Biotech 'Diamonds-in-the-Rough' Promise Huge Potential Returns: Rahul Jasuja


Rahul Jasuja Rahul Jasuja, managing director and senior biotechnology analyst with Noble Financial Capital Markets, doesn't shy away from the smallest micro-cap companies. He relishes the potential upside in finding undervalued drug developers with technology platforms that are, frankly, difficult for most investors to understand. The micro-cap companies he covers must demonstrate scientific rigor and have management capable of executing corporate and clinical goals. In this exclusive interview with The Life Sciences Report, Jasuja shares some of his favorite names, which he believes can return major multiples back to investors.

The Life Sciences Report: Would you briefly touch on your themes?

Rahul Jasuja: Let's start with gout. Gout is a forgotten disease, but over the last couple of decades, owing to the Western diet and lifestyle, it has come back with a vengeance. It is also different than the old gout, which was known as a disease of kings, queens and the wealthy—the privileged who could afford to consume heavier diets rich in protein and alcohol. The culprit in gout is serum uric acid. When uric acid levels in blood are elevated, uric acid crystals form and trigger an inflammatory cascade that causes painful arthritis in the joints. The old standard of care, allopurinol (brand names Lopurin, Zyloprim and generics), doesn't really work for modern-day gout because it does not reduce serum uric acid to a level below 6 milligrams per deciliter, where crystal formation does not occur. Only about 50% of gout patients can be effectively treated with allopurinol. The literature suggests that, to a significant extent, the use of high fructose corn syrup in sodas and preserved foods has increased the prevalence of gout in recent years. Gout is now an important area of unmet medical need and new therapies with big pharma interest are on the horizon.

TLSR: Can you describe other themes?

RJ: Harnessing the immune system in the control of disease has been a significant area of drug research and development for a long time now. Today we have a better understanding of cancer biology, autoimmune diseases and immunology in general, as well as better drug discovery tools to enhance the effort. Developing immunotherapies and vaccines is an area of renewed focus for biotechs and big pharma, though neither big pharma nor investors are comfortable with immunotherapy as of yet. More data points and commercial successes are needed. Examples of approved immunotherapies include cell-based approaches, such as Dendreon Corp.'s (DNDN:NASDAQ) Provenge (sipuleucel-T), a dendritic cell therapy targeting advanced prostate cancer, and approaches that modulate immune receptors, such as Bristol-Myers Squibb Co.'s (BMY:NYSE) Yervoy (ipilimumab), which treats melanoma by allowing cytotoxic T lymphocytes to destroy cancer cells.

TLSR: Immunotherapy is a good lead-in to another area of interest—targeted oncology.

RJ: Targeted oncology received much attention during the recent American Society of Clinical Oncology (ASCO) meeting, held the first week of June in Chicago.

"Developing immunotherapies and vaccines is an area of renewed focus for biotechs and big pharma."

Again, as scientists advance our understanding of cancer biology, improve genetic analysis (the molecular and genetic changes unique to each patient's cancer), and improve drug discovery tools, the next generation of targeted oncology drugs will be more precise, preferentially attacking cancer cells and saving normal cells from toxic effects. Big pharmas, as well as little biotechs, have developed strategies for patient specificity and patient enrichment in clinical trials—a personalized approach to cancer therapy. For example, lung cancer and melanoma are treated using knowledge of genetic analysis based on mutations within an individual patient, which dictates the course of therapy for improved outcomes. This is an area of significant promise that investors should keep an eye on.

TLSR: You have themes in gout, immunotherapy and targeted oncology. Is there anything else?

RJ: My last theme is an outlier—I have one company under coverage in the area. The indication is female sexual dysfunction (FSD), an area of acute unmet need. No drug has been approved in the U.S., and there have been many failures along the way. Notably, the same receptor targeted for FSD is also a target for obesity.

TLSR: Rahul, it is rare to see analysts initiate coverage and do detailed research on micro caps of the penny-stock variety. Obviously, stocks of this size give investors the chance to reap huge gains—five, 10 or 20 times the initial investment. How do you pick micro-cap names?

RJ: There is always more risk with micro caps. I search for micro caps with scientific rigor and, most importantly, with capable management. I believe I can pick early-stage companies driven by innovative science that may result in a paradigm shift in disease treatment. I am passionate about communicating such "diamonds-in-the rough" to investors. I am an academic at heart, and being closer to the science and drug development issues are factors that drive my interest. Micro-cap stocks fit that interest. But focusing on micro caps exclusively could be foolish in a market where investors are running away from risk and moving toward safer investment vehicles. With the dislocation in the capital markets, micro caps are not in favor with the general investors. However, sophisticated biotech investors are at ease with micro caps and may see opportunities at low valuations. Given that micro caps are out of favor, analysts must be more diligent. If an analyst is going to take on a micro cap he or she had better be super knowledgeable and convey the risk/reward proposition accurately.

