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Laidlaw's Yale Jen: Biotech 101 for Buyers and Sellers
Interview

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Yale Jen Former biotech consultant Yale Jen picked up a few tricks advising companies on their pipelines before he came to Wall Street as a sellside analyst. These days Jen, managing director and senior biotechnology analyst at Laidlaw & Co., advises institutional investors to own stocks with stories that are not yet well understood by the market. In this interview with The Life Sciences Report, Jen offers investors a handful of names for consideration, each of which has an exceptional value proposition and exciting growth prospects.

The Life Sciences Report: You had an interesting career before you came to Wall Street. You spent several years with KPMG Corporate Finance, where you focused on mergers and acquisitions (M&A) of healthcare assets. Was that about traditional M&A activity—companies buying each other—or was it about acquiring molecules for development?

Yale Jen: It was more about buying assets. We were frequently retained on the selling side, but periodically on the buying side, to look at assets, evaluate them and analyze where they should be going.

From the buyer's perspective, different assets have different values during different stages of development—and they have different risks associated with them. We would drill down deep into preclinical and clinical data to understand efficacy and safety, which are both critical. Sometimes, there were intangibles to look at. We wanted to understand the intellectual property position, which is important given that patents grant developers a limited time frame in which to operate exclusively in the commercial space. We also looked at the market dynamic going forward. If four or five drugs were expected to enter the space within the next few years, that presented a very different value proposition for a company versus an asset with no market competition expected for the same period. Those are the basics—the 101 stuff that is so important from a buyer perspective.

From the seller's perspective, you have to properly assess the value of the asset, the pros and cons, and the risks and rewards. Presumably, a certain level of synergy will exist between the seller's asset and companies looking for a pipeline or to expand a pipeline. With regard to a later-stage asset, does the prospective buyer have the necessary marketing or sales structure? That is important, because companies have to identify and know which prospective partners to speak with.

TLSR: There are never enough drugs in a pipeline, especially in larger pharma companies fighting the law of large numbers, which are unable to grow by the multiples investors desire and expect. Do you see pipelines thinning in the larger drug companies?

YJ: Relatively speaking, pipelines are thinning at the big pharmas. But at the same time, pipelines outside their organizations are expanding. The larger pharmas have places to explore to enrich their future pipeline growth. Larger drug companies nowadays are also more focused, and understand that synergy is important. They want to stay in the markets where they can leverage their current or expanded sales forces.

TLSR: You also worked as a strategic consultant specializing in pipeline optimization for pharmaceutical and biotech clients. What is meant by pipeline optimization?

YJ: Certain large organizations might have a lot of pipeline products at different stages of development. Scientific or clinical curiosity might lead to a certain stage of development for a particular asset, but ultimately a large pharma needs to look at the overall economic value that program might bring, and maximize shareholder value. Even if a drug looks good at a certain stage, a company might be better off licensing it out or selling the asset to someone else—it might ultimately get a better return that way. If an organization has not developed a sales force in a certain area, there may be no post-approval support for a product. In other words, when we look at pipeline optimization, we don't simply look at the clinical data—we also look at where an asset is in the pipeline and where it is headed strategically and operationally. Then we can determine the best option going forward.

TLSR: You have true micro-cap companies in your coverage, under $100 million ($100M) and even below $40M in market value. These companies tend to have lower relative strength as a group and, therefore, these stories really have to work for investors, because bad news is not forgiven by the market. The downside can be huge. With that high-risk profile, how do you approach these names for your clientele?

YJ: Whether they are mini caps or micro caps, some of the companies simply deserve to be in those categories because of bad fundamentals, while others are just the victims of market inefficiency. For the latter, sometimes the companies can turn around, change and move up. However, sometimes smaller-cap companies stay where they are, and it's not necessarily because they have bad fundamentals, but certain mishaps may have occurred along the development path that place them with low valuations. Such companies have the potential to be good turnaround stories with the addition of good assets, and possibly new management teams, assuming the market is efficient. At the early stage of a turnaround, a valuation could be rather attractive.

