Friday, January 23, 2015

The Outpatient Surgery Business Rains Cash: Nobilis Health's Harry Fleming

Nobilis Health Corp. has invented a genuine recipe for success: Provide outpatient surgical services with high profit margins and saturate a local consumer health market with advertising. In this interview with The Life Sciences Report, Nobilis' president Harry Fleming explains exactly how his booming firm's business model works—and why investors should take note of the new kid on the block.

Management Q&A: View From the Top

The Life Sciences Report: Tell us a little bit about the financial history of Nobilis Health Corp. (TSE:NHC).

Harry Fleming: The company was originally a rollup of ambulatory surgery centers—outpatient centers. Back in 2007, when it was called Northstar Healthcare Inc., the company successfully launched a high-profile initial public offering (IPO) on the Toronto Stock Exchange for $150 million ($150M). The IPO was very large for Canada. Dr. Donald Kramer, who is now our chairman, was CEO at the time. In 2010, he got crosswise with the Northstar board of directors and bought a controlling interest to fix some structural issues. The 2010 revenues were $12M. In 2013, revenue rose to $31M. We expect to hit $83M in 2014.

Ambulatory surgery is trending strongly in the U.S. We started out in Texas and Arizona. A recent acquisition has brought Nobilis Health ambulatory surgery centers to eight different states ranging from Minnesota to Florida. We are completing our U.S. registration statement for listing on the New York Stock Exchange. There are several other "Northstar" healthcare companies on the exchange, so we rebranded as Nobilis Health.

TLSR: What is an ambulatory surgery center?

HF: It is an outpatient surgery center, as opposed to a hospital-based surgery clinic, which requires an overnight stay. The centers are typically much smaller than hospital clinics. Twenty years ago 30% of all surgeries were out-patient; today 70% are.

Our centers are very selective about the types of procedures we perform. That selection is based upon the reimbursable, or the rate of revenue, we can earn on a procedure. For example, we do bariatric cases—stomach sleeves for weight loss. We do spine and pain surgeries, and podiatry. We are slated to add several more procedures as we move through 2015.

TLSR: How many centers do you have? Are they close enough to share the regional resources?

HF: In Houston, we have four different facilities; three ambulatory surgery centers and a small hospital. In Dallas, we have two ambulatory surgery centers. In Phoenix, we have an ambulatory surgery center. We have ambulatory surgery center relationships in 11 other cities.

We are positioned for an annual growth rate of 20%. Our forecast for 2015 is $205M, with earnings before interest, taxes, depreciation and amortization (EBITDA) of about $41M. During the last four years, our growth has averaged 50% per year.

TLSR: What is the company's basic business plan going forward, including marketing and expanding into new regions?

HF: We operate our own facilities and have contracted relationships with other centers. We spend significant localized marketing dollars to acquire patients for doctors who are in our network. Our staff doctors do the surgical procedures at our centers. The doctor gets his professional fee on his own from the insurance company; we do not participate in that billing. We do receive a facility fee for each surgical case. And we control our revenues with the marketing plan: For example, we will spend heavily on marketing specific foot pain procedures to build case flow in a given region. Advertising works.

TSLR: Is marketing for outpatient services a new idea?

HF: In the past, doctors typically formed partnerships to operate ambulatory surgery centers. Each doctor would direct case flow to his or her own center. But over the years, ambulatory centers began to proliferate. Trying to control the market, doctors bought interests in other ambulatory surgery centers—which only resulted in diluting the case flow for everyone. In short, proliferation of walk-in surgery facilities destroyed the business model of relying on doctors for cash flow.

We, on the other hand, do not rely on doctors to find patients. We advertise directly to prospective patients. Success in advertising gives us the kind of sustainability and predictability for our revenues that eludes the doctor-owned centers.

TLSR: Do you monitor the quality of the outpatient treatments?

HF: Many of our 400 employees are devoted to maintaining quality of care. Nobilis is fundamentally results-oriented.

TLSR: What professional qualifications do you and other key players bring to Nobilis?

HF: I have worked for 30 years as a lawyer and businessman in securities and mergers and acquisitions (M&A). My job at Nobilis is to develop the marketing strategy, and to find acquisitions for the company. We went on an acquisition binge after I joined up two years ago.

Dr. Kramer has 20 years of experience creating startups, primarily in the outpatient space. He has bought and sold 60 or so ambulatory surgery centers. He is a rock star in the field.

Our CEO is Chris Lloyd. Lloyd was the CEO of Athas Health LLC, which we purchased in November. Athas was an online marketing company focused on laser spine procedures under North American Spine (private). We purchased Athas Health because it has a great deal of marketing expertise. Lloyd has worked as a top executive at many companies, including as an auditor at one of the Big Four accounting firms.

TLSR: What did the acquisition of Athas Health bring to Nobilis?

HF: Nobilis is on track to book more than $80M in 2015. Athas had about $40M on its pro forma for 2014, but its model was fundamentally different from that of Nobilis. It advertises, it acquires the patients, it sends them to a doctor in a facility with which it has a contractual relationship, splitting the facility fee. If Athas make $40M, the facility made $40M. By buying Athas, we are capturing most of the facility’s $40M, because 90% of Athas' business is at our ambulatory surgery centers. We did not acquire $40M in revenue in the Athas deal; we actually acquired $76M in revenue. The numbers really glow at the level of EBITDA and the bottom line.