If I see value in a stock that is being ignored and is mispriced, or that the Street is unaware of because it is a $15 million ($15M) market-cap company, it is crucial that I am well armed and knowledgeable enough to have a scholarly discussion with sophisticated investors. I must add, again, that having capable management is all the more important when analyzing micro caps. One needs to develop a good relationship with management and one needs to be comfortable with management's capabilities, experience and expertise, both at the corporate and scientific levels.

TLSR: Institutional investors typically can't buy stocks with a $15–20M market cap. At what point do they begin to nibble at micro caps? Is the threshold $50M, $75M, $100M?

"The next generation of targeted oncology drugs will be more precise, preferentially attacking cancer cells and saving normal cells from toxic effects."

RJ: That is really a pertinent question. Generally speaking, the vast majority of investors aren't buying micro-cap biotechs in the open market, partly because of lack of liquidity. In addition, often there is a financing on the horizon that provides more favorable metrics for investing, such as warrants and/or discounts. Small-cap mutual funds are not normally interested in companies below $150–200M in this market. Early-stage biotechs are in a dilemma of sorts because of the dwindling number of willing investors interested in micro caps. Early-stage biotechs in these market conditions seem to be raising cash at low valuations, and with a limited set of professional, biotech-focused investors. Some biotechs find themselves cash-strapped and running clinical trials with reduced capital resources. There may be too many ideas chasing too little money in these times.

It is a challenge for an analyst to communicate about early-stage biotechs and convince investors based purely on the long-term fundamentals. Even if the science and management is top-class, the lack of liquidity may be an issue with most investors.

TLSR: Let's talk about companies now. Could you tell me some of your favorites?

RJ: Let's talk about the gout space first. I cover three companies in that area, Ardea Biosciences Inc. (RDEA:NASDAQ), which was recently acquired by AstraZeneca Plc (AZN:NYSE), BioCryst Pharma (BCRX:NASDAQ) and Savient Pharmaceuticals Inc. (SVNT:NASDAQ). I have a Hold on Savient; coverage was initiated with a hold. Savient is in a tight corner because its drug targets a small, niche acute gout patient population. Savient has been a big disappointment. Ardea and BioCryst are my favorites. Ardea has a promising gout drug candidate, lesinurad, in phase 3 as an add-on to allopurinol, enhancing serum-lowering acid. AstraZeneca acquired Ardea for a healthy $1.3 billion (B). BioCryst is in the same serum uric acid-lowering gout space as Ardea, with a phase 3-ready asset waiting for a partnership.

BioCryst's lead candidate, BCX4208, has completed phase 2b trials and had a successful "end of phase 2 meeting" with the U.S. Food and Drug Administration (FDA). BCX4208 shows good efficacy and is synergistic with allopurinol as an add-on. It also has a good safety profile at the doses the company will carry forward. BCX4208 is differentiated from Ardea's drug candidate and will compete well in the future gout market.

Furthermore, BioCryst has a promising preclinical pipeline that includes hepatitis C (HCV) and hereditary angioedema (HAE) drug candidates. Both the HCV and HAE candidates address unmet or high-demand market needs. BCX5191 for HCV has shown superiority to Gilead Sciences Inc.'s (GILD:NASDAQ) NS5B inhibitor GS-7977 in head-to-head preclinical pharmacokinetic and pharmacodynamic comparison studies. BCX5191 is a nucleoside analog ("nuc") that selectively and potently inhibits HCV RNA polymerase across all genotypes. The HAE candidate BCX4161 is a kallikrein inhibitor—a commercially validated target. It is an oral drug that would be a competitor to the injectable treatment marketed by ViroPharma Inc. (VPHM:NASDAQ). Both the HCV and HAE assets are value-creating over a fairly short time, and my valuation of BioCryst reflects that.

TLSR: You have an $8 target price on BioCryst, which represents better than a 100% return from current levels. This stock has moved quite well since you reiterated your Buy rating back on June 1. What was the catalyst?

