Submitted by The Life Sciences Report as part of our contributors program.
Source: George S. Mack of The Life Sciences Report (1/10/13)
JMP Securities Managing Director and Senior Biotechnology Analyst Michael King Jr. never recoils from the most sophisticated science. He’s always been partial to oncology indications and to new technologies that disrupt old paradigms and usher in the new. King has the kind of stock-picking track record that merits attention, and in this interview with The Life Sciences Report, he brings six important ideas to the table for investors to consider.
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The Life Sciences Report: Mike, after nearly two decades as a sell-side analyst, you’ve seen any number of new therapeutic trends emerge and new opportunities appear for investors. Back when you and I spoke in 1998-1999, you made a strong case for Immunex Corp. and its antibody fusion protein technology, which would be acquired by Amgen Inc. (AMGN:NASDAQ) for $16 billion ($16B) on the strength of Enbrel (etanercept). That was a great call.
Michael King: Thank you. The antibody revolution is not done in the least. Another burgeoning area is the oligonucleotide space, with companies like Alnylam Pharmaceuticals Inc. (ALNY:NASDAQ), Isis Pharmaceuticals Inc. (ISIS:NASDAQ) and Regulus Therapeutics LLC (RGLS:NASDAQ) active in the arena. Sarepta Therapeutics’ (SRPT:NASDAQ) morpholino exon-skipping technology has proven to be active and quite exciting in the treatment of Duchenne muscular dystrophy. I like to say we’re in a ribonucleic acid (RNA) world these days, and these oligo companies are, perhaps, what antibody companies were two decades ago.
We also see good immunotherapy science being developed, versus the old style that I refer to as “grind it up and stick it back in the patient.” That was a crude approach and one that did not prove fruitful. But we are learning more about the basic science behind the immune response-or lack thereof-in oncology. Galena Biopharma Inc.’s (GALE:NASDAQ) NeuVax (nelipepimut-S or E75) is a very exciting approach to preventing the recurrence of breast cancer. It is an example of the good science going on in the immunotherapy space right now.
TLSR: Your coverage contains a wide range of market caps, from $100 million ($100M) all the way up to Celgene Corp. (CELG:NASDAQ), with a large-cap $33B market valuation. There is also a lot in between. Many of your institutional investor clientele can’t buy micro caps, but I’m wondering if you find that some billion-dollar-and-above investors are curious about stocks on the very low end. How might they take advantage of these smaller opportunities?
MK: There is some mythology about what investors can or cannot purchase. I’ve seen some of the big hedge funds-and even some venture capital (VC) funds-go in after micro caps. The VCs haven’t been quite as proficient at this as the hedge funds have been, but basically what these investors do is recapitalize (recap) a business. They’ll put in as much-or more-cash as the current market cap of a company to make sure that its technology progresses and that it retains the bulk of the commercial rights in the process. Let’s face it: If investors can go in and recap sub-$100M companies-and really do it right-they can make logarithmic returns on their investments. Baker Bros. Advisors LLC has done a fabulous job with biotech; one prominent standout benefitting from that technique is Synageva BioPharma Corp. (GEVA:NASDAQ), which is developing an ultra-orphan disease enzyme replacement therapy for a lysosomal storage disorder. The company now has a market cap of more than $1B.
TLSR: Could we go ahead and talk about some companies?
MK: Sure. Galena Biopharma’s NeuVax is a very exciting vaccine-type approach to breast cancer. NeuVax is indicated for patients who are ineligible for treatment with Herceptin (trastuzumab) because they are not HER2-positive (human epidermal growth factor receptor 2, also known as “neu”), meaning they do not show 3-plus or greater levels of HER2 expression. NeuVax is an adjuvant immunotherapy that seems to prolong the disease-free survival interval in HER2-negative patients – those with low levels of 1-plus or 2-plus HER2 expression, which represent 50% of patients. Galena will complete enrollment in its pivotal randomized phase 3 trial in node-positive early-stage breast cancer with low-to-intermediate HER2 expression by H2/13.
TLSR: Mike, going into a phase 3 trial implies that there is clinical proof of concept already. Is that indeed the case?
MK: Yes. One needn’t look too hard to find plenty of evidence in the scientific literature that Galena’s drug works. Experts have shown that the drug is active. Some of the data generated at the MD Anderson Cancer Center are quite intriguing. Now it is up to Galena to do the registration trial that will be required for the U.S. Food and Drug Administration (FDA) filing. We have the regulatory hurdle to get over and Galena is doing a very nice job of executing on that.
TLSR: The stock has quadrupled over the past 12 months, and so there has already been a lot of value creation for investors. I asked about proof of concept because the data look incremental to me, and competing products could make NeuVax obsolete. I wonder if the NeuVax data strike you as remarkable?