TLSR: How does Nobilis break down expenses and revenues?

HF: Our No. 1 expense is marketing. We spend a great deal of money on advertising, whether it's our local sales team, our marketing team, our call centers, TV advertising or Google ad word-search purchases.

At the facility level, we have traditional rent and overhead, primarily staffing costs. But we focus on high-revenue cases—cases with extraordinarily high margins. For instance, on a spine case, we can get $30–$40,000 ($30–40K) in reimbursement, but our costs will be $4–5K. It is the same with bariatrics and podiatry, where the costs of $20K reimbursable can be as low as $1K. Carpal tunnel, obstetrics and gynecology, and headache treatments follow the same model—high revenues, very low costs and, again, all based upon serving a medical need that can be marketed to the general public.

TLSR: This reimbursable is only from insurance companies?

HF: We do not accept Medicare or Medicaid. All of our cases are paid by third-party insurance. About 95% of our patients are employed, with insurance through their employers.

TLSR: Why is the markup so high on the reimbursables?

HF: Spinal surgery, for example, requires advanced procedures. The equipment is extremely expensive. A robotic spine machine we just purchased cost $750K. There are extremely high capital costs for advanced surgical equipment.

TLSR: Are your capital expenditures (capex) included in your reimbursement charge?

HF: No. Capex is not figured into in the reimbursement amount. The amount we charge for a procedure differs from community to community according to formulas set up by insurance companies.

TLSR: Do you have an eye on new acquisitions?

HF: Yes. We have multiple acquisitions on our radar. Primarily, we want to build a cookie-cutter platform, where we have a small hospital and an ambulatory surgery center in each market. We have done that in Houston. We are in talks to acquire small hospitals in Dallas and Phoenix.

TLSR: How do you finance acquisitions? Debt?

HF: We have $13M in debt; $12M of that was shareholder debt from the acquisition of Athas Health in November. We are in the process of refinancing that debt. We have a very clean balance sheet. Our total cash exceeds $10M throughout our facilities. We have a large receivables account, the collection cycle is 60–90 days. The fourth quarter is typically the strongest in our line of work.

TLSR: Has the Patient Protection and Affordable Care Act impacted your revenue stream?

HF: We hope that it will impact us positively, because more people now have insurance. We do not yet have any numbers on that.

TLSR: Who are your competitors?

HF: We have no direct competitors because we offer multiple procedures through marketing, and nobody else is doing that right now. Our closet competitor, if there is one, would be Laser Spine Institute LLC (private), which sells a laser spinal procedure. It is a heavy advertiser and does quite well in Florida. The large portfolio companies—United Surgical Partners International Inc. (USPI; private), Amsurg Corp. (AMSG:NASDAQ) or Surgical Care Affiliates Inc. (SCAI:NASDAQ)—own 100 to 200 ambulatory surgery centers each. But the model is what I call old-school: As management companies, they only own about 15% of the facilities. The other owners are doctors. The large firms can only hope that the doctors will maintain case flow. There is very little possibility for growth under that model. We do not see the large firms as competitors. We have a new model—disruptive, to borrow a phrase.

TLSR: Do your advertising campaigns target potential patients directly, or do you also target doctors?

HF: We go directly to the consumer. All of our procedures are elective. We do not do emergency room procedures. We do not do brain surgery or cancer surgery. The beauty of our system is that people can elect when they want to get their back treated. They can elect when they want that nasty foot pain resolved. They can elect when they get a stomach band procedure. Our services are tailored to fit the consumer's needs. Part of the sales process, as you can imagine, is educating the consumer on the procedure. And we only work with the finest doctors in the area for each procedure.

TLSR: You mentioned that doctors are responsible for making sure they get paid.

HF: The doctor bills his or her professional fee to the insurance carrier, so we are not involved in that aspect. There are three fees for a standard case. A professional fee for the doctor. A professional fee for the anesthesiologist, who also bills separately. We only bill an insurance company for the facility charge.

TSLR: What do the doctors get from associating with Nobilis?

HF: The struggle in our industry is getting case flow. We generate flow through marketing to the consumer, but we also get it directly from doctors. Rather than offer equity positions to the doctors, our vast marketing department builds them custom marketing programs to find more patients. That makes everybody happy.

TLSR: What do you offer to investors?

HF: Nobilis is still the early stage of a creating a high-growth vehicle. We are building out a platform that can be applied in multiple cities around the country. The diversity of our revenue stream—pumped by strong reimbursement margins—makes us quite attractive, if I can say so. There is still marketing space for build out in Phoenix, Dallas, and Houston. In Texas, we are looking at expanding into San Antonio and Austin. We can move our model into 30, 40, or 50 cities throughout the country. As we scale up, the advertising spend will benefit from economies of scale. Under this scenario, we can run statewide campaigns, rather than be limited to localities. Large marketing campaigns will increase our bottom line.

TLSR: How is your stock performing?

