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Exuberant, Yes: Michael King on How the Oncology Drug Development Machine Builds Biotech Wealth

Source: George S. Mack of The Life Sciences Report   (3/13/14)

Michael G. King, Jr. Veteran biotechnology analyst Michael King of JMP Securities has seen drug development evolve from hit-or-miss to the sophisticated, high-throughput discovery techniques in place today. He understands the sector, the entrepreneurs and the valuations as well as anyone on Wall Street. In this interview with The Life Sciences Report, King zeros in on the oncology space, his focus for nearly two decades. Never single-minded, King's stable of thoroughbred names includes a bonus pick he likes very much in the field of fertility.

The Life Sciences Report: Mike, are you seeing a lot of new interest in biotech? Do you see generalists coming into biotech conferences to try to catch the wave?

Michael King: Yes, for sure. I would say generalists have been in the sector for the last 12–15 months, if for no other reason than job preservation, because there has been so much alpha generated in the space. Interest has ebbed and flowed, but it's certainly at its highest level in more than a decade. If you're a growth manager, then you have to pay attention to the biotech space.

TLSR: Traditionally, we think of the last guys in as foretellers of doom. Is this activity in biotech starting to feel a bit like a bubble to you?

MK: A little bit, but I think we should enjoy it for a while. It's not out of control. The valuations on some companies are obviously quite high, but I wouldn't say they've reached levels that are impossible to justify. When you see something like Facebook making a bid for WhatsApp for $19 billion ($19B)—that, to me, is when you get to a bubble phase. But I don't see that happening in biotech. I think investors are much more rational in this space.

TLSR: You have written that in the second week of February, $1.1B was raised in equity and convertibles. That was just one week, right?

MK: Yes. One week.

TLSR: Does this look exuberant to you?

MK: Exuberant, yes. Irrational, no. The middle of the biotech market was hollowed out over the last decade by a lot of mergers and acquisitions (M&A), and at the same time companies were being formed. The mid-cap guys with products were getting gobbled up, and venture capitalists were creating companies for the purpose of being acquired. That was the vogue. You really weren't getting a repopulation of the $250 million ($250M)–$2B sweet space, where molecules go into the clinic and a lot of value is created.

Today, a lot of the money is going into the sweet spot, because the mega caps are self-funding. Celgene Corp. (CELG:NASDAQ) doesn't need to raise money, although it did. Gilead Sciences Inc. (GILD:NASDAQ) certainly doesn't. Amgen Inc. (AMGN:NASDAQ) certainly doesn't. The money today is going into names like—and I'll just name some that we've been involved in—Karyopharm Therapeutics Inc. (KPTI:NASDAQ), Acceleron Pharma Inc. (XLRN:NASDAQ), Epizyme Inc. (EPZM:NASDAQ), Ultragenyx Pharmaceutical Inc. (RARE:NASDAQ) and Dicerna Pharmaceuticals (NASDAQ:DRNA). These are the kinds of names that filled out the biotech ecosystem after it was depleted by M&A and a lack of funding from the venture community. We are not seeing irrational exuberance—I think we have a ways to go.

TLSR: Is there a theme you're thinking about and working on for investors for the rest of 2014?

MK: There are a couple. First, we'll continue to focus on oncology. A recent survey by the Biotechnology Industry Organization (BIO), just before its BIO CEO Conference in New York in February, asked respondents for their favorite investment topics in the biotech space. By a wide margin, oncology came out on top. Companies are advancing clinical candidates to value inflection points, whether that's a phase 2 or phase 3 study. Other companies have novel approaches. We've seen very good reception to companies in what I'd call the molecular oncology space. That is why an Epizyme or a Karyopharm, in my coverage universe, has been received so well; they have a differentiated approach to the treatment of cancer.

Another huge theme is cancer immunotherapy, but right now that is the province of large pharmas: Bristol-Myers Squibb Co. (BMY:NYSE), with its programmed death 1 (PD-1) blocking antibody nivolumab in non-small cell lung cancer (NSCLC); Merck & Co. Inc. (MRK:NYSE), with its anti-PD-1 drug MK-3475, also in NSCLC; Roche Holding AG (RHHBY:OTCQX), with its anti-programmed death ligand (PD-L1) antibody MPDL3280A. In mid-February Novartis AG (NVS:NYSE) acquired a private company, CoStim Pharmaceuticals, to gain access to an anti-PD-1 agent. AstraZeneca Plc (AZN:NYSE) is also in the game.

But a lot of people are looking at small-cap ways to play the craze for cancer immunotherapy. The problem is that there aren't a lot of great ways to do that because of the big pharmas.

TLSR: You mentioned the BIO CEO Conference; I wanted to ask you about the panel you hosted and moderated there. Was there a lot of interest?

MK: My panel was very well attended. We addressed questions about T-cell immunotherapies at the end. Some attendees wanted to talk about TCARS—T-cell antigen receptors, where you transplant CD19 receptors into T cells and then infuse the T cells back to the patient. The outcomes have been quite remarkable—very high response rates, and some complete responses. Companies have been formed to exploit this technology. Novartis has invested a lot of money in technology being developed out of the University of Pennsylvania School of Medicine by a physician named Carl June. A company out of Seattle called Juno Therapeutics Inc. (private) raised $145M to access technology coming out of Fred Hutchinson Cancer Research Center and Memorial