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With the odds stacked against a drug entering clinical trials, investors need to be assured that the upside will be momentous when success does come. Burrill & Co. Managing Director Elemer Piros leverages science and the unmet needs of patients with his extensive knowledge of the capital markets to bring lower-risk, higher-return ideas to investors. In this interview with The Life Sciences Report, Piros explains his investment thesis and zeroes in on best bets.
The Life Sciences Report: Burrill & Co. is known as a biotech venture capital firm. Now you have a boutique research franchise to shine some light on very small public companies that might have excellent technology but are ignored by the Street. Would you tell me about that?
Elemer Piros: The core philosophy of Steve Burrill, for the last 25 years, has been to embrace unrecognized technologies on the cutting edge in therapeutic areas such as regenerative medicine and personalized medicine. We have expanded on that by adding the research function. It’s not just about the companies that are ignored; we also look at companies that have been loved in the past but have been forgotten. Perhaps there was a failure, or a series of failures in a company’s history. But if we find a promising pipeline, we are willing to be open-minded.
TLSR: Are there special areas of focus?
EP: Our research encompasses these two categories: First, we look at early-stage companies where the scientific groundwork has been laid down and is solid, and second, we look at companies embracing human testing for the first time and demonstrating some indication of efficacy in treatment of a disease. Wherever we look the upside needs to be significant, because, as everyone knows, there is only a 10% chance that a drug will make it to the market once it enters a phase 1 trial. That means a 90% failure rate, unfortunately.
TLSR: Even small-cap funds can’t buy micro caps in a lot of cases. Are any of the major institutional investors beginning to look at micro-cap companies as viable entities for some of their qualified investors? And what about venture capitalists (VCs) investing in micro-cap public companies?
EP: This happens on a selective basis, and usually involves specialist investors in biotech. Let me cite one very recent transaction?an investment in an oncology company called MethylGene Inc. (MGY:TSX). It just closed a $26 million ($26M) round, which essentially recapitalized the company. The financing was led by Baker Bros. Advisors LLC, OrbiMed Advisors LLC, Tang Capital Partners LP, Biotechnology Value Fund and Ouray Capital. These are specialist investors in biotechnology, and they are definitely investing, even at early stages: MethylGene has a couple of compounds in phase 1/2 development for oncology indications.
You asked whether VC firms or some of the larger funds would embrace a slice of investment in the early stages of public biotech companies. Actually, there is an interesting trend. They are not moving en masse, but there are signs of activity, with some VC firms hiring portfolio managers whose sole focus will be on publicly traded, early-stage biotechnology. They invest $5?20M per company with a VC-like three- to five-year time horizon.
TLSR: Back on April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. Your firm is attempting to leverage some of the benefits of this JOBS Act. What does it mean in practice? How will it affect a startup company? More to the point, how does Burrill help companies with these new rules of eased regulatory encumbrances, restrictions and costs on small businesses?
EP: Whether we are dealing with a startup or a restart, the reduced burden of regulations, such as Sarbanes-Oxley compliance requirements, for at least a five-year period, allows these companies to invest the money they save in research and development (R&D). That is a very nice trade-off. The legislation also allows companies to enter the public markets at an earlier stage, opening access to capital from a more diversified investor base, especially when money is less available. For listed companies, liquidity is a factor for investors who don’t necessarily want to stay with an investment until a trade sale or initial public offering. How can Burrill help? We have extended our scope of services to already public or newly listed companies via the JOBS Act.
TLSR: What are you looking for today in emerging life sciences companies? What features get your attention and tip you to a bullish persuasion?
EP: A solid scientific foundation is a must, a given. Also, there has to be a clearly defined, unmet medical need. In the biotech world, there are very few examples of an Apple Inc. (AAPL:NASDAQ), where we really didn’t know we needed an iPad or iPad mini until the company presented one. We don’t often find examples where need was actually created by a biotech company.
I also like areas that are currently ignored. It could be because of historical setbacks, an example being Novelos Therapeutics Inc. (NVLT:OTCBB) in the field of radiopharmaceuticals. Titan Pharmaceuticals Inc. (TTNP:OTC) is another example, in that the field of drug addiction is not yet recognized as a meaningful market for drug development.
TLSR: You seem to have embraced the U.S. Food and Drug Administration’s (FDA) 505(b)(2) regulatory pathway, which enables companies to leverage drugs that are already in the public domain.
EP: Yes. It certainly is an easier path to follow, and companies can leverage data that were collected in phase 1, 2 and 3 trials by a previous sponsor. A specific example of a company that has been able to do this is Titan Pharmaceuticals.
TLSR: Do you get the impression that investors don’t take 505(b)(2) pathway development projects quite as seriously as you think they should? Do they overlook them because these drugs seem old to them?
EP: There could be that myth or misunderstanding. At times, the difference in formulation of a drug allows for such a minute advantage that it is difficult to handicap how it would translate into a competitive edge in the marketplace. However, sometimes a reformulated product can make a dramatic difference. For instance, the opioid-addiction pill Suboxone (buprenorphine + naloxone), originally sponsored by Reckitt Benckiser Pharmaceuticals Inc. (RBGPY:OTCPK), only works if patients take it every day. If a patient takes a drug holiday, he or she relapses back into addiction. But Titan’s Probuphine (buprenorphine) is reformulated in a subdermal implant. Patients can forget about it for six months and still be protected. Even if patients choose to abuse heroin during treatment, the illegal substance will not have the same impact because the protective drug is in the patient’s system at all times. Here, the difference in formulation is quite vast. The new formulation addresses a key problem in addiction, which is compliance.