I also cover companies with larger market caps. One name in my coverage is Isis Pharmaceuticals Inc. (ISIS:NASDAQ), which has a $4.6 billion ($4.6B) market cap. Repros Therapeutics Inc. (RPRX:NASDAQ) is smaller, as its stock price has come down a bit this year. But it still has a $418M market cap. We anticipate positive catalysts later this year could potentially turn stock price movement in the other direction.

TLSR: Given the small market valuations of some of the stocks in your coverage, I assume you have a lot of small hedge funds as clients. Would that be correct?

YJ: We have hedge fund clients in the small market value space; in biotech there are a lot of these hedge funds. Also, I speak with all kinds of investors. Some are long-only investors, who are looking for undervalued stocks for the wrong reasons and want to avoid stocks that deserve to be in the penalty box. Others are looking for stories of misalignment, where a company should probably be at a much lower valuation than it currently is.

TLSR: Let's go ahead and address some companies, please. You said you wanted to talk about Isis Pharmaceuticals?

YJ: Yes, Isis is first on the list of my four favorite names. The second is Mast Therapeutics Inc. (MSTX:NYSE MKT), which is one of the smaller companies in my coverage. The third is Repros Therapeutics, and last but not least is Adma Biologics Inc. (ADMA:OTCBB).

We recently initiated on Isis with a Buy rating and a $52 target price. The stock was recently trading in the $39/share range. Drugs, whether small molecules or antibodies, traditionally inhibit or target a protein, but Isis is a leader in antisense drug development, where you target a gene directly to inhibit or modify the protein that gene will express. The company has an approved drug called Kynamro (mipomersen) for a rare form of familial hypercholesterolemia.

"Large pharmas want to stay in the markets where they can leverage their current or expanded sales forces."

Isis owns a very large pipeline. The company indicated at the end of the year that it had 38 programs in various stages of clinical development. As you know, the term "multiple shots on goal" is frequently used in the biotech space: A company needs to hedge against individual drug program failures, given the success rate of any drug varies substantially. Isis has one of the largest pipelines in its relevant market cap space. We think its large pipeline is a very important aspect of its investment thesis, given the overall greater risks of biotech investments.

The second part of my investment thesis is that Isis currently has several Phase 3 clinical studies in progress, three of which are the main near-term drivers. We believe that if any or all of these studies are successful, the stock will experience a substantial appreciation in value. Many of the studies are in rare or very severe disease categories.

TLSR: Yale, please briefly mention each of these programs so investors can watch them.

YJ: Sure. The first is ISIS-APOCIII, targeting the ApoCIII gene, which expresses the apoC-III protein that is responsible for the transport of triglycerides in patients' blood. Elevated apoC-III is linked with atherosclerosis and metabolic syndrome. The ISIS-APOCIII oligonucleotide (oligo) can reduce these circulating triglycerides in patients who have familial chylomicronemia syndrome (FCS). It's in a Phase 3 program in FCS, and Phase 2 for hypertriglyceridemia. This program is unpartnered.

ISIS-SMN is in Phase 3 for spinal muscular atrophy (SMA), which results from a deletion of the SMN gene. Instead of inhibiting a gene, the ISIS-SMN antisense oligo modifies the splicing in a closely related gene called SMN2 to increase production of the SMN protein. SMA is a very serious, genetic, motor-neuron disease. In the U.S. alone, more than 30,000 patients have SMA. This program is partnered with Biogen Idec Inc. (BIIB:NASDAQ), where there could be lots of synergies.

Another Phase 3 program is for ISIS-TTR as a potential treatment in patients with familial amyloid polyneuropathy. ISIS-TTR inhibits the expression of mutated TTR gene, since proteins expressed by this mutated gene aggregate into destabilized tetramer that induces the formation of amyloid fibrils in tissues such as the heart and peripheral nerves. Based on the mechanism of action, ISIS-TTR could block TTR protein production of all types of mutations. The Phase 3 study has already been underway for more than a year. This one is partnered with GlaxoSmithKline (GSK:NYSE).