HF: It took a couple years to get investors to understand that we are running on a different business model now, and to bring them back to Northstar—now Nobilis. In early 2013, we were at $0.10/share, and just starting our road shows to meet investor institutions. It was a bit of a hard sell at first. But we kept coming back to the same people every few months. As our new model took hold, institutional investors started to buy stock. It moved into the $1/share range, and then to the $2/share range. Due to our most recent acquisitions, Nobilis is now trading around $.50/share. That tells you something about how the market sees us.

TLSR: Is share dilution an issue?

HF: We have about 60M shares out. Fully diluted, it is about 74M. We do not have any plans for a dilutive equity raise. We will do acquisitions through debt financings.

TLSR: Is Nobilis itself a candidate for M&A?

HF: One of our long-term goals is to attract one of the multibillion-dollar companies—one with a portfolio of 100 or 200 ambulatory surgery centers or hospitals. The partner would need to buy into our model. For us, the possibility of entering into an M&A is a matter of growing to the right size. If we finish 2015 at $200M-plus, we are going to be on the M&A scope.

TLSR: Which major players would be interested?

HF: There are companies like USPI, which is owned by Welsh, Carson, Anderson & Stowe, a private equity firm. There is Surgical Care Affiliates, and AmSurg. These large companies have huge portfolios, and none of them has a marketing model comparable to ours. As we prove that that our model is robust and scalable, we will become increasingly desirable.

TLSR: Thanks for your time, Harry.

Harry Fleming, president of Nobilis Health Corp., has more than 25 years of legal and business experience in corporate finance and securities law, focusing on emerging growth companies, mergers and acquisitions, strategic business planning and turnaround execution. His background includes venture capital representation, business strategy consulting, public company representation, as well as mergers and acquisitions with high-tech firms in Houston and Boston. Additionally, he has extensive experience consolidating companies in the healthcare, energy and waste management industries. As CEO, president, CFO and general counsel for several public and private companies, Fleming has a broad base of experience dealing with turnaround and growth strategies. Having spent more than 20 years at law firms in Houston and Boston, Fleming maintains the highest rating (AV) of U.S. attorneys by Martindale-Hubbell. Fleming is admitted to practice law in Texas and Massachusetts. He is also admitted to practice before the U.S. Supreme Court. Fleming received his master's degree in business administration from Boston College in 1999, his juris doctorate from the University of Houston in 1983, and a bachelor's degree from the University of St. Thomas in 1980.


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DISCLOSURE:
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 or his family own shares of the following companies mentioned in this interview: None.
2) Nobilis Health Corp. paid Streetwise Reports to conduct, produce and distribute the interview.
3) Harry Fleming had final approval of the content and is wholly responsible for the validity of the statements. Opinions expressed are the opinions of Harry Fleming and not of Streetwise Reports or its officers.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
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Streetwise – The Life Sciences Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part..

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Participating companies provide the logos used in The Life Sciences Report. These logos are trademarks and are the property of the individual companies.

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Thursday, January 22, 2015

Convert Catalysts into Profits: Sagient Research's Edward Stopke

Source: Peter Byrne of The Life Sciences Report (1/22/15)

http://www.thelifesciencesreport.com/pub/na/convert-catalysts-into-profits-sagient-researchs-edward-stopke

The biotech sector is teeming with companies racing to bring the hot new drug or therapy to the marketplace. But realistically assessing the therapeutic potential of pipeline products is the healthy approach for selecting a winner. In this interview with The Life Sciences Report, Edward Stopke of Sagient Research unveils his list of companies with catalytic moments in the making.

The Life Sciences Report: What types of catalysts affect biotech stocks?

Edward Stopke: The primary catalyst affecting a biotech stock is trial data, especially large Phase 3 trials that test the compound against a comparator. The other main catalysts emerge from regulatory interactions with the U.S. Food and Drug Administration (FDA) or the European Medicines Agency. Product safety rulings can drastically affect the trajectory of a biotech stock, of course. But investors need to watch a company's interactions in meetings with the advisory committees serving the governmental agencies. These interactions can presage whether or not the agency will eventually approve the drug.

TLSR: Are there economic catalysts that affect the life sciences sector as a whole?

ES: Pending changes in pricing policies for therapies can catalyze shareholder actions. Historically, many companies have been able to price high without too much backlash from payers. Companies have typically charged less for treatments with large patient populations, and the more expensive treatments target smaller numbers of patients. But during the last year, some high pricing became less sustainable. I am thinking of Gilead Sciences Inc.'s (GILD:NASDAQ) pricing for Sovaldi, its treatment for hepatitis C virus (HCV), which caused quite a stir with insurers and governments alike. Companies generally argue that high prices are in line with previous treatments and that the products offer superior efficacy. But the sheer number of eligible patients for a high-priced drug can strain entire healthcare systems. I predict that during 2015 payers will force prices downward, not just for highly prevalent diseases such as HCV, but in all therapeutic markets, stem cells included.

TLSR: What catalysts are coming up for stem cell companies in 2015?

ES: Cytori Therapeutics Inc. (CYTX:NASDAQ) is developing a stem cell therapy from fat-derived stem and regenerative cells. It has Phase 1/2 data for heart disease slated for release in Q1/15. Vericel Corp. (VCEL:NASDAQ), which recently changed its name from Aastrom Biosciences Inc., has Phase 2 data expected in H1/15 on tissue repair cells for heart failure. Athersys Inc. (ATHX:NASDAQ) is developing a stem cell product called MultiStem.

