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Charles Duncan: 2014 Is for Careful Stock Pickers, Not Dart Throwers

Source: George S. Mack of The Life Sciences Report  (4/24/14)

Charles Duncan Veteran Senior Biotechnology Analyst Charles Duncan of Piper Jaffray & Co. sees platform companies as the perfect way to play a consolidating market. We've had a big run in biotech, and Duncan believes now is the time to identify, through careful diligence, companies that can advance in a more temperate market. In this interview with The Life Sciences Report, Duncan discusses five biotech and specialty pharma innovators poised to produce therapies enabled by versatile and scalable technology platforms that target multiple disease indications.

The Life Sciences Report: Charles, you are a veteran biotech sellside analyst. What differentiates your work from that of other analysts in the field?

Charles Duncan: I am firmly committed to being a biotech generalist, but I am a neuropharmacologist by training, and have a fair amount of experience in that area—that's where I can differentiate my work from other analysts. Analysts generally gravitate toward oncology and therapy areas with a well-bedded set of success factors in the clinic. By contrast, I deal with relatively complicated sets of endpoints, at least in terms of clinical development in neurology. I have more comfort and experience in this area than most on the Street.

One example is Acadia Pharmaceuticals Inc. (ACAD:NASDAQ), a company that I assisted in taking public while at a previous firm. We currently cover it here at Piper Jaffray, where we have it rated Overweight, which is the top rating in our system.

We were involved in not only interpreting the Phase 2 trial data of its compound pimavanserin in Parkinson's disease psychosis (PDP), but also its initial Phase 3 data. We were frankly disappointed in that first Phase 3 study, so we got involved in understanding the changes made to the Phase 3 protocol, and in helping investors become comfortable with the second Phase 3 trial. That study read out well, and there was a dramatic transition from the $100–150 million ($100–150M) market cap level to roughly $2 billion ($2B) today.

TLSR: Can you elucidate a theme about your work?

CD: Thematically, we're focused on small-cap neurology and oncology innovators. I believe small caps generally outperform larger caps over time. We have some coverage in gene therapy, as well as in other clinical areas and special situations where we believe we can conduct diligence and get a handle on a differentiated viewpoint.

TLSR: In the April 3 edition of Nature, there's a short news article entitled "Drug Development: The Modelling Challenge." Preclinical drug development is about translating research from animal models to human clinical trials. But in the case of neurocognitive disease, it's hard to understand preclinical data because investigators can look at the signs of disease, but the animals can't tell the investigators their symptoms. That's clearly the biggest problem preclinical investigators, analysts and investors face in neurodegenerative disease, isn't it?

CD: That absolutely is the case. Animal models have better predictive value in some areas: An example would be in antiviral drug development, where it's pretty easy to gauge efficacy in animal models. When investigators are able to eradicate the virus, or at least reduce viral load, there is direct predictive evidence. There are other diseases—even oncology or hematology—where animal models demonstrate good predictive value for later success in humans.

"By the end of 2014, you're going to have some pretty good news flow out of BioDelivery Sciences International Inc."

But in the case of neurocognition and behavioral studies, including pain, it is much more subjective. Also, skeletomuscular disorders, such as weakness, can be very subjective.

TLSR: Let's continue with Acadia. Even with the recent and significant pullback in the biotech space since the end of February, Acadia is still up about 165% over the past 52 weeks. It is truly one of the great success stories of the past year. What's the next milestone we could see from the company?

CD: The next step for Acadia is to file its new drug application (NDA) for pimavanserin in PDP. We anticipate that will occur by the end of 2014.

TLSR: You have a lot of names under coverage, and I'd like you to cover a few of them. Could you go ahead and address BioDelivery Sciences International Inc. (BDSI:NASDAQ), please?

CD: We have BioDelivery Sciences rated Overweight. I consider this company to be a neuro innovator, and we think it is pretty interesting. It has three drugs in late-stage development, meaning Phase 3 or later. One of them is a drug for opioid addiction called Bunavail (buprenorphine + naloxone in soluble film for buccal mucosa). The NDA was submitted at the end of July 2013, and is pending review at the U.S. Food and Drug Administration (FDA). The Prescription Drug User Fee Act (PDUFA) date is in June 2014, and we anticipate this product will be approved. It would compete in a marketplace where the current market leader is called Suboxone (buprenorphine + naloxone sublingual film; Reckitt Benckiser Pharmaceuticals Inc. [RBGPY:OTCPK]), which did $1.5B in 2012 revenue. That's pretty interesting market potential for a film-based drug that you put on the inside of your cheek, where it releases naloxone and buprenorphine and reduces the craving to seek out stronger opiates.

