Turning a Clinical Eye on Biotech Stocks with High Potential Investor Reward
Companies / BioTech Aug 01, 2014 - 03:54 PM GMTBy: TLSReport
A biotech analyst could play it safe, and stick with mid-, late- and commercial-stage companies that offer higher odds and decent returns on good news. Christopher James, on the other hand, recommends that investors willing to diversify their holdings and take on informed risk hold a short list of companies with huge potential. James, a senior analyst and managing director at Brinson Patrick Securities, is a neurosurgeon by training, and examines new platforms and proposed therapies with a clinician's eye. In this interview with The Life Sciences Report, James turns that eye on three names with dramatic, paradigm-changing technology platforms that could energize portfolios.
The Life Sciences Report: Chris, small molecules will always be an important part of medicine. But now we are seeing therapeutic interventions move to new paradigms, with larger molecules such as antibodies and fusion proteins, and soon we'll see wider use of regenerative and immunologically enhanced cells, as well as oligonucleotides—small segments of DNA and RNA. It's hard to discern how clinicians will embrace these newer therapies. How do investors get their arms around these concepts? How do we know that some of these ideas won't be the eight-track tapes of tomorrow?
Christopher James: You raise a great point. Yes, small molecules will always have a place in medicine, particularly for the broader population and for larger indications like hypertension, diabetes and hypercholesterolemia. They are very simple for community-based practices to prescribe; easy to use and to titrate dose. Also, small molecules have very attractive pharmacokinetic profiles.
That being said, I do believe that pharmas and investors are increasingly interested in larger molecules, in RNA-based therapies, and in regenerative approaches such as stem cells, which have the ability to actually modify disease, versus a small molecule that must be used chronically, for long term. The newer modalities offer the right combination of technology and intellectual property (IP), and are attracting the investment capital to advance. These potentially very powerful medicines can help patients with diseases that represent truly unmet needs. They also offer a potentially faster path to approval—especially for orphan disease indications.
TLSR: A physician can write a prescription for any approved small molecule. Any patient can carry these pills on his/her person. Plain and simple, they are modular. Newer therapies may break that model, resulting in slower uptake. I'll give you an example: Rheumatologists have been slow to embrace B-cell blockade with antibodies for autoimmune disease—psoriatic arthritis, rheumatoid arthritis, etc.—because they think of these infusions as chemotherapeutic agents. Infusions of large molecules don't traditionally fit into the rheumatologist's practice model. Do we just assume that newer modalities, such as stem cells and oligonucleotides, are going to encounter slow uptake?
CJ: Let's take a step back. You mentioned oligonucleotide therapies; these include antisense, RNA interference (RNAi) and approaches to target microRNAs. These therapies offer a unique opportunity to target a range of diseases that cannot be addressed with traditional, small-molecule pills. I believe that once the data are mature, the potential for targeting diseases with oligonucleotides will be recognized as unique and huge.
You can target microRNAs to control gene expression and entire pathways of diseases. It's a very powerful technology. Regulus Therapeutics LLC (RGLS:NASDAQ) has demonstrated positive preclinical data for this therapy in hepatitis C (HCV) and in Alport syndrome, an X-linked orphan disease characterized by a fibrotic process that leads to end-stage renal disease. Regulus' lead candidate in Alport syndrome, RG-012, received orphan drug designation on July 21. My point is that these therapies, in many instances, will have to be used to treat these complex diseases.
TLSR: You initiated coverage on Regulus in mid-May of this year. The company was formed as a joint venture of Alnylam Pharmaceuticals Inc. (ALNY:NASDAQ) and Isis Pharmaceuticals Inc. (ISIS:NASDAQ), which pooled their IP surrounding microRNA technology to form a new company. A single microRNA can control or inhibit anywhere from a dozen to up to 500 messenger RNAs (mRNAs). If you inhibit a single microRNA, you can affect hundreds of genes. That implies that those genes could have some evolutionary commonality. Do you imagine this moves us out of the realm of monogenic (single gene) disease and into the realm of most other diseases, which are polygenic in their origins?
CJ: Yes. We believe Regulus is on the forefront of the movement away from monogenetic disorders and toward targeting entire pathways. The microRNAs that Regulus targets are extraordinarily powerful, and can regulate networks that play a major role in biological processes such as immune modulation, metabolic disease and neurological disease. The company's technology is differentiated because microRNAs work farther upstream than either antisense or RNAi, which both target only single genes.
