Seven Biotech Options that Buck Tradition: Christian Glennie


Christian Glennie Edison Investment Research assesses the value of emerging companies with a model that assumes revenues and earnings are years away. Then again, every investor does that. What's unusual is that Edison looks for tomorrow's upside in companies still small enough to double, triple and quadruple in value down the line. In this interview with The Life Sciences Report, Edison Biotechnology Analyst Christian Glennie applies his valuation skills to seven innovative biotech and specialty pharma companies and discusses the share-moving catalysts that investors need to know about now.

The Life Sciences Report: Let me ask you to go ahead and talk about some of your names. Would you choose a company to start with?

Christian Glennie: Thanks, George. Sucampo Pharmaceuticals Inc. (SCMP:NASDAQ) has had a good run starting from the very solid base it has built over a number of years. The company is founded on a novel technology—prostone-based compounds, which are essentially derivatives of natural fatty acids. It is the only company we know of that is working in this area. The key product so far is Amitiza (lubiprostone), which has been developed to treat a range of constipation disorders. It first launched in 2006, and Takeda Pharmaceutical Co. Ltd. (TKPYY:OTCPK) has been the company's long-term marketing partner for Amitiza in the U.S.

On April 23 the company announced U.S. Food and Drug Administration (FDA) approval of Amitiza for opioid-induced constipation (OIC), which is a very significant market opportunity. We estimate that approximately 2.5 million (2.5M) patients taking opioids chronically for non-cancer pain will suffer from OIC. The approval puts the product in a strong position, given there are very few competitors in this space, certainly in terms of prescription drugs. We model U.S. peak sales for the product at $665M, of which the opioid-induced constipation application is approximately $200M.

TLSR: Christian, to be clear, that $665M represents the total of peak sales in the U.S., and that figure is partnered with Takeda. Is that right?

CG: Yes. The drug is sold by Takeda, Sucampo's U.S. partner. Takeda has an opportunity to invigorate the brand. Sales have been solid but not spectacular. Revenues have been increasing year over year, but not at huge growth rates. I see an opportunity for the company to reposition and reinvigorate Amitiza with a new marketing effort.

The approval also distinguishes the product from a new competitor on the scene, Linzess (linaclotide) from Ironwood Pharmaceuticals Inc. (IRWD:NASDAQ) and Forest Laboratories Inc. (FRX:NYSE), which was launched at the end of last year. So far, in our analysis, it looks like prescriptions of Amitiza are holding up. Our theory has always been that the entrance of Linzess would actually help grow the market for use of prescription drugs for constipation disorders. The cascade of treatment protocols for constipation starts with dietary and lifestyle changes, followed by regular over-the-counter laxatives and prescription-type laxatives before patients and physicians move on to targeted agents.

TLSR: So what is Amitiza's advantage in OIC over its pipeline competitors?

CG: The advantage of Amitiza is that it acts directly on the epithelial secretory glands to stimulate mucosal secretion of water and sodium chloride. This increases liquidity in the gut to help soften stools and aid motility. By acting directly, Amitiza bypasses the negative secretory actions of opioids on receptors in the gut, which causes the constipation. In contrast, mu-opioid antagonists block these receptors. But the real issue for this class at the moment is FDA concern over cardiovascular safety associated with the chronic use of these drugs. The approvability of these agents are in doubt until the FDA completes its review of the field.

TLSR: How do you value this company?

CG: We currently have a valuation of $420M, which is $10/share. It's not a price target. It's rather a valuation as of discounted cash flow (DCF) to where we believe the shares should be trading today. Once Amitiza rolls out commercially in Europe there will be upside, as we don't currently include European sales in our DCF model. But this is more of a 2014 story.

TLSR: Let's go ahead to your next idea.

CG: Biotie Therapies Corp. (OTCMKTS:BIOZF), based in Finland, is interesting on two levels. First, it has just introduced a drug into Europe called Selincro (nalmefene), an opioid antagonist, which is intended for alcohol dependence. Selincro was launched through Biotie's Danish pharma partner H. Lundbeck A/S (HLUKY:OTCPK; LUN:OMX).

