The Life Sciences Report: Your experience is very broad. Just four or five years ago, you were a big pharma analyst at a major investment bank, where you followed the largest drug makers in the world. From your perspective today, as an analyst following small-cap biotech and medtech, can you talk about the clinical assets that drive value in smaller companies?
Ed Arce: From a market perspective, the key value drivers largely remain the same. First, and by far most important, are the clinical data. The stronger the efficacy, the better. But meeting clinical endpoints needs to translate into a clinically meaningful benefit. An outright therapeutic cure is optimal, but is also quite rare. Also, the overall safety and tolerability profile of any new therapeutic must be commensurate with the severity of the disease, and comparable to the risk profiles of any existing pharmacotherapies. Risk/benefit is obviously a trade-off. The U.S. Food and Drug Administration (FDA), in attempting to balance the risk/benefit equation, has leaned a bit in one direction or the other over the years.
The second point, from a market perspective, is the size of the patient population and the degree to which that population has been, or is, treatment naïve.
The third point is value driven by a long product life, in the form of a long-dated patent suite, as well as any regulatory exclusivity offered to the drug.
Last would be pricing. This has, for a long time, been strongly correlated to the strength of the data, and rightly so. But increasingly, companies are focusing one or more of their development programs on rare diseases that qualify for the FDA's orphan indication, with the candidate drug being entitled to marketing exclusivity. In these cases, the pricing is much higher than in broader indications.
TLSR: You have alluded to a very interesting point regarding orphan indications—incentives from the FDA for developing these products and the pricing models available to companies for focusing on rare diseases. It seems to prove that these programs have been effective, does it not?
EA: Yes. The FDA's orphan drug programs have been among the most successful over the last couple decades. Originally the industry was a bit slow to pick up on the commercial opportunity, but now, and over the last few years, there has been a resurgence and an awakening to the commercial opportunities concerning all of the program's aspects, which include market exclusivity, tax benefits and the other items. The incentives make development of orphan drugs a much more profitable proposition.
TLSR: You follow a few medical technology companies in addition to biotechnology companies. Do you find differences in the way the Centers for Medicare & Medicaid Services (CMS) treats device companies versus drug companies? What variances have you noticed with regard to allowing reimbursement for devices versus drugs?
EA: I've come to believe that there are, in many cases, more hurdles regarding reimbursement for devices than for drugs. Specifically, I think devices are much more likely to experience incremental, piecemeal reimbursement approvals by private payers across the country, even after CMS allowance. Typically, private-pay reimbursement is much more rapid and uniform with drugs.
TLSR: Generally speaking, where do opportunities lie for investors?
EA: My focus is on companies and their fundamentals. In that regard, opportunities for upside lie specifically with those companies that have impactful and near-term catalytic events ahead of them.
TLSR: With that bottom-up theory, let's talk about some of your favorite ideas. Pick one that you like.
EA: The first one I'll mention is NPS Pharmaceuticals Inc. (NPSP:NASDAQ). NPS is a biotech company focused on developing orphan therapeutics for rare gastrointestinal and endocrine disorders. We believe its lead development product, Gattex (teduglutide), for short bowel syndrome, is a key, near-term value driver.
"Increasingly, companies are focusing one or more of their development programs on rare diseases that qualify for the FDA's orphan indication, with the candidate drug being entitled to marketing exclusivity."
Gattex was recently evaluated by the FDA's Gastrointestinal Drugs Advisory Committee and the panel voted unanimously in favor of FDA approval. We believe Gattex significantly restores intestinal absorption to patients and offers most of them one or more days off the expensive standard-of-care therapy, which is parenteral nutrition (PN). Not only is chronic PN treatment a huge burden for these patients, it dramatically decreases their quality of life, and it comes with some serious complications, including catheter-related infections and even liver disease. I think the likelihood is quite high that Gattex gains FDA approval on or before its Prescription Drug User Fee Act (PDUFA) action date of Dec. 30.
NPS also has a second, late-stage compound in Natpara (recombinant human parathyroid hormone [rhPTH 1-84]), for hypoparathyroidism. If approved, Natpara would be offered as a hormone replacement therapy for patients who have no other alternative than to take huge daily doses of oral calcium and vitamin D. NPS expects to file a biologics license application (BLA) for Natpara in mid-2013.
