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Stellar Biotechnologies (SBOT:NASDAQ) Could Rise with KLH Vaccine Trial Success

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Jason McCarthy Several KLH-based vaccines are in trials for indications as varied as breast cancer and lupus, and clinical success could propel Stellar Biotechnologies, which is the only provider of KLH that has its own aquaculture facilities, says Jason McCarthy, an equity research analyst with Maxim Securities. Maxim currently has a price target of $4 on Stellar and the stock currently trades at around $1.65.

Amaran Biotechnology Selects Stellar KLH for Cancer Vaccines.

The Life Sciences Report: Welcome, Jason. How have the passage of the 21st Century Cures Act and the advent of the new administration in the U.S. changed the landscape for biotech?

Jason McCarthy: The 21st Century Cures Act was the last piece of legislation that the Obama administration put in place before the transition to the Trump White House. It allows companies with a therapy that has a positive safety profile, particularly cell-based therapies in the regenerative medicine space, to have multiple avenues to demonstrate efficacy for large unmet needs in relatively smaller studies. It gives a more expedited path to the marketplace. So it's really meant to encourage companies to develop innovative therapies that have good safety profiles, which should pave an easier path to the market.

In the new administration, I think that President Trump is going to put more pressure on payers and pharma companies; I don't think he's going to pick one side or the other specifically to focus on. As a businessman he understands the need for something like Medicare to get a better deal. We've heard him talk about the EpiPen debacle with Mylan Inc. (MYL:NASDAQ). He's vocalized that Medicare, as the largest drug purchaser in the country, is not leveraging its clout to get better pricing.

We are probably going to see some increased flexibility from the U.S. Food and Drug Administration (FDA) on novel types of therapies, such as cell therapies or engineered T-cells like chimeric antigen receptor T (CAR-T), which is a form of cell therapy and gene therapy. That's where we're going to see the fundamental changes with the new administration, particularly in 2017 where the first CAR-T therapies could be approved for Kite Pharma (KITE:NASDAQ) and Novartis AG (NVS:NYSE), probably in the middle of this year. And we could also see the first gene therapy approved, from Spark Therapeutics Inc. (ONCE:NASDAQ), which is expected to file a biologics license application soon, and approval could be also in 2017.

Those types of approvals from the FDA should signal some increased flexibility with these novel types of therapeutics that are developed from our evolving knowledge at the molecular and genomic levels. I would characterize drug development today as a paradigm shift from "serendipitous drug discovery," to "drugs-by-design," and this includes the gene therapies, the CAR-Ts, exon skipping, anti-sense therapies and designer small molecules—and there are more. And you can take the provisions from the 21st Century Cures Act and wrap it around this as well.

TLSR: Would you talk about a company you follow that has a novel niche in vaccine research and production?

JM: I follow Stellar Biotechnologies Inc. (SBOT:NASDAQ), which produces keyhole limpet hemocyanin (KLH). This carrier protein is being evaluated immune modulating agent in a number of vaccine trials.

TLSR: Would you explain what is special about KLH?

JM: If you want to make a vaccine, it's very difficult. You often can't just vaccinate with a small molecule by itself, even with an adjuvant it's difficult. Many times that antigen may need to be linked to a carrier protein for presentation to the immune system to generate the appropriate immune response, and that's what KLH does.

KLH is special in that it's a tremendously big protein. It has a lot of amine groups on it so you can hook a lot of things up to it. And the KLH itself is very immunogenic. So KLH can actually stimulate its own immune response and actually help generate antigen-specific responses almost by default just by being the carrier protein. The KLH itself will tend to play a role in generating immune responses to your antigen.

"No one else can supply KLH at the quality and the quantity that Stellar Biotechnologies Inc. can."

When you're developing a vaccine for any indication, you can have a dendritic cell vaccine, you can have a DNA-based vaccine, you can have a KLH-based vaccine or a peptide vaccine, and each one has its own advantages, disadvantages and attributes that you may or may not want as part of the immune response you are targeting. KLH seems to be geared toward generating antibody responses versus T-cell responses. So when you're trying to target something like lupus and you're trying to take out all of the interferon cytokines that are floating around and driving unwanted hyperinflammation, neutralizing antibodies might be an ideal approach. And an ideal approach for generating lots and lots of neutralizing antibodies is to use a KLH-based vaccine.

TLSR: How Stellar is producing KLH, and how that is different from others?

JM: What is unique from a Stellar perspective is that the company has on-land aquaculture. It is producing a very consistent KLH product from the keyhole limpet animals, whereas others rely on harvesting those animals from the ocean. There are only a few spots in the world off the coast of California where you could do that. And there's a lot of variability in the KLH product by harvesting off the ocean floor whereas Stellar does it in a very consistent, very reproducible process.

Part of the challenge with KLH is that it's such a big protein that you can't make a recombinant KLH, which is why you need the sophisticated aquaculture facility that only Stellar has to generate sufficient quantities to make a reproducible ingredient that could be used for vaccines.

TLSR: What KLH-based vaccines are in the pipeline and how far along are they?

