blood. Further, as a result of markers on the nucleosomes, the diagnostic can determine what type of cancer an individual has.

In the U.S., we use the colonoscopy as the diagnostic for colorectal cancer (CRC), and it is 93% accurate. Exact Sciences Corp. (EXAS:NASDAQ) has come out with a new test, Cologuard, which is a feces-based diagnostic that is proven to be 92% accurate. Another feces-based test is only about 60% accurate—not Exact Science's test, but based on the same science. The less-accurate feces test is sent out free of charge to the citizenry in the U.K. following their 50th or 60th birthdays. The government pays for the tests, but only gets about 50% compliance, meaning only 50% of the people are willing to handle their own feces, put it on a piece of cardboard and send it in for a test, even though there is no charge to the individual.

In a trial with 938 samples tested with VolitionRx's NuQ test, which only needs about a quarter of a drop of blood, NuQ was found to be 84% accurate in determining individuals with colorectal cancer. Now, 84% is not 92%, but I believe 84% is pretty high for a test that's probably going to be priced at $50 or $60 versus Exact Sciences' test, which is about $600 and requires patients to handle their own feces. Moreover, VolitionRx's test can be done in conjunction with other blood tests, since so little blood is required. You just indicate that you'd like to have a test for colorectal cancer. Given the cost and ease of a blood test, it is likely that an individual will be tested with greater frequency, thereby increasing the overall accuracy of the results of the blood-based tests.

One thing that's important about the trial results with regard to colorectal cancer is that the test was just as accurate for stage I cancer as it was for stage IV cancer. That's important because, in general, if a cancer is caught in stage I, you have a 74% chance of survival over five years, whereas with a cancer caught in stage IV, you have a 6% chance for survival over five years.

TLSR: When will NuQ be available? What's its current status?

DH: Currently, trials in Europe are being performed for colorectal cancer. I think that will lead to the test being approved in Europe, possibly in 2015, with the possible start of sales in late 2015. In the U.S. the test would have to be approved by the FDA, and then approved for reimbursement by Medicare, Medicaid and insurance companies. VolitionRx has not yet begun that process. A 14,000-sample trial will follow the 4,800-sample trial, and if those achieve the same results as the 938-sample trial, and if the company achieves a $50 or $60 price point, which I have every reason to believe it can, I would think that FDA approval would come within the next three or four years. I also think the test would have a really good shot at being reimbursed by insurance.

TLSR: Dick, you mentioned prostate cancer earlier. Where is that in the pipeline?

DH: Prostate cancer also has a screen, the prostate-specific antigen (PSA) test, which is done via blood draw. It's only about 68% accurate. In early October, VolitionRx announced that it is beginning trials at the MD Anderson Cancer Center in Houston for its blood-based test for prostate cancer. This would be the first trial that the company has done in the U.S.

There aren't really any screens for cancer beyond prostate and colorectal. VolitionRx has also had success with a blood-based screen in its lab with lung, pancreatic and breast cancers. The company thinks its blood-based test might be applicable in as many as 20 cancers. I think there's huge opportunity here. There's still a lot of risk, because VolitionRx doesn't have an approved product, but it is close in Europe. The company, over the course of the three years that I've followed it, has done what it said it was going to do. And it has done that without much capital. In its history, VolitionRx has only raised about $15M, and approximately half of that money has come from officers and directors of the company.

TLSR: Dick, last time we spoke you mentioned Omni Bio Pharmaceutical Inc. (OMBP:OTC). Did you want to update it?

DH: GVC has participated in several capital raises for Omni Bio over the years. We have raised approximately $13M for the company over a seven-year period of time. Unlike Volition, which is a diagnostic company, this is a drug company. Drug companies obviously need more money, and take a longer period of time to achieve ultimate success. Omni has announced that it raised a couple million dollars this year, but that was not done through GVC. It was pretty expensive capital, and I think the company balance sheet reflects that.

The company has moved forward and initiated trials with its recombinant alpha-1 antitrypsin therapy (AAT Fc) in graft-versus-host disease (GvHD), but it is going to need a substantial amount of money going forward to further its trials and take the next steps. The therapy also may have applicability to type 1 diabetes, refractory gout, arthritis and other inflammatory diseases.

TLSR: Dick, we're looking at a company with an $8M market cap. Would you imagine at least twice that much has been invested into Omni Bio?

DH: Yes, I would say about $15M has been invested.

TLSR: I wonder if Omni Bio wouldn't do better as a private company, so that it can get out of the spotlight and get to its knitting. For a company with this kind of market capitalization, reporting every quarter is very onerous. Have you thought that way?

DH: In retrospect, knowing that it's been public since 2009, I'm sure the company would say that it would have preferred to deploy the $2–2.5M cost of being public toward its research and additional trials. Concurrently, probably $11–13M of its $15M has been raised in the public market place, and I don't know that the company could have raised that kind of money privately.

It would take a pretty deep pocket for Omni to go private now. Our experience is that it's very difficult to find somebody to take that kind of risk. It would require a huge amount of time and capital commitment. You're looking at a project that could take seven to 10 years, and maybe $150–200M in capital commitment, to complete. Big pharma is not willing to take that risk any longer; it would rather just acquire a company or joint venture with it once the science is proven through Phase 1 or Phase 2 trials. For guys like me, who deal in the micro-cap space, it's hard to find a party that might be willing to take a company like Omni private—to commit that type of capital and wait that length of time to monetize the investment.

TLSR: I'm looking at a letter dated Oct. 2 of this year from Omni Bio's CEO, Bruce Schneider. There didn't really seem to be a milestone that investors might look forward to. Did you have an idea of what catalyst there might be to move these shares?

DH: I don't think the company currently has the capital to get to a milestone. It may have news as it relates to its GvHD trial, and I think the majority of investors would view that as a great thing. But it's still early, and it's not a big trial sample.

TLSR: Dick, thank you.

Richard H. Huebner is a senior managing partner at Denver-based GVC Capital, and a member of the firm's Commitment Committee, which makes the final decisions on all the banking deals. Huebner joined GVC Capital in October 2001 in a management capacity, to plan and facilitate its growth. He has been in the securities industry for nearly 30 years. His experience includes serving as general counsel for Hanifen, Imhoff Inc. from January 1984 through September 1995. While at the firm, he served in numerous positions, including executive vice president, director, and member of the executive committee of Hanifen, Imhoff Holdings Inc. In 1995, Huebner became an executive vice president, director and member of the executive committee of Hanifen, Imhoff Clearing Corp., which was sold to Fiserv Inc. in December 1997. He continued in those capacities for Fiserv Correspondent Services. Huebner received a bachelor's degree in economics and business administration from Hastings College, and a juris doctorate from the University of Nebraska.