MK: I don’t know of anybody else working on products in the same low-HER2 expression area. Understand that NeuVax is an adjuvant therapy for breast cancer in patients who are in remission following surgery and/or chemo. The drug actually works in patients who have node-positive, as well as node-negative, disease. It happens to work a bit better in lower-risk patients than in higher-risk patients, but it could potentially be used in both. To your point, the idea is to prevent relapse, and these patients are typically women who would otherwise just be watched and not receive any therapy at all.
TLSR: You mentioned Sarepta Therapeutics Inc. with regard to oligonucleotide technology, which you seem excited about. Would you comment on it?
MK: Here at JMP, senior analyst Lisa Bayko and associate analyst Heather Behanna follow Sarepta. The company has done a commendable job getting the morpholino technology to work. It goes right at the heart of the genetic defect, or at least one of the genetic defects, in Duchenne muscular dystrophy (DMD). There are subtypes of DMD with different exon deletions, but for exon 51 disease, Sarepta’s eteplirsen (formerly known as AVI-4658) seems to be quite active.
TLSR: Sarepta is up more than sixfold over the past six months, and it now has a market valuation of more than $600M. This product and the company have garnered some significant attention in nonscientific and non-business media. For you, is it a cautionary sign that Sarepta has a lot of retail investor presence?
MK: It can cut both ways. On the one hand, it is in keeping with the [former Fidelity Magellan portfolio manager] Peter Lynch maxim of investing in what you know. From that perspective, there’s nothing wrong with reading something in the paper and investing in it, whether in biotech or some other industry.
To your point about valuation, investors need to keep perspective. If Sarepta is successful with eteplirsen, it should be worth a heck of a lot more than it is today. The company had no problem raising $125M in mid-December, and you don’t raise that kind of money from retail investors. That tells me a fair amount of sophisticated institutional money was in that financing. Institutions do their due diligence on the science, the clinical and the regulatory. The only thing I would add is that investors have to be clear on what their timelines are. There has been a lot of enthusiasm about the possibility of Sarepta filing for approval in 2013.
TLSR: The eteplirsen data have been pretty dramatic in this small group of patients. Do you feel the company may file in 2013?
JMP Associate Analyst Heather Behanna joins the conversation.
Heather Behanna: We think the data look promising. But we think it is highly unlikely, given the small trial sample size, that the FDA will give eteplirsen accelerated approval. There would be huge upside if it did, but we don’t see that as likely. We should know in Q1/13: Sarepta won’t disclose the information until it has the minutes in writing and everything is set.
TLSR: Mike, I know you follow Onyx Pharmaceuticals Inc. (ONXX:NASDAQ), which had its product Kyprolis (carfilzomib) approved on July 20, 2012, for multiple myeloma. Could you comment on it?
MK: Onyx has done a great job in getting approval for Kyprolis. It succeeded despite significant doubt among many, not only in the Wall Street community, but also the medical community. A fair number of people thought that the FDA wasn’t going to approve any drug on the basis of single-arm studies, and that it would ask for another trial. Actually, FDA said it didn’t want lousy single-arm studies. Onyx undertook a very good study in a patient population that represented a significant unmet need. Kudos to it. But investors are grappling with a few issues right now.
TLSR What issues?
MK: First, there are the competitive products. The 800-pound gorilla in this new room is Celgene’s pomalidomide, now in phase 3 for myeloma and for myelofibrosis. Another competitive threat representing a bit of an overhang is Millennium Pharmaceuticals’ (the U.S. oncology unit of Takeda Pharmaceutical Co. Ltd. [TKPYY:OTCPK]) proteasome inhibitor Velcade (bortezomib), which is administered as a subcutaneous therapy, and perhaps will be an orally administered product in the future. The idea of an oral proteasome inhibitor used to scare doctors, but it turned out not to be the deadly poison that many thought it might be.
Velcade has been on the market since 2003. Oncologists have become familiar with it and now manage the side effects very well, especially with the subcutaneous version. However, I’d point out that there is a large population of myeloma patients who have received intravenous Velcade and are probably intolerant to it now. That’s a perfect market for Kyprolis, which, I think, is an all-around better drug.
Kyprolis dosing began with a 15-minute infusion to compete with Velcade, but in a bold move the infusion was stretched out to 30 minutes. With the new protocol oncologists could get significantly higher doses into patients over a longer period, and the product has been well tolerated. Some surveys of Kyprolis users have found that clinicians have become comfortable with using doses that are higher than what the label recommends, as well as combining Kyprolis with other agents to improve its efficacy.