TLSR: Who would be the buyers of Probuphine? Would it be clinics, state health departments, departments of correction?
EP: Interestingly, the clinician would need to learn a minor surgical procedure to administer the treatment. It takes about seven to 10 minutes to implant Probuphine, a matchstick-like rod made of a flexible plastic, and it takes about five minutes to take it out after six months. Not every clinician will be willing to learn this procedure, at least at first. However, about 25?30% of clinicians, according to some surveys, have indicated willingness to learn.
TLSR: You have a $4 target price on Titan, which represents an implied grand slam, a near quadruple from current levels. Is it possible that institutional buyers might negotiate the price down so far that the margins would be too thin?
EP: I think institutional buyers for the product would be in the minority, as opposed to clinicians who deal with these patients on an individual basis. Also, we haven’t witnessed a large degree of price erosion with the original product, Suboxone. To many investors it appears to be a nonexistent market, but this drug actually brought in $1.2 billion ($1.2B) last year. It is far from nonexistent.
TLSR: When might we expect approval of Probuphine?
EP: Titan submitted a new drug application (NDA) at the end of October, and the FDA has 60 days to assign a Prescription Drug User Fee Act (PDUFA) date, which would be either six or 10 months from the date of submission. We should hear a decision on the drug sometime in mid-2013.
TLSR: We know this implantable technology is used in contraception. But are there other opportunities for unmet needs?
EP: Parkinson’s disease is perhaps its second indication. Some encouraging animal data shows the technique is a reliable delivery mechanism for L-dopa (dihydroxyphenylalanine). Again, it’s not only a convenience but also a compliance-enhancing solution. The potentials are essentially limitless. The only thing Titan needs is access to additional capital to move these programs into the clinic. The source of that capital could be a potential partnership for the commercialization of Probuphine. Just before the NDA was submitted, an unnamed partner made a down payment in the form of buying stock at a 25% premium?about $4M worth?just to extend an option to negotiate for commercialization rights of Probuphine until Dec. 31. We should hear about the fate of that partnership before year-end.
TLSR: If you could go ahead and mention another stock that you like, I’d love to hear it.
EP: One of them is very easy to understand. Ohr Pharmaceutical Inc. (OHRP:OTCBB) is developing a squalamine eye drop for wet age-related macular degeneration (AMD). The only solutions we have right now are intravitreal injections, meaning injections into the eye, every month to two months. Those drugs are Avastin (bevacizumab; Genentech/Roche Holding AG [RHHBY:OTCQX]) (used off-label), Lucentis (ranibizumab; Genentech/Roche AG) and a newcomer, Eylea (aflibercept). This market is $4B worldwide and the new entrant, Eylea, from Regeneron Pharmaceuticals Inc. (REGN:NASDAQ), is anticipated to do $800M in sales in 2012, which will be the first full year after launch. The advantage of Eylea versus Lucentis is that it requires slightly less-frequent injections. Obviously, patients just hate the injections, as well as the time they must spend in eye exams before the very painful treatments actually occur.
Ohr’s squalamine is in phase 2 testing, and so, on paper, we don’t yet have clinical proof of concept. But that is not entirely true. An intravenous (IV) formulation of the drug was developed by a predecessor company, Geneara Corp., and it went through phase 2 clinical testing in about 200 patients. It has shown very similar efficacy as observed with Avastin and Lucentis, but is slightly less robust. However, having a weekly IV infusion at a physician’s office is much more onerous for patients than a once-every-two-months injection. The predecessor company had to give up because it was in a noncompetitive situation, and it wasn’t able to raise money for a phase 3 trial.
What we know now, after preclinical animal studies with squalamine as an eye drop, is that the patient is getting about six times as much drug into the retina than the dose required to inhibit neovascularization (the formation of abnormal, leaky blood vessels). This allows us to speculate that the phase 2 trial in progress will be successful. The design is very interesting. A patient is started on Lucentis and then every day, twice a day, the eye drop is given.
TLSR: Sounds like an ideal maintenance therapy.
EP: Yes. And eventually, if evidence shows Lucentis injections do not need to be given because improvement with the drops is as remarkable as it is with Lucentis, patients could start with the eye drop. But that’s farther down the road.
TLSR: Squalamine is a small molecule. Could it be synthesized?
EP: Yes, the synthesis has been worked out. It’s not coming from a natural source, which was the shark liver.
TLSR: Another stock you could mention?
EP: Another interesting stock is Neptune Technologies & Bioressources (NTB:TSX; NEPT:NASDAQ) and its majority-owned pharmaceutical subsidiary, Acasti Pharma Inc. (APO:TSX). This omega-3 fatty acid manufacturer up in Canada suffered a very unfortunate occurrence in early November. Its manufacturing plant in Sherbrooke, Qu