Thursday, December 18, 2014

Doug Loe: Canada Has Earned Its Spot in the Biotech All-Star Team Photo

Source: George S. Mack of The Life Sciences Report (12/18/14)

http://www.thelifesciencesreport.com/pub/na/doug-loe-canada-has-earned-its-spot-in-the-biotech-all-star-team-photo

Biotech investors in the United States who overlook investment opportunities across the borders are missing out on huge opportunities, says Douglas Loe, healthcare equity analyst with Euro Pacific Canada. In this interview with The Life Sciences Report, Loe gives the Canadian life sciences industry an upbeat prognosis, and offers ideas on companies that could realize generous returns in the sector in 2015.

The Life Sciences Report: Doug, you have been with Euro Pacific Canada for about a year and a half. During that time, the U.S. healthcare and biotechnology market has performed well by historic standards, yet your firm's name implies a focus on non-U.S. equities. If this is indeed true, can you explain why?

Doug Loe: Our firm is Canada-based, but offers broad-spectrum financial services to retail and institutional clients worldwide. The life sciences sector represents a relatively new focus. While our national headquarters are in Toronto, we have an office in Tokyo, where we have strong relationships with Japanese pharmaceutical and medical technology firms, and with regional investors.

We do focus on Canadian healthcare equities rather than international (and specifically U.S.) healthcare equities for a few reasons, but we are not prohibited from covering non-Canadian firms. In fact, many of our coverage stocks happen to be dual-listed on a U.S. exchange, typically the NASDAQ, since it is the most appropriate platform in terms of garnering the most investor exposure. Dual-listed stocks within our coverage universe include drug developers like Cardiome Pharma Corp. (CRME:NASDAQ; COM:TSX) and Tekmira Pharmaceuticals Inc. (TKMR:NASDAQ; TKM:TSX), specialty pharma/nutritional supplement developers like Cipher Pharmaceuticals Inc. (DND:TSX) and Neptune Technologies & Bioressources Inc. (NEPT:NASDAQ; NTB:TSX), and medtech firms Novadaq Technologies Inc. (NVDQ:NASDAQ) and Neovasc Inc. (NASDAQ:NVCN).

TLSR: With the U.S. biotech sector so strong, can you tell us why investors might want to look to Canadian life sciences for investment options?

DL: I'll start with a short history lesson, to provide context for just how deeply committed to life sciences the Canadian economy has been.

The Canadian life sciences industry is older than generally realized, dating back to the late 1890s, when pharmacist Charles Frosst founded one of Canada's first pharmaceutical distributors and manufacturers. Charles E. Frosst & Co. was acquired by Merck & Co. Inc. (MRK:NYSE) in the 1960s to form Merck Frosst, a research and development operation known as global leader in inflammation research. The research center was shut down a few years ago. Merck Frosst focused on leukotriene biology specifically, developing and commercializing leading anti-allergy medications including leukotriene analog drug Singulair (montelukast).

Canada established its "street cred" in infectious disease treatment in the early 1900s, when the Connaught Laboratories were established as a spinout of the University of Toronto to produce diphtheria and tetanus vaccines. Connaught worked with Jonas Salk in the 1950s to produce a safe and attenuated polio vaccine, and was central to the production of next-generation polio vaccine formulations, as well as methods for producing effective vaccines against measles and influenza. If you haven't contracted a fatal infectious disease recently, thank a Canadian.

And every diabetes drug developer owes a debt of gratitude to Canadians Frederick Banting and Charles Best for their Nobel Prize-winning work on isolating insulin in its active form, and then demonstrating its blood glucose-modulating activity in humans back in the 1920s.

The other key factor in Canada's healthcare history is that we have a critical mass of successful firms—firms that have either achieved clinical or regulatory success for lead technologies or have locked in shareholder returns on acquisition. Our most successful public companies, just based on takeout valuation, include Biochem Pharmaceutical Industries Ltd., which was acquired by Shire Plc (SHPGY:NASDAQ; SHP:LSE) in 2000 for US$4 billion (US$4B). Ocular drug developer QLT Inc. (QLTI:NASDAQ) redefined its strategy when it divested wet age-related macular degeneration photodynamic therapy Visudyne (verteporfin) to Valeant Pharmaceuticals International Inc. (VRX:NYSE; VRX:TSX). Visudyne was, in its day, the most successfully launched eye disease drug in history, achieving peak sales of US$484 million ($484M) in 2005. Boston Scientific Corp. (BSX:NYSE) justifiably gets most of the credit for, and garners most of the economic upside from, the first-to-market paclitaxel-eluting coronary stent, Taxus. Taxus, if memory serves, generated sales exceeding US$500M in the first full quarter of U.S. sales. But British Columbia-based Angiotech Pharmaceuticals Inc. (now private) was the firm whose paclitaxel-eluting polymer made Taxus possible.

All that said, we understand the bias toward U.S. healthcare equities, which, collectively, have generated cumulative returns since Q4/08 of 450%–550%, depending on whether you use the NASDAQ Biotechnology Index or the NYSE ARCA Biotechnology Index. It is undeniably true that bellwether biotech firms like Celgene Corp. (CELG:NASDAQ) and Gilead Sciences Inc. (GILD:NASDAQ) and Biogen Idec Inc. (BIIB:NASDAQ) have generated substantial returns over this timeframe, in each case with valuation driven materially by revenue growth from recently launched medical products—Revlimid (lenalidomide) for Celgene, Sovaldi (sofosbuvir) for Gilead, and Tecfidera (dimethyl fumarate) for Biogen Idec.

We would be hard-pressed to identify drug developers in our Canadian coverage universe generating returns based on new product launches in recent quarters, but when returns are not achievable by blockbuster drug development, Canadian healthcare stocks generate them in niche healthcare markets. A number of our coverage stocks did that over the last few years.

More recently, we have seen two distinct waves of merger-and-acquisition (M&A) activity lock in value within our coverage universe—in fact, across all sectors, without any one specific theme driving activity other than attractive valuation for the acquirer as determined by the acquiree. In 2008, we "lost" the cancer antibody developer Arius Research Inc. to Roche Holding AG (RHHBY:OTCQX), cryoablation developer CryoCath Technologies Inc. to Medtronic Inc. (MDT:NYSE), gastrointestinal disease drug developer Axcan Pharma to Texas Pacific Group (TGP Capital; private), and radiopharmaceutical/contract manufacturing hybrid firm Draxis Health Inc. to Jubilant Organosys Ltd., all at premium valuations to those ascribed by public markets at the time.

The M&A floodgates opened wide again in 2013, when we "lost" another basket of coverage stocks, including myelofibrosis drug developer YM BioSciences Inc. to Gilead, the laboratory services provider CML HealthCare Inc. to its main Canadian peer LifeLabs Medical Laboratory Services (private), specialty pharmaceutical firm Paladin Labs Inc. to Endo International, and infectious disease immune plasma producer Cangene Corp. to U.S.-peer Emergent BioSolutions Inc (EBS:NYSE).