According to some of the data presented for newly diagnosed myeloma patient population at the American Society of Hematology (ASH) annual meeting (held in December 2012), the therapy is getting remarkable results – 100% response rates in some cases. These are relatively small studies of 70 – 80 patients, but not puny by any stretch of the imagination. The more use the drug gets, the better it is going to look. For that reason, it will start out by picking off the low-hanging fruit, which is the relapse/refractory-to-Velcade population.
TLSR: The patients in this study were being treated with combination therapy of Kyprolis, Revlimid (lenalidomide) and dexamethasone, and the data were absolutely stunning. Being newly diagnosed patients, I’m wondering if that implies that the hematologist/oncologist (heme/onc) would want to begin using Kyprolis as a first-line therapy?
MK: Yes. The thought leaders start there, but as word of mouth gets out, publications and journals come out and results are presented at conferences, you’ll see followers come to Kyprolis pretty rapidly.
TLSR: Onyx is still just a $5.3B market-cap company. It has doubled in the past year, and it’s up 77% over the past six months. How much more upside is there to this stock?
MK: I’ve been pretty public with my long-term thesis, where I’ve said Onyx could approach a $10B+ market cap. Look, Millennium was bought for $8B by Takeda. That was with Velcade, a drug that doesn’t have the same product characteristics that Kyprolis has. Plus, you have to add in the kinase inhibitor franchise that Onyx possesses. It has regorafenib, which was approved and is the first breakthrough drug in colon cancer since Genentech’s (a unit of Roche Holding AG [RHHBY:OTCQX]) Avastin (bevacizumab). I believe approval for regorafenib in relapsed/refractory gastrointestinal stromal tumor is pretty well assured. That’s a pure royalty. Onyx doesn’t have to spend a nickel against that revenue stream, and the market should capitalize that generously because it is pure profit. A $10B market valuation seems like a very doable number to me.
TLSR: You also follow Ariad Pharmaceuticals Inc. (ARIA:NASDAQ), which just got accelerated approval for Iclusig (ponatinib) for treatment of resistant or intolerant chronic myelogenous leukemia (CML) and for Philadelphia chromosome-positive acute lymphoblastic leukemia. The approval was given three months before the drug’s Prescription Drug User Fee Act (PDUFA) date.
MK: Accelerated approval, I think, was to be expected. I said to investors before the approval that if they looked at the FDA’s recent pattern with Johnson & Johnson’s (JNJ:NYSE) Zytiga (abiraterone acetate) in December and Medivation Inc.’s (MDVN:NASDAQ) Xtandi (enzalutamide) at the end of August, both in prostate cancer, and with Kyprolis for multiple myeloma in July, the accelerated approval of Iclusig was a no-brainer.
TLSR: The Street was not happy that the FDA tacked a black box warning onto the Iclusig label, and Ariad shares sold off. What happened?
MK: I only wish the drug had been approved before the ASH meeting, which was in early December, and not after. That would have helped a little bit. But, frankly, the black box warning, which warns of potential liver and cardiac toxicity, doesn’t matter much because the drug is going to sell by word of mouth. The academics know about this therapy. If you watch blogs and patient discussion groups, you see that people are very excited about Iclusig and couldn’t wait for its approval. I think the Street freaked out unnecessarily when the FDA put the black box warning on the drug. I also think that the FDA is smart enough to understand that Iclusig is going to get a lot of use. Let’s face it – look how long Gleevec (imatinib mesylate) has been around, and look at the relative lack of activity. I don’t want to create the impression that these are bad drugs, but treatments like Sprycel (dasatinib) and Tasigna (nilotinib) are better than Gleevec, and they still leave a lot to be desired. I think Iclusig is going to make the older drugs look relatively tame in comparison.
TLSR: You and I have recently spoken about stocks selling off when a drug is approved, perhaps even on good news. Could this have been a factor in Ariad’s sell-off?
MK: Oh yes, inevitably. But the black box warning exacerbated that.
TLSR: The scourge of the heme/onc and leukemic patients in general is development of resistance. A patient might do well in the beginning, but then the drug is rendered ineffective when the tumor cells figure out how to pump out or otherwise neutralize the agent. Iclusig inhibits not only its target BCR-ABL gene, but also its isoform mutants, which confer resistance on the tumor cells. I’m wondering if you believe that is going to be the biggest selling point for the heme/onc?
MK: Yes. No question about it. In fact, the data from the trials suggest that the number one prognostic factor in the treatment of CML concerns the development of resistance.
TLSR: Are there any other companies you wanted to speak about?
MK: Pharmacyclics Inc. (PCYC:NASDAQ) is another name in my oncology wheelhouse. We think the company will be a big winner over time. A seminal discovery and some very impressive translational work has been done with ibrutinib, the Bruton’s tyrosine kinase (BTK) inhibitor targeting chronic lymphocyctic leukemia (CLL) and other B-cell malignancies. The drug was a real tour de force at the recent ASH conference. It is clear, at least in my mind, that ibrutinib is the Gleevec of CLL.