TLSR: What are the projected applications for MultiStem?

ES: Athersys is studying MultiStem in human trials for stroke, myocardial infarction (MI) and graft-versus-host disease (GvHD). It is in Phase 2 development for stroke and early Phase 1 for MI and GvHD. The firm completed enrollment in its Phase 2 stroke study before the new year, so the first 90-day results will emerge in Q1/15E. Athersys plans to progress its MI program into Phase 2 in Q1/15. The company is looking for a development partner to further its program. Announcing a partnership deal would signal investors that experts have faith in MultiStem, and Athersys' stock price would respond positively.

TLSR: Who else do you like in the stem cell space?

ES: bluebird bio Inc. (BLUE:NASDAQ) is developing its Lenti-D product, which is more of a gene therapy product, but does consist of the patient's own stem cells. These are modified by the lentiviral vector to deliver genetic material into the cells themselves. There is a lot of hype floating around this company. It is currently in Phase 2/3 studies for a rare genetic disease, adrenomyeloneuropathy, which is similar to multiple sclerosis. Hopefully, we will see data for that pipeline product next year.

TLSR: What other therapeutic spaces do you like for strong catalysts in early 2015?

ES: Neuralstem Inc. (CUR:NYSE.MKT) has a major depressive disorder product in clinical trials code named NSI-189. It is an oral compound designed to stimulate neurogenesis of the hippocampus, which could potentially reverse the atrophy seen in depression and schizophrenia. So far, we have only seen earlier preclinical and Phase 1 data, but those results have shown meaningful reductions in both cognitive and depressive symptoms in patients who are on active therapy. And the treatment has been well tolerated.

TLSR: How does Neuralstem's product differ from competitive products?

ES: There are many treatments on the market for treating depression, of course. Most of these products, however, are small molecules. They work by inhibiting the reuptake of a combination of norepinephrine, serotonin and/or dopamine. Neuralstem's treatment uses the patient's own neural stem cells to protect against damage to the nervous system itself, and to repair existing damage, too.

TLSR: What expertise do Neuralstem's managers bring to the marketplace?

ES: Neuralstem's chief scientific officer and senior vice president of research previously worked at the National Institutes of Health's Laboratory of Molecular Biology, where they researched the isolation of human neural stem cells.

TLSR: Do you see any other potential catalysts for Neuralstem?

ES: If all goes well, Neuralstem's NSI-189 product will move into Phase 2 development in Q2/15, so that is a good advancement opportunity. We should see topline results in the early part of this year for the firm's other stem cell products, including NSI-566. That treatment is currently being studied in a Phase 2 trial for Lou Gehrig's disease.

TLSR: Who is making waves in the cancer treatment space?

ES: There is a lot of excitement surrounding the chimeric antigen receptor (CAR) T-cell immunotherapies that engineer the patient's own immune cells to target tumor-specific molecules. Kite Pharma (KITE:NASDAQ) is developing its CAR T programs for hematologic cancers, and its KTE-C19 program has shown high response rates in earlier Phase 1/2 studies. Kite just bought a licensing deal with Amgen Inc. (AMGN:NASDAQ). The deal is related to the next generation of immunotherapies based on Kite's cell therapy platform. Celgene Corp. (CELG:NASDAQ), Novartis AG (NVS:NYSE) and Juno Therapeutics (JUNO:NASDAQ) are working on similar programs.

Rexahn Pharmaceuticals Inc. (RNN:NYSE.MKT) has a couple of clinical-stage oncology candidates. Its most advanced compound is known as Archexin. It targets the PI3K pathway and is being studied in a Phase 2 trial for renal cell cancer. While we have not yet seen data yet from this compound, last year the FDA approved Gilead's Zydelig for lymphoma, which has a similar mechanism of action. Other large pharma companies, such as Novartis and Merck & Co. Inc. (MRK:NYSE), are studying similar compounds in various oncology indications. The research synergy with these big firms could prove fruitful for Rexahn in terms of acquisition potential.

TLSR: I see that Rexahn recently appointed Richard Rodgers to its board. What does Rodgers bring to the company?

ES: He brings experience with in- and out-licensing, as well as mergers and acquisitions. He was previously with Abraxis BioScience Inc. until it was acquired by Celgene. He was also with MGI Pharma Inc., which was acquired by Eisai Inc. (ESALF:OTCPK).

TLSR: What types of specific catalysts are likely to affect Rexahn's stock price?

ES: If Rexahn can harness Rodgers' experience to secure a licensing deal for Archexin, its stock price would obviously respond positively. It has a few other early-stage compounds in various tumor types. If any of these products survive later-stage studies, the market will provide rewards. We could see some Phase 1 data from Rexahn's RX-5902 and RX-3117 compounds in the near future. These are being studied for very solid tumor indications.

TLSR: What other biotechs with emerging catalysts do you follow?