RJ: My original Buy rating was on initiation in September 2011. Recently there were a couple of catalysts. The May timeline reflected the post-Ardea acquisition by AstraZeneca, which reaffirmed my Buy rating and price target, as well as my belief that the gout market is meaningful. However, BioCryst stock did not reflect any gains during that period. Looking at the stock chart during the February and March timeline, you will see that BioCryst went up nicely after HCV and HAE preclinical data were announced in February. I raised my price target from $6 to $8 based on that data. The pipeline was revalued based on encouraging data with BCX5191 for HCV and BCX4161 for HAE.

TLSR: You wrote a note stating that a sophisticated institutional biotech investor had taken a significant position in BioCryst because of its "nuc." Why so much interest in a preclinical product, especially when there are so many HCV candidates in the clinic now?

RJ: That is a good question. Preclinical assets rarely get this kind of interest because public investors are not typically attentive to early-stage programs. The interest in the preclinical HCV compound is due to the nature of the drug candidate and the HCV indication. Investors can better understand an early-stage HCV asset. BCX5191 is a potent NS5B inhibitor, akin to Gilead's GS-7977, which was the big driver behind the acquisition of Pharmasset Inc. for $11B last November. Let me mention as an aside that the value of promising HCV pipelines is unlikely to be as lucrative as the Gilead/Pharmasset deal, or even the $2.5B Bristol-Myers Squibb/Inhibitex deal. HCV acquisitions are likely to be far less lucrative because the space will be more crowded and mature, with established market players. The lure of interferon-free therapy is the next big incremental progress in HCV therapy, and a potent and safe NS5B inhibitor, such as GS-7977, or a candidate with the potential to improve on that "nuc," such as BCX5191, will be in demand. At the recent European Association for the Study of the Liver (EASL) meeting in Europe, the combination of an NS5B inhibitor (Gilead's GS-7977) and an NS5A inhibitor (Bristol-Myers Squibb's daclatasvir) showed early promise as an all-oral, interferon-free regimen.

TLSR: Let's move on to immunotherapy.

RJ: Sure. This is where I cover a couple of micro-cap companies. One of them is Inovio Pharmaceuticals Inc. (INO:NASDAQ). Inovio has made notable progress with its DNA vaccine platform. One of the goals of developing a vaccine is to trigger a strong T-cell response. Vaccines have historically been efficient in inducing an antibody response by activating the humoral side of the immune system. However, most vaccines have not produced a potent cell-mediated immune response, such as a T-cell-driven immune response. Cell-mediated immunity is needed for viral- and cancer-based therapies.

"Sophisticated biotech investors are at ease with micro caps and may see opportunities at low valuations."

Inovio has developed a proprietary engineered DNA plasmid (circular DNA that is translated into amino acids/protein outside of the nucleus and chromosome). The plasmid is delivered by electroporation (an electrical pulse given topically at the injection site) to induce dendritic cells and antigen-presenting cells (immune cells) to take up the DNA plasmid and synthesize antigens (amino acid sequences/proteins) in a manner that mimics a natural immune response. The outcome is a strong T-cell response. Early studies show robust antigen-driven T-cell responses in clinical trials. If successful, Inovio's technology platform could revolutionize the future of vaccines, both therapeutic and preventative. Such innovation in micro caps may be risky and face hiccups along the way, but it also has the potential to reward investors in the long term.

OncoSec Medical Inc. (ONCS:OTCBB) is a spinoff of Inovio and uses the same electroporation delivery technology as Inovio. However, instead of delivering a DNA plasmid that codes for an antigen sequence to trigger an immune response, it delivers the DNA sequence of a potent cytokine, IL-12, locally at the tumor site by topical electroporation injection. Electroporation enhances the cellular uptake of the DNA plasmid. IL-12 is toxic if administered systemically, and past attempts at IL-12 delivery by intravenous injection have been hindered by safety and tolerability issues. The power of IL-12 could not be harnessed with systemic intravenous injection. But when delivered locally by electroporation as a DNA plasmid, IL-12 can modulate immune pathways in the tumor microenvironment and induce an antigen-driven, regulated and systemic tumor response. In other words, IL-12 may reverse the immune-suppressed state in the tumor environment and realign the immune system to destroy the tumor.

TLSR: Is there any indication that localized drug delivery with electroporation might elicit an immune response to inhibit metastasis or aggressive tumor expansion?

RJ: A topical delivery that drives the immune system? The electroporation injection has the potential to be administered intratumorally to internal organs as well. OncoSec is first focusing on those tumors that manifest on the skin—melanoma, Merkel cell carcinoma and cutaneous T-cell lymphoma are most amenable to topical electroporation delivery. OncoSec has shown early proof-of-concept in phase 1 data. We need more data points, but the technology is extremely promising. The ongoing phase 2 studies will be crucial.