I'd like to make a couple points on this acquisition activity. First, we believe the activity establishes a critical mass of attractive Canadian public healthcare equities for which value was locked in on acquisition. By achieving critical mass, we believe Canadian healthcare has established itself as a sector meriting institutional client interest, and not just from specialty funds. Second, it is clear from the characteristics of the acquired stocks that there were few themes tying these firms together, other than that they were deemed acquirable at about the same time.

This does enhance the level of complexity that investors must endure to achieve any weighting in the sector. It reflects a major theme in our coverage—that being that the space is an exceedingly eclectic one, one that requires company-specific analysis to fully understand how returns will be generated, and over what timeframe.

Canada belongs in any conversation that seeks to identify the leading nations in global healthcare—if not at the top of the list, a position we concede to our U.S. neighbors, certainly in the team photo.

TLSR: The Canadian life sciences sector saw cumulative market value for Toronto Stock Exchange (TSX)-listed stocks appreciate markedly within the last year or two. Are there any specific factors driving this performance, and if so, are they sustainable?

DL: We believe that most of the market value appreciation generated in TSX-listed healthcare equities has been generated on two fronts, predominantly in specialty pharmaceuticals but also in pharmaceutical benefits management, for which the representative stock on the TSX is Catamaran Corp. (CTRX:NASDAQ). Catamaran is now a U.S. firm in most respects, other than its legacy Canadian listing, but the company has Canadian roots as SXC Health Solutions, before the merger with Catalyst Health Solutions in 2012.

Separately, we saw strong performance in plasma products development, as reflected in the performance of Quebec-based ProMetic Life Sciences (PLI:TSE). ProMetic's valuation was driven in part by expectations that the firm's clinical and commercial pipelines in plasma-derived biopharmaceuticals can grow in parallel in 2015 and 2016.

If we consider cumulative absolute returns for these two stocks—Catamaran and ProMetic—since the beginning of 2012, and then add them to total returns over the same timeframe for the two largest TSX-listed specialty pharmaceutical firms, Valeant Pharmaceuticals and Concordia Healthcare Corp. (CXR:TSX), we get pretty close to a cumulative 36-month return of nearly $47B.

Moving beyond these specific stocks, we believe attractive investments exist across all sectors within the Canadian healthcare universe. But a long-standing investment thesis of ours is that notably robust returns are achievable specifically in the specialty pharmaceutical space and in medical technology development.

Starting with specialty pharmaceuticals, I suspect some of your readership may not know why the subsector is generating so much interest with institutional clients. Specialty pharmaceuticals are drug or biologics marketed to specialty physicians—to 'ologists' like gastroenterologists, cardiologists or neurologists—and not directly to general practitioners, as many drugs are. Specialty pharmaceuticals are, by definition, a more focused medical market, generating greater revenue on a per physician basis from deploying a more modest, more focused marketing team than would be required to market a broadly utilized chronic care drug or biologic.

But this characteristic in isolation would not drive investor interest without the unambiguously positive history of business success in this industry, including in Canada, and the substantial returns that have been generated.

Reflecting back a few years, Canadian investors generated impressive returns when Axcan Pharma was taken private in 2008—through various acquisitions it is now part of the specialty pharma giant Actavis Plc (ACT:NYSE). Investors also saw good returns when Biovail Corp., the Canadian drug formulation firm, merged with Valeant in 2010. And Paladin Labs was generating historically strong revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) growth before it was scooped up by Endo. We assume Endo is quite pleased with the 45–50% EBITDA margin pharmaceutical sales that Paladin was, and presumably still is, generating. But the acquisition was ostensibly a tax expense mitigation strategy that has become increasingly common in recent healthcare M&A activity.

Fueled by positive perception of historic returns in specialty pharma, the sector continues to garner substantial investor interest. There are, in our view, at least three macro elements driving future achievable value. First, well-managed specialty pharma organizations can generate EBITDA margins and operating cash flow at levels rivaling—or even exceeding—those achievable in virtually all other business categories, even when compared to traditionally high-margin industries like oil exploration or computer technology development. EBITDA margins above 30% represent the norm, even for firms that sell off-patent, mature pharmaceuticals.

Second, an abundance of mature drug products are available for acquisition. Sanofi SA (SNY:NYSE) and Merck announced in recent months that sizable components of their off-patent product portfolios were available for sale. A well-capitalized product acquirer can grow EBITDA aggressively by acquisition in this environment, as Paladin Labs did in 1996–2013, and as next-generation peers are doing now. We should say though that product availability could be softening a bit now that GlaxoSmithKline (GSK:NYSE) has withdrawn from sale a basket of established products generating about US$1.7B in aggregate sales. We'll see if this is an industry signal or a Glaxo-specific signal on product availability.

Third, a product acquisition strategy can, by definition, generate substantial revenue/EBITDA growth without incurring the expense, or the risk, of clinical research and development, driving EBITDA margin even higher.

TLSR: Do you have any Canadian specialty pharmaceutical firms that investors should be tracking?

DL: The dominant TSX-listed firm in this space, by a considerable margin, is Valeant Pharmaceuticals. Independent of its thwarted efforts to acquire U.S. peer and Botox developer Allergan Inc. (AGN:NYSE)—now poised to be enveloped into another peer firm, Actavis—Valeant grew dramatically in recent years through acquiring both products and entire firms, and in so doing still sustained an EBITDA margin at or near industry highs.

The firm's most recent transactions of substance were the acquisition of the ophthalmology-focused firm Bausch & Lomb and the dermatology/cosmetics-focused Medicis Pharmaceutical Corp. After deals for both of these massive organizations, and others, were consummated over the last few years, Valeant still generated an EBITDA margin of 46% in Q3/14. Valeant has been trading in recent weeks at near 14x enterprise value-to-EBITDA, using 2015 consensus EBITDA estimates as the denominator. Valeant is arguably fairly valued at such an aggressive multiple, but we have no criticism on the growth strategy execution that has held the profitability metrics firm while sustaining an industry-leading pace of acquisition.

An emerging Valeant/Paladin-like firm that we follow is Concordia Healthcare, a relatively new entrant into the specialty pharmaceutical milieu but one that, in its brief history, has grown revenue/EBITDA substantially since going public in Q4/13. In fact, Concordia generated an EBITDA margin in Q3/14 of 58%, which was superior to Valeant's performance, though Concordia has a shorter track record of generating margins at that level.

Concordia's originally acquired product portfolio is a mix of assets from Japanese pharma firm Shionogi [4507:TSE]. New assets include the irritable bowel syndrome drug Donnatal (hyoscyamine sulfate, atropine sulfate, scopolamine sulfate and phenobarbital), acquired from Revive Pharmaceuticals. In an interesting juxtaposition of business strategies, Revive is trying to shed mature products to focus on its research and development (R&D) pipeline, while Concordia is trying to do the opposite, rather successfully in our view.