JM: In the year ahead, we expect a number of companies to announce that they are using KLH in vaccines that are in preclinical and/or clinical development. We expect some of Stellar's partners, like OBI Pharma Inc. (4174:Taipei), which is a Taiwanese company that's developing a breast cancer vaccine, to go ahead with a Phase 3 trial. Neovacs SA (ALNEV:Alternext Paris) is in a Phase 2b study in lupus; that study, if it's positive, could result in commercial launch in Korea in 2018. It also sets up for Phase 3 in China and in the U.S. in 2018. We also expect data from Neovacs in dermatomyositis later in 2017. A company called Araclon Biotech SL (a subsidiary of Grifols S.A. (GRFS:NASDAQ)) is developing an Alzheimer's vaccine.

As these companies make progress in 2017 and announce data, that important for Stellar.

KLH-based vaccines for diabetes are early stage. Neovacs is a company that has a program in diabetes. It's early stage; it's preclinical. Neovacs still has some investigational new drug enabling studies to work out, but it's a very interesting approach because nobody's really attacking diabetes by targeting interferon, though remember, it's still early days for that.

TLSR: So how do these active immunotherapies under development compare to first-generation drug products like Humira or Rituxan monoclonal antibodies?

JM: If you're going to vaccinate in general—and KLH is particularly good at this—you're going to generate polyclonal antibody responses. You're going to make antibodies that target all different kinds of epitopes of the same protein or cell, whatever you're looking to target, whereas a monoclonal antibody is very specific for a very tiny, tiny little epitope that's probably just a few amino acids long. So I would describe it as maybe taking a shotgun approach with a KLH vaccine and polyclonal antibodies versus Humira or Rituxan being like a rifle shot. With a rifle, you have one shot, one target, whereas you get multiple targets with a polyclonal vaccine-like response.

TLSR: Are there other uses for KLH besides vaccines?

JM: There are. If you're trying to generate monoclonal antibodies, you can use KLH with an antigen attached to generate a polyclonal response and then screen for a high affinity monoclonal antibody. KLH is just one tool that these companies are using. The immuno-oncology and the autoimmune immunotherapy-based spaces have made tremendous advances, but they're still in their infancy. KLH is going to play a significant role, but it's going to be one of many approaches.

TLSR: In your most recent research report, you had a $4 target price on Stellar. What do you think are the most significant valuation drivers?

JM: Our thesis on Stellar has remained unchanged. The $4 price target is based on its partners, the companies that are using its KLH, hitting their clinical milestones and that translating into supply contracts or partnerships for Stellar. That's what drives our price target.

TLSR: What should investors be looking at in the trials to see how the technology is developing?

JM: With an earlier-stage study, you can get a sense of whether the KLH vaccine is generating neutralizing antibodies, and what's the immune profile that we're seeing in some of these patients. But I would be looking at those more advanced studies and their data that are expected in the next year or two as an indicator of KLH's potential, at least in those specific indications. You can't draw conclusions from a lupus study if it's going to work in breast cancer.

TLSR: If these trials have clinical success, do you think that Stellar would be a takeover candidate by any of its partners or a large pharmaceutical company?

JM: I don't think so, and as an analyst, I don't speculate on the company being a takeover target. I think the company is very small right now. You need to see some clinical successes with KLH vaccines and see that KLH supply increase as one company using KLH goes toward commercial stage.

Chairman and CEO Frank Oakes has really built Stellar to where it is today, and he and his team are still expanding. In my opinion I would believe he wants to be there as it grows. I think Stellar as a KLH supplier could play a significant role for a number of companies, if those companies are clinically successful. And if they are successful, Stellar should be the beneficiary.

TLSR: Anything else you would like us to know?

JM: What drives Stellar ultimately is its partners. As its partners grow, so should Stellar by being the KLH supplier to the companies. As far as I know, no one else can supply KLH at the quality and the quantity that Stellar can, but it is tied to the success of its partners. We're looking for data from those groups.

TLSR: Thanks for your insights, Jason.

Jason McCarthy, Ph.D., is an equity research analyst covering the biotechnology industry at Maxim Group. McCarthy joined Maxim Group in July 2014. Prior to joining Maxim he received his doctoral degree in biomedical sciences from the Albert Einstein College of Medicine. McCarthy also holds master's degrees in both biomedical research (Albert Einstein College of Medicine) and molecular biology (Adelphi University), as well as a bachelor's degree in biochemistry from Stony Brook University. He closely follows gene therapy, CAR-T and the cancer immunology spaces, as well as many traditional biotechnology companies.

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1) Patrice Fusillo conducted this interview for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. She owns, or members of her immediate household or family own, shares of the following companies mentioned in this article: None. She is, or members of her immediate household or family are, paid by the following companies mentioned in this article: None.
2) The following companies mentioned in this interview are billboard sponsors of Streetwise Reports: Stellar Biotechnologies Inc. Streetwise Reports does not accept stock in exchange for its services. Click here for important disclaimers. The information provided above is for informational purposes only and is not a recommendation to buy or sell any security.
3) Jason McCarthy: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: None. I, or members of my immediate household or family, are paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this interview: Stellar Biotechnologies and Neovacs. I determined which companies would be included in this article based on my research and understanding of the sector. 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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