Tuesday, November 25, 2014

Rolling with Biotech's Regulatory Punches: Chen Lin

Source: Peter Byrne of The Life Sciences Report (11/25/14)

http://www.thelifesciencesreport.com/pub/na/rolling-with-biotechs-regulatory-punches-chen-lin

Being temporarily burned by the U.S. Food and Drug Administration can be a mixed blessing for a biotech with a good product in the pipeline. In an interview with The Life Sciences Report, Chen Lin, publisher of the investor newsletter What is Chen Buying? What is Chen Selling?, explains how to make money on biotech trades in sync with both the good regulatory news and the bad.

The Life Sciences Report: It's been a turbulent year for the biotechs. Why?

Chen Lin: In general, the market is favoring big caps. The capital market for small caps is tough. Small-cap biotech companies constantly need to raise capital to sustain research. But it seems like every time a small-cap biotech raises a lot of money, its shares are hit hard. One reason is that small caps have fewer investors than the large caps. Small cap investors like to sit back, waiting for the shares to drop so they can get in at a good price.

TLSR: Has the Ebola epidemic in Africa impacted your investment strategy?

CL: We successfully traded two stocks around the Ebola issue. When the Ebola fear was high, we sold at the peak—right after the second nurse was infected in Texas. We booked a nice profit.

TSLR: Which Ebola-related stocks did you sell?

CL: One of my long-term holdings, Sarepta Therapeutics Inc. (SRPT:NASDAQ), has a drug candidate for treating Ebola virus disease. It had discontinued a Phase 1 trial, but the drug had been effective in previous tests. When Sarepta's CEO, Chris Garabedian, talked about the Ebola product on CNBC, I sold some of my position. When the Ebola fears quieted down a few days later, I bought it back. I've done that two or three times. That buy-sell-buy strategy has lowered my cost base.

Another Ebola-related stock that did well for me was NewLink Genetics Corp. (NLNK:NASDAQ.GM). It has an Ebola vaccine candidate. Very few people had heard about it. I got in at around $20/share, when the vaccine, initially developed by researchers in Canada, started testing. The vaccine testing in animal and nonhuman primate studies showed it was very effective, according to the Canadian government. I sold NewLInk close to $40/share a week later—a very pleasant trade, indeed.

TLSR: Can you tell us a little bit more about NewLink?

CL: Yes. The company has a line of promising biotech products. NewLink's management has a very good reputation and a fine track record. But my trading around NewLink was just for Ebola. [Editor's note: An agreement to partner with Merck & Co. Inc. (MRK:NYSE) on development of the NewLink Ebola vaccine was announced on Nov. 24.]

TLSR: Ebola is not over yet. It could continue—hopefully, not—but do you see any further opportunities there?

CL: Ebola is not over. However, the nurses are fully recovered. That confirms my original assessment of a couple of months ago, which was that Ebola can be contained. NewLink plans to start testing its Ebola vaccine soon in the U.S., the European Union and in a large Phase 2 trial in Africa. GlaxoSmithKline (GSK:NYSE) is also testing its Ebola vaccine in Phase 2 in Africa. If the tests are successful, NewLink's stock has a lot more upside.

TLSR: Can you tell me a little bit more about Sarepta's Ebola product?

CL: With its RNA drug platform, Sarepta is well positioned to attack the Ebola virus. It had done testing on its product that was sponsored by the U.S. Department of Defense. Those tests were quite successful, but the government stopped sponsoring the trials due to a budget cut. Sarepta kept a few dozen usable doses of its Ebola drug on hand, though. When CNBC was featuring any company with a product that could cure Ebola, Sarepta was one of them. The publicity provided me with a nice trade. With the recent Ebola outbreak, I believe the chance is high our government will sponsor the development again.

TLSR: The U.S. Food and Drug Administration (FDA) recently threw Sarepta a curveball on its Duchenne muscular dystrophy (DMD) program. How did that affect its prospects?