Those are the three leading programs. In terms of the development timeline, pivotal data releases for any of these programs could start in 2016. If some or all of those data are positive and get approval, the product launches could start in 2017. Because of the company's concentrated activities and catalysts beginning in 2016, we anticipate the stock value potentially could move to a very different place. In addition to the three lead programs, the company's other programs would continuously generate catalysts going forward. Obviously, not every catalyst has the same importance, but the valuable ones could move the stock in a very material way. We feel there is a lot room for Isis share price to grow.

TLSR: Isis had a $7B market cap about six months ago—albeit for a short time—and has taken quite a hit since. Do investors have some concerns about the Isis platform? Some people have wondered about toxicities, since these molecules will presumably be administered for the patient's entire lifetime.

YJ: That question has been posed to management multiples times, and I've spoken with the company about this as well. My understanding is that the issue is more about the specific target, and not necessarily the antisense platform per se—more drug/target/disease-specific rather than platform-specific. Could similar problems or adverse events occur going forward? Nobody can say. We will have to wait for the next sets of data from programs in the pipeline. However, the company is constantly improving on chemistry and enhancing drug potency, and so you could see the drug applied at a lower dose, which possibly could alleviate some of those concerns.

TLSR: Please proceed to the next company.

YJ: We have a Buy rating and a $2.50 target price on Mast Therapeutics (formerly Adventrx Pharmaceuticals), with the stock recently trading at around $0.61/share and with a market cap a little bit north of $70M. This smaller-cap company is focused on developing its lead drug, MST-188 (purified poloxamer 188), as a potential treatment for sickle cell patients. The specific aspect of sickle cell to be treated is called vaso-occlusive crisis (VOC), an episodic event of persistent pain in patients, who frequently end up in the hospital for treatment.

TLSR: Could MST-188 also be used as a prophylaxis against VOC episodes?

YJ: No. A drug called hydroxyurea, which is the only approved therapy for sickle cell, tends to prevent these episodes from occurring. However, once the VOC starts, hydroxyurea has no impact on it. The treatment patients get in the hospital is palliative care, in which the symptoms are treated.

MST-188 is intended to actually shorten the period of hospitalization, which is typically seven to eight days. That's the value proposition of MST-188: Shorter hospital stays benefit the patient and also the healthcare system.

TLSR: What's the catalyst we're waiting on here?

YJ: The greatest catalyst for Mast Therapeutics will be data from the current Phase 3 study, which is slated for Q4/15. Five quarters, roughly.

TLSR: Will biotech investors look out that far ahead, or will they buy the stock later?

YJ: The current low valuation of the stock is why we put out this name. Mast has roughly $46.6M in cash, and at its current market value of about $74M, the enterprise value is approximately $25M. Mast has a Phase 3 asset in place, a good likelihood of clinical success (in our opinion), and enough cash to complete that study. It is clear this stock is undervalued. Obviously, there's the time lag waiting for data, but we feel that investors should put this stock on their consideration list. When to start taking a position—or how fast to take a position—would depend on that investor's risk/reward/time-horizon situation.

"Even if a drug looks good at a certain stage, a company might be better off licensing it out or selling the asset to someone else."

As for the competiton, GlycoMimetics Inc. (GLYC:NASDAQ) also has a drug in this space, GMI-1070 (rivipansel), which is a synthetic glycomimetic molecule. It's in a collaboration with Pfizer Inc. (PFE:NYSE). This is the only name we have seen in the sickle cell treatment space with a little bit more visibility. The company went public in January 2014. Having a company recently go public has increased awareness in this space. Nevertheless, Mast remains underexposed.

