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Drug Pricing, Presidential Politics, and Three Biotechs with Promise PTIE, DRRX, ABEO, AST

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George Zavoico While the vagaries of the 2016 political season create uncertainty in the biotech and pharmaceutical sectors, companies are moving ahead with innovative cell therapies, gene therapies and new, safer ways to deliver addictive drugs, and investors find themselves in a position to play the development ideas with varying degrees of risk. In this interview with The Life Sciences Report, George Zavoico of Jones Trading Institutional Services explores how the presidential race could affect the biotech industry, and explains the growth prospects of three biotech names that could strike gold.

[Editor's Note: This is part two of a two-part series with Dr. George Zavoico.]

The Life Sciences Report: George, the upcoming November election is on everyone's mind. The next president of the United States will certainly affect healthcare policy, perhaps more than President Obama has. At this point, it looks like a race between Donald Trump and Hillary Clinton. Do you have a thought as to how the election might affect healthcare and drug development?

George Zavoico: I have some thoughts and I have some hopes. As you know, in the primaries the candidates tend to play to their bases. One issue that has come up over and over again is the high cost of drugs. Of course, this hasn't been helped by the examples of Turing Pharmaceuticals AG and Valeant Pharmaceuticals International Inc. (VRX:NYSE; VRX:TSX), both of which dramatically jacked up the prices of generic drugs that had been fairly low-priced. That got everybody mad. The companies didn't do anything illegal, but there was no real reason for hiking those prices other than to maximize profits.

"DURECT Corp.'s new formulation of oxycodone, Remoxy, has made it very difficult for abusers to extract the active ingredient to get a concentrated hit of the pill's payload."

So the candidates are railing about the cost of drugs. Interestingly, as long as the focus is on drug prices, it probably makes hospitals and other service providers, as well as instrument and medical device manufacturers, feel a little bit more comfortable. The pressure is off them, even though prices are going up pretty much across the board in healthcare and the fact that drugs still represent a relatively small fraction of the total healthcare costs.

Based on what the candidates have said, yes, there is reason to worry that they might go after the biotech and pharmaceutical industry. My hope is that, whoever it might be, the new president will realize these are critical industries.

TLSR: Right now, the U.S. government cannot negotiate the price of drugs with pharmas and biopharmas. If policy changes under a new administration, what effect would that have on drug developers?

GZ: You really don't know what a candidate will do until he or she is elected. Governing is different from campaigning. Once elected, I'm hopeful the new president and Congress, no matter which party is in control, will remember that it's in no one's best interest to drive drug companies out of business. The U.S. is leading the world in biotech and pharma industries, and not much should be done to disrupt that fact.

Having said that, I think whoever is elected will make an effort to change policy, if only to satisfy their base and follow up on campaign promises. So I suspect there will be attempts to tweak and modify the current situation. But I don't believe the drug development model and profit structure is going to be destroyed.

Yes, the U.S. is unique among nations in that we're one of the only countries—if not the only country—where we don't set or negotiate drug prices. In Europe, prices are negotiated before a drug gets on the market. I don't have a problem with that as long as negotiated prices don't inhibit innovation. If it happens that way, then if Medicaid and Medicare are able to negotiate drug prices, I don't think that would have a huge impact. We're already seeing companies making more rational decisions and becoming more efficient and cost-effective. If this continues, it is not a bad trend.

We also don't need to be subsidizing drug prices for the rest of the world. Negotiating drug prices could put us on a more even playing field. Look at it this way—as long as pharma companies know they can charge much higher prices in the U.S., they are more willing to settle for lower prices outside the U.S. But if they had to negotiate in the U.S, they might be able to negotiate higher prices outside the U.S. But if this is done suddenly or disruptively, we'd probably see prices of pharmaceutical stocks go down dramatically.

There's no question that biotech and pharma companies need to be profitable to sustain innovation, but it's also clear that the healthcare system—not only drug pricing but pretty much all aspects—is broken, and something needs to be done. Remember that innovation also comes from the National Institutes of Health (NIH) and other organizations, which fund academic centers to develop new ideas that investigators can explore to find new drugs and spin out new companies. That's what you want to maintain. As long as you design features into new public policies that maintain entrepreneurship, changes could end up being good for everybody—for industry, for patients, for caregivers, and for taxpayers.

TLSR: Could we talk about some stocks?