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DISCLOSURE:
1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and he 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: MusclePharm Corp. 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) Richard H. Huebner: I own, or my family owns, shares of the following companies mentioned in this interview: VolitionRx Ltd., Omni Bio Pharmaceutical Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. The opinions expressed in this interview are not the opinions of GVC and not an offer to buy or sell any security. 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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Friday, November 14, 2014

Thinking Differently About Ebola Virus Disease: WBB Securities' Steve Brozak

Source: George S. Mack of The Life Sciences Report (11/13/14)

http://www.thelifesciencesreport.com/pub/na/thinking-differently-about-ebola-virus-disease-wbb-securities-steve-brozak

What do you get when you combine a top-ranked industry analyst with a retired lieutenant colonel from the U.S. Marine Corp.? You get Steve Brozak, who brings his one-of-a kind perspective on the intricacies of Ebola virus disease to this interview with The Life Sciences Report. His military background, combined with 20 years as a biotech and medtech analyst, has allowed the WBB Securities cofounder to develop a reasoned perspective on how West Africa's Ebola epidemic might be humanely halted. Brozak also mentions small-cap names that could considerably enhance investors' portfolios.

The Life Sciences Report: Steve, you wanted to address Ebola virus disease (EVD) from a socioeconomic point of view. Please give us your thoughts on the stress EVD could put on healthcare systems in the U.S. and worldwide.

Steve Brozak: Let me start by paraphrasing a quote that I heard from a very smart person. Ebola is a horrific disease, and because of that, unfortunately, it is the first made-for-television disease that we've witnessed. It will not be that long before we see some major Hollywood studio make a movie about the events we're looking at on the news today.

But I don't think people who are watching—and certainly not a large part of the investing community—really understand EVD or its ramifications. That really is the most insidious part of this disease—the fact that it is not understood.

TLSR: How is EVD not understood?

SB: What people don't understand is that it is impractical to carry out mass treatment protocols here in the U.S. You cannot set up every single facility in this country to deal with Ebola. Even setting up specific centers to deal with something like Ebola is impractical. It is far more practical, far more efficacious, far more efficient and far more humane to deal with Ebola at its center, which everyone acknowledges is in West Africa. That's what people don't understand, unfortunately. Instead, the media have been reporting on facilities in Dallas, Atlanta and New York, and making observations about the patients who are being treated there.

The reality right now is that we are at a critical juncture. Médecins Sans Frontières (MSF; Doctors Without Borders) has been the only organization that has been coherent in providing healthcare infrastructure in West Africa. However, MSF is depleted to the point where the U.S. Centers for Disease Control (CDC) can no longer stand by. CDC is actively recruiting people to assist with the MSF mission in Africa, but this is not a one-for-one fit, because we are not very well versed in this kind of venture. We are entering into uncharted territory that, candidly, gives me great cause for concern.

TLSR: Aside from the vicious nature of the disease and the fact that some healthcare workers have been infected, what is it that gives you great concern right now?

SB: I'm concerned when I see, in newspapers, online or on TV, people making assumptions that there are drugs or products available today that will save the day. That is simply not factual. Yes, there are noteworthy products, but there is a very unfortunate dichotomy in that the products we know a lot about don't really work, and we don't have enough of the products that seem to be efficacious. Everyone is finger-pointing, but the reality is that we are not addressing the issues that we have to address.

TLSR: Steve, you have said we really do know how to manage viral disease outbreaks like this one. What is the evidence for that? Give me an example.

SB: Having covered pandemics and epidemics now for ten years, I would say that, for the first time, we actually understand how to control an outbreak like this, and it's only because of significant government spending for other threats.

For example, take H5N1, or bird flu. A decade ago, everyone said that bird flu was going to come to the U.S., but it didn't. We still set up and retooled our vaccine systems in the U.S. in response to the threat. If we hadn't done that, imagine where we would be today. H1N1, or swine flu, literally became a pandemic in 2009, and in 2014 it is firmly entrenched in the influenza ecosystem here in the U.S. We caught this problem at the last possible moment—H1N1 became the first instance where we could understand a threat and stop it using the infrastructure our government invested in. That was possible because our government invested in a diagnostic mechanism in preparation of bird flu that allowed us to check for unusual viruses. It was the surveillance tool we developed for H5N1 that saved us from H1N1. Today, when you get your regular seasonal flu vaccine, you receive protection from H1N1. All this was possible because of government funding.

TLSR: Would you briefly mention a few companies offering some promising ideas to combat EVD?

SB: I'll go over companies that are interesting, and I’ll also explain the shortcomings of each. We need to understand the limitations and strengths of each technology, because Ebola is not an isolated incident. It is unfortunate, but predictable, that there will be more outbreaks, and we have to be prepared. That is the reality.

Everyone looks at Mapp Biopharmaceutical Inc.'s (private) product, ZMapp (three chimeric monoclonal antibodies manufactured in tobacco plants, specifically Nicotiana benthamiana). If anyone says the government isn't responsible for advancing science, they should understand that ZMapp is prima facie evidence for government support in advancement of drug development, drug manufacturing and everything related.

ZMapp was funded by the U.S. via the U.S. Army Medical Research Institute of Infectious Diseases (USAMRIID). Its production was accelerated by USAMRIID personnel, who have assisted in differentiating the antibodies that would work with the greatest efficacy. The only difficulty is that the production method for ZMapp is plant-based which, in itself, is a very good technology, but doesn't lend itself for large, ramp-up manufacturing. As such, we have to wait. That is ZMapp's limitation.

Another company working in the area is Chimerix Inc. (CMRX:NASDAQ), which has a broad spectrum antiviral called brincidofovir that has been funded by the U.S. National Institutes of Health and is now in Phase 3 trials for cytomegalovirus and other viruses in bone marrow transplant patients. It's also a potential therapy in adenovirus.

Chimerix's program is also being funded by the U.S. Biomedical Advanced Research and Development Authority for treatment of smallpox under the Animal Rule. This rule allows drugs or biologics to pursue regulatory approval to become part of the national strategic stockpile based on preclinical studies in animals and safety studies in patients. Brincidofovir may also be applicable to EVD, but again, we have a product that you can't test in nonhuman primates for EVD because there is no cross-reactivity there. It's a bit of an unknown, which is problematic. There's just not enough information for anyone to expect a specific outcome. A Phase 2 protocol has been developed with the U.S. Food and Drug Administration (FDA), and the investigational new drug application has been authorized to test brincidofovir in Ebola patients. This trial could begin anytime.