ES: I like quite a few smaller companies, like Raptor Pharmaceutical Corp. (RPTP:NASDAQ), Celator Pharmaceuticals (CPXX:NASDAQ), Sarepta Therapeutics Inc. (SRPT:NASDAQ), Celldex Therapeutics Inc. (CLDX:NASDAQ), PTC Therapeutics Inc. (PTCT:NASDAQ) and Rockwell Medical Inc. (RMTI:NASDAQ). Each of these has a unique pipeline.

TLSR: Can you synopsize where each of these companies is at in the pipeline?

ES: Raptor Pharmaceutical's main compound is Procysbi. It is already on the market. It was approved in 2013 to treat cystinosis, and it is one of only three such treatments approved in the U.S. Raptor is also studying Huntington's disease and nonalcoholic fatty liver disease, the latter being of notable interest due to its large market size and connection to obesity. Raptor is expecting results from its larger Phase 2b study in H1/15.

Celator Pharmaceuticals is developing CPX-351 for leukemia. It began Phase 3 development in late 2012 with about 300 patients. The first results from this study are expected sometime in Q2/15.

Sarepta Therapeutics has a number of compounds. The most advanced is eteplirsen, developed for a type of muscular dystrophy. We have seen clinical data on it, and it is fairly good, although taken from a small subset. There is a lot of speculation about whether the FDA will accept Sarepta's new drug application (NDA) and what kind of data the agency will require for approval. Sarepta expects to file around the middle of this year. A successful filing and acceptance could move the stock price nicely.

PTC Therapeutics is developing its ataluren compound for muscular dystrophy. The company submitted a rolling NDA to the agency in late December. It is not yet a complete application, but it does allow completed portions of the application to be submitted and reviewed on an ongoing basis. PTC hopes to complete the application in late 2015. We should see the first results from its larger Phase 3 study toward year-end 2015.

Celldex Therapeutics' most advanced candidate is rindopepimut, which is being developed for glioblastoma, brain cancer. Topline results for a large Phase 3 are expected in the middle of this year. If the results prove positive, Celdex shareholders will benefit, as rindopepimut is the firm's main compound in a large treatment space.

Rockwell Medical has a single compound called Triferic. It is being reviewed by the FDA as a treatment for iron deficiency in chronic kidney disease patients. The agency is expected to give a decision on provability by the end of this month.

TLSR: Aside from handicapping the pipeline products, what qualities do you look for in a firm?

ES: It is vitally important to understand the capital structure of a company. As far as a company's potential staying power, I look at the general platform. Is it a stem cell platform? Is it a genetic therapy type of platform? Is it a completely new mechanism of action? Is it something that could be used in various types of diseases?

TLSR: Sounds good, Edward. Thank you for speaking with us.

ES: Thank you, Peter.

Edward Stopke is a financial analyst with BioMedTracker and has been with Sagient Research for three years. He is responsible for day-to-day analysis with the BioMedTracker analyst team, and works with the scientific analysts to determine the financial and market impact of early-stage drugs. In his time with Sagient, Stopke has gained an understanding of the pharmaceutical and biotech development process to better develop revenue models for various indications. Stopke received a bachelor's degree in economics from San Diego State University.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

DISCLOSURE:
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 or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Rexahn Pharmaceuticals Inc., Neuralstem Inc., Athersys 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) Edward Stopke: I own, or my family owns, shares of the following companies mentioned in this interview: Gilead Sciences Inc., Sarepta Therapeutics Inc. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned. Directors, officers, employees or members of their families are prohibited from making purchases and/or sales of those securities in the open market or otherwise during the up-to-four-week interval from the time of the interview until after it publishes.

Streetwise – The Life Sciences Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part..

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Life Sciences Report. These logos are trademarks and are the property of the individual companies.

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Thursday, January 15, 2015

Oppenheimer Analyst Rohit Vanjani's 2015 Pipeline: Pot, Pain, and Babies

Source: Peter Byrne of The Life Sciences Report (1/15/15)

http://www.thelifesciencesreport.com/pub/na/oppenheimer-analyst-rohit-vanjanis-2015-pipeline-pot-pain-and-babies

Building on another blockbuster year in specialty pharmacy and generics, Rohit Vanjani, a senior analyst at Oppenheimer & Co., has reason to be excited for 2015. Vanjani specializes in nurturing firms developing novel ways to treat some of humanity's most persistent medical problems, and in this interview with The Life Sciences Report, he describes some of the most promising therapies, and companies, in the life sciences sector.

The Life Sciences Report: At Oppenheimer, you are an expert in products related to epilepsy, fertility and opiate intolerance/pain control. What do these biotech spaces have in common?

Rohit Vanjani: Not a lot, frankly. There is a mix of influences on the structure of my coverage list. I have a personal preference for picking firms in certain therapeutic areas, especially pain alleviation and generics. The firm's institutional preferences are reflected through banking deals. The bankers do secondary offerings or initial public offerings (IPOs) for companies that we cover. Our analysts are roped into that process when we have an underlying interest in a company. Conversely, an analyst can reject covering a company that does not make sense to him or her.

For example, Marinus Pharmaceuticals, Inc. (MRNS:NASDAQ) was a banking-related name. It made sense for me to learn about its epilepsy product because I cover specialty pharmaceuticals and generics. Marinus has a product in development that I believe in. The product, ganaxolone, may offer a new mechanism of action with a low side-effect profile. I conservatively model its sales starting in 2020.