The drug is an alternative approach to alcohol dependence. Current therapy is targeted at complete abstinence from alcohol consumption, which presents obvious challenges since abstinence may not be a realistic or attainable treatment goal. The difference with Selincro is that it actually helps moderate consumption, and that over a period of time—months and years—it has significant long-term health benefits.

TLSR: I'm sure there are social implications to this newer thinking. How much support is there for this kind of shift from such an old, entrenched model?

CG: There are huge implications on both the social and health levels. Acceptance of the therapy is going to require a paradigm shift in the treatment of alcohol independence in Europe, where the overriding theme is still very much about abstinence, just as it is in the U.S. A lot of data about the drug's benefits is emerging from clinical trials and supportive work by key opinion leaders, talking about how more realistic treatment goals should have significant benefits. Initial uptake of the product is likely to be fairly slow. A significant education and awareness program is required from Lundbeck, but in the long run we see peak annual sales in Europe in excess of €300M ($392M).

TLSR: Because of the educational component and the paradigm shift required, what period of time are you talking about for peak sales?

CG: That peak would be about 10 years out—in 2023 or so—and the product has a 10-year exclusivity. The peak is at the end of that period.

TLSR: Is there any prospect of getting the product approved in the U.S.? Is a new drug application (NDA) or supplemental NDA anticipated?

CG: No, not at this stage. The company simply wouldn't have the intellectual property (IP) protection to make it worthwhile at this stage. The product itself, nalmefene, has been available in other forms in the U.S. If Selincro were to launch in the U.S., it might only have three years of new product exclusivity, and three years is probably not worth the investment.

The key is establishing the therapy in Europe, because of the potential for approval in eastern European countries outside the European Union, as well as in places like Russia, which could be a significant market. There are plans to develop a market in Japan as well.

TLSR: I understand why a slow uptake is anticipated. You would be fighting a lot of tradition. But I'm wondering, who are the clinicians being targeted in Europe? Psychiatrists? Treatment centers? Where do you start?

CG: The drug will be targeted at the specialists, but also general practitioners in Europe. Selincro does have to be part of a broader treatment program that includes psychosocial support. Some clinicians will still focus on complete abstinence as the ultimate endgame, but a product like Selincro should help patients along that path. Abstinence is not the explicit initial treatment aim for the product, but ultimately any product that helps patients reduce alcohol consumption should bring them farther down the path to complete abstinence.

TLSR: You said you liked Biotie on two levels. Is the Parkinson's disease product, the selective adenosine 2a receptor (A2A) antagonist tozadenant (SYN115), driving any value here?

CG: Yes. Because Selincro is licensed to Lundbeck, the key operational focus of Biotie is tozadenant, which is, as you say, an A2A antagonist. It has a partner in UCB S.A. (UCB:BSE) for that program, but the deal has been structured such that Biotie is responsible for development of the pivotal phase 3 program. UCB will pay milestones as the drug goes through the various stages. Although UCB is helping fund the trials, it is Biotie's responsibility to conduct them.

Biotie had the phase 2b data readout earlier this year, and we are very encouraged by the data. When we compare tozadenant to other A2A receptor antagonist candidates, Merck & Co. Inc.'s (MRK:NYSE) preladenant and Kyowa Hakko Kirin Co. Ltd.'s (4151:TYO) istradefylline (KW-6002), in terms of phase 2 data, efficacy and reducing Parkinson's "off" time, the benefits of Biotie's therapy were more significant. We view Merck's recent decision to abandon development of preladenant after the failure to demonstrate efficacy in three phase 3 trials as a potential positive for Biotie in the long run, given that tozadenant is now the leading A2A candidate in development.

The benefits of tozadenant were also evident in the actual disease score. When you score Parkinson's patients on the extent of the severity of their disease, tozadenant presented significant improvements in that measure. That was encouragement to proceed to phase 3.