Then we have BioCryst Pharmaceuticals Inc. (BCRX:NASDAQ), which is also working with a government contract. Its candidate, BCX4430 (an adenosine analog), is another broad-spectrum antiviral. We could see testing in humans in H1/15. This drug platform represents important technology, but we will take a wait-and-see approach as to what it can do specifically in EVD.

I'm very interested in Tekmira Pharmaceuticals Inc. (TKMR:NASDAQ; TKM:TSX). Again, it has seen government resourcing, and it is working with a good technology, RNA interference (RNAi). The company has begun to manufacture, on a limited basis, a new therapeutic agent specifically targeting the Ebola-Guinea variant, which is responsible for the EVD epidemic now in West Africa. There will actually be some supply available for investigators in early December, but again, these will be limited quantities. What we need is a product that can be manufactured in such a way that we can actually start to test it, and compare it in actual field use. That doesn't exist here.

I want to mention one company that, believe it or not, people are not talking about with regard to EVD, Sarepta Therapeutics Inc. (SRPT:NASDAQ). In the past, I didn't believe Sarepta's approach to FDA testing was going to pass muster, and I took a lot of grief for that. But the company got response back from the FDA, and we started to see the agency ask good questions about how to test Sarepta's EVD candidate, AVI-7537, and how to implement its technology. Sarepta has a program we believe in because it can manufacture its antisense products to scale. I'm not going to say the product can be manufactured quickly, but it can be made in a realistic amount of time, with the ability to test for efficacy. This is something that I think should be explored, and if it works, should be exploited.

TLSR: What about big pharma? Which companies have joined the Ebola fight?

SB: Johnson & Johnson (JNJ:NYSE) says it is dedicating itself to creating a vaccine answer. The company has a technology that is fairly easy to understand. Again, the difficulty is that standard vaccines require time to make. The same goes for GlaxoSmithKline (GSK:NYSE). Your readers should keep in mind these are incredibly large organizations that are not as focused on a response to EVD as the smaller biotechs we have discussed.

TLSR: On Nov. 4, Republicans took control of the U.S. Senate, and now they control both houses of Congress. What do you think the political environment is going to be with regard to funding research? Do you imagine that the majority in Congress is going to continue to be resistant to investing in basic science?

SB: I would say to those who now control both houses of Congress, be very careful what you ask for, because you may very well get it. If you do get your cuts, you will be held responsible for what takes place on your watch.

Also, expecting a quarantine or blockade to stop Ebola is foolishness. If politicians espouse something like that, there will be a response, but it will not be the response that they want. I would say to you that the longer we do not address this issue globally, beginning in West Africa, the more expensive this outbreak will be in, both currency and human life.

TLSR: Steve, if you have thought about this, what do you think happened at Texas Health Presbyterian Hospital in Dallas? One would have to assume that this institution has a top-flight intensive care unit, but the hospital failed to protect its health workers. How did two nurses become infected with EVD in a U.S. hospital after treating an EVD patient?

SB: We looked it over and came to the conclusion that it was a simple rule of physics. The patients who suffer through Ebola throw off waste products the likes of which no one experiences typically. Your focus as a healthcare provider is to be humane and maintain certain standards; however, the realities are that the amount of waste generated in the form of feces, vomitus, blood and blood products is so significant that containment without proper protocols and enough personal protective equipment is difficult. There is an unavoidable degradation in care and technique—at least when the providers haven't had previous experience in this disease. It's not like anyone can perform at 100% under these circumstances, so mistakes happen. When mistakes happen, unfortunately, the costs are high. These systems will undoubtedly improve. Hospitals all over the country are now working on protocols.

TLSR: Steve, you have a large list of small-cap companies in your coverage. Looking away from Ebola for the moment, could you mention a few names that you feel have impressive growth prospects?

SB: There are five companies with seminal moments on the horizon, and exciting technologies that are not flash-in-the-pan approaches. Looking back at Sarepta and Tekmira, you see technologies that are going to change the way drugs are developed. That kind of change presents significantly important considerations for investors. Instead of getting a 28% return annualized for a year and a half, you might now get a tenbagger, which is the ultimate return that small-cap investors seek.

TLSR: Go ahead with the first name.

SB: It's a stem cell company called NeoStem Inc. (NBS:NASDAQ). On Nov. 17, at the American Heart Association's annual meeting, the company will announce results from its Phase 2b PreSERVE-AMI trial with NBS10 (autologous bone marrow-derived CD34+/CXCR4+ enriched cells) to treat damaged heart muscle following an acute myocardial infarction (AMI). PreSERVE-AMI is a smaller trial, with 160 patients, but it's double-blind and placebo-controlled. This is a different kind of technology that we like very much because NBS10 has potential to be a restorative product. I look forward to seeing the results.

TLSR: Another name, please.

SB: The next would be Omeros Corp. (OMER:NASDAQ). Its product, Omidria (phenylephrine + ketorolac), was approved on May 30 of this year. Omidria is a simple combination of two older drugs that have been in the public domain for quite some time. One is a mydriatic or pupil-dilating agent, and the other is an anti-inflammatory and analgesic. The product was designed for use in cataract and intraocular lens replacement surgery, and it results in patients having less post-operative pain. The company will start selling Omidria on Jan. 1, 2015, and just recently, on Oct. 30, the product received pass-through reimbursement approval from the Center for Medicare & Medicaid Services. Now Omidria can be reimbursed by Medicare, Medicaid and many private insurers beyond the cost of the surgical procedure itself. Omeros' reimbursement will be based on the product's wholesale acquisition cost of $465 per single-use vial, which would cover a single procedure.

TLSR: Steve, ophthalmologists have been using these same drugs as homebrews, or getting them from compounding pharmacies, for a very long time. What's the value proposition for Omidria?

SB: Instead of having to use compounded products or homebrews to do lens surgery, the surgeon can now use a product that is FDA-approved, proven sterile and safe, and reimbursable by payers. Physicians should be using it as standard of care. I don't think there is an obstacle to adoption of Omidria at this point.

TLSR: Another name?