Concordia also acquired the epilepsy drug Zonegran (zonisamide) from Japanese giant Eisai Inc. (ESALF:OTCPK). The aforementioned products cumulatively contributed to the EBITDA margin. By coincidence, Concordia is valued at about 14x enterprise value-to-2015 consensus EBITDA as well, and we assume that, like its bellwether peer Valeant, Concordia intends to grow its pipeline with new product acquisitions.

We cover two smaller, emerging, specialty pharmaceutical firms, Cipher Pharmaceuticals and Merus Labs Inc. (MSL:TSE), both based in the greater Toronto area. Both are generating their own attractive EBITDA margins, though those margins were achieved in different ways.

Cipher, until recently, was focused on its own product development, and thus only recently qualified for specialty pharma status. Throughout most of its history, Cipher developed novel formulations of already approved drugs, like the blood triglyceride-lowering drug fenofibrate (Cipher's brand is Lipofen), the opioid-like pain drug tramadol (ConZip) and the vitamin A-analog acne drug isotretinoin (Absorica), using its licensed CIP drug delivery technology. Accordingly the firm was investing in its own R&D efforts, though at an extremely modest level.

All three drugs are meeting our expectations on prescription market share and royalty revenue, but the biggest-selling drug in the portfolio by far is Absorica, mostly because its CIP formulation is demonstrably superior to generic forms. The drug does not need to be ingested with a high-fat meal as others do, and failure to comply greatly mitigates effectiveness of drugs that have to be ingested in this way. By the end of Q3/14, Absorica's U.S. prescription market share was nearly 20%, and that was achieved while pricing Absorica at a premium to generic alternatives sold in the U.S.

Cipher's quarterly revenue and EBITDA are still far below what Concordia and Valeant routinely generate, but the firm's balance sheet is impeccable, with $47M in cash and no debt, so without any substantial working capital obligations, EBITDA and cash flow are essentially identical for the firm, both in the $5.1–5.2M range in Q3/14. Accordingly, Cipher has abundant financial flexibility to grow its product portfolio by acquisition, with an intense focus on dermatology.

Merus is distinct from Cipher in that it has grown its current portfolio by acquisition and not by internal development initiatives. We expect both firms to acquire pipeline, rather than develop it, in future periods. Moreover, most of Cipher's product sales are in North America, while Merus' sales for its two lead drugs are mostly in Europe, a highly fragmented market, and one where pricing flexibility tends to be more restrictive. But Europe is still a market where stable free cash flow can be generated.

In recent years, Merus acquired two mature drug assets from Novartis AG (NVS:NYSE). The first, acquired last year, is a urinary incontinence drug called Emselex (darifenacin), and the other, acquired last quarter, is the anticoagulation and stroke prevention drug Sintrom (acenocoumarol). Merus also sells a Clostridium difficile-targeted oral vancomycin formulation called Vancocin in Canada; Shire holds U.S. rights.

Merus' financial results in Q3/14 included only Emselex and Vancocin, but even then revenue and EBITDA were impressive, at $7.2M and $3.9M, respectively, and both measures will grow appreciably when Sintrom hits the income statement next quarter. We have Buy ratings on both Cipher and Merus, and believe that both firms can grow by acquisition.

TLSR: We have been tracking efforts to curtail the Ebola outbreak in western Africa and elsewhere. There are several publicly traded firms focused on new therapy development. Can you comment on how Ebola is impacting life sciences valuations overall, and how it is specifically impacting the Canadian healthcare sector?

DL: The Ebola outbreak in western Africa has been driving new focus on R&D efforts both locally and in North America, where new product development has been most active. Before the most recent outbreak in West Africa, Ebola emerged in sporadic outbreaks. The first cases were identified in 1976, and the largest number of afflicted subjects prior to 2013/14 was limited to 425 cases before the outbreak was contained, far below the levels of afflicted subjects during the current outbreak, with more than 17,000 cases reported earlier this month.

There are no FDA-approved cures for the disease, though several companies with strong preclinical data have initiated Phase 1 clinical trials. One of the more prominent life sciences firms with clinical-stage Ebola-targeting therapies is under coverage, British Columbia-based Tekmira Pharmaceuticals. The company is a short-interfering RNA (siRNA) drug developer whose product, TKM-Ebola, is currently in Phase 1 clinical testing.

We had a singularly positive view on Tekmira back in 2012, when it successfully settled a trade secret misappropriation case with partner Alnylam Pharmaceuticals Inc. (ALNY:NASDAQ). After that, the stock was trading at its cash value and nothing more. Returns have exceeded 1,700% since Q4/12, though some pullback has transpired in recent weeks.

TKM-Ebola is partnered with the U.S. government in a biodefense-focused product development and product stockpiling alliance valued at $140M, but future product sales to the stockpile should drive cumulative deal value far higher during the product life cycle. The deal was consummated long before the western Africa breakout, and paradoxically, deal economics are virtually independent of current Ebola epidemiology—the drug is not FDA-approved and won't be for at least a couple of years, if not more.

We believe TKM-Ebola has been prescribed for compassionate use in western Africa and is officially available under special access in the U.S. In the meantime, we expect Tekmira to resume Phase 1 testing next year.

Tekmira has multiple siRNA projects that contribute to our overall valuation, including the hepatitis B drug TKM-HBV and the cancer drug TKM-PLK1, both of which are advancing well in the pipeline. Another preclinical candidate targets liver disorders, for which gene expression knockdown is predicted to confer therapeutic benefit.

A few other Ebola drug developers that we follow are not traded on the TSX, but we track them as part of our peer group analysis of Tekmira and its pipeline. The private firm Mapp Biopharmaceuticals Inc. has garnered attention in recent months for its lead antibody drug ZMapp, which was developed in collaboration with the Public Health Agency of Canada (PHAC). ZMapp was one of the first not-yet-approved therapies deployed for frontline use in treating U.S. Ebola patients. ZMapp is a cocktail of three distinct monoclonal antibodies targeting distinct Ebola epitopes, hopefully eradicating the viral infection synergistically.

The race to develop an Ebola vaccine is also garnering interest from global pharmaceutical firms, particularly since Mapp reported depleted antibody supply earlier in 2014. The list of publicly traded Ebola therapy developers basically included Tekmira and its RNA drug development peer Sarepta Therapeutics Inc. (SRPT:NASDAQ) as recently as a year ago. The list is now long and growing, and includes NewLink Genetics Corp. (NLNK:NASDAQ.GM). NewLink's vesicular stomatitis virus-based vaccine rVSV-EBOV, developed with the PHAC, entered a 40-patient Phase 1 study in September 2014, but while data initially reported for the first 34 patients enrolled showed the vaccine to be reasonably safe, the trial was transiently halted last week due to joint pain reported in four vaccinated subjects. This vaccine is being developed in partnership with Merck, which paid NewLink US$50M in upfront and contingent cash payments in exchange for regional distribution rights once clinical testing concludes, a highly lucrative economic transaction for a rare orphan indication, even while Ebola is becoming less orphanlike with each new case.