TLSR: Is short bowel syndrome a surgical phenomenon, or is this product for congenital conditions?
EA: It is actually both, but the lion's share of the patient population has had surgery, which is a treatment sometimes recommended for Crohn's disease. In other cases surgery might have been for treatment related to cancers.
TLSR: How does Gattex actually work? Is this an active transport type of mechanism in the bowel, able to increase permeability across cell membranes?
EA: Teduglutide is a recombinant glucagon-like peptide-2 (GLP-2) analog. It acts as a growth hormone specific to the intestines. It has been shown in tests to increase the restoration of the epithelial cells making up the intestinal lining. That increases the level of absorption for the remaining section of the bowel.
TLSR: What is the market opportunity for Gattex and Natpara? How big is it?
EA: In the U.S., there are estimates of between 10,000–15,000 patients who have short bowel syndrome and are dependent on parenteral nutrition. That would be the key target patient population for Gattex. With Natpara, for hypoparathyroidism, estimates range from 65,000–80,000 patients in the U.S.
TLSR: What do those numbers translate to in dollars?
EA: We believe both of these could generate several hundred million dollars in peak sales for NPS.
TLSR: NPS has an $800 million ($800M) market cap. The market opportunity is significant.
EA: Yes, it would be significant. Both products have solid patent protection out to the middle of the 2020s. I want to point out that Gattex is known as Revestive in the European Union (EU), and it received European market approval in September 2012. The approval was received with NPS' partner, Nycomed, which was acquired by Takeda Pharmaceutical Co. Ltd. (TKPYY:OTCPK). Revestive is now in the process of launching country-by-country through the region. NPS earns mid-teen royalties from sales of the drug in the EU. For both Natpara and Gattex, once they are approved, sales in North America would accrue entirely to NPS.
TLSR: Both of these indications are relatively rare. The endocrinologist would be managing the hypoparathyroidism, and the gastroenterologist or internist would be managing the short bowel syndrome. You don't need a huge sales force for either of these products, do you?
EA: That's right. In fact, NPS has been diligently preparing for the launch of Gattex for more than a year now. The company is preparing the infrastructure and starting with key managers on the commercial side. The company is now in the process of following up with medical science liaisons. It is also working with patient advocacy groups and others to get the best understanding of where the target patient population is, who treats those patients and how to manage that treatment.
TLSR: Gattex's PDUFA date is Dec. 30. Do you generally expect a stock to sell off on the good news when the drug is approved?
EA: That has been happening with more frequency lately. It all depends on how much the stock has run up in the months before the advisory committee date, and then how much it may have run up between the time of the advisory committee and the PDUFA date. It also depends on the investor base. In the case of NPS, I think the company has a very solid, long-term institutional shareholder base that largely reduces that risk. The institutional shareholders are about 90%.
TLSR: That's pretty high. How do you bid up the price of shares when 90% are already owned by institutional investors? Those shares could actually be a source of supply. But that may be a rhetorical question. Do you expect sales of Gattex, starting in January 2013 or thereafter, to begin driving this stock again?
EA: It wouldn't surprise me if, after the run-up following the advisory committee and the approval, the stock traded sideways for the first two months of 2013, as we get an idea of what the early launch sales trajectory looks like. But I would also mention that in the same timeframe—the first few months of next year—NPS will be wrapping up its BLA for Natpara. These two important compounds are back-to-back, and serve as incremental catalysts for the stock now and well into 2013.
TLSR: What is your next idea?
EA: I like BioCryst Pharmaceuticals Inc. (BCRX:NASDAQ), a pharmaceutical company developing novel small molecules that block key enzymes involved in inflammatory and infectious diseases. It utilizes its state-of-the-art crystallography lab to do structured, guided drug design. It has two late-stage compounds, and the key value driver is its compound for gout, ulodesine. The main catalyst is that this drug is phase 3-ready, following positive results reported earlier this year. The catalyst that investors are awaiting is announcement of a development and commercialization collaboration with a partner to undertake the phase 3 program, and ultimately to commercialize the product.