SB: We have covered Navidea Biopharmaceuticals Inc. (NAVB:NYSE) for a long, long time. Back in mid-June, the company received FDA approval for intraoperative sentinel lymph node mapping for head-and-neck cancer with its radiopharmaceutical agent, Lymphoseek (technetium Tc 99m tilmanocept). Back in March 2013, Lymphoseek was approved for lymphatic mapping in breast cancer and melanoma. With Lymphoseek, the surgeon uses a gamma detector to assist in finding diseased lymph tissue to dissect out. It's a way of preventing metastasis by removing tumor-draining lymphatics that contain active tumor cells.

By the FDA's own description, Lymphoseek represents the greatest improvement it has seen in 30 years for the head-and-neck cancer application. There is just no comparator. It is also interesting that this technology guides clinicians to inflammation, which means there's potential for many different diagnostic, and possibly even therapeutic, applications. Hospitals are now reevaluating all their detection approaches, and we believe that they will be looking at Lymphoseek very seriously.

TLSR: After Lymphoseek was first approved in 2013, Navidea partnered with Cardinal Health Inc. (CAH:NYSE), a major distributor of radiopharmaceuticals. Is Cardinal Health giving its best effort in marketing Lymphoseek? How is this working out?

SB: Cardinal plays an important role for Navidea, and brings a touch point to the nuclear pharmacist. While that's important, and continues to be important, it was more so with the prior label. With the new label, Navidea can establish a touch point directly with surgeons and additional decision makers on the treatment team. This is how Lymphoseek can displace a decades-old agent and a very entrenched mentality. Surgeons are set in their ways to use colloids, which are old agents. Now there's a label that differentiates Lymphoseek, and allows Navidea to call on the surgeon directly.

We're looking forward to seeing what Navidea's newly appointed CEO, Rick Gonzalez, has in store for 2015. His background is in managing commercial products, and their sales and marketing. On a recent conference call, he said that he's focused on enhancing Navidea's operations to help complement Cardinal's sales and marketing efforts. Navidea now has the right product with the right label and the right CEO.

TLSR: The next name?

SB: The next name is another company we've followed for a number of years— Cempra Inc. (CEMP:NASDAQ). It has an antibiotic called solithromycin, which we believe to be the single strongest antibiotic we have ever seen. It's a broad-spectrum antibiotic in the macrolide family. The significance is that solithromycin doesn't just attack bacteria, it prevents them from replicating within cell membranes. The antibiotic is in Phase 3 for community-acquired bacterial pneumonia. It can be used as step-down therapy from intravenous to oral administration, and that is a tremendous advantage.

Cempra has several ongoing collaborations with the U.S. government, through a contract valued at $58M in nondilutive funding. The company has been able to leverage these programs to fund solithromycin's development in pediatric use. All of the pediatric development and trials are being paid for by the government, which is significant. The U.S. government is paying attention to this company.

Viruses like EVD are awful, but with bacteria you are talking about bad bugs that could move through a population with equally disastrous results. Cempra has the ability, with solithromycin, to deal with not just the bad bugs we are aware of today, but with the bad bugs out there that could become more prevalent and dangerous in the future. This type of broad-spectrum antibiotic could be the only thing we have that could even attempt to address that kind of situation.

TSLR: Steve, go ahead with your last company.

SB: Tetraphase Pharmaceuticals Inc. (TTPH:NASDAQ) is another antibiotic company that's also working with the U.S. government. Its candidate, eravacyline, a next-generation tetracycline, is now in Phase 3 for complicated intra-abdominal infections, as well as complicated urinary tract infections. Tetraphase's product is in advanced trials, and we think it would be very attractive to potential big pharma partners. The physician community is very familiar and comfortable with tetracycline, and that will play well if Tetraphase is able get its next-generation version of the product to market. We have a Buy rating on Tetraphase.

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

SB: Thank you too.

Steve Brozak is the managing partner and president of WBB Securities, an investment bank and financial analytical firm engaged in the biotechnology, pharmaceutical and medical device sectors. Before cofounding WBB Securities, he worked for several Wall Street firms, including Salomon Brothers, Dean Witter, Cowen & Company, and Alex. Brown & Sons. As WBB Security's Senior Equity Analyst, Brozak has been acknowledged for his investment acumen and equity research performance by the major analyst ranking systems. In 2013, he was selected as the #2 ranked analyst in the pharmaceuticals sector by the StarMine/Financial Times Industry Analyst Awards system. The Wall Street Journal distinguished Brozak as its Best on the Street Medical Equipment and Supplies financial analyst in its 19th Annual Best on the Street Survey in 2011. In 2010, Brozak received StarMine Thompson Reuters/Financial Times Best Brokerage Analyst award for his selection of top-performing companies in the biotechnology space. With a 25-year track record in banking and analysis in the life sciences space, Brozak also works as media commentator on the life sciences sector on the web, on television, and in print media. Brozak served in the United States Marine Corps and now serves on the Secretary of the Navy's Navy and Marine Corps Retiree Council, where he focuses on healthcare, benefits and other veteran issues. He received a bachelor's degree and a master's degree in business administration from Columbia University, and also holds FINRA licenses 3, 7, 8, 24, 63, 65, 79, 86, 87 and 99.

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DISCLOSURE:
1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and he 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: Omeros Corp., NeoStem 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) Steve Brozak: I own, or my family owns, shares of the following companies mentioned in this interview: Navidea Biopharmaceuticals Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has acted as a financial advisor with the following companies mentioned in this interview: NeoStem Inc., Cempra 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 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, but refrain from investor suitability decisions.
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Wednesday, November 12, 2014

Molecular Biology Meets Finance: MLV & Co.'s George Zavoico on Ebola's Silver Lining

Molecular Biology Meets Finance: MLV & Co.'s George Zavoico on Ebola's Silver Lining

Source: George S. Mack of The Life Sciences Report (11/12/14)

http://www.thelifesciencesreport.com/pub/na/molecular-biology-meets-finance-mlv-co-s-george-zavoico-on-ebolas-silver-lining

A working knowledge of molecular biology is essential for a biotech investor, but it helps when someone with deep knowledge of science and medicine can bring understanding to the people who commit capital to growth ideas. George Zavoico of MLV & Co. has that advantage, having been a senior investigator at a large pharma before moving on to research at smaller, pure biotech firms. In this interview with The Life Sciences Report, Zavoico brings a wealth of experience to bear on the valuations of smaller companies with phenomenal growth prospects, and discusses how the quest for a cure for Ebola could disrupt—and improve—our approach to medical crises.