GlaxoSmithKline also reported safety data for its chimpanzee adenovirus-based Ebola vaccine. In a 20-patient safety study, data showed a strong and dose-dependent immune response to the vaccine, a sufficiently robust observation that was published in the New England Journal of Medicine last month.

We are also aware of small molecule development in Ebola, with Chimerix Inc.'s (CMRX:NASDAQ) brincidofovir and BioCryst Pharmaceuticals Inc.'s (BCRX:NASDAQ) BCX4430, and we'll see where the ground eventually settles underneath these two early-stage assets. But we remain resolute in our view that Tekmira's TKM-Ebola benefits from the strain specificity that an siRNA therapy can engender, thus allowing for siRNA sequence modification as viral mutations arise, a key advantage for a stockpile therapy in our view. We are equally resolute in our view that Tekmira's trading activity is driven by its fame, but its underlying market value is driven by substance and by the strong pathophysiological underpinnings of appropriately delivered siRNAs in general.

TLSR: You mentioned medical technology as one of the key valuation drivers for Canadian healthcare. Can you describe specific firms that you are following, and provide reasons for why you believe returns are notably strong in Canada, as opposed to the U.S., where a broader array of investment candidates exist?

DL: We have seen substantial returns and expect strong performance to continue in medical technology development. To be clear, this was not a strong sector within Canada until recently, though the drug-eluting stent developer Angiotech and the cryoablation catheter developer CryoCath are notable exceptions. Both were instrumental in developing cardiovascular devices that are still category leaders in interventional cardiology and cardiac ablation, respectively.

Firms that we formally track, and anticipate sustained operational performance from in future years, include Ontario-based Novadaq Technologies, a fluorescence imaging technology developer that has effectively partnered its SPY platform, and demonstrated the platform's efficacy in multiple, niche, surgical markets. The platform may actually be indispensible for conferring standard of care in those markets, as supported by medical evidence. In breast reconstruction, colorectal or esophageal resection, gall bladder surgery, lymph node imaging and other types of surgery, SPY imaging reduces complication rates and improves patient outcomes. The stock was one of our official Top Picks this year, until it rapidly ascended to our target. We shifted our rating to a Hold in Q2/14, but we have abundant confidence that Novadaq's SPY can generate substantial revenue growth both in system sales and in recurring procedural volume-based revenue in global markets. The firm generated record quarterly revenue of US$12.1M in Q3/14 sales, in what would normally be a seasonally soft quarter for the firm.

We also hold BC-based Neovasc in high regard. The company is developing a leading mitral valve replacement technology called Tiara, which is as advanced as any comparable device developed by far larger peers. Tiara can be deployed using a delivery catheter instead of through open heart surgery, and thus has potential to be an effective minimally invasive—well, as minimally invasive as cardiovascular surgery can be—treatment for mitral regurgitation. Neovasc has a separate technology used to treat chronic refractory angina called Reducer, and we expect both Tiara and Reducer to be well advanced in new human studies by 2015.

The other stock we are watching closely is the low-temperature sterilization system developer TSO3 Inc. (TOS:TSX; TSTIF:OTCPK), whose Sterizone VP4 platform is nearing regulatory resolution in the U.S. We expect the firm to consummate a global distribution alliance with one of the four leading sterilization technology developers worldwide, one of which includes Swedish infectious disease giant Getinge AB (GETI.B-STO), with whom TSO3 already has signed a letter of intent. Assuming regulatory risk can be resolved in the next quarter or two, we expect TSO3 to rapidly transition from being a technology developer to a technology marketer, with the revenue and EBITDA growth that this normally entails.

TLSR: Doug, thanks for your time.

Douglas Loe, healthcare equity analyst with Euro Pacific Canada, brings more than a decade of experience to financial analysis in the global drug development, medical technology, healthcare services and specialty pharmaceutical sectors. Loe has been recognized as one of Canada's top healthcare analysts by the StarMine Analysts Awards. With his extensive knowledge of the healthcare industry, Loe analyzes and publishes his views on trends in the sector and interprets them within the context of a diversified suite of companies under coverage, many of which locked in substantial returns for investors over the last several quarters. He holds a Ph.D. in biochemistry.

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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 provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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3) Douglas Loe: I own, or my family owns, shares of the following companies mentioned in this interview: Cardiome and TSO3. 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: Euro Pacific Canada underwrote an equity offering within the last twelve months for Neptune Technologies and Bioressources. Euro Pacific Canada has a financial relationship with Merus Labs. 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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Thursday, December 11, 2014

Wedbush Securities' David Nierengarten on Genetic Cures for Disease: Impossible Dream Come True?

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

http://www.thelifesciencesreport.com/pub/na/impossible-dream-come-true-wedbush-securities-david-nierengarten-on-genetic-cures-for-disease

Clinicians like to speak in terms of "managing" disease. That term of art is an admission that, in most cases, they can't cure the serious problems confronting patients. In this interview with The Life Sciences Report, David Nierengarten of Wedbush Securities explores gene therapies that actually correct an inborn mutation in human DNA, creating permanent change, actual cures and better lives for patients. It sounds beyond the reach of medicine . . . and therein lies the opportunity: Investors in gene therapy companies may capture serious returns on risk capital when the cure is attained.

The Life Sciences Report: David, you've been a venture capitalist (VC) investing in early-stage biotechnology. The companies you follow today as a sellside analyst are more sophisticated and advanced than the companies you once held in your private equity portfolios. How does that VC experience inform the work you do today, performing diligence on public biotech companies?

David Nierengarten: The risk/reward equation on early-stage companies is often quite dramatic, and that VC background did help me learn how to properly gauge that equation. Early-stage biotechs do not have the more traditional metrics used by stock analysts, like revenues or earnings. I also hold a Ph.D. in molecular and cell biology, and that helps me evaluate the science.

TLSR: You've also had experience working in a biotech company with at least one product in the clinic, and the company was in the position of needing capital. In that way, you were on the other side of the street, mindful of achieving milestones. Has that experience been helpful to you when talking to a company? Are you able to get a sense of management's ability to achieve goals?

DN: Working with Epiphany Biosciences Inc. (private) on valomaciclovir stearate did a couple of things for me. It instilled a gut check, where I look to see whether management is mindful of timelines and is being conservative in terms estimating time to completion of clinical trials. Also, looking at companies from the corporate side, the experience provided a certain perspective. Is this a management team that I think will present the case well to investors? Back in the day, I was a part of those presentations.

The other, more subtle thing that experience did was give me an opportunity to see how clinical trials are run and managed in a corporate setting. This helps me evaluate whether expectations, clinical planning and interactions are realistic. I'm also able to see if there are upsides or downsides to what management expects in terms of clinical trial recruitment and acceptance by physicians in allocating patients to clinical trials. I think those questions should come up frequently, but they don't necessarily come up on the investor side of things.