TLSR: Naloxone is a narcotic antagonist. Is that to help keep respiration up, or is it to antagonize the central effects of the narcotic?

CD: It's more the latter. Naloxone also reduces craving. Buprenorphine is an opiate derivative, but it has a far different and interesting activity profile; it can be used to treat chronic pain. The naloxone, as you said, is really about modulation of the central activity—the reward pathway.

TLSR: Do you expect Bunavail to be approved on the June 7 PDUFA date?

CD: I'm not overly focused on that date because I know the agency has its hands full. I would like to see Bunavail approved then, and would anticipate approval within three months of that date. I usually use PDUFA dates as targets—with a three-month leeway.

TLSR: Although it's been weak over the past month, like almost all biotech and specialty pharma stocks, BioDelivery Sciences is up about 80% over the past 52 weeks. Is the Bunavail approval baked into the stock, or do you believe there's still upside with approval?

CD: I think there is upside, but that's a good question. The drug is not yet approved, and there is still that regulatory risk. With approval that risk comes off the table and the stock should go up, assuming a logical market and a logical response. The greater source of upside is associated with the product's market potential and timeline to market penetration, which has been a key point of debate among institutional investors. I believe that Bunavail could be a superior product to the reference product, Suboxone.

TLSR: You have led me right into my next question: What is the real value proposition here? Is Bunavail superior to Suboxone?

CD: I believe it's a superior product. It hasn't necessarily shown that yet because BioDelivery Sciences is utilizing the 505(b)(2) regulatory pathway, which means you only have show equivalence to the comparator. I believe we will see similar activity with a reduced amount of drug showing up in a patient's gastrointestinal tract and, therefore, a reduced chance of side effects, such as constipation. The upside comes from the product getting into the market, in seeing its adoption and uptake, and in seeing that third-party payers will reimburse its use. At this point, we model Bunavail to take roughly 20% of the market. Certainly, we'd like to see physicians willing to write for Bunavail relative to their writing pattern on Suboxone.

"The Phase 2 trial for VGX-3100 could be a major clinical validation of the power of Inovio Pharmaceuticals Inc.'s broadly applicable platform."

I should mention that BioDelivery Sciences owns Bunavail outright, which is important. We believe the company could market the drug with a relatively small, capital-efficient sales force.

TLSR: You mentioned three late-stage drugs. What about the other two?

CD: Another drug under development is BEMA (BioErodible MucoAdhesive) Buprenorphine. This drug is under development, with partner Endo Pharmaceuticals Inc. (ENDP:NASDAQ), for moderate to severe chronic pain. Earlier this year, we saw a successful Phase 3 readout of BEMA Buprenorphine in a certain cohort of chronic pain patients who were naïve to opiates. We would anticipate a second Phase 3 to read out roughly midyear in a second cohort of patients who are opiate-experienced and chronic pain sufferers. If Phase 3 reads out positive, then we would anticipate Endo to fast-forward an NDA for that drug, perhaps even by the end of this year. In addition, Endo would need to pay BioDelivery a fair amount in milestone payments with the completion of the Phase 3, and then filing. That would be a good thing.

The third drug is topical clonidine gel, which the company in-licensed. It will be developed for painful diabetic neuropathy. The company's Phase 2/3 study will read out at the end of this year. By the end of 2014, you're going to have some pretty good news flow out of BioDelivery Sciences.

TLSR: You also follow Inovio Pharmaceuticals Inc. (INO:NYSE.MKT) and Threshold Pharmaceuticals Inc. (THLD:NASDAQ). Could you take those one at a time, and tell me your value proposition for each?

CD: We'll talk about Inovio first. We have it rated Overweight. There are some pretty interesting Phase 2 data that could come in roughly midyear. This readout is going to be very important, but Inovio's platform is broadly applicable for both cancers and infectious diseases, as both prophylactic and therapeutic vaccines.

The Phase 2 trial is testing the therapeutic vaccine VGX-3100 in cervical intraepithelial neoplasia (CIN), or cervical dysplasia resulting from human papillomavirus (HPV), the most common sexually transmitted infection in the U.S. This study is arguably the most rigorous test of Inovio's platform thus far, because it is a double-blind, placebo-controlled study. It will be looking at the ability of VGX-3100 to downgrade the dysplasia from CIN 2/3 or CIN 3 to a more normal tissue, CIN 1 or less. Favorable data, I believe, will result in Inovio expanding into head-and-neck cancer, which is also caused by HPV in some patients. This trial could be a major clinical validation of the power of Inovio's broadly applicable platform. Though this is an early-stage story, we'll soon have the greatest validation that the company has had in its history.