TLSR: You have said that you consider gout to be an untapped market. Allopurinol has been on the market for the longest time, and other generics, such as probenecid, are available. There are also newer products, such as Takeda's Uloric (febuxostat) and Savient Pharmaceuticals Inc.'s (SVNT:NASDAQ) Krystexxa (pegloticase). Also, AstraZeneca Plc (AZN:NYSE) has a product, lesinurad, that has been in phase 3 studies now for a year. Why is ulodesine so important? Why do you think of gout as an untapped market, with all the other products out there?
EA: On face value, I agree with you. It would seem that there are several products addressing this condition. But let's go over them one by one. First of all, you're right: The standard of care, used to treat well over 90% of patients, is the widely genericized drug allopurinol, which has been around for 40+ years. Despite the entrance of Krystexxa and Uloric, that has not changed much over the last few years. Uloric is a slightly more efficacious version of allopurinol. It works by the same mechanism of action, and given that it produces incremental improvement, it hasn't garnered much market share relative to the much cheaper generic alternative. At the other end of the spectrum is Krystexxa. This is a potent drug, is an injectable and is intended for the most severe gout patients, those who have severe tophaceous gout that is not responding to allopurinol. Even by its own label, Krystexxa is targeting a subset of patients who suffer from the worst symptoms.
"Opportunities for upside lie specifically with those companies that have impactful and near-term catalytic events ahead of them."
Essentially, the majority of patients who have gout—in fact, about 60% of them—are on treatment but are underserved and are not reaching the therapeutic goal, which is to reduce serum uric acid levels to below 6 milligrams per deciliter (mg/dL). Until patients reach that level, they will likely continue to experience sporadic episodes of painful gout flares. The only way to address the underlying condition is to reduce the uric acid level well below the 6 mg/dL. The two lead, late-stage compounds in development, as you mentioned, are ulodesine and AstraZeneca's lesinurad.
TLSR: I understand that the phase 2 data for combination therapy of ulodesine and allopurinol showed a doubled response rate versus the control arm of allopurinol alone. Are you concerned about the toxicity of these two products used together? Is that going to be the major risk factor to share price as this combination enters phase 3?
EA: There have been, in the past, some concerns about the safety profile of ulodesine given the mechanism of action. There are specific actions with ulodesine in combination with allopurinol that act synergistically in the urate metabolic pathway. The question about the safety has been, in my view, answered thoroughly by tests done on infection rates in both B cells and T cells. My view is that the drug is safe and well tolerated.
TLSR: BioCryst is a small-cap company with a $204M market valuation. The company has about $54M in cash and cash equivalents on its balance sheet, and that should hold it for another 18 months or so. Is the company going to be squeezed into giving away too many points when it licenses ulodesine?
EA: No, I don't think so. In fact, I think the company is in a rather strong position to negotiate some favorable terms with a future partner because of the market dynamic we've just discussed. Ulodesine is the last remaining, unpartnered, late-stage gout compound.
We also expect that in the interim, the company's second-lead late-stage compound, peramivir, a neuraminidase inhibitor for influenza, could wrap up its phase 3 trial and show some positive data by late next year. The trial is evaluating intravenous peramivir in patients with acute influenza in the hospital setting. If it is approved on the basis of positive phase 3 data, it is highly likely that the U.S. government, in the form of the Biomedical Advanced Research and Development Authority (BARDA), will grant a contract for $100M or more, just based on BARDA's past purchases of these types of drugs, both influenza vaccines and antivirals.
TLSR: Even with thin margins, that amount of money is going to be important for the company. Is the Street giving peramivir any value currently, or is it a call option?
EA: It really is a call option. At this point, I include it in my model and valuation because I believe the data speak highly to the prospects for approval. Of course, it is appropriately risk-adjusted. But having said that, I don't think peramivir has been given much credit by the Street. It will be a significant catalyst when the data come out positively.
TLSR: Another idea?
EA: Ligand Pharmaceuticals (LGND:NASDAQ) is a biotechnology company that has been around since the mid-1990s, but it has been through several iterations. Today it has a large, diverse pipeline of mostly partnered assets that are in various stages, from preclinical through phase 3. Several of those assets are now generating royalties.