TLSR: You have a strong focus on gene therapy in your practice. What are your thoughts on the events, and aftermath, of September 1999, when 18-year-old Jesse Gelsinger died as he took part in a safety trial at the University of Pennsylvania? He had a mild form of a disease caused by an enzyme deficiency. He was not really sick and was able to manage his condition. Today, it's almost a reflex that when people hear the term "gene therapy," they think of that young patient. Why do you think that case got so much attention?

DN: Gene therapy was a novelty at that time, and it held a lot of promise. It was attempted in several patients, but that one very unfortunate incident became very high profile because of the therapy's novelty.

TLSR: Do you think the Gelsinger death impeded the progress of gene therapy?

DN: It definitely did, especially here in the U.S. In fact, some of the technology and initial clinical studies relating to companies I cover comes from Europe, which has been supportive of more and varied trials in the past decade than the U.S. Food and Drug Administration (FDA) has been. This unfortunate incident resulted in a moratorium on clinical trials here in the U.S. for years, until companies came back with what I see as safer technologies, and technologies focused on life-threatening diseases.

TLSR: Today, companies involved in antisense, RNA interference (RNAi) and even DNA-based immunization never refer to their platforms as gene therapy. It seems like there's a bias against that term. But companies like Applied Genetic Technologies (NASDAQ:AGTC) and bluebird bio Inc. (BLUE:NASDAQ) have begun using that term with some pride.

DN: I don't view RNAi and these other technologies as gene therapies, even though they're working on the genetic level. That's because they don't effect a permanent change. That's the main selling point of gene therapy. Not only are you correcting the disease at its source—that one defective gene—but it is a one-time treatment.

TLSR: Because antisense and RNAi are reversible?

DN: Yes, exactly. You could argue, with RNAi or antisense, that you are treating disease at a genetic source or close to the genetic source, but they require chronic treatment.

TLSR: But that permanence presents a danger factor too, because it is irreversible. That could be a big problem, couldn't it?

DN: Potentially. That's another reason the majority of gene therapy companies are looking at relatively rare diseases. Frankly, it would be tragic to have side effects occur. But you have to balance public safety and public health. If the potential for serious adverse events is only going to occur in a few thousand people out of 300 million (300M) in America, that's a different proposition than the adverse event profile for a drug like Lipitor (atorvastatin), which 29M people have been prescribed.

TLSR: Most diseases are polygenic (involve multiple genetic factors) in origin. Is gene therapy useful in polygenic disease, or is it only useful in monogenic disease?

DN: It's hard to say what may come in 10 or 20 years, but right now—and in the foreseeable future—gene therapy is only going to be used in monogenic diseases, with some exceptions. Some companies are looking to treat diseases, such as heart failure, which is a polygenic disease, by increasing the expression of or replacing a single protein in the person's body. That may be the one exception to the rule. The fact is, you might be treating a polygenic disease with a single gene. That said, the vast majority of companies right now are looking to treat single gene mutation-caused diseases with a corrected form of that one gene.

TLSR: David, do you consider gene therapy to be a more difficult technology to get through the regulatory process than, say, protein inhibition with a small molecule or antibody?

DN: I think it's definitely more complicated. The complexities arise not just from the permanence of gene therapy's effect, but also from the technology used and the manufacturing processes used to create the viruses in the therapies. There are multiple regulatory checks required that the FDA really hasn't dealt with in the past, as opposed to making a pill, which the FDA has been dealing with for 50 years. Even making a protein—the FDA has been dealing with that for more than 20 years. The FDA hasn't established a regulatory pathway for making a virus to deliver a gene that will have a permanent, irreversible effect on the patient.

The FDA has been working with companies to initiate gene therapy clinical trials for several years, but we still haven't seen an approved gene therapy or approval pathway in the U.S. The FDA might want something close to a permanent conditional approval, where you can treat with the gene therapy but each patient must be monitored for his or her lifetime. Is that going to be part of the treatment paradigm? There are several open questions. The number and length of the safety database are primary questions that need to be resolved for the FDA to approve these therapies.

TLSR: Would you please go ahead and choose a company under coverage to talk about?

DN: Let's start with two of the gene therapy companies, since we're on that topic. I'll begin with bluebird bio, which has had some really remarkable results to date. The company is focused on treating genetic diseases, and what's gotten people excited is initial data in beta thalassemia, where the company has essentially cured two patients to date with its latest formation. We got a data update on the next few patients at the annual meeting of the American Society of Hematology (ASH), which just took place in San Francisco. The data was really quite remarkable, with continued cures seen in additional beta thalassemia patients, with no significant safety issues or other concerns. It's amazing to think about a permanent cure for this disease. Over the next few months there will be continued updates for these patients and others in the treatment queue.

Beta thalassemia patients require transfusions to keep their red blood cell counts up to treat their anemia. What's exciting about bluebird's therapy is that the first patients became transfusion-free almost immediately after the treatment. Frankly, it is a result that I didn't think was physiologically possible. I thought, at a minimum, you would have to wait three, six, maybe 12 months to see transfusion independence develop. The response was exciting to see. Those initial data were reported at the European Hematology Association meeting back in mid-June, in Milan, Italy.

Since then, bluebird has also treated a sickle cell anemia patient. We should see initial data for that patient sometime in 2015—maybe in H1/15. We'll then see how the data evolve. Sickle cell anemia is a significant and serious disease here in America, and worldwide. The initial safety data at ASH was encouraging—the sickle cell patient appears to be tracking close to how the beta thalassemia patients began, which should bode well for efficacy in that patient.

The company has another program in childhood cerebral X-linked adrenoleukodystrophy (ALD), which is a devastating disease that affects boys. It's a neurological disease that leads invariably to death in roughly two or three years. In an earlier version of the bluebird technology, treatment stopped the progression of this disease in four boys. We're looking for the company to complete enrollment in its ALD trial in 2015. Hopefully, early data will start coming out a year or so after that. Bluebird has real potential for very exciting data flow over the next one to two years in those indications.

TLSR: David, I'm noting the Phase 2/3 trial in X-linked adrenoleukodystrophy has 15 patients in it.

DN: It's an extremely rare disease.

TLSR: Conducting clinical trials with so few patients is a very inexpensive process compared to regular drug development. Plus, companies have regulatory orphan disease benefits as well. Could this Phase 2/3 trial be pivotal?

DN: Yes. If it has positive data, I would expect bluebird to file for approval after the data are mature.

TLSR: The start date on this Phase 2/3 trial was August 2013, and the primary completion date is August 2018. I'm sure we'll have results long before 2018. Could this gene therapy be approved before that final, formal completion date?

DN: I think it's a possibility. It's going to hinge upon the duration of safety data, as well as the efficacy data. We're talking about a one-time cure, but no one really knows. No one has ever followed these patients over a very long period of time. The FDA might want a certain minimum treatment period during which these patients are followed.