CL: Sarepta is focused on treating DMD, not Ebola. The recent FDA communications with Sarepta are disappointing. The FDA found a problem in one of Sarepta's manufacturing facilities. It can be fixed if the FDA will work with Sarepta.

The DMD formula is a magical drug candidate, in my opinion. That is why we invested in Sarepta. This drug candidate has zero side effects! Sarepta should have enough money to get through drug approval if the FDA allows it to file a new drug application (NDA) in H1/15. I think political pressure will convince the FDA to give Sarepta a chance for approval in 2015. This drug can save the lives of children suffering from DMD.

TLSR: What did the FDA findings do to Sarepta's stock?

CL: As I told my subscribers, when I saw the recent news of the FDA giving Sarepta a hard time, I reduced my position. It is not good for a company to be fighting with the FDA. Sarepta is one of the most heavily shorted stocks in the biotech space.

TLSR: Does Sarepta have other products in the pipeline?

CL: It has the Ebola and other antivirus drugs, but the DMD drug is key.

TLSR: Do you have suggestions for investors who hold Sarepta stock?

CL: I am still holding a core position. If the data continues to look good—and I have no reason to doubt that it will—Sarepta will be successful in the end. The FDA is under a lot of pressure from the parents with DMD-afflicted children and from other people in the industry. The FDA does not want to change its ways. But in the end, it's a taxpayer-funded institute. The FDA will have to answer to the patients, to the parents. I believe that Sarepta's DMD drug will be approved in 2015–2016.

TLSR: Are Sarepta's competitors pressuring the FDA?

CL: Prosensa Holding N.V. (RNA:NASDAQ) is Sarepta's main competitor. The issue with Prosensa's competing drug candidate is that its toxicity is very high. As a result, it can only dose 6 milligrams per kilogram (6 mg/kg), whereas Sarepta can dose 50 mg/kg. That is why the effectiveness of Sarepta's drug is so overwhelming; it is a very similar RNA technology to Prosensa's candidate, but the dose is higher. Prosensa was a partner with Glaxo in a Phase 3 trial that failed. Glaxo withdrew from the partnership, but Prosensa is still filing an NDA. Ironically, the FDA is not rejecting that application.

Prosensa was just taken over byBioMarin Pharmaceuticals Inc. (BMRN:NASDAQ). That transaction shows renewed interest in the space. It makes Sarepta an interesting takeover target as well. [Editor's note: The BioMarin acquisition of Prosensa for $840 million was announced on Nov. 24.]

TLSR: Who do you like in the cancer space?

CL: I own Sorrento Therapeutics Inc. (SRNE:NASDAQ). This undervalued biotech is researching a bioequivalent to Celgene Corp.'s (CELG:NASDAQ) blockbuster Abraxane (paclitaxel). The data will come out in Q1/15 and an NDA could be made in Q3/15. At that point, the market will suddenly wake up to the good news that Sorrento has a drug that can compete with Celgene's key product. Frankly, Sorrento also would be a good takeover candidate for Celgene.

TLSR: What is Sorrento's stock trading at now relative to where it was a year ago?

CL: Sorrento is trading around $4/share. A year ago it was at $15/share. The company raised money a few months ago at $5/share. That is where I got in. I feel that Sorrento will soon be posting a very significant result. Insiders have been buying, and I am holding on to the stock. My understanding is that the managers have enough capital to last until the end of 2015. The key results will be out in Q1/15, and the company should be filing the NDA by Q3/15. That should be positive news for the share price.

TLSR: What qualities do you look for in the management of a biotech firm?

CL: For firms I intend to hold for a while, I focus on an executive's asset management skills and deal-making experience. There are a lot of small-cap deals in the biotech realm. Because it is very hard to go public, many small companies sell themselves or merge with other biotechs to provide liquidity. That makes management experience very important. For example, Sorrento acquired its key asset, the drug candidate competing against Celgene's, from another company last year. Management teams with a good vision can acquire some very good assets.