TLSR: What's the next story you wanted to talk about?

CG: Turning to a near-term catalyst story, NovaBay Pharmaceuticals Inc. (NBY:NYSE) should get readouts from three phase 2 trials on its aganocide technology in H2/13. Aganocides are synthetic, stable analogs of N-chlorotaurine, which are produced by white blood cells as an endogenous antiseptic to kill foreign microbes. NovaBay has produced a lot of data to show that its agent, NVC-422 (auriclosene), has the ability to overcome bacterial resistance, which is a key issue for the healthcare industry as a whole.

TLSR: What about the trials getting ready to give a readout?

CG: The trials are in viral conjunctivitis, impetigo and urinary catheter blockage and encrustation. They all will report in H2/13. The company has a significant partner for its impetigo program in Galderma Pharma SA, a private Swiss company specializing in dermatology products. We currently have NovaBay valued at about $1.90/share. But if all of the trials read out strongly positive, I've put the valuation in the region of $3.50/share, which would justify phase 3 probabilities.

TLSR: Christian, NovaBay has a $50M market cap. The company's lead compound, NVC-422, will not be used internally but on mucous membranes, sclera or/and the eardrum. But even with those limitations, it still can mitigate or even prevent the use of antibiotics in so many indications. For instance, children with conjunctivitis could be treated and sent back to school without having antibiotic eye drops. Clinicians all over the globe are looking for antibiotic substitutes. Is this product and platform seen as not being very sophisticated, in part because it is a topical medication?

CG: Ultimately it comes down to data. That's why these trials are so key. They are, by far, the most extensive trials that NVC-422 has undergone. The previous trial in viral conjunctivitis was mixed. It was a phase 2-type study, not as well designed or powered as the current study, and it produced mixed data. The back story is that Alcon Laboratories (a subsidiary of Novartis AG [NVS:NYSE]) was a partner of NovaBay in the eye disorders setting, and terminated the agreement after those results came out. That was obviously disappointing. But if the phase 3 data is positive, then, yes, the stock is significantly lower than where it could be.

TLSR: What's the next name you'd like to visit?

CG: Another catalyst story for 2013 is Cleveland BioLabs (CBLI:NASDAQ). This is a very different story. In the near term it's a biodefense play, but its longer-term potential is in oncology. The company's compound, entolimod (CBLB502) is a medical countermeasure to radiation. It is going through the U.S. government's Biomedical Advanced Research and Development Authority (BARDA) to fund development and for potential supply contracts for stockpiles. It's critical to understand that the regulatory pathway is very different. The FDA created the Animal Efficacy Rule for these kinds of biodefense products; companies need to demonstrate the efficacy of a product in animal studies, but only need to demonstrate safety in humans.

The key catalyst for Cleveland BioLabs in the near term is the award of a development contract from BARDA, which is due any time now. It could be worth up to $50M, but it is not an upfront payment. BARDA will reimburse the company for further studies on entolimod.

TLSR: What is entolimod? What is the mechanism that makes it both potentially efficacious in radiation injury and in oncology?

CG: It's being classified as a TLR5 (toll-like receptor 5) agonist, which is fairly unique within the TLR class of potential anticancer agents. Two opposite therapeutic concepts are at work here. One is that entolimod can suppress apoptosis (cell death) in normal cells, which helps protect against damage induced by radiation. The second is that it also helps activate apoptosis in tumor cells, specifically in TLR5+ tumors, by mobilizing an innate immune response.

TLSR: I understand that the near-term catalyst is getting the development contract from BARDA, but then what does Cleveland have to do? What are the next events?

CG: The company has done a number of studies demonstrating the efficacy of entolimod in nonhuman primates, but the company needs to do another set of animal studies, and another set of clinical human safety studies. The target would be to file a biologic license application (BLA) toward the end of 2014. The other major potential catalyst would be a procurement contract, whereby BARDA would commit to buying X number of doses from Cleveland BioLabs over a certain number of years. Looking at previous contracts that have been handed out by BARDA for products targeting anthrax or smallpox, I estimate an order in the region of 300,000 (300K) doses, which would equate to a contract of more than $200M to Cleveland.