TLSR: Do these viral vector therapies migrate to the cells that are supposed to have the genes turned on to express the correct protein? Do the genes normally get expressed in the "right" cells?

DN: It's a very good question, and brings us to a couple of the different technologies used in gene therapy. Bluebird bio uses what's called a lentivirus vector in the context of an autologous stem cell transplant. It takes a patient's stem cells out of the patient's body, ex vivo, and changes them with the lentivirus vector by inserting the corrected gene into the cells and putting them back into the patient. This is an autologous transplant procedure because the patient's own cells are used. The technique doesn't require the virus to home in on the right tissue.

Other companies, like Applied Genetic Technologies, are focused on tissue-specific gene corrections that either use localized injection or specific tropisms (affinity for targets) of another type of vector called adeno-associated virus (AAV), which prefer to infect particular tissues. Some AAVs prefer to go to central nervous system tissue or to muscle. Different companies use different versions of the virus to enhance delivery into the tissue where the desired correction is to be made.

TLSR: That's a good segue to Applied Genetics Technologies. Go ahead and address it.

DN: This company is really exciting, and also has an exciting 2015 teed up. It is working with AAV virus, which is locally delivered in the eye with the corrected gene to cure rare genetic causes of blindness. It is looking to begin trials in two different diseases—X-linked retinoschisis (XLRS) and achromatopsia—in early 2015, with potential early results at the end of next year.

The virus is delivered either by an intravitreal injection, meaning into the gelatinous mass between the retina in the back of the eye and the lens in the front, or by a subretinal injection, into a space that's created between retinal layers. This ensures the virus is delivered to the specific tissue layer of the eye where gene correction is desired. The company has had some very good results in animal model disease, and it also had positive results in an indication that it is no longer pursuing, which is Leber congenital amaurosis. It has treated several patients using its technology and caused improvements in vision in those patients. It's an exciting company with a different approach than bluebird's.

TLSR: Antisense and RNAi companies started developing therapies for the eye, which is a closed, self-contained compartment that's walled off from the immune system. For that reason, intraocular therapies appear to be a safe place to start. However, Applied Genetic's alpha-1 antitrypsin (AAT) deficiency therapy is an intramuscular injection. This AAT deficiency therapy is now in a Phase 2b trial. Will we see this platform translate in a non-ocular indication?

DN: The eye has been very attractive for gene therapy because of its immune-privileged position. Also, with an eye-delivered agent, huge volumes of virus or drug material do not need to be manufactured to effect a change. Presumably, if you have lower yield on the manufacturing side, your costs won't be as high going into the eye. That's another reason why I think companies view the eye as an attractive place.

Applied Genetic's AAT program also uses a virus. The company is trying an isolated limb perfusion technique to get enough virus into the needed tissues. It's the flip side of using the eye with the technology. Some other indications—for instance, muscular dystrophy—may not be ideal targets for gene therapy. It depends on the potency of the viral vector that you're using and the amount of protein required to be expressed by the new gene to cure the disease. When you start bringing up another compartment—other tissues outside the eye—there's the potential for immune reactions, not just to the virus itself, but also to the transformed cell, which is producing a protein the body might have never seen before because of a patient's inborn genetic defect. Even if it's the correct or corrected protein, it could trigger an immune response.

That's another reason why systemic therapies have lagged behind the progress we've seen in developing therapies for eye disorders, or in the alternative bluebird bio approach, which is essentially using transformed stem cells to correct the defect in the hematopoietic cells in the bone marrow.

TLSR: Is there another name you could discuss today?

DN: I'm looking for NPS Pharmaceuticals Inc.'s (NPSP:NASDAQ) Natpara (rhPTH[1-84]) to be approved by its Prescription Drug User Fee Act (PDUFA) date of Jan. 24, 2015, and that product launch, along with continued growth in the company's Gattex (teduglutide [rDNA]) franchise, both in the U.S. and ex-U.S., to drive the company and the shares in 2015.

TLSR: NPS has a $3.6 billion ($3.6B) market cap. It's not going to be as easy to move these shares as it is for Applied Genetic, a small-cap company with a $345 million ($345M) market cap, or the low mid-cap bluebird bio, with a $2.4B market cap. Can Gattex revenue propel this name?

DN: Rare disease-focused companies tend to have higher sales multiples than other biotech/pharma companies, so yes, I think continued growth in the Gattex franchise will support NPS shares. But it is the combination of that growth and the Natpara launch that should cause more significant share price appreciation.

TLSR: Can hypoparathyroidism actually move the needle on NPS?

DN: I think Naptara's market opportunity is approximately the same as Gattex's, so I definitely think hypoparathyroidism can move the needle. One factor that everyone is watching will be the Natpara label, assuming approval. If it's too restrictive, it might slow the launch. I tend to think the label will be less restrictive than feared by some on The Street, and that the launch will meet or exceed estimates.

TLSR: Thank you, David.

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

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Thursday, December 4, 2014

Brinson Patrick's Christopher S. James: All Catalysts Are Not Created Equal

Source: George S. Mack of The Life Sciences Report (12/4/14)

http://www.thelifesciencesreport.com/pub/na/all-catalysts-are-not-created-equal-brinson-patricks-christopher-s-james

Why do some good-news milestones cause stocks to languish, or even fall? Neurosurgeon Christopher James, managing director and senior biotechnology analyst at Brinson Patrick Securities, performs due diligence on stocks, in part, by connecting his clinical experience to the readiness of physicians and patients to adopt new therapies. In this interview with The Life Sciences Report, James gives real-life examples of catalysts and their effects, and highlights three strong biotech plays that could return multiples of invested capital.

The Life Sciences Report: When a small-cap company fails to meet its primary endpoint in a Phase 2 trial, the stock can lose a big chunk of its value in minutes. However, with positive data, a stock may uptick and then level out. How do you deal with this kind of situation in small-cap names, primarily in Phase 1 and Phase 2 studies?

Christopher James: That's a big challenge in the small-cap biotechnology space—and yes, it appears these stocks get overly punished for bad data and don't reap the rewards of success. We try to mitigate that risk by looking for companies developing drugs for multiple indications. Too often, small-cap stocks are valued on one or maybe two drugs. In early drug development, the goal is to establish safety, in addition to understanding the pharmacokinetics (PK) and pharmacodynamics. Phase 2 proof-of-concept is where we start to see the inflection of share price, when value creation occurs. At this stage, stocks will generally trade fairly. Investors pay a tremendous amount of attention to Phase 2 data.

TLSR: What do you look for in a catalyst? We know small-cap stocks will be reactive on the downside, but how do you know that a milestone is going to be reactive on the upside?

CJ: It depends a lot on the stage of development. Completing enrollment of a study is meaningful, but it's certainly not going to drive the stock to significant levels. The most important near-term catalyst in most of these growth names is going to be data.