Regulus has large pharma alliances, which lower the risk and validate its microRNA technology platform. The company recently renewed a strategic alliance with Sanofi SA (SNY:NYSE) to focus on orphan diseases and oncology targets. Regulus is also well capitalized. We think it's currently trading extraordinarily cheap, and has tremendous investment upside.
TLSR: The company's market cap is almost $300 million ($300M). You have a $16 price target on Regulus, which implies a market valuation of $600M or more. Yet the company doesn't have a molecule in the clinic yet. What moves these shares?
CJ: Regulus actually does have a molecule in the clinic. It is RG-101 (targeting microRNA-122 [miR-122]) in a 100-patient Phase 1 study that includes both healthy and HCV-infected patients in the Netherlands. In terms of moving the valuation, we expect human proof-of-concept data from the study by year-end. We also expect the company to nominate a third clinical candidate for development. Right now the company is preparing to initiate a natural history of disease study (NCT02136862) in Alport syndrome. In H1/15, the company plans to initiate a Phase 1 study with RG-012 (targeting miR-21) in Alport syndrome. A number of clinical catalysts are coming up that can move the needle.
TLSR: Chris, allow me to go back to RG-101 for HCV for a moment. Is that a U.S. Food and Drug Administration (FDA) trial? Why is it being done in the Netherlands?
CJ: It's not a U.S. study, and if the study is not being conducted in the U.S., it does not have to be in the clinicaltrials.gov database. We don't believe that will affect the drug moving forward. The study is being done in the Netherlands primarily for cost savings and efficiency. This won't affect, in any way, advancement of RG-101 into a Phase 2 FDA trial.
RG-101 is targeting miR-122, which is one of the most highly conserved (by evolution) regions encompassing all HCV genotypes. RG-101 is pan-genotypic in its scope, which would include HCV genotype 3. Gilead Sciences Inc.'s (GILD:NASDAQ) Sovaldi (sofosbuvir), which was approved in early December, has great data in genotypes 1 and 2, but there is a greater unmet need for genotype 3. I'll add that Regulus does not intend to move RG-101 into Phase 2 without a partner.
TLSR: To your point about partnering, both Alnylam and Isis have created business models where they achieve proof of concept in targeting genes, and then partner their products with companies that have expertise in marketing to that disease indication. Does this appear to be what Regulus is doing?
CJ: Yes, absolutely. I'll remind you that in January, Alnylam entered into a large strategic alliance with Sanofi/Genzyme with regard to RNAi therapeutics. We also saw Sanofi renew its strategic alliance with Regulus earlier this year, and Biogen Idec Inc. (BIIB:NASDAQ) has entered into collaborations with Regulus and Isis on microRNA biomarkers to predict patient responses to multiple sclerosis treatment.
TLSR: You have a new company under coverage. Could you tell me about it?
CJ: StemCells Inc. (STEM:NASDAQ) is a great company and a great fit for my coverage, given my background. I actually started to do research on the company after our initial discussion back in mid-May, after you pointed out a number of names that could fit well with my background in neurosurgery. I did bench work as a medical student with stem cell transplantation in rodents. We transplanted olfactory ensheathing cells from the bulb into thoracic spinal cord injury rodent models, and were able to assess the morphometric changes. We were actually able to show improvements in movement.
TLSR: Give me your investment theory on StemCells Inc.
CJ: This company is rapidly advancing a neural stem cell therapy for multiple indications, particularly for the central nervous system. It is going after chronic spinal cord injury (SCI) and geographic atrophy age-related macular degeneration (GA-AMD). Both indications, we think, will generate significant data over the next 24 months.
TLSR: These two indications are the catalysts for StemCells Inc.?
CJ: The main catalyst right now is GA-AMD. Investors like this story because of their familiarity with Genentech/Roche Holding AG's (RHHBY:OTCQX) antibody Lucentis (ranibizumab intraocular injection). Before that there was the oncology antibody Avastin (bevacizumab), which was used off-label for AMD until Lucentis was approved. Investors know these stories.
Recently, we saw initial interim data from the Phase 1/2 study with the company's HuCNS-SC cells (purified adult human neural cells of fetal origin) in GA-AMD. These data were extraordinarily encouraging. In fact, when you compare them to Phase 2 data from Roche's drug, lampalizumab, they are actually quite favorable. StemCells saw a reduction in GA progression of approximately 65–70% at one year, whereas in a broader population, lampalizumab showed a 20.4% reduction, and in a specific subpopulation of GA patients, a 44% reduction.
We will see additional data from this StemCells study in mid-November during the company's R&D Day. More important, the program is rapidly moving into a randomized, controlled Phase 2 study that would be the first with a human neural stem cell. It's a large opportunity—with more than 8M GA patients worldwide—and that gets the attention of investors and analysts.