GZ: Absolutely. Here's one related to something that's been in the news lately. The president and presidential candidates have been discussing the epidemic of opioid abuse and addiction in the U.S. I'd like to talk about Pain Therapeutics Inc. (PTIE:NASDAQ). Not only is this company addressing this important issue, but the name is appropriate for other reasons. On March 15 the Centers for Disease Control (CDC) came out with new guidelines for prescribing opioids for chronic pain. The idea is to reduce the epidemic of hospitalizations and deaths from opioid abuse. In 2014, there were nearly 20,000 deaths because of this, and the CDC estimates that more than 10 million (10M) people in the U.S. use prescription opioids for nonmedical reasons.

Together with its partner, DURECT Corp. (DRRX:NASDAQ), Pain Therapeutics developed a more effective abuse-deterring version of oxycodone, the active ingredient in OxyContin, which continues to be abused in its current form. DURECT's new formulation of oxycodone, called Remoxy (ORADUR-oxycodone), has made it very difficult for abusers to extract the active ingredient to get a concentrated hit of the pill's payload. It's poorly or not at all extracted in alcohol; it turns into a gel; you can't grind it; you can't snort it.

"We don't need to be subsidizing drug prices for the rest of the world. Negotiating drug prices could put us on a more even playing field."

Pain Therapeutics partnered this drug with King Pharmaceuticals, now a unit of Pfizer Inc. (PFE:NYSE), back in 2005. King and Pain Therapeutics filed a new drug application (NDA) in 2008, but received a Complete Response Letter, with the FDA requesting additional nonclinical data. King Pharma took on sole responsibility for obtaining regulatory approval and submitted a second NDA to the FDA just after its acquisition by Pfizer. The FDA was still unsatisfied and another Complete Response Letter was received. Pfizer took over and spent millions of dollars and several years to run a number of different trials and work on the formulation to get it just right.

Then, suddenly, in late 2014, Pfizer hands Remoxy back to Pain Therapeutics. Maybe Pfizer knew something that Pain Therapeutics didn't know, but I think what is poorly understood is that Pfizer was, and is, developing its own abuse-deterrent oxycodone, which is paired up with naloxone, an opioid antagonist. If Pfizer could get its own abuse-deterrent opioid developed, it would not have to pay milestones to Pain Therapeutics on sales of Remoxy. I think Pfizer gave Remoxy back to Pain Therapeutics from a purely economic standpoint. Pain Therapeutics guided the Street to filing a third NDA before the end of Q1/16, and it did so on March 29. Remoxy could very well be approved before the end of this year, and it would be one of the first, if not the very first, superior abuse-deterrent oxycodones on the market. I think this is worth watching.

[Editor's Note: On April 12, 2016, DURECT and Pain Therapeutics announced that the NDA for Remoxy had been accepted by the FDA for review, with a Prescription Drug User Fee Act (PDUFA) date of Sept. 25, 2016.]

TLSR: Physicians are already paranoid about prescribing schedule II narcotics. This CDC directive is going to make them more wary about writing opioid prescriptions for patients, even though some patients really need them. Do you think the physician's anxiety about prescribing these kinds of products creates a huge market for Remoxy if it gets approved?

GZ: There are already quite a number of physicians who don't want to, or prefer not to, prescribe opioids. So yes, it might make even more physicians reluctant to prescribe these drugs. On the other hand, the CDC regulations might create an opportunity for the growth of pain specialty practices, something that I think is sorely needed. There are too few of these, and there is a definite need for more physicians who are specialists in treating pain. This might stimulate a shift in that direction, especially if it goes together with policies and regulations that encourage patients to go to specialists because they won't be able to get pain medications from general practitioners.

TLSR: How large do you imagine the market is for Remoxy?

GZ: The branded extended-release version of oxycodone is OxyContin, and in 2014 it brought in about $2.4 billion ($2.4B) in global sales. To understand this more clearly, Pain Therapeutics' market valuation is just at $110M right now. Remoxy is going right for that market.

It's hard to predict what effect the new CDC regulations will have on the market size, but let's speculate that opioid prescriptions will become better regulated and the opioid abuse and addiction epidemic will diminish. Demand will fall, and growth in the market will stop or will get smaller. Remember, any reduction in demand will be offset by an aging population that will be living longer, many with chronic pain. Let's just speculate that the market size is reduced by one-third, to about $1.6B. Even if Remoxy captures just 10% of the market, $160M in annual sales revenue to a company the size of Pain Therapeutics is a big deal. If Remoxy is demonstrated to have superior abuse-deterrent properties than OxyContin, which emerging evidence suggests it does, then it's likely to capture more of the market. By the way, depending on sales volume, DURECT stands to receive 6% to 11.5% of sales revenue as royalties from Pain Therapeutics.