But timing that kind of contract is uncertain. I provisionally have an estimate that it might come in 2015, which might coincide with an FDA approval on the biologic license. However, FDA approval is not a prerequisite for a supply contract with the U.S. government. A number of other products—again, for anthrax and smallpox—have already been delivered to the U.S. government but have not gotten formal FDA approval. The procurement agreement would be a significant event.

TLSR: What's the next name you'd like to mention?

CG: Medigene AG (OTCMKTS:MDGEF) is a German company with a longer-term play in terms of catalysts. It is focused on the development of a product called RhuDex, a CD80 antagonist to treat autoimmune disorders. RhuDex is an immunomodulator that potentially blocks the interaction between CD80 on antigen-presenting cells and CD28 on T cells, preventing the overstimulation of T-cells that is often involved in autoimmune disorders. The company has done initial studies in rheumatoid arthritis (RA)—mainly safety studies—but it has decided to focus on primary biliary cirrhosis (PBC), a rare autoimmune disease of the liver. This is very much of an orphan disease indication, with the key market for PBC in the 200–300K patient range across the U.S., Europe and Japan.

Developing RhuDex for PBC could be very lucrative compared to trying to develop it for RA. The clinical timelines are significantly shortened. Also, the company has approximately $22.2M in cash at the moment, which is sufficient to get a phase 2 study in PBC going.

In looking at Medigene, investors will find a big valuation discrepancy versus another company also targeting PBC, Intercept Pharmaceuticals Inc. (ICPT:NASDAQ), which did a $75M initial public offering (IPO) in H2/12. It has more than just a PBC opportunity, but Intercept's value has been underscored by the potential in PBC. It has done significant subsequent fundraisings, and now has a market valuation of about $530M, versus Medigene with a $37M valuation.

Intercept is in the middle of a pivotal study for its PBC candidate. The phase 2 that Medigene is running is of a similar design to Intercept's phase 2 trial. It will start in H1/14, and we hope to get some data by the end of 2015.

TLSR: Medigene also has a phase 2 candidate, a newer version of an old cytotoxic agent. Could this drive any value?

CG: Yes. In fact, Medigene has just secured SynCore Biotechnology Co. Ltd. (a member of the Sinphar Pharmaceutical Group) as its global development partner for EndoTAG, a novel lipid-based formulation of paclitaxel. The theory here is that the positively charged lipid formulation targets the negatively charged endothelial cells lining the blood vessels that feed tumor cells. Phase 2 data suggests an overall survival benefit when EndoTAG is added to paclitaxel in patients with triple-negative breast (HER2/neu-negative, estrogen receptor-negative and progesterone receptor-negative) cancer, compared to paclitaxel alone. The SynCore deal ends uncertainty about the drug's future after a long search for a partner, and a global phase 3 trial is now targeted to start in H2/14. We estimate a potential market launch in 2019.

TLSR: So the primary value driver is RhuDex, followed by EndoTag, is that right?

CG: EndoTag probably accounts for about one-third of the valuation. But in the longer term, the story is very much about RhuDex in PBC.

TLSR: Staying with EndoTag for a moment, I saw a note that five out of a total six patients had a complete response in triple-negative breast cancer. That was certainly a very small number of patients, but it makes me want to see what happens with further development. Triple-negative breast cancer is a truly unmet need in oncology.

CG: Yes, very much so. A number of products are being developed for the setting, but, as you say, it's a tough form of cancer that does not respond to standard hormonal therapies or targeted agents, with chemotherapy being the only treatment option.

TLSR: Did you have another name you could share?