TLSR: Going back to spinal cord injury, loss of motor function is a difficult indication, and that really gets people's attention. I'm wondering why StemCells and other companies are going after chronic SCI, when an acute injury might be more amenable to successful therapy. With chronic SCI you have scar tissue formed over time, but with acute injury you have vascularized, fresh, unscarred cord. Why not target acute spinal cord injury?
CJ: That's a great point, which I can address from a clinically practical standpoint. There is a large commercial opportunity with spinal cord injury, but a real, practical problem with treating acute injury patients.
As you mentioned, the microenvironment changes over time. There is glial scarring, and the disease process changes. Treating the acute form of spinal cord injury does offer patients the best possible outcomes. The problem is that you are treating a patient who was fine up until a motorcycle or car accident. Suddenly he can't feel a certain part of his body—or, God forbid, he may have a high cervical injury, with paralysis from neck down. It's hard to convince this patient that he is not going to walk again for the rest of his life. Can you imagine the conversation at the bedside? Can you say to this patient: "You are not going to walk again, and we need you to accept that. We also need you to accept an experimental therapy."?
Treating the acute-injury patient is a very delicate situation. Patient acceptance of the true situation may be six months in the future. But a therapy would be more efficacious earlier than later. This opportunity will come eventually, after good data and proof of concept have been generated.
TLSR: What kind of improvements have we seen in spinal cord injury with StemCell's HuCNS-SC cells?
CJ: We have seen improvements in sensation at the thoracic level. Thoracic injuries are much worse than cervical injuries. You need greater trauma to affect the thoracic cord versus the cervical cord, where very small amounts of trauma can cause problems. Cervical cord is much more delicate and controls more motor function. To show improvement in a difficult area like thoracic cord bodes well for the next phase, which will start later this year and focus on cervical injury. You need less improvement in the cervical cord to regain movement—actual motor function. We think the thoracic data will translate to increased efficacy at the cervical level and the presence of small motor improvements, such as allowing movement in the hands—maybe to control an electric wheelchair, maybe to type—that would really affect quality of life. These commercial opportunities will propel the company's valuation higher.
TLSR: Chris, could you mention another name?
CJ: We are very excited about Rexahn Pharmaceuticals Inc. (RNN:NYSE.MKT). It's an early-stage oncology company with multiple shots on goal. It is developing three drugs, Archexin (Akt1 antisense oligonucleotide inhibitor), RX-3117 (a nucleoside analog/DNA synthesis inhibitor), and Supinoxin (RX‐5902; phosphorylated-p68 RNA helicase inhibitor).
We're particularly excited about Rexahn's RNA-based therapeutic, an oligonucleotide. This class of drug is coming of age. The Archexin Phase 2a proof-of-concept trial in metastatic renal cell carcinoma is enrolling patients. It also has orphan drug designation.
TLSR: Do all of those programs have data forthcoming that could move this stock over the next year?
CJ: We should have some safety data from the Archexin study in Q4/14. The company recently provided an update on its Phase 1 supinoxin trial in cancer patients. Enrollment with the fourth dose is complete, and the estimated bioavailability is approximately 50%. Complete enrollment is on track for Q4/14. With RX-3117, we also expect a Phase 1 study to be completed in Q4/14.
TLSR: Thank you, Chris.
CJ: Thanks so much.
Christopher James, M.D., is a managing director and senior equity research analyst focusing on life sciences companies with strong growth potential and developing novel agents for serious diseases including cancer and infectious, neurological, inflammatory, metabolic and cardiovascular diseases. He was previously a senior equity research analyst at Rodman & Renshaw and MLV & Co. Prior to joining Brinson Patrick, Dr. James was chief medical officer and senior vice president of medical affairs at Retrophin, a biotechnology company focused on developing therapeutics for rare and devastating diseases. While at Retrophin, he played a pivotal role in the study design and subsequent acceptance of an investigational new drug application with the cardiorenal division of the FDA to initiate a Phase 2 clinical study in a rare kidney disease called focal segmental glomerulosclerosis. Dr. James has prior buyside experience working at Trivium Capital Management and MSMB Capital Management. He trained in neurological surgery at Cornell-New York Hospital and Memorial Sloan Kettering Cancer Center, and obtained a medical degree from Yale University School of Medicine and a bachelor of science in biology from Cornell University.
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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: Rexahn Pharmaceuticals Inc., StemCells Inc. Streetwise Reports does not accept stock in exchange for its services.
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