TLSR: Mast has lost about half of its value since the middle of January. There has been general market weakness in biotech this year, but I'm curious to know if Mast's weakness is about the lack of a near-term catalyst, or if some event triggered this decline?

YJ: Obviously, the share price weakness has been compounded by a general malaise in the market. By the way, the NASDAQ Biotechnology Index (IBB:NASDAQ) is coming back after the lows of this summer. But to answer your question, I believe that when GlycoMimetics, which we do not cover, went public in January, it had an impact on Mast, given that Mast now has a competitor in the marketplace, and that GlycoMimetics is in a collaboration with Pfizer. GlycoMimetics has also gotten some attention because other analysts are writing reports about it. But Mast's fundamentals have not changed since January. Overall, we are bullish on Mast's prospects based on a high probability of clinical success, and the company could retain the full economies of the asset since the sickle cell treatment market is very concentrated, and is a fit for a biotech company.

There is another issue. Poloxamer 188 went through a Phase 3 study in sickle cell with its previous owner, and that study did not show statistical significance, although it trended very positively in terms of its outcomes. That's probably one of the reasons Mast's valuation has been in the penalty box.

TLSR: What has changed since the previous trial? Why do you expect this current Phase 3 study to be different?

YJ: I looked at the failed trial in detail. The design and endpoints of that study were much more stringent. In that previous trial, 188 had to meet four sub-endpoints to be considered positive. The current Phase 3 pivotal study, called EPIC (NCT01737814), has only one primary endpoint, that being the reduction of the duration and hospitalization of VOC in subjects with sickle cell disease. There are two secondary endpoints, one being the re-hospitalization rate.

TLSR: Go ahead and address Repros Therapeutics, please.

YJ: Repros is focused on developing its lead product, Androxal (enclomiphene citrate), for treating secondary hypogonadism, which means low testosterone levels. The current treatment is testosterone replacement therapy, like AndroGel (testosterone gel) and other marketed testosterone products—you've probably seen the advertisements.

Androxal is in two Phase 3 studies, and the data from the first trial will be released in the first half of September. Data from the second Phase 3 study will be reported in the first half of October. We are very bullish on these outcomes, because the company has studied this drug in multiple Phase 2 studies over almost the last decade, and the data have consistently shown that Androxal provides the same level of testosterone replenishment as other marketed products. However, because it has a different mechanism of action, the therapy also has a benefit of preserving spermatogenesis, or sperm production. The shortcoming for almost all of the testosterone replacement therapies is reduced sperm production.

My investment thesis is that Androxal is an oral drug, which is a more favorable form of delivery in the U.S. I also think the clinical risk is rather low. In addition, we estimate the market for secondary hypogonadism to be $2B annually in the U.S., and we believe this product could potentially peak at about $700M. Finally, we believe the company could be an active acquisition candidate after it releases its top-line data. The company is expected to file its new drug application toward the end of this year, and could potentially have a product on the market by late 2015 or early 2016.

Aug. 28 Update: The company just reported positive top-line results from one (ZA-305) of the two identical Phase 3 studies ahead of its early September schedule. The study met all its primary endpoints and some secondary endpoints and we anticipate the second Phase 3 study could behave the same. As such, we anticipate NDA filing in late 2014 as the company indicated.

TLSR: You wanted to talk about Adma Biologics next.

YJ: We have a Buy rating on Adma and a $15 target price. The stock was recently trading at $9.20/share with roughly a $85M market cap. This company is developing intravenous immunoglobulin (IVIG) as a potential treatment for respiratory syncytial virus (RSV) infection in patients with primary immune deficiency diseases (PIDD), as well as patients undergoing organ transplantation. PIDD patients need certain types of IVIG infusions to replenish their immune systems year-round. The value proposition for Adma's product, RI-002 (human plasma-derived polyclonal immune globulin), is that during the RSV season, which typically begins in September or October and continues to February or March, RI-002 would be used instead of the standard IVIG, because it gives patients added protection against RSV infections. This product is currently in a Phase 3 study. We anticipate that top-line data will be available in Q4/14.