TLSR: Go ahead with your next idea.

GZ: Abeona Therapeutics Inc. (ABEO:NASDAQ) is working in the fields of orphan diseases and gene therapy. It is using a retroviral vector to treat two types of Sanfilippo syndrome that affect children in many ways, but predominantly through central nervous system (CNS) symptoms, meaning motor, behavioral and cognitive decline. These are lysosomal storage disorders where sugars (mucopolysaccharides, now called glycosaminoglycans) are not broken down in the cells, leading them to accumulate and causing malfunction. The idea is to get a normal version of the dysfunctional gene into cells to express the enzyme that clears the blockages from the lysosomes in the cells. Sanfilippo syndromes are monogenetic disease—one gene and one enzyme—so you don't have to deal with many genes malfunctioning, which is the case in many diseases. I think this is an area to watch very carefully as well.

You need a virus—called a vector—because the virus is the vehicle that can deliver genes into the cells of the CNS, as well as cells in other affected organs, to fix an enzyme deficiency. In this case, Abeona is using an adeno-associated virus 9 (AAV9) serotype, which can cross the blood-brain barrier and deliver the gene into the cells of the CNS.

"The U.S. is leading the world in biotech and pharma industries, and not much should be done to disrupt that fact."

This whole field is still in a fairly early stage of development, and in the U.S. there are no approved gene therapies. Europe has one—uniQure NV's (QURE:NASDAQ) Glybera (alipogene tiparvovec), also an AAV vector for lipoprotein lipase deficiency—but it is not selling very well. I think Abeona Therapeutics is unique among the gene therapy companies in that it has mitigated its risk with a second technology platform to spin out other types of high-value products.

TLSR: How has the company mitigated its risk?

GZ: Abeona also has a proprietary plasma protein platform for protein replacement therapy. Its so-called "salt diafiltration" manufacturing process is gentler than more traditional methods so it's able to isolate plasma proteins at a higher yield and at a lower cost of goods. Globally, this is a $14B market, with half of that from sales of IVIG, or intravenous immunoglobulin, for patients with various immune deficiencies. Abeona is going after this market. Its SDF-ALPHA and SDF-IVIG product candidates contain alpha-1 antitrypsin (AAT) and immunoglobulins for the treatment of AAT deficiency and immune-related disorders, respectively. These products are being developed using the FDA's abbreviated 351(a) bioequivalence pathway, and they could be approved and on the market in 2017 or 2018.

In addition, the company has some backup gene therapy candidates, including a gene-editing product using the exciting CRISPR/Cas9 technology. There are inherent risks in gene therapy, but Abeona and other pioneering companies in the field are all pretty much at the same level, about Phase 1 or Phase 2.

TLSR: George, what catalysts should investors be looking for?

GZ: As of Feb. 29, the investigational new drug (IND) application is now active for ABO-102 for Sanfilippo Type A (also known as mucopolysaccharidosis IIIA, or MPS IIIA). A Phase 1/2 study is beginning now as a dose escalation trial in 6–9 children. The FDA has previously granted both orphan disease and rare pediatric disease designation for ABO-102 in Sanfilippo Type A, as well as for ABO-101 in Sanfilippo Type B, which is still preclinical, but is on its way to the clinic as well. The IND for ABO-102 is expected this year.

Abeona is also working on a third AAV9-based gene therapy product, ABO-201, for another lysosomal storage disorder called juvenile Batten disease. It's still at the preclinical study stage. It is also working on CRISPR/Cas9 gene-editing technology with its ABO-301 agent for Fanconi anemia, which is still in the research phase and could soon to move to preclinical status. These are all rare diseases. If they are successful, these therapies could claim premium pricing.

TLSR: Do you have another theme and company you'd like to mention?

GZ: Sure. We're finally getting to the point where we're able to better manipulate cells in culture and arrive at good manufacturing practices to produce consistent product, which is very important from a therapeutic perspective. This is also something the FDA wants to see in the regulatory process. We are beginning to see this translate into both ex vivo cell and gene therapies, where cells are harvested from the patient, engineered with a gene payload to make them do something that would be clinically beneficial, and then put back into the patient.

Asterias Biotherapeutics Inc. (AST:NYSE.MKT) is a combination gene therapy and cell therapy company. Whereas Abeona is working on CRISPR/Cas9 and AAVs, Asterias has developed AST-OPC1. This cell therapy product is composed of oligodendrocyte progenitor cells differentiated from the company's pluripotent human embryonic stem cell platform to treat spinal cord injuries. This cell therapy, when it's injected into an injured spinal cord, will help prevent scar tissue formation. It will support myelin formation and hopefully help heal crushed neurons that have been rendered dysfunctional by the injury, restoring some clinically meaningful motor function and sensory function. Final data collection is currently scheduled for June 2018.