TLSR: What is the backstory on ganaxolone?

RV: Ganaxolone treats refractory epilepsy. Roughly 60 percent of the patients taking epileptic drugs are treating epilepsy with either a single antiepileptic drug or polypharmacy. The rest are refractory, in that typical antiepileptic drugs do not work for them. Doctors are always looking for new therapies in epilepsy to treat the refractory patient population. Marinus' ganaxolone is a naturally occurring product that is slightly modified in the lab. It has a low side-effect profile that could be useful for treating the refractory patient population.

Marinus is also developing ganaxolone in various orphan indications, including Fragile X syndrome, a genetic condition that causes intellectual disability, and PCDH19 female pediatric epilepsy, also a genetic disorder. I do not give credit for these orphan indications in my model, but the products could provide upside to the valuation if they pan out.

TLSR: Marinus has recently reported a net loss. Is the company fairly valued?

RV: I don't believe Marinus is fairly valued. It is hard for investors to get excited about revenues when they are further out. Marinus has upcoming catalysts, however. In mid-2015, data will arrive for PCDH19 and Fragile X. By the end of 2015, there will be additional data for ganaxolone in the firm's larger target market of epilepsy. I believe Marinus will likely report a loss for the next couple of years, as the company invests in its pipeline, and that is as it should be. In 2019–2020, the onset of sales will translate into profitability further down the road.

TLSR: Are institutions investing in Marinus?

RV: Marinus' initial public offering, a couple of months back, was mostly supported by institutions. Institutional long-term investors can wait three to five years for returns while retail folks tend to have shorter horizons.

TLSR: What else is going on in the epilepsy space?

RV: SAGE Therapeutics Inc. (SAGE:NASDAQ) did very well in its IPO. SAGE has an allopregnanolone compound as well, with an orphan drug indication. Marinus has another form of the allopregnanolone compound, an oral formulation that is slightly modified to make it less reactive and longer acting. SAGE's allopregnanolone compound has a different indication called super-refractory status epilepticus. SAGE's product is an injectable. However, because SAGE's IPO has done so well, Marinus is now dusting off its injectable product, looking to find a niche.

TLSR: Is SAGE Therapeutics' stock doing well in the current market?

RV: SAGE IPO'd a few weeks ahead of Marinus. It was targeting $60 million ($60M). It went to $90M on the IPO. The IPO price was $18/share. It is now trading at $43/share, so it has done really well.

TLSR: What else can you tell us about SAGE's prospects in the orphan drug market?

RV: Orphan indications like SAGE's allopregnanolone are often treated differently by the markets. There are a number of studies on expenses for orphan drugs. Some studies show that sales of drugs designated orphans by regulators in the U.S., Europe or Japan will grow at an annual rate of 11% per year through 2020, compared to only about 4% for drugs treating larger populations. The industry has rushed to develop orphan drugs in recent years, because they have cost incentives to put orphans through clinical trials. There can be a 50% tax credit on research and development (R&D). These are not inexpensive projects, but there are considerable cost incentives in play. Plus, the patent holder gets seven years of exclusivity, which can allow for premium pricing.

TLSR: Are there any other firms in the epilepsy market that you follow?

RV: There are a number of developers working in the cannabidiol space. The background story on cannabidiol is that Cannabis has a number of different active cannabinoids. THC, delta-9-tetrahydrocannabinol, is known colloquially as marijuana, and is likely the best known cannabinoid. But cannabidiol, another cannabinoid in Cannabis, is thought to have more therapeutic applications than THC. People are looking at cannabidiol for various therapeutic areas—for epilepsy, for glioma, for arthritis. It is an exciting, new therapeutic paradigm.

Insys Therapeutics, Inc. (INSY:NASDAQ) has a cannabidiol program. GW Pharmaceuticals Plc (GWPH:NASDAQ), which has done really well, also has a cannabidiol program. A private company called Zynerba Pharmaceuticals Inc. has a transdermal gel and patch cannabidiol program.

TLSR: Do these firms manufacture their own cannabinoids, or do they take them from the plants?

RV: GW's is plant-based. Insys' is synthetic; it manufactures cannabidiol in a facility in Texas.

TLSR: Is there a difference between synthetic and horticultural cannabidiol?

RV: Most people say no, that the active constituents are the same for both. But the idea is that by going synthetic, a factory may generate greater yield. Manufacturing margin could be wider with a synthetic because extracting cannabidiol from a whole plant can be more cumbersome, but this still is a bit of a wait-and-see.

TLSR: Cannabinoids can address epileptic symptoms?

RV: Animal models have shown some effectiveness in epilepsy, and that is where the cannabinoid excitement was born. But all of the cannabidiol programs are in very early stages. There is not a ton of data out there to say whether cannabinoids will actually work as theorized in humans.

TLSR: Who do you like in the infertility space?