The objective of the Phase 3 trial is to get RI-002 approved as a regular IVIG, given that the IVIG approval pathway is well established. In its filings with the U.S. Food and Drug Administration (FDA), the company anticipates the Phase 3 study will demonstrate that RI-002 contains higher titers of anti-RSV antibodies. The possible product label, if approved, cannot claim to be a specific treatment for RSV infections, or that Adma's drug prevents RSV infections. But treating physicians, such as immunologists and infectious disease specialists, are able to understand the specific attributes of the different types of products, and are likely to use IVIGs on an off-label basis. We also believe management team has substantial experience in marketing and sales of plasma-derived products.

TLSR: Would RI-002 be used in cancer patients undergoing chemotherapy?

YJ: In the long term, yes, it could be used in that setting. But we are not modeling for that indication. Patients for which RI-002 could be more immediately relevant are those undergoing transplantations of the heart, lung and other organs.

TLSR: Yale, these chronic primary immunodeficiency diseases include a group of more than 200 infectious diseases, some worse than others. I don't want to suggest that RI-002 might prevent all of these, but could it, as a cocktail of polyclonal antibodies, prevent many unnamed disorders aside from RSV?

YJ: The short answer is yes. Let me expand on that. First, there are different severities and different etiologies or causative agents for the diseases resulting from PIDD, which is a genetic disorder. In our assumptions for our financial models, we usually look at the more severe patients, because they have greater needs. If they need immunoprotection, it's not only in just one area, such as RSV—it's protection against multiple types of microorganisms. Adma's IVIG is a way to boost the overall immune system. As a polyclonal serum, RI-002 provides protection against a broad spectrum of infections. It has a high titer of anti-RSV antibodies. RSV is seasonal, and is sometimes severe in patients. That's the value proposition right now.

TLSR: The company raised $27M last year, but it is opening a second plasma collection biocenter before the end of this year and a third sometime next year. Do you imagine that investors will be diluted once again?

YJ: Building these plasma collection biocenters is not that costly, and Adma doesn't need additional capital right now. The company could use its cash on hand, and also has some credit lines it can draw down on. But as Adma moves forward, if it needs to market RI-002, there could be the need for additional financing, be it equity or debt.

You can never rule dilution out. In the biotech space, no company can really say to analysts and investors that it will never have to raise another dime going forward. Quite honestly, it's just not realistic. At the same time, doing a raise doesn't necessarily reduce the share price if investors view the additional cash as making the ultimate value of the company greater.

TLSR: Yale, thank you.

Dr. Yale Jen joined Laidlaw & Co. in September 2013 as managing director, biotechnology analyst. He has more than 10 years of Wall Street healthcare analyst experience. Prior to joining Laidlaw, he was a senior equity analyst at Roth Capital Partners, focusing on biotechnology. Before that, Jen was a senior equity analyst focusing on biotechnology and Chinese healthcare at Maxim Group. Previously, he was an associate analyst at Rodman and Renshaw and Thomas Weisel Partners, covering large-cap as well as mid- to small-cap biotechnology and specialty pharmaceutical companies. His investment views have been cited in the Wall Street Journal, Bloomberg, Thomson Reuters and Dow Jones Newswire. Before joining Wall Street, Jen spent several years with KPMG Corporate Finance Life Sciences Group and Genesis Group Associates focusing on mergers and acquisitions of healthcare assets, as well as on pipeline optimization for pharmaceutical and biotechnology clients. Jen received his Ph.D. in molecular biology from Cornell Medical School, and his master's degree in business administration from Rutgers University with a concentration in finance. He holds FINRA licenses 7, 63, 86 and 87.

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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 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. Streetwise Reports does not accept stock in exchange for its services.
3) Yale Jen: I own, or my family owns, 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: Adma Biologics Inc. 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. 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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