We are changing the paradigm for CLL treatment. In fact, between BTK inhibitors and PI3 kinase inhibitors, as in the case of Infinity Pharmaceuticals Inc. (INFI:NASDAQ), oral meds are going to transform the therapy of CLL. I think chemotherapy will continue be used and Rituxan (rituximab; administered via infusion) will continue to be used, but now the new drugs will begin to be used in the relapse/refractory patient population. Researchers are also starting to see similar positive responses in patients with mantle cell lymphoma. The question becomes: What happens with other lymphoma subtypes, such as non-Hodgkin’s lymphoma subtypes like diffuse large B-cell lymphoma? We have seen signs of activity in these areas.
TLSR: Pharmacyclics was a $1B market-cap company one year ago and is now a $4.25B company. Do you see it as a big takeout like Millennium? Is it on the screen of some big pharma waiting to acquire for $8 – 10B?
MK: I think the company could get there on its own merits. But the only real buyer at the moment would be Johnson & Johnson, which made a $50M milestone payment to Pharmacyclics in October for development of ibrutinib in CLL. So far J&J has paid $150M in milestones, and Pharmacyclics could receive up to $675M more in milestones. The company is in the collaboration because J&J’s original offer to acquire Pharmacyclics was not acceptable to the board at the time. But that doesn’t mean an acquisition won’t happen. If Pharmacyclics comes up with a BTK inhibitor that is useful in immunology, then J&J has every incentive to buy it out because it would have yet another blockbuster opportunity that would go up against JAK (Janus kinase) inhibitors and the like. But for now, Pharmacyclics is probably not going anywhere.
TLSR: Are there any other companies you wanted to mention?
MK: Let me give a shout out to Astex Pharmaceuticals Inc. (ASTX:NSADAQ) in the context of the epigenetic platform. Its marketed epigenetic inhibitor is Dacogen (decitabine), which is very similar to Celgene’s Vidaza (azacitidine), both of which are DNA hypomethylating agents used in myelodysplastic syndromes (MDS) and acute myeloid leukemia (AML).
TLSR: Astex now has a $259M market cap. This company has really experienced a lot of difficulties. You would think that if you had this successful drug for MDS and AML, you would have a bigger market cap.
MK: There are a couple of things going on here. One is that Dacogen is a great drug, but it’s not a magic bullet for MDS or AML. Second, there is the intellectual property (IP) issue. Two things have been protecting Celgene’s Vidaza (azacitidine): its orphan disease status, which has now expired, and the fact that Vidaza is difficult to manufacture, so there’s been no generic competitor so far. Of course, any generic competitor that would impact Vidaza would impact Dacogen as well. Also, I don’t know that management has done itself a lot of favors by hypothecating the drug to Eisai Co. Ltd. (ESALY:OTCPK) and to J&J. Astex owns more of a residual interest in Dacogen, rather than a real substantial economic interest.
However, I think that is about to change, with recently generated data regarding Astex’s phase 2 hypomethylating agent SGI-110, which is being tested in MDS, AML and ovarian cancer. SGI-110 is a prodrug (administered in an inactive form and rendered active in the body) of decitabine (Dacogen), which, by the way, is already a prodrug. The data so far look very good. If Astex can get SGI-110 to market, then a whole different calculus will go on. The company will then have a longer IP life, and with differentiated activity. In addition, it would see the benefits of improved dosing convenience. Also, a biomarker would be developed. A lot of good stuff goes along with SGI-110, and it’s not just a reformulated version of decitabine.
TLSR: Many thanks to you.
MK: Thank you, George. I enjoyed it.
Michael King is a managing director and senior biotechnology analyst at JMP Securities. King comes to JMP from Rodman & Renshaw LLC, where he was managing director and senior biotechnology analyst. He has more than 17 years of experience as a leading biotechnology equity research analyst, consistently ranking at the top of Institutional Investor magazine’s annual sellside research survey, in addition to being named that publication’s “Home Run Hitter” in 2000. King also served as senior vice president of corporate development and communication at ZIOPHARM Oncology (ZIOP:NASDAQ). Prior to joining ZIOPHARM, King was a managing director and senior biotechnology analyst at Wedbush Securities. He holds a bachelor’s degree in finance from Baruch College.
[Editor’s Note: Michael King joined JMP Securities during the course of producing this interview and has yet to formalize his coverage list.]
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1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Galena Biopharma Inc. and Johnson & Johnson. Johnson & Johnson is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Michael King: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
4) JMP Securities acted as banker for Galena Biopharma Inc.
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