RV: It might be worthwhile to take a step back and look at the history of infertility treatment to grasp the present situation. In vitro fertilization (IVF) was introduced in the late 1970s by a scientist named Robert Edwards out of the U.K., and his gynecologist colleague, Patrick Steptoe. They are largely credited with pioneering the process of IVF. The two had the innovative but controversial idea that they could help couples with infertility problems by harvesting eggs directly from the ovaries and returning them to the womb once they had been externally fertilized. The technique worked, and has become the standard of care today, but there likely haven't been many paradigm-breaking developments in the fertility field since then.

I am not discounting the innovations that have occurred, such as preimplantation genetic diagnosis, which involves subjecting early-stage embryo cells to genetic analysis, and intracytoplasmic sperm injection (ICSI), where a single sperm is injected directly into the egg. That process greatly assisted male infertility. Those improvements emerged in the 1990s. But they may not have been on the order of the leap we saw in the late 1970s with the introduction of IVF.

There are now three companies working in the fertility field. Each company targets a different step in the IVF pathway, all with the goal of improving pregnancy rates.OvaScience (OVAS:NASDAQ) works to improve the quality of the ova, or eggs, used in IVF for fertilization. Auxogyn Inc., a private company, aims to select the most viable egg after fertilization. Another private company, Nora Therapeutics, strives to improve the embryonic environment or the womb space once the egg is implanted.

TLSR: What is the nature of OvaScience's technical advance?

RV: Think of mitochondria as the battery packs of a cell. Studies have shown that adding donor mitochondria to eggs can improve fertility rates by adding energy. But each mitochondrion has its own chromosome. Therefore, donor mitochondria adds a foreign DNA source to the egg. A lot of regulatory bodies have an issue with that.

OvaScience has discovered that the outer cortex of a woman's ovary contains egg precursor cells, which are basically arrested eggs. Each of these eggs has mitochondria. Using laparoscopy or biopsy, OvaScience can extract precursor cells, withdraw mitochondria, and inject the mitochondria into the egg along with the sperm, using the ICSI process. This avoids injecting foreign DNA because it uses the woman's own egg precursor cells. There has not been a lot of data from OvaScience's AUGMENT process yet. But based on the prior studies using donor mitochondria, OvaScience' technique makes sense in theory.

TLSR: What time frame are we looking at to find out whether or not AUGMENT really works?

RV: OvaScience has launched abroad in four regions—the United Arab Emirates, Turkey, the U.K., and Canada. It will also launch in Japan. OvaScience has a patient registry program, but we are not likely to see patient data until the end of 2015 or early 2016. The company is going to launch commercially and hope it works out as planned.

TLSR: Does OvaScience have pricing advantages in play?

RV: After OvaScience's recent investor day, its stock ticked up significantly. Pricing was three to five times higher than perhaps what the Street had been anticipating. IVF is priced differently in different regions. In the U.S., the cost can be roughly $15,000 ($15K) per cycle or procedure for clients using their own eggs, and $25K for procedures using a donor egg, but can vary from region to region. The idea was to price AUGMENT between $15–25K in the U.S., the cost of one cycle.

However, the technique was not allowed to launch in the U.S. because of the U.S. Food and Drug Administration (FDA). The FDA did not halt the OvaScience studies, but it did require a discussion about the state of the trials. OvaScience has pivoted its marketing strategy and launched in regions where the regulatory agencies are more lax—where IVF products can be sold without running patient trials, and sometimes where IVF is done at lower prices. However, when OvaScience announced that AUGMENT would be sold within the range of the U.S. price no matter the region, it effectively set a global price. That news has significantly bolstered the value of its shares.

TLSR: OvaScience can market its IVF product in these regions without having gone through the clinical trials that would be necessary in the U.S.?

RV: In the U.S. there is a low bar and a high bar on what is called the 361 HCT/P pathway. The FDA can allow a developer to go through the low bar, which is a practice-of-medicine standard by which, if a product sort of works and catches on, it is effectively approved. The high bar is used for greater-risk new drugs, biologics and medical devices. IVF was originally introduced without rigorous patient trials, using an adoption technique. OvaScience thought that it could apply this same methodology. It was targeting 40–80 test cycles in the U.S. before launching. The FDA, however, sent the company a letter in September 2013, in effect stopping the tests. So instead, OvaScience launched abroad in areas where regulatory agencies are more conducive to the practice-of-medicine standard rather than running clinical trials.

TLSR: What kind of clinical trials do you have for IVF? It seems a little extreme to have to have people give birth in a study.

RV: Exactly. That is why there are no clinical trials for IVF. Because AUGMENT was enhancing IVF, OvaScience thought it could run the product through the low bar. By launching abroad, however, it can gather procedural data over a number of years, and then come back into the U.S. without having to run clinical trials. Or so the theory goes.

TLSR: Why did the FDA step in?

RV: For safety. If something goes wrong, it does not want to be accused of having allowed the methodology without running any clinical trials.

TLSR: Let's talk about the pain control space. Who do you like there?

RV: Insys Therapeutics, which has the cannabidiol program in the pipeline, is growing very quickly in its various markets. Its alternate formulation product, Subsys (fentanyl sublingual spray), launched in March 2012, has already reached the 40% range of market share for breakthrough cancer pain products. Management is aiming for peak penetration at roughly 50% within one to two years. The company expects continued prescription and revenue growth for Subsys in Q4/14. It believes that Subsys can continue to achieve revenue growth in the next two years.