TLSR: What other innovative biotech firms do you like?

CL: I have been holding Neptune Technologies & Bioressources Inc. (NEPT:NASDAQ; NTB:TSX) for a long time. It has a krill oil-based product. Krill oil is different from fish oil because it is very easy to absorb. It can reduce triglycerides, reduce low-density lipoprotein (LDL), and increase high-density lipoprotein (HDL). No other drug can do that.

Neptune is really under the radar. Its stock is not trading very high. The company is going through a management change: It has taken on industry veteran Jim Hamilton as the new CEO. Its stock went over $2/share on the news.

Neptune has built up its production line to 150 tons/year of krill oil. It has also reached a remarkable licensing agreement, by which other krill oil manufacturers have to pay Neptune a royalty. The company has a very solid balance sheet. It recently announced a stock repurchase. Insiders are buying the stock. It should be a solid ride in 2015.

TLSR: You put out a scorecard for your investments. Who are your best biotech firm performers this year, and who has not met expectations?

CL: The best performer is NewLink. Its stock almost doubled in one week. The most disappointing performer is Sarepta because of the FDA's recent communication. It has been a very tough year. But to be successful, an investor must be nimble. I like to get into the stocks that few people have noticed, and then sell when people get excited.

TLSR: Are there any other life science juniors that you would like to call to our attention today?

CL: I like another company that also has a problem with drug approval, AcelRx Pharmaceuticals Inc. (ACRX:NASDAQ). The company should be able to refile its NDA in H1/15. I have owned this stock for a while, and I now have a smaller position than I had before. But I am closely watching it. AcelRX is going through a management change. It should have enough capital to last until the FDA approval. We are looking at an H1/15 filing and, hopefully, in H2/15, a final approval.

TLSR: What is the nature of its drug?

CL: It is an innovative way to kill pain called Zalviso (sufentanil sublingual microtablet system). After a painful operation, many patients are hooked up to intravenous morphine bottles for pain control. This is a painkilling product that the patient puts underneath the tongue. It has been very successful in Phase 3.

TLSR: What has the trajectory of AcelRx's stock been?

CL: If Zalviso gets approval, AcelRx should return to double digits. It trades at about $6.70/share currently.

TLSR: Thank you, Chen.

Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc. While a doctoral candidate in aeronautical engineering at Princeton, Chen found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.

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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 owns, or his family owns, shares of the following companies mentioned in this interview: none.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. 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) Chen Lin: I own, or my family owns, shares of the following companies mentioned in this interview: Sarepta Therapeutics Inc., Sorrento Therapeutics Inc., Neptune Technologies & Bioressources, AcelRx Pharmaceuticals 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. 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. Comments and opinions expressed are my own comments and opinions. 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, November 20, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TLSR: Could you talk about some companies, please?

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

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

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

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

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

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

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

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

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

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

TLSR: Could you go to the next name?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TLSR: Dick, thank you.

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

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DISCLOSURE:
1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and he provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: MusclePharm Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Richard H. Huebner: I own, or my family owns, shares of the following companies mentioned in this interview: VolitionRx Ltd., Omni Bio Pharmaceutical Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. The opinions expressed in this interview are not the opinions of GVC and not an offer to buy or sell any security. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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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Friday, November 14, 2014

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

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

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

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

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

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

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

TLSR: How is EVD not understood?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

TLSR: Go ahead with the first name.

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

TLSR: Another name, please.

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

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

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

TLSR: Another name?

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

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

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

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

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

TLSR: The next name?

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

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

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

TSLR: Steve, go ahead with your last company.

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

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

SB: Thank you too.

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

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 recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

DISCLOSURE:
1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and he provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Omeros Corp., NeoStem Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Steve Brozak: I own, or my family owns, shares of the following companies mentioned in this interview: Navidea Biopharmaceuticals Inc. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has acted as a financial advisor with the following companies mentioned in this interview: NeoStem Inc., Cempra Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview, but refrain from investor suitability decisions.
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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