TLSR: Charles, most everybody refers to VGX-3100 as a therapeutic vaccine, but I've always wondered if it could be considered a prophylactic immunization. Certainly there is that hoped-for therapeutic activity in which it would regress the dysplasia. But it is also proposed to prevent cervical cancer formation. Could it be thought of as a prophylactic, as well as therapeutic, intervention?

CD: That's a great observation, and you're right. There is kind of a dichotomy in this particular case. I would consider VGX-3100 a therapeutic vaccine, because it turns out that these cancers are the result of HPV and cervical dysplasia.

"Threshold Pharmaceuticals Inc.'s soft-tissue sarcoma study should read out at the end of 2015; that could be a very exciting time."

In some ways, however, it's both prophylactic and therapeutic. I would say that when I use these two terms, I make the distinction from the kind of vaccine people get in the fall to prevent influenza. That is prophylactic. The prophylactic vaccine stimulates the immune system to recognize an antigen you could be exposed to in the future, whereas a therapeutic vaccine is used to recognize active antigens causing disease, like the proteins that VGX-3100 is targeting. But it's a great observation because VGX-3100 is serving as a therapeutic vaccine in terms of regressing the cervical dysplasia, and a prophylactic vaccine that reduces the potential for cervical cancer.

However, to make a further distinction, we have companies under coverage that have vaccine candidates to treat established cancers. These are certainly therapeutic, and different from VGX-3100.

TLSR: You said we would be seeing a data readout from Inovio's Phase 2 trial in the middle of this year. Given that this stock is up 400% over the past 52 weeks, could we see significant upside if we get that statistically significant validation?

CD: My view is yes. It's a cautious yes, in that we don't know when that value will be recognized because the biotech market has already been on a tear. I definitely think that 2014 is a year for consolidation and for stock picking, not a scattershot market where everything goes up. People will be turning their eyes toward value, and not only value relative to the absolute potential of one product. I think the value in Inovio will be seen and driven by the use of its platform in other cancer indications, such as head-and-neck cancer.

Also, Inovio signed an interesting partnership with Roche Holding AG (RHHBY:OTCQX) last November, whereby it is looking at prostate cancer with its therapeutic vaccine INO-5150 and hepatitis B virus with INO-1800. Both of these are preclinical programs. Roche made an upfront payment of $9.2M, with potential milestones worth more than $400M, plus double-digit tiered royalties on product sales if these programs make it to the market. Also, I should note that the deal with Roche is only for those two indications. It's not for access to the entire platform. If another company was interested in a broader technology license or a certain indication, I think it could probably get that with Inovio—if that other company was committed and had the financial resources to put behind the program.

TLSR: Go ahead and address Threshold Pharmaceuticals, please.

CD: Threshold Pharmaceuticals is an oncology innovator that has partnered with Merck KGaA (MKGAY:OTCPK). I've covered Threshold for several years, as I have Inovio, Acadia and BioDelivery.

Threshold has a very innovative platform focusing on hypoxia-activated drugs for oncology. These drugs have a warhead or payload of chemotherapy attached that is activated within a low-oxygen (i.e., hypoxic) environment, which is a property of all solid tumors and some hematologic marrow cancers. In solid tumors this condition is characteristic because an established tumor may be walled off in tissue that is not well vascularized.

"2014 is a year for consolidation and for stock picking, not a scattershot market where everything goes up."

A drug that is only activated in that kind of environment could be pretty interesting because it could deliver a relatively higher concentration of chemotherapy into a tumor mass. This could result in greater efficacy. And when you think about it, it could also result in a reduced side-effect profile because a physician might be able to eliminate or reduce some of the systemic delivery of the chemotherapy.

TLSR: In effect, then, a hypoxia-activated drug is actually exploiting the weakness of current chemotherapeutic agents, which cannot get into the tumor mass because the surrounding tissue may be necrotic, with no vasculature to deliver the cytotoxic payload. Is that it in a nutshell?

CD: Yes, exactly. But there is something else. It makes sense to look at paradigms in which the use of Threshold's drugs, such as its lead candidate TH-302 (hypoxia-activated prodrug releasing bromo isophosphoramide mustard) could be combined with Avastin (bevacizumab; Genentech/Roche Holding AG), or other vascular-disrupting agents. If it's not TH-302, it could be a next-generation compound or something else that the company is working on.