The Life Sciences Report: We are in one of those high news flow periods, this time precipitated by Ebola virus disease and the fear surrounding it. Media are consumed with that topic right now. One important aspect of these crisis periods, as we saw with HIV/AIDS 30 years ago, is that they are disruptive. How do you see this current made-for-media crisis playing out?

George Zavoico: The crisis is made for media because of how horrible Ebola disease is, and how transmissible it is under certain circumstances. The extent of the epidemic in West Africa is unprecedented for Ebola, and the video and pictures that have come out of the region are extraordinarily frightening.

Since the disease made its appearance in the U.S., the media and politicians got involved because Ebola could not be contained in a Texas hospital, where a couple of healthcare workers who were handling the seminal patient, Eric Duncan, became infected. Although it's easily transmissible under some circumstances, Ebola is not airborne, like the flu or a cold. Once it becomes evident that folks aren't going to be easily infected under normal conditions, I expect people will begin to calm down.

TLSR: Clearly our attention has been diverted from some other pressing needs. What needs attention right now?

GZ: What's not garnering attention, despite affecting far more people, are the chikungunya and dengue virus epidemics in Puerto Rico, which are trickling into some of the southern states of the U.S., Florida in particular. These epidemics are not getting as much attention because they aren't as bad in terms of what happens to patients when they get sick. Also, the fatality rate is much lower. But these viruses are going to affect many more people. While there's not much media attention, the U.S. government, the U.S. Food and Drug Administration (FDA) and the U.S. Centers for Disease Control (CDC) are monitoring the viruses very closely. Hopefully, these mosquito-transmissible diseases will be effectively contained.

TLSR: U.S. National Institutes of Health (NIH) head Francis Collins said recently, and I'm paraphrasing, that we would have had an immunization for Ebola if NIH funding had not been static over the last decade. Do you believe this current Ebola scare has focused the minds in Congress? Do you believe this will trigger renewed funding from Congress?

GZ: That's a complex question. Has it focused the minds in Congress? Yes, but not necessarily on more research funding. The Congress has focused on why the CDC appears to have messed up. Congress will probably go for a short-term solution and look for scapegoats, rather than look for new funding. If it turns out there are just a few cases in the U.S., it's unlikely this outbreak will have a big impact. I don't see the crisis having an impact that could result in greater than a 5–15% increase in research funding, given the current environment in Congress. Members are focused on cutting funding, not adding funding.

Having said that, however, some funding could come from the Biomedical Advanced Research and Development Authority (BARDA) and the U.S. Department of Defense (DOD). Their jobs are to protect against this sort of thing. BARDA and DOD have pandemic flu programs underway. DOD is involved because servicemen and women are stationed overseas. BARDA and DOD may redirect, or perhaps add additional funding for Ebola or other infectious disease research. The Bill & Melinda Gates Foundation will probably become more involved in Ebola, because it is devastating the developing world.

TLSR: I think we're seeing a willingness among regulators to allow expanded access to Ebola virus disease treatments, formerly known as compassionate use exemptions. Could this spill over into non-Ebola indications? Will regulators allow use of highly experimental, even preclinical, therapies in critical areas?

GZ: Yes, a trend is developing in that direction. We're seeing more investigational device exemption (IDE) applications in compassionate use, some in blood-borne pathogens. Exemptions are influenced by patient advocacy and other advocacy groups as well, and it depends on the indication, obviously. The ALS (amyotrophic lateral sclerosis/Lou Gehrig's disease) Association has basically volunteered its ALS patients to be guinea pigs; these patients are willing to take the risk because it's a fatal disease. People diagnosed with ALS typically die within one or two years, and are not willing to wait to enroll in a properly planned, long-term clinical trial. They want the experimental drugs sooner.

TLSR: Do you believe that Ebola-related stocks are overbought at this point, considering how early stage the development is in virtually all of these companies?

GZ: There certainly has been a surge in some of the stocks involved in Ebola. I don't think very many companies are going to make a lot of money off Ebola. If an Ebola vaccine is developed, I don't think there will be a nationwide Ebola vaccination program.

But I think a lot of companies will use Ebola research to engender goodwill, and also to validate technology. For example, malaria is not particularly prevalent in the U.S., or in any First World territory. Europe doesn't have it. Australia doesn't have it. But GlaxoSmithKline (GSK:NYSE) is pouring tens of millions of dollars into a malaria vaccine, called RTS,S, for Africa. I don't think the company will get more than cost, plus a little bit more, out of it. The World Health Organization (WHO) and individual nations will be the customers, not pharmaceutical companies. It is goodwill and, in Glaxo's case, it could prove that a certain adjuvant, called QS-21 Stimulon and developed by Agenus Inc. (AGEN:NASDAQ), works. The same applies to Cerus Corp. (CERS:NASDAQ), which could potentially validate its INTERCEPT platform to deactivate pathogens in blood components.

I would also like to mention Novavax Inc.'s (NVAX:NASDAQ) remarkable recent accomplishment with its vaccine development platform. Just about six weeks after the nucleic acid sequencing of the 2014 strain of the Ebola virus responsible for the current epidemic in West Africa, Novavax generated a nanoparticle vaccine candidate against the virus's glycoprotein (GP), and tested it in mice, where the vaccine induced the generation of high titers of antibodies against Ebola. Notably, this is the first vaccine produced against the current, epidemic 2014 West African Ebola GP sequence. Novavax has guided to commencing a first-in-human Phase I safety trial of its Ebola vaccine before year-end. Just think, from nucleic acid sequence to human trials in less than four months!

TLSR: You mentioned BARDA. Is BARDA able to move funds around and switch emphasis?

GZ: Yes, the agency can do that. There is a certain amount of funding available to BARDA, and its awards are usually done in stages, so that when investigators reach milestones, they get the next stage of funding. If you get first-stage funding, there's no guarantee that you'll be funded beyond that. BARDA money could shift if companies don't achieve agreed-upon objectives. That money then could become available for another award.

In special situations, BARDA could also go to Congress and say, look, we have to ask for money because this disease, Ebola or some other, is worse than we thought. Hopefully, that will never be the case, but the agency can ask for more funding.

In the context of Ebola, we have to wait and see how BARDA reacts, because it is a very careful and methodical organization. It often takes time to make a decision. BARDA could be waiting to see how the epidemic in West Africa develops, and whether the virus moves overseas more easily than it already has. Meanwhile, I'm sure the agency is keeping a close eye on developments.