TLSR: One final question on OncoSec. It has an $18–19M market cap currently. Does this represent deep value?

RJ: OncoSec is mispriced and understandably so. One cannot expect the Street to gauge the potential of OncoSec's platform because the technologies are complex and difficult to understand. And, as we discussed earlier, given market conditions, micro caps with significant associated risk are not of interest to public investors. A valuation of $18M or $19M is clearly a sign that if OncoSec succeeds in phase 2 for either one of its oncology studies, the stock could react nicely. For such micro caps or nano caps, market valuation at this stage is an inefficient metric. Once clinical data is understandable and can be digested by the large majority of investors, the valuation will likely be healthier.

TLSR: Please tell us about your next idea.

RJ: Targeting melanocortin receptors for sexual dysfunction, obesity and other potential disease indications is promising. Melanocortin receptors are a rich target for drug development. While there are drugs that may act indirectly on melanocortin receptors, no drug directly targeting melanocortin receptors is on the market. For example, the obesity drugs in development by Orexigen Therapeutics Inc., Vivus Inc. and Arena Pharmaceuticals Inc. all act indirectly via melanocortin receptor 4 (MCR4). Female sexual dysfunction (FSD) can be targeted by melanocortin receptors.

"Innovation in micro caps may be risky and face hiccups along the way, but it also has the potential to reward investors in the long term."

No drug has been approved in the U.S. for FSD. In Europe, testosterone is approved for treatment of FSD but it does not mechanistically address the complex nature of FSD, which has psychological, physiological, social and neurohormonal components. FSD is unlike erectile dysfunction (ED), which is usually related to "male plumbing" and typically can be managed by increasing blood flow to the genitalia. That doesn't work in women. If it did, then Viagra (sildenafil) and Cialis (tadalafil) would be bigger blockbusters than they are today. By the way, the FSD market is as large, or maybe larger, than the ED market.

Palatin Technologies Inc. (PTN:NYSE.A) is targeting the melanocortin 4 receptor with bremelanotide (BMT). BMT is an agonist (a peptide that binds to a cell receptor to trigger a response) of MCR4. MCR4 seems to be a versatile receptor that regulates sexual function as well as energy homeostasis and metabolism related to obesity. In phase 2 studies Palatin has shown promising data, demonstrating improvement in FSD metrics as well as in ED in men. I should clarify that this drug is not being developed for ED currently.

The initial development pathway had issues in that the drug's intranasal delivery caused a minor increase in blood pressure. Subsequently, the company developed a subcutaneous version that is safe and efficacious. Subcutaneous delivery allows the drug to be in the optimal therapeutic window reproducibly and consistently. General investors have discounted Palatin's platform, and the ongoing phase 2b study in FSD, because of a past failure. Note that in 2011, educated investors financed the company to the tune of $23M, believing in the platform and the 400-patient phase 2b study for FSD. The ongoing phase 2b study learns from experience and past interactions with the FDA. Data is expected in Q3/12. If the study is positive, this may be one of those micro caps that could unravel for a huge increase in market value.

TLSR: Now that BMT is being delivered via subcutaneous injection, is it showing the same efficacy as it did with intranasal delivery?

RJ: Yes. With intranasal delivery there was variability in response from patient to patient, and that led to some patients being overexposed to the drug in the bloodstream, while other patients had less exposure in the blood. Those patients who were overexposed (had excess BMT in blood) had a transient increase in blood pressure, and those who were underexposed were probably not getting the same kind of efficacy. The intranasal route was not the optimal mode of delivery due to patient-to-patient variability. Subcutaneous delivery solves the problem safely and effectively.

TLSR: I really enjoyed talking to you, Rahul.

RJ: Thank you. I enjoyed it too.

Rahul Jasuja brings more than 18 years of experience in the biotechnology field, which has encompassed corporate business development, sellside equity research and academia. After obtaining his bachelor's degree in microbiology from the University of Bombay and his master's degree in microbiology from the University of Montana, he earned his doctorate in immunology from Tufts University School of Medicine in Boston. Since graduation he has held progressively senior positions with Techvest Equity Research, Rodman & Renshaw, MDB Capital Group and Idera Pharmaceuticals as vice president of corporate development. Through the years, Dr. Jasuja has participated in investor and business panels, authored and coauthored several biotechnology business white papers, and successfully built institutional life-sciences franchises through a long-term, deeply technical research-and-analysis approach with educated life-sciences investors.

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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: OncoSec Medical Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Dr. Rahul Jasuja: 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.

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