CG: Mast Therapeutics Inc. (MSTX:NYSE.A) is in a completely different area of disease. It used to be called Adventrx Pharmaceuticals, but changed its name in March of this year. It is currently developing MST-188 (purified poloxamer 188), which is in a phase 3 pivotal trial for sickle-cell disease.

Poloxamer 188 is essentially a polymer surfactant that helps to improve blood flow. The drug binds to hydrophobic surfaces of damaged cell membranes and restores these surfaces to a more natural and healthier hydrated state. This is particularly important for sickled blood cells because they block small blood vessels, which leads to a number of complications, one of which is vaso-occlusive crisis, an acute episode that causes immense pain. Many patients experience these crises frequently through a year, and severe cases may require hospitalization for five to seven days. At the moment, the only available therapies are analgesics and fluids. MST-188 could apply to a number of disease indications involving impaired blood flow.

TLSR: Peripheral artery disease perhaps?

CG: Yes. At the moment Mast has plans to do a proof of concept-type study in acute limb ischemia in combination with standard thrombolytic agents. The concept is that MST-188 could be a positive addition to a number of therapies in a number of settings. By helping restore blood flow, clinicians could reduce the duration of crisis episodes in sickle cell patients, a huge benefit because the more often patients have these events, the greater the cumulative effect, causing gradual massive damage to various organs.

TLSR: What about a catalyst? When and what?

CG: The sickle cell study has just gotten underway this year. In terms of completion of the study and getting the data, we're looking at 2015. Similar to Medigene, data for MST-188 in sickle cell are a little way off, but the company does have a number of potential proof-of-concept studies to run, which hopefully will be supportive of MST-188. Ultimately, the key valuation driver would be the sickle cell study.

TLSR: What about staying power? Mast is a small company with a $32M market cap. Is it funded well enough to complete a lengthy study?

CG: It is reasonably well funded, with $32M in cash as of Q1/13. Sickle cell is not an area that has attracted huge investment or interest from big pharma, but it's interesting that within the last couple of years, the likes of Pfizer Inc. (PFE:NYSE) and Novartis AG have gotten involved in the sickle-cell space by licensing a couple of mid-stage development products for the disease. That provides reasonable validation of the interest in the space.

TLSR: MST-188 is not proposed as a chronic therapy, is it? It may be used for a few days—two to three days, correct?

CG: Exactly. The drug would be used in conjunction with intravenous analgesics and fluid drips. The idea is to reduce the duration of crisis, but hopefully there would be other benefits—reduction in pain, reduction in time to hospital discharge and the like.

TLSR: Christian, I know you follow Athersys Inc. (ATHX:NASDAQ). Could you speak to it?

CG: We've certainly been interested in Athersys, but we have not initiated full coverage. I'm interested and excited by the MultiStem (multipotent adult progenitor cell) technology it is developing. It has Pfizer as a partner in ulcerative colitis. The real big ticket item, potentially, is the outcome of its phase 2 trial in ischemic stroke trial, with results expected in 2014. This could be transformational for the company. It's an exciting story and definitely a company to watch.

TLSR: Many thanks to you. I've enjoyed this very much.

CG: Yes, I have enjoyed it as well. Thank you too.

Christian Glennie joined the healthcare team at Edison Investment Research in January 2012 and has 11 years' experience covering the global biotech/pharmaceutical sector as an analyst and a journalist. He came to Edison having held senior analyst and editorial roles at EvaluatePharma and EP Vantage. Glennie also has prior experience as a marketing analyst at Zeneca Agrochemicals.

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1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He 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: Athersys Inc., Merck & Co. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment. Merck & Co. Inc. is not affiliated with Streetwise Reports.
3) Christian Glennie: I or my family own shares of the following companies mentioned in this interview: None. 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: Sucampo Pharmaceuticals Inc., Biotie Therapies Corp., Novabay Pharmaceuticals Inc., Cleveland BioLabs Inc., Medigene AG, Mast Therapeutics Inc., Athersys Inc. I was not paid by Streetwise Reports for participating in this interview. 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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