TLSR: This therapy is early stage. What do we know about Asterias' spinal cord therapy so far?

GZ: We saw some good preclinical results in animal studies. Also, a five-patient Phase 1 study was completed in 2013. The trial in progress is a 13-patient Phase 1/2 study. The therapy has already gone through its first, very low-dose cohort and is now into a second low-dose cohort. The difference is that, based on animal studies, the very low-dose cohort is not expected to produce much clinical benefit but will demonstrate safety. The low-dose cohort will be in the range expected to produce some sensory and functional benefit. A third cohort will evaluate a still higher dose of cells.

This therapy isn't going to turn anybody into an Olympic athlete, but any sort of clinically meaningful benefit in a complete spinal cord injury would be a tremendous advance. Asterias is enrolling patients who are quadriplegic, paralyzed from the neck down. The first cohort was administered only 2M cells, and the company isn't expecting much of an effect with that. Patients in the second cohort are getting 10M cells and the third cohort will get 20M cells. The company believes 10M and 20M cells should have a clinical effect.

TLSR: What about Asterias' gene therapy side?

GZ: The human embryonic stem cells are allogeneic, meaning that they come from the same species but from a different individual or individuals. On the gene therapy side Asterias is developing an autologous platform, using the patient's own cells, in acute myeloid leukemia (AML). It's an autologous dendritic cell vaccine, AST-VAC1, designed to be used as maintenance therapy in patients who have had a complete response with induction chemotherapy. A Phase 2 trial was started by Asterias' predecessor company, Geron Corp. (GERN:NASDAQ). These cells are genetically engineered to express telomerase, which is an overexpressed protein present in more than 95% of cancers. It therefore represents a potentially important pan-cancer antigen.

Patients were originally treated with this vaccine by Geron, which gave up the platform halfway through the trial to BioTime Inc. (BTX:NYSE), which then spun it off to Asterias. Meanwhile, the patients were still followed. When the database was finally analyzed the investigators found that the AML patients who were treated had a remarkably long period of progression-free survival. The median progression-free survival was not even reached with an average follow-up of 4.3 years, both in the intent-to-treat population of 19 patients, as well as in a subgroup of seven patients who were more than 60 years old.

Asterias is moving forward with this, and is designing its next trial. It had a successful end-of-Phase 2 meeting with the FDA, and is preparing an application for a special protocol assessment (SPA). Importantly, the FDA agreed that median progression-free survival is an acceptable primary endpoint, and that a single pivotal Phase 3 will be sufficient for approval if the results are favorable. The company has guided to commencing this trial in early 2017. Taken together, the company has an interesting and promising mix of technologies.

TLSR: When could we see some data from Asterias?

GZ: This year and next, look for some more spinal cord data with AST-OPC1, and the start of a pivotal Phase 3 AML trial—after the FDA grants the company an SPA—for AST-VAC1.

TLSR: Thank you, George.

Dr. George Zavoico, senior equity analyst at JonesTrading Institutional Services LLC, has more than 10 years of experience as a life sciences equity analyst writing research on publicly traded equities. His principal focus is on biotechnology, biopharmaceutical, specialty pharmaceutical, and molecular diagnostics companies. Previously, Zavoico was a senior equity research analyst in the healthcare sector at MLV & Co., and an equity analyst at Cantor Fitzgerald and Westport Capital Markets. Prior to becoming an equity analyst, Zavoico established his own consulting company serving the biotech and pharmaceutical industries, providing competitive intelligence and marketing research, due diligence services and guidance in regulatory affairs. Zavoico began his career as a senior research scientist at Bristol-Myers Squibb Co., moving on to management positions at Alexion Pharmaceuticals Inc. and T Cell Sciences Inc. (now Celldex Therapeutics Inc.). Zavoico has a bachelor's degree in biology from St. Lawrence University and a Ph.D. in physiology from the University of Virginia. He held post-doctoral fellowships at the University of Connecticut School of Medicine and Harvard Medical School/Brigham & Women's Hospital. He has published more than 30 papers in peer-reviewed journals and has coauthored four book chapters. He received The Financial Times/Starmine Award two years in a row for being among the top-ranked earnings estimators in the biotechnology sector.

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1) Dr. George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences 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: DURECT Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) George Zavoico: 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: None. My company has a financial relationship with the following companies mentioned in this interview: Pain Therapeutics Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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