In addition, it acquired CyDex Pharmaceuticals Inc. in January 2011. Through that acquisition the company now has the Captisol (a polyanionic beta-cyclodextrin derivative) formulation platform technology, which is in six marketed drugs as well as a handful of compounds that are in the clinic.
Going forward, Ligand has two key value drivers. The first is Kyprolis (carfilzomib). This is Onyx Pharmaceuticals Inc.'s (ONXX:NASDAQ) drug for relapsed and refractory multiple myeloma, which was just approved by the FDA a few months ago. Indications are that the launch with Onyx is going well. Ligand, because of its formulation technology with Captisol, gets 1.5–3% of annual sales. Normally this percentage would be considered small—and perhaps even insignificant—but for a company the size of Ligand, with a $336M market cap, and for the market opportunity that we see in Kyprolis, specifically for patients who have come to the end of the line and have no therapeutic alternatives left, we see this as one of the key value drivers, especially starting next year.
TLSR: Kyprolis is labeled as a third-line therapy for multiple myeloma. The patient has to fail two prior therapies, including Velcade (bortezomib; Takeda). Is the company doing studies to advance this product to earlier-stage disease or earlier-stage treatment?
EA: There are late-stage studies evaluating just that question. I think that as the months roll over and prescribing physicians gain more experience with the drug, some off-label prescribing could occur on the margins, because there is the view that Kyprolis could be both efficacious and safe.
TLSR: Is there another company you wanted to talk about?
EA: Affymax Inc. (AFFY:NASDAQ) is a very interesting story. The company is known for its drug Omontys (peginesatide), a treatment for anemia in patients with chronic kidney disease who are on dialysis. Omontys is a synthetic, pegylated, peptidic compound that binds to and stimulates the erythropoietin receptor. It is an erythropoiesis-stimulating agent (ESA), like Amgen Inc.'s (AMGN:NASDAQ) Epogen (epoetin alfa). The key difference is that Omontys is administered once a month for dialysis patients, as opposed to three times a week, typically, with Epogen. Earlier this year Affymax and its partner, Takeda, were granted approval before the PDUFA date, and the product has been doing very well in the first few months of its launch.
TLSR: I find this company so interesting. The stock performance is off the chart, up 385% over the past 12 months and up 100% in the past three months. It flagged after the drug was approved, and then it seemed to take off on new contracts with dialysis providers. Those were the great big catalysts for the company.
EA: In fact, within fewer than three months after approval, the company signed an initial supply agreement with the world's largest dialysis provider, Fresenius Medical Care (FMS:NYSE), which became an early adopter of Omontys. The initial contract, signed in July, was for a little more than 100 dialysis centers in the U.S., representing about 10,000 patients. In August, Affymax signed with U.S. Renal Care.
The bigger picture is that Epogen has been the only ESA available to dialysis patients for more than 20 years. This was a long-standing monopoly with monopoly pricing. Affymax has been very successful in the first few months of the Omontys launch, and it is getting some key suppliers to adopt the product. In fact, we think it's likely, perhaps even as early as the end of this year, that Fresenius and Affymax will announce a longer-term and much broader, comprehensive agreement to supply Omontys throughout all of its dialysis centers, or many more of its dialysis centers than it currently does.
TLSR: Ed, thank you so much for your time.
EA: Thank you very much. I enjoyed it.
Ed Arce joined MLV & Co. in April 2011 as an equity analyst in the Life Sciences Equity Research group, covering biotechnology, biopharmaceutical and specialty pharmaceutical companies. Prior to joining MLV, he worked as a senior research associate at Wedbush Securities and UBS Securities, covering the biotechnology and U.S. large-cap pharmaceutical industries, respectively. Arce started his equity research career in 2005 as a research associate at First Albany Capital (now Gleacher & Company Inc.), covering specialty and generic pharmaceutical companies. Arce holds a master's degree in finance from Boston College. In addition, he holds a bachelor's degree in civil engineering from Florida International University (FIU), and is a graduate of the executive master's degree program in business administration at the Chapman Graduate School of Business at FIU. Arce is a board-licensed professional engineer (PE), and a level III CFA candidate.
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1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/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: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Ed Arce: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
4) Disclosures for MLV & Co. can be found here.