TLSR: You mentioned chikungunya and dengue. You also mentioned Cerus Corp., which has a connection to these diseases. Could you address this company?

GZ: Cerus has a blood pathogen inactivation technology. Just about any pathogen with DNA or RNA that is in donated blood or any of its components—the platelet concentrate, plasma and packed red cells—is inactivated if treated using Cerus' INTERCEPT system. A proprietary compound is added to the components, which is activated with ultraviolet light. The compound crosslinks any nucleic acids of pathogens in the components, so that any virus or bacteria—pretty much anything with DNA or RNA—is inactivated. When the nucleic acids are crosslinked, the pathogens can't replicate or divide.

Cerus' blood pathogen inactivation system basically circumvents the need to test blood for chikungunya and dengue, for which, by the way, screening assays don't exist. You treat the blood using the INTERCEPT system, and you know that anything with DNA or RNA is not going to replicate. This system has shown its utility already in a number of epidemics, including the chikungunya epidemic on a small French island in the Indian Ocean, and the company is already selling these systems in more than 20 countries. All the platelets produced in Iceland, Belgium and Switzerland are treated this way. The haemovigilance data show that it's effective. It's a matter of time before it's implemented more widely.

TLSR: George, what about approval in the U.S.? Where does that stand?

GZ: In the U.S., Cerus has submitted premarket approval (PMA) applications for the INTERCEPT plasma and platelet systems, and the FDA is reviewing those. We expect a decision by mid-year 2015. With implementation and installation, we expect revenue in this North America/U.S. market to eventually tip Cerus over into profitability. Our understanding of the protection that the system provides against emerging infectious diseases like chikungunya and dengue is that transmission through the blood supply will be prevented.

One of the reasons the stock went down so much is that the Spanish company, Grifols S.A. (GRFS:NASDAQ), stopped distributing the system in Spain and Portugal. The inventory of that distributor sold off and wasn't restocked. Cerus is distributing in Spain on its own now. The recently reported Q3/14 numbers are beginning to rebound, with a healthy quarter-over-quarter increase of $1.8 million ($1.8M) in product revenue to $10.4M. We think that as revenue recovers, and as new markets and revenue opportunities open up in new territories, as we expect, so will interest in the stock. These will be catalysts for the stock.

Also, Ebola is still not considered a huge market. There have only been a handful of patients in the U.S. In Africa, the system would be a cost-plus product, if that. It will probably take some time to train people to implement the system, although Cerus is experienced in rapid installation of its products, and we expect it would also do a good job in Africa.

One important thing for investors to remember is that the FDA approved the compassionate use IDE in Puerto Rico for chikungunya and dengue. That IDE approval tells me that the FDA has high confidence in the technology. In my mind, it's prescient of an approval next year.

TLSR: Does the company have something like "fast-track status" for a device approval in the U.S.?

GZ: Originally, the FDA asked Cerus to do a second Phase 3 study in platelets, but then the agency said the first trial was fine, and that the company could also use the international data. The company submitted the INTERCEPT platelet PMA without having to do an additional Phase 3 trial. It's not really "fast tracked," but Cerus doesn't have to do another trial. For the INTERCEPT plasma application, Cerus pushed back the guidance for approval so it could work through some questions raised by the FDA before the agency continued its review of that PMA.

TLSR: Could we go to another company?

GZ: I think Omeros Corp. (OMER:NASDAQ) is on the cusp of an inflection point. At the end of May, the company's Omidria (phenylephrine + ketorolac) irrigation solution for intraocular lens replacement surgery was approved. It's a combination product of a pupil-dilating (mydriatic) agent and an anti-inflammatory. It reduces postoperative pain after intraocular lens surgery. It should be easily adoptable because the pupil-dilating property makes surgery more efficient, improves patient outcomes and reduces the frequency of complications, with minimal change to what the physician already does.

Omidria should have a big effect on this very large market. One of the important issues for investors is that Omeros is likely to be marketing Omidria itself, which is prudent since the company can focus on centers that do a lot of these procedures. It won't need a huge sales force. However, Omeros has never sold anything before, so there is a little pushback on that. On the other hand, the benefit is that Omeros collects all the revenue, and doesn't have to share the profit.

TLSR: Will there be any special reimbursement for Omidria?

GZ: It's a new, FDA-approved product that provides additional benefit to patients, and recently Omeros got a very favorable decision from the Centers for Medicare and Medicaid Services (CMS) on reimbursement. The company requested, and received, pass-through reimbursement status, effective Jan. 1, 2015, which means that Omidria's cost will not be bundled with the reimbursement for an intraocular replacement surgery procedure. Omeros is guiding to a launch early next year, just as the pass-through status becomes effective. By the way, this was a catalyst for the stock, stimulating an uptick from around $11.60/share to more than $17/share. We'll be watching the quarterly sales revenue numbers to better gauge market penetration. Omeros has stated that it expects to charge a wholesale price for a single use vial at $400-$500.

TLSR: You wrote a research note on Oct. 22 referring to Omeros' schizophrenia and Huntington's disease candidate, OMS824, a phosphodiesterase 10 (PDE10) inhibitor. The company said the Phase 2 Huntington's trial is being delayed due to a higher than anticipated drug concentration in the blood of rat models. Either of these indications is going to be difficult. Is the company's business model to let Omidria revenue fund development of OMS824 from here on?

GZ: If Omidria revenue doesn't fund everything, hopefully it will fund a substantial fraction. We see a pretty healthy revenue stream coming from Omidria.

TLSR: What about the orthopedic/arthroscopy indication with OMS103HP? The idea here is to irrigate during arthroscopic knee surgery to reduce postoperative pain, similar to Omidria's mechanism and benefit for eye-surgery patients. Where is this program?

GZ: I think the orthopedic product is on the back burner at this point. Right now, Omeros is focusing on getting Omidria launched and moving forward with OMS824 and OMS721. OMS721 is a proposed therapy for atypical hemolytic uremic syndrome (aHUS), a rare but life-threatening form of thrombotic microangiopathy (TMA). It's in Phase 2 development.

TLSR: Would data from OMS721 be market moving when results are released?

GZ: With positive results in Phase 2, Omeros will be able to decide which TMA indication to go after with OMS721, because there are several possibilities. One TMA, aHUS, is treated with Alexion Pharmaceuticals Inc.'s (ALXN:NASDAQ) antibody Soliris (eculizumab). It's a big drug for Alexion—$555M in Q3/14, so potentially over $2 billion for the year. For a company like Omeros, with a $580M market cap—about the same as the last quarter's Soliris sales revenue—having a drug in Phase 2 that may be as good as Soliris represents a market-moving opportunity with positive results. Even if it captures a small fraction of the Soliris market, if OMS721 proves safe and efficacious and is approved, you're still talking about a few hundred million dollars in revenue. Absolutely, it would be market moving.