TLSR: Charles, you have noted the relationship between a hypoxic environment and metastases, which are the true killers in solid tumors. Would you address that?

CD: This is a very important consideration in cancer therapy. Micrometastases are those cells that break away from the primary tumor. When they seed into distal tissues, they may not be able to attract blood flow, and they may therefore be in a hypoxic environment. These micrometastases often come back to haunt patients with a vengeance. A hypoxia-activated drug may be the way to get to these killer cells, which tend to be more resistant to chemotherapy than the primary tumor.

TLSR: Where is TH-302 in its development cycle right now?

CD: Toward the end of 2015 you could see Threshold's soft-tissue sarcoma study read out. That could be a very exciting time for the company. The current timeframe for the NDA submission is the very end of 2015. An interim analysis could come roughly the end of this year or early next year, but we wouldn't anticipate that to be sufficient to accelerate the timelines. In addition, the company has an ongoing pancreatic cancer study, which is being managed more by Threshold's partner, Merck KGaA. It doesn't take a long time, unfortunately, for events (defined as time from patient randomization to death) to accrue within a pancreatic cancer study. We'll wait and see when that reads out.

TLSR: Can you address one more company?

CD: Orexigen Therapeutics Inc. (OREX:NASDAQ) has a very late-stage product pending review at the FDA for the treatment of obesity. We would argue that Orexigen's drug Contrave (naltrexone + bupropion) is very likely to be the best drug with the best timing and the best partner of the three very visible obesity drugs out there. The other two drugs are Qsymia (phentermine + topiramate) from Vivus Inc. (VVUS:NASDAQ), which I cover and have rated Underweight, and Belviq (lorcaserin HCl) from Arena Pharmaceuticals Inc.'s (ARNA:NASDAQ), which is covered by my colleague, Ted (Edward) Tenthoff here at Piper.

The historical challenges for the obesity market have been well reported, and those issues are driven by a concern about the clinical value and safety in treating obesity with drugs. We think that Orexigen's Contrave is going to be a drug for which patients have much greater tolerance and will want to persist in their dosing, and, therefore, it's going to be the best overall drug.

TLSR: Orexigen has been weak, not just since we've been in this biotech slump, but all year, even when others have been up as doubles and triples. Orexigen is flat versus one year ago. What is the reason for this relative weakness?

CD: I think the weakness is primarily driven by the negative perspective that institutional investors have generally associated with the obesity market. Although it is increasing, the adoption of Qsymia and Belviq has been weak. In addition, there has been both clinical risk and regulatory risk. The clinical risk has recently been dealt with via Orexigen's large cardiovascular outcomes trial. It recently told the world that Contrave met its primary safety endpoint at the interim analysis. The regulatory risk is still perceived by some investors, but I don't think that risk is very high. I think the greatest concern is commercial risk.

TLSR: You think there is a competitive risk between Contrave and the other two drugs, Qsymia and Belviq?

CD: Yes. We think that, in the short term, Contrave may not have better uptake than the other two drugs. But in the longer term, looking out a couple of years, I think Contrave will be the winner. The other thing that differentiates the Orexigen story from the two comparables is that the company has the potential to get approval for and launch Contrave in Europe. Neither of the other two products is positioned for that, because neither has completed a cardiovascular outcomes study.

TLSR: It's been a pleasure speaking with you. Thank you.

CD: Thank you, too.

Dr. Charles Duncan is a managing director and senior research analyst at Piper Jaffray & Co. focusing on small- and mid-cap emerging growth biotechnology companies. Duncan brings more than 18 years of sellside experience and has been recognized by industry sources, including the StarMine Analyst Awards, as being among the best analysts for his fundamental and timely analysis. He is a graduate of the University of Wisconsin and holds a doctorate in neuropharmacology from the University of Colorado.

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DISCLOSURE:
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: Inovio Pharmaceuticals Inc.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Inovio Pharmaceuticals Inc., Threshold Pharmaceuticals, BioDelivery Sciences International Inc. Streetwise Reports does not accept stock in exchange for its services.
3) Charles Duncan: 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 or may have a financial relationship with the following companies mentioned in this interview: Acadia Pharmaceuticals Inc., Orexigen Therapeutics Inc., Vivus Inc., Arena Pharmaceuticals Inc., Genentech/Roche Holding AG, Merck KGaA, Inovio Pharmaceuticals Inc., Threshold Pharmaceuticals, Endo Pharmaceuticals Inc., Reckitt Benckiser Pharmaceuticals Inc., BioDelivery Sciences International Inc. 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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