Let me cite an example of very meaningful data, and why it moved shares so dramatically. Regulus Therapeutics LLC (RGLS:NASDAQ) really had no data before the hepatitis C virus (HCV) data came out on Oct. 22. The company is developing oligonucleotides that target microRNAs (miRs), and its proposed HCV product is RG-101 (GalNAc-conjugated anti-miR targeting miR-122). People didn't have high expectations for RG-101 or the HCV indication. In fact, most people didn't even think of RG-101 as a drug. But it really surprised investors to the upside, and the stock has nearly tripled since that data release—even after a pullback in November.

A lot has to do with investor sentiment going into the data. In Regulus' case, sentiment was low, in part because HCV is an incredibly crowded market; however, the data showed a mean 4.1 logarithmic drop in viral load after a single dose of RG-101. Even though this was only a Phase 1 trial with 16 patients, the data release was truly transformational, and now Regulus is around $17/share with a market cap of about $840 million ($840M). I initiated coverage on the company when it was $6/share.

Other catalysts are regulatory milestones, the most obvious of which is a drug approval. But most of my companies under coverage are early stage, with the exception of a couple. We saw the approval of MannKind Corp.'s (MNKD:NASDAQ) Afrezza (human insulin of recombinant DNA origin, inhalable, delivered via Technosphere particles) on June 27, but then we saw the stock sell off on the news. Another meaningful milestone was MannKind partnering with Sanofi SA (SNY:NYSE) to market Afrezza. Product sales are the next step for a company like MannKind.

TLSR: How do you know when a product in development is going to be well received by the medical and patient community?

CJ: That question is always difficult to gauge. When I was chief medical officer of Retrophin Inc. (PINK:RTRX), our work with the product started well before we even went public. We did a lot of work to understand the market and the unmet needs. This is one of the reasons I like companies like Retrophin, which focuses on rare diseases. In orphan indications you often have strong patient advocacy groups that (1) are well funded, and (2) have established ties with the U.S. Food and Drug Administration (FDA) in advance of drug development. The FDA is well aware of the unmet needs, where there are often no approved therapeutic options. The FDA really wants these companies to succeed, and will do everything in its power to expedite approval. But gauging the market potential and demand for the product must start very early in the drug development process. Today, in my job as an analyst, I speak with key opinion leaders at medical meetings to better understand that underlying need.

TLSR: What are some of the challenges facing drug developers and investors?

CJ: Generally speaking, I can say that scale is a major challenge in the cell technology industries. I'm covering a couple of companies that are developing cell-based therapeutics, and one of these companies, Opexa Therapeutics Inc. (OPXA:NASDAQ), is developing a personalized T-cell therapeutic agent called Tcelna (imilecleucel-T) for secondary progressive multiple sclerosis. One of the biggest challenges to commercial success with Opexa is its ability to scale up to Phase 3 clinical and commercial levels.

I'm also covering StemCells Inc. (STEM:NASDAQ), which held its first analyst day event on Nov. 20. One of the biggest questions was whether the company would be able to produce its cell-based therapeutic, HuCNS-SC (purified adult human neuronal cells of fetal origin), to scale. HuCNS-SC is a central nervous system-based therapeutic that differentiates into multiple cell lines—neural cells, glial cells and astrocytes. The company does have the ability, at least based on our conversations, to produce billions of cells at both Phase 3 clinical and commercial levels.

TLSR: Is there a concern that the original cell line may not remain viable in perpetuity?

CJ: That is a concern, but as I previously stated, the company has the ability to scale it up into billions of cells, and has also mentioned that it can qualify additional fetal brains to expand that beyond the original fetal brain. The bigger challenge right now is to identify the optimal dose. Right now, it's 20 million (20M) cells in the spinal cord injury studies, and the top dose in the ophthalmic study of age-related macular degeneration with geographic atrophy is 1M cells.

I definitely think there is extraordinary upside potential on this name, and there are meaningful milestones to get this stock to my target price of $6/share within the next 24 months.

The next data point will be the results from the second age-related macular degeneration (AMD) cohort of patients. We are looking for these data in Q1/15. We saw the first cohort drive the stock significantly in the summer. What's important about the second cohort is that there will be seven patients with slightly better visual acuity but greater geographic atrophy, and all these patients will have received the highest dose of cells, a cell dose of 1M. We could see even better efficacy in the second cohort compared to the first cohort, and the first cohort was pretty significant. I believe it was a 65 or 70% improvement in geographic atrophy.

TLSR: What are the potential ramifications of Roche Holding AG's (RHHBY:OTCQX) antibody lampalizumab, now in Phase 3 for geographic atrophy? Is that something that could take market share from StemCells, given that it's a drug rather than a cell therapy?

CJ: Lampalizumab is certainly a drug that we're aware of. It's a monoclonal antibody. Lampalizumab actually got pretty good reduction in geographic atrophy, and it was statistically significant. At 18 months, it showed a 20% reduction, and then 44% reduction in a specific subpopulation. That compares to 65–70% reduction that we saw with the StemCells' HuCNS-SC at one year.

This is a significant difference. Data from Roche's Phase 2 MAHALO trial with lampalizumab were presented at the annual meeting of the American Society of Retina Specialists in Toronto during August, and the drug appears to be efficacious, but there was a big difference from the earlier data. Early signs show that StemCells certainly has the efficacy advantage, but it's hard to make conclusions, because StemCells' patient numbers aren't there.

It's important to note that the advantage with StemCells' HuCNS-SC is a potential one-time treatment versus monthly intraocular injections of the monoclonal antibody by a physician, which are not only a discomfort for the patient but also raise a question of safety around multiple dosing. Our view is that a one-time transplant is a more ideal regimen for this patient population. But we're certainly going to be watching the Roche drug. In fact, we like the fact that lampalizumab is creating buzz around the indication. I think, net-net, it's overall a positive for StemCells.

TLSR: Roche's ongoing Phase 3 study with lampalizumab has 936 patients in the trial. Final data collection is slated for October 2018. What stage are we looking at for the StemCells trial?

CJ: StemCells is in a Phase 1/2 study. It is dosing patients with geographic atrophy AMD, and it's an open-label study. The next step would be to design a randomized, controlled Phase 2 study, and that process is currently underway. We expect that study to start in early 2015.

TLSR: Has the company seen any indications of efficacy in its thoracic spinal injury studies?

CJ: Yes. As someone who has treated devastating injuries in cervical spine, I'm very excited. I think there is a strong potential for success from what we've seen in thoracic spine. One patient recently developed some voluntary motor function in one of his toes. It's just one patient, and it's hard to make conclusions, but it looks like there could be some hints toward motor function restoration in these patients.

If you're able to move your hand, you can essentially operate an electric-powered wheelchair, which would be a phenomenal improvement in the quality of life for patients, and a phenomenal breakthrough for the company. I'm very excited about this Phase 2 cervical study, and the potential to restore any motor function. Can you imagine the headlines? Every major news source would want to speak to the investigators and to the patients.