TLSR: How does Insys' product work better than similar products?

RV: The main differentiator for Subsys is its formulation—a sublingual spray—and its fast onset of action. The comparator products, Actiq (fentanyl citrate oral transmucosal lozenge/Teva Pharmaceutical Industries Ltd. (TEVA:NASDAQ) and Fentora (fentanyl buccal tablet; Teva), are an oral lollipop and a buccal tablet, respectively. With Actiq, you have to actively swab the product, and with Fentora, the product must dissolve. They can be tough to take. They also have a 15-minute onset-of-action time compared to Subsys' 5 minutes. The difference likely has to do with the sublingual nature of Subsys. The sublingual surface has a shorter distance to blood vessels than does the blood mucosa region, the lining of the cheeks and the back of the lips, where Actiq and Fentora are placed. Because Subsys covers a mucosal surface with its spray stream geometry, the result is predicted to be better absorption with faster time to relief of pain.

TLSR: What other products does Insys have in the pipeline?

RV: Insys has an oral dronabinol product, which is a different formulation of Marinol (dronabinol; AbbVie Inc. (ABBV:NYSE)), for chemotherapy-induced nausea and vomiting (CINV). The Marinol capsule has a highly viscous active pharmaceutical ingredient with delayed absorption and high intrapatient variability—dose to dose it can behave very differently. Patients can get different results when they take the same dose at different times of the day. Insys' oral liquid formulation is supposed to improve on these shortcomings.

Oral dronabinol is the first pipeline product that the company will likely launch (other than Subsys). The other program that people are excited about is the cannabidiol program, which Insys is developing for a number of orphan drug indications, including Lennox-Gastaut and Dravet syndromes, two orphan pediatric epilepsy indications.

TLSR: Is Insys looking for acquisitions along the way?

RV: Insys' management team has indicated that it is looking at both product and company acquisitions. It has noted that any deal would consist of marketed products that fall under the supportive care umbrella. Insys has previously defined that therapeutic category as either pain products or nausea and vomiting products.

2015 may be more of a spend year, as Insys works on its cannabidiol, buprenorphine, and dronabinol programs. If that is the case, then investors will look to Subsys, and Subsys is fairly well valued in the share price, in my opinion. To get investors excited, Insys could look for a product acquisition in the CINV space.

TLSR: How is Insys stock doing?

RV: The stock has done really well, and I was Outperform for a long time, but am now Neutral rated. Insys has a valuable pipeline, but I want to see the company hit some of the road markers ahead before giving credit to that. The shares have done really well based on Subsys' growth, but I think the story now is more about the pipeline.

TLSR: Are there any other firms that you think we should be watching?

RV: IGI Laboratories Inc. (IG:NYSE.MKT) did something very similar to what ANI Pharmaceuticals (ANIP:NASDAQ) did, which I talked about in a previous interview with The Life Sciences Report. IGI could be what ANI was 12 months ago. Both have taken significant price increases on products—ANI with esterified estrogens/methyltestosterone, and IGI with econazole nitrate—that were a large part of the story until now. However, last December, ANI did a deal that was somewhat transformative, in which it purchased 31 discounted products from Teva. Almost a year later, we're starting to see the benefits from that deal, as ANI returns those products to market, one of which was a drug shortage product for which ANI was able to take significant price.

With IGI, at the end of September, the company announced a product acquisition deal as well. The company acquired injectable products from AstraZeneca Plc (AZN:NYSE). Nine of the 17 injectables that it purchased from AstraZeneca are drug shortage products, so it is now a race for IGI to return those discontinued products to market, with the potential of significantly raising prices. That could be a big story in 2015 and 2016.

TLSR: How do you think 2015 is going to shape up for life sciences?

RV: Generics companies will likely have a pricing window for a year or two because of the problems with the Indian manufacturers, in my opinion. Orphan drug companies are going to continue to develop orphan drugs that have pricing behind them, that have market exclusivity, and that have R&D tax credits. However, there is likely going to be increasing pushback from the pharmacy benefit managers because they are in a more consolidated space. We have already started to see pushback from Express Scripts Inc. (ESRX:NASDAQ) and CVS Health Corp. (CVS:NYSE), which are flexing their muscles and taking drugs off of their formularies. That dynamic is going to continue in 2015.

TLSR: Thanks for your time, Rohit.

Rohit Vanjani is a director and senior analyst at Oppenheimer & Co., covering generics and specialty pharmaceuticals. Vanjani has been with the firm since 2011, initially working on the Healthcare Services Team (healthcare IT, PBMs, and labs). Prior to Oppenheimer, Vanjani worked at Jefferies, UBS and Leerink Swann, helping cover biotechnology, managed care and hospitals, and specialty pharmaceuticals. He has also worked as an assistant economist at the Federal Reserve Bank of New York, and as an economics associate at Stanford University, helping to conduct healthcare economic research. Prior to those roles, Vanjani worked as a laboratory associate researching enzyme active site residues and animal mitochondrial DNA. Vanjani holds bachelor's degrees in biochemistry and economics from the University of Michigan, and a master's degree from New York University's Stern School of Business.

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