TLSR: When might we see some data on OMS721?

GZ: Omeros initiated the Phase 2 trial this summer. It's a small, 29-patient open-label trial, so we could see interim results starting some time later next year, with final results by the end of 2015.

TLSR: What about near-term catalysts for Omeros? Is this now an Omidria revenue story?

GZ: It's transitioning into a revenue story, but not solely. I think that if either OMS824 or OMS721 prove effective, their potential revenue would be more than what is expected from Omidria. But if revenue is strong, Omidria should sustain the company for a while, or lessen the need to go back to the capital markets. In the best-case scenario, the revenue will support the company, but we have to see how the sales trends develop.

TLSR: My understanding is that Omeros could expect European Medicines Agency (EMA) approval of Omidria by the end of 2014. Would that be market-moving news?

GZ: I think it's worth an uptick. Again, it has to do with reimbursement. Some people may pay for Omidria out of pocket because they don't want to be in pain and they want to avoid adverse events with their eyes. That might be more of the case in Europe, where the solution will either be on the formulary or not. If it's not, it could cost the patient up to about $400, as part of an operation that costs a few thousand.

TLSR: The bottom line is that margins will be achieved in the U.S. Is that what you're saying?

GZ: In the shorter term, yes. The sales trends in the U.S. will predict what might happen in Europe as well.

TLSR: Could you go to another name, please?

GZ: Let's talk about Threshold Pharmaceuticals Inc. (THLD:NASDAQ), which is targeting hypoxia, a characteristic of many solid tumors and some blood cancers. The company has a couple of near-term milestones. At the Society for Neuro-Oncology in mid-November, Threshold plans to present some TH-302 (hypoxia-activated chemotherapeutic prodrug) data from a glioblastoma study. Then, in early December at the American Society of Hematology meeting, it is presenting further data on multiple myeloma. Threshold has two Phase 3 trials going on with TH-302 in sarcoma and pancreatic cancer, which should read out by the end of 2015 or early 2016. It also has a number of ongoing investigator-sponsored trials.

Back on Oct. 9, the company did something interesting: It licensed a hypoxia-activated epidermal growth factor receptor tyrosine-kinase inhibitor (EGFR-TKI), called hypoxin (formerly PR610), from the University of Auckland in New Zealand. Like TH-302, it's a prodrug that is hypoxia-activated. It's been shown to induce tumor cell death in erlotinib-resistant non-small cell lung cancer (NSCLC). It could be used in combination with another EGFR-TKI to get broader activity, with hypoxin penetrating deeper into tumors to kill tumor cells a targeted EGFR-TKI might not reach. In other words, the targeted agent would kill the tumor cells nearest the tumor blood vessels, while the hypoxia-activated prodrug would kill cells in more hypoxic regions, farther away from blood vessels. You could potentially get more efficient tumor killing, which could diminish the risk of mutations that make tumors more resistant. This could enable prolonged progression-free survival and perhaps even overall survival.

TLSR: I realize this molecule was just in-licensed, but what is its current status?

GZ: Threshold is doing preclinical studies to see whether the theory I just described might play out. The company will announce later whether it's going to advance the asset into clinical trials. I would very much like to see Threshold advance the EGFR-TKI prodrug further, because it would be the logical next step in the company's platform and in introducing a new class of agents, targeted hypoxia-activated prodrugs.

TLSR: Why didn't the company issue a press release on the acquisition of hypoxin?

GZ: Because it's not definitive. If the company were confident it was going to move forward with this drug, it would have issued a press release. Because the drug could fail in preclinical testing, it could end up being a blip, and not have material impact. The terms of the acquisition weren't disclosed either.

TLSR: George, you have a $14.50/share target on Threshold Pharmaceuticals. The recent price was $2.79/share. Your target represents more than a quadruple. What events could move this stock to that level?

GZ: Any positive data in the pancreatic or the sarcoma studies could take shares to that target. Threshold also has a number of investigator-sponsored trials (ISTs) ongoing. More positive data from these studies will add confidence to a positive outcome in the pancreatic and sarcoma trials.

The pancreatic cancer trial involves adding TH-302 to gemcitabine. The standard of care is now Abraxane (paclitaxel protein-bound particles; Celgene Corp. [CELG:NASDAQ]) + gemcitabine. Threshold is beginning trials with a triplet—Abraxane, gemcitabine and TH-302. If approved and the trials show that the triplet doesn't increase adverse events, then we can see TH-302 added to the doublet in pancreatic cancer.

Soft tissue sarcoma is a tough nut to crack. Threshold has increased the size of its trial and pushed back the timing of the final results. There are a number of ways to interpret that. One is that the standard of care has changed and is improving, so historical progression-free survival and overall survival data aren't relevant anymore. Therefore, the original trial design may not be sufficient to show better efficacy and safety. Hopefully we will still be able to see a significant difference between the progression-free survival and the overall survival.

TLSR: Do investors give a lot of credence to the ISTs?

GZ: If those are positive, they give confidence. If they're negative, the stock could tank. If the ISTs are positive, then the company has to decide if it's going to commit resources to moving forward in a pivotal glioblastoma or multiple myeloma trial.

TLSR: Are we still looking for Phase 3 data in soft tissue sarcoma in summer of 2015?

GZ: It's likely to be H2/15 for the Phase 3 sarcoma trial, H1/16 for the pancreatic cancer Phase 3 trial.

TLSR: Could we look at another name, please?

GZ: The developing story about Peregrine Pharmaceuticals Inc. (PPHM:NASDAQ) is the emerging recognition that bavituximab, its lead compound, a monoclonal antibody, is indeed an immune checkpoint inhibitor.

As you know, tumor immuno-oncology and checkpoint inhibitors are the Holy Grail in cancer research right now. If you can get the immune system to recognize cancer and enable T cells to eliminate it, then you can get remarkable results, like we've seen with some of the antibodies targeting PD-1 (programmed cell death protein-1) and CTLA-4 (cytotoxic T-lymphocyte-associated protein 4). Bavituximab is upstream of those—at the very beginning of the cascade.

Peregrine is investigating combinations with some of the more established checkpoint inhibitors. As interesting as these targets—PD-1 and CLTA-4—have been, they are effective by themselves in up to 40% or so of patients, depending on the cancer. There are multiple pathways through which T cells are inhibited and stimulated to recognize a tumor. Some of these immunotherapy combinations could be toxic, and might even tip a patient over into an autoimmune disease, so researchers have to be very careful with the combinations they choose.

Bavituximab is in a Phase 3 trial in NSCLC. Hopefully that will play out positively for Peregrine and put the therapy on the map. Bavituximab has a bit of a checkered history, including problems in the Phase 2 trial, when the contract research organization (CRO) running the Phase 2 trial messed up. Certainly there are risks here, but investors are seeing a higher level of risk than is justified, because bavituximab, even correcting for the mishap with the CRO, has pretty good data in prolonging both progression-free and overall survival.

TLSR: On Oct. 15, Peregrine put out a press release saying it had peer-reviewed data to show that phosphatidylserine, the lipid being targeted by bavituximab, could be of value as a target in Ebola virus disease. Is the company looking for some BARDA funding or other federal money to move that along?

GZ: Peregrine has had an antiviral program for some time, but it has been dormant because the company has focused its resources on the cancer indications.

But you're right, virally infected cells express phosphatidylserine on their surfaces. When enveloped viruses like Ebola bud off the mammalian cells they infect, they carry some of that membrane with them. That means the phosphatidylserine remains on the surface of the virus. So bavituximab potentially could be effective in not only identifying infected cells, but also in identifying the virus. The Peregrine investigators have found that bavituximab by itself is not as effective as it would be in combination with antivirals, and we know from experience that the best results with antiviral therapy requires a cocktail of two or more drugs. If bavituximab can be used to enhance the efficacy of an existing cocktail, that would be an important finding for Peregrine.

TLSR: Did you have another name that you wanted to talk about today?

GZ: I wanted to mention two European names. One is Galapagos NV (GLPG:BSE), and the other is MorphoSys (MPSYF:OTCPK). They both have pretty high valuations as biotechs, and they're both worth watching because they have deep pipelines.

MorphoSys, in particular, has a proprietary antibody discovery and development platform with a lot of partnered compounds in a number of different indications. Altogether, MorphoSys has more than 90 distinct antibodies at various stages of development, with two of them in Phase 3 and licensed out: bimagrumab for certain musculoskeletal diseases to Novartis, and gantenerumab for Alzheimer's disease to Roche. Even if a fraction of its products play out favorably, we see MorphoSys becoming even more profitable than it is already. Apart from its many partnered antibody candidates, MorphoSys is now developing its own suite of three proprietary antibodies, now in Phase 2. Two of these are now partnered with large pharmaceutical companies.

Galapagos, in contrast, has a novel drug target and small molecule drug discovery platform, and it too has already established multiple partnerships with pharmaceutical companies. Five of its drug candidates are in Phase 1 or 2 trials. What we find interesting about Galapagos is its focus on the discovery of new drug targets, so that it can lead the field and potentially deliver first-in-class drugs for underserved indications.

Its leading drug candidate is GLPG0634, a very selective JAK1 (Janus kinase 1) inhibitor with continuous target inhibition in Phase 2 for rheumatoid arthritis and Crohn's disease. The rheumatoid arthritis trial showed an improvement in the ACR20 score in 83% of patients within four weeks of starting therapy. An interesting drug candidate still in preclinical studies is GLPG1837, which acts as a potentiator to enhance the efficacy of certain drugs that treat cystic fibrosis patients with certain mutations. Interestingly, MorphoSys and Galapagos recently established a collaboration to discover antibodies directed against some of the new drug targets Galapagos discovered.

We think that if the stock of either of these companies were traded in the U.S., their valuations would be substantially higher than they are in Europe. I think they both are notable and underappreciated.

TLSR: Did you have one more company to comment on?

GZ: I want to mention CytoSorbents Corp. (CTSO:OTCBB). It's a small company that developed a cartridge called CytoSorb, which contains beads that can filter a number of cytokines from patients who have sepsis, trauma and burns. These "cytokine storms" are the result of a systemic inflammatory response that occurs in very sick patients. CytoSorb is CE-marked in Europe, which is the equivalent of FDA device clearance in the U.S., and is being used in Europe.

The product requires no learning curve: Doctors just put the cartridge in a blood dialysis system or in a cardiopulmonary bypass circuit. That's it. I think it's in use in more than 30 countries now. There are also a number of ISTs with CytoSorb going on in Europe. The company's recent revenue growth is impressive. CytoSorbents plans to start a trial in cardiac surgery in the U.S. A small trial in Germany demonstrated that the use of CytoSorb with a heart-lung machine in high-risk cardiac surgery reduced blood levels of proinflammatory cytokines and inflammatory biomarkers in a three-day post-operative period. If CytoSorb gets approved in the U.S., we could see a big uptick in revenue and the value of the company.

What's impressive about CytoSorb are numerous case studies coming out of Europe where the use of the cartridge induces a rapid reversal of multiorgan failure in sepsis or traumatic shock, with full recovery of the patients. We see CytoSorb gaining traction in territories where a CE-Mark is sufficient to launch a product.

TLSR: We've covered a lot today. Thank you.

Dr. George B. Zavoico, managing director and senior equity analyst at MLV & Co., has more than 10 years of experience as a life sciences equity analyst writing research on publicly traded equities. His principal focus is on biotechnology, biopharmaceutical, specialty pharmaceutical, and molecular diagnostics companies. He received The Financial Times/Starmine Award two years in a row for being among the top-ranked earnings estimators in the biotechnology sector. Previously, Zavoico was an equity research analyst in the healthcare sector at Westport Capital Markets and Cantor Fitzgerald. Prior to working as an analyst, Zavoico established his own consulting company serving the biotech and pharmaceutical industries, providing competitive intelligence and marketing research, due diligence services and guidance in regulatory affairs. Zavoico began his career as a senior research scientist at Bristol-Myers Squibb Co., moving on to management positions at Alexion Pharmaceuticals Inc. and T Cell Sciences Inc. (now Celldex Therapeutics Inc.). Zavoico has a bachelor's degree in biology from St. Lawrence University and a Ph.D. in physiology from the University of Virginia. He held post-doctoral fellowships at the University of Connecticut School of Medicine and Harvard Medical School/Brigham & Women's Hospital. He has published more than 30 papers in peer-reviewed journals and has coauthored four book chapters.

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1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and he 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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