Restoring motor function is an exciting topic, but we are excited about AMD, too. I think, for the most part, investors are more interested in the ophthalmic side because it's more of a commercially established market.

TLSR: What is the growth driver for StemCells? Is it AMD with geographic atrophy?

CJ: That's one of the growth drivers. The geographic atrophy-AMD Phase 1/2 data will be released in Q1/15. Getting back to the cervical spine study, the company is now screening patients for Phase 2, and we will see the final data set from the Phase 1 study in both thoracic spine and AMD in H1/15. We have a number of data points in 2015 to help drive the stock to my price target.

TLSR: Can you talk about another company with interesting upcoming catalysts?

CJ: We like Rexahn Pharmaceuticals Inc. (RNN:NYSE.MKT), and we think there's a big disconnect between the current valuation of about $1.15/share and our $3/share target price.

It is rare to see an actual pipeline of proposed products in clinical trials in the small-cap space. Rexahn's focal point is oncology, but it is focused diversely. You have lots of shots on goal with this name. You have Archexin, which is an RNA-based therapeutic—an antisense compound—as well as a two small molecule approaches with differing mechanisms of action. In addition to that, the company has a platform.

Last year was tough for the stock because of the lack of catalysts, but the company has a number of significant drivers coming in Q1/15. We will see Phase 1 data from Supinoxin (RX‐5902) in solid tumors in patients who previously failed other regimens. Also in early 2015, we will see Phase 2 proof-of-concept data from Archexin (Akt-1 antisense oligonucleotide inhibitor) in metastatic renal cell carcinoma. That's a program we're very excited about, and probably the most significant near-term growth driver for the stock. Then, possibly in late in Q1/15, we could see data from RX-3117 (fluorocyclopentenylcytosine) in patients with solid tumors. I think 2015 will shape up to be much more meaningful for Rexahn than 2014.

There are lots of ways to create value with Rexahn. Once we start to see some data—some hints of efficacy—early next year, I think the discussion around partnership should pick up. That could be a significant driver as well.

TLSR: You and I previously discussed BioCryst Pharmaceuticals Inc. (BCRX:NASDAQ). At the end of May, the company reported positive results from its Phase 2a OPuS-1 trial with its lead molecule BCX4161 for prophylaxis of hereditary angioedema (HAE). You have the stock rated Market Outperform with a $15/share target price. Tell me why you like the company.

CJ: BioCryst is one of the rare small-cap companies that is well capitalized. It reported approximately $128M on its balance sheet in its Q3/14 earnings report, so there is certainly no need to do any near-term financing. We're most excited with the HAE program. By the end of 2014, the first patient will be dosed in the OPuS-2 trial, which will take a year to complete. That could certainly serve as the pivotal study. The mechanism has been validated in OPuS-1, and those results were phenomenal.

TLSR: Is there a current overhang on this stock?

CJ: BCX4161 is an oral drug, and one of the things that investors have been concerned about is the formulation change in dosing. It is going from a hard capsule formulation to a soft gel capsule formulation, and there is also a pill burden around that.

The OPuS-2 study is going to be over 12 weeks, versus OPuS-1, which was four weeks. You're talking about 9-15 pills/day over 12 weeks instead of four weeks. That's a lot of pills.

But I'll remind you that these patients are extraordinarily motivated. One HAE attack can kill you. There's going to be a strong motivation to not miss any doses. But dosage is one thing that we're going to be watching.

We're also excited about a second-generation kallikrein inhibitor compound for HAE. One of them will be advanced in H1/15. We have seen better PK and greater potency characteristics with the second-generation compounds.

TLSR: What would be the advantage there? Does greater potency and improved PK mean fewer pills per day?

CJ: Yes, a once daily administration. But we're also talking about significantly higher bioavailability. You have the potential to reduce HAE attacks even further and, potentially, to prevent HAE attacks. It would be a true prophylactic, taken once a day, to prevent all HAE attacks. The second-generation kallikrein inhibitor is not just about better compliance; it's also an opportunity for a more potent compound overall.

TLSR: BioCryst has a broad-spectrum antiviral, BCX4430, a candidate for hemorrhagic fevers such as Marburg virus. I'm sure the company is thinking about using the antiviral in Ebola virus disease, where government funding can be readily accessed. The company had previously guided that nonhuman primate testing might begin by the end of 2014, and be completed in Q1/15. Do you know if these studies have begun yet?

CJ: Yes, that study is underway, and we are really pretty excited about BCX4430. The company did do a dose-ranging study in cynomolgus monkeys that demonstrated a statistically significant increase in survival at the highest dose tested. The caveat is that no animals survived past 21 days. Next, the company will be going into rhesus monkeys. This study has probably already started. It was supposed to begin in November with a higher-dose regimen.

The company has received additional funding of $2.4M, recently awarded by the U.S. National Institute of Allergy and Infectious Diseases for manufacturing. There are good trends toward efficacy at the lower dose, and the company is going to be dosing higher. We're excited about that program as well.

TLSR: Is the company still on track for an investigational new drug (IND) application filing for BCX4430 before the summer of 2015?

CJ: It's going to depend. We will see data in Q1/15, so I think the company is on track to file the IND.

TLSR: The latest World Health Organization situation report noted that deaths had quadrupled from Ebola virus disease in Guinea, Liberia and Sierra Leone since the previous report. With that kind of epidemic progression and mortality, is BCX4430 a candidate for an expanded access, compassionate use program? And could a Phase 1 trial begin soon?

CJ: Just given the number of deaths, I think that's certainly a possibility. We've always thought about BCX4430 as going directly from animals to infected patients. Once you establish safety in humans, it's feasible to make the leap to the IND within a year, and that a therapeutic could be approved. Certainly, an experimental agent like this could be available for these patients even before approval.

TLSR: Thank you.

Christopher S. James, M.D., is a managing director and senior equity research analyst focusing on life sciences companies with strong growth potential and developing novel agents for serious diseases including cancer and infectious, neurological, inflammatory, metabolic and cardiovascular diseases. He was previously a senior equity research analyst at Rodman & Renshaw and MLV & Co. Prior to joining Brinson Patrick, Dr. James was chief medical officer and senior vice president of medical affairs at Retrophin, a biotechnology company focused on developing therapeutics for rare and devastating diseases. While at Retrophin, he played a pivotal role in the study design and subsequent acceptance of an investigational new drug application with the cardiorenal division of the FDA to initiate a Phase 2 clinical study in a rare kidney disease called focal segmental glomerulosclerosis. Dr. James has prior buyside experience working at Trivium Capital Management and MSMB Capital Management. Dr. James trained in neurological surgery at Cornell-New York Hospital and Memorial Sloan Kettering Cancer Center. He obtained a medical degree from Yale University School of Medicine and a bachelor of science in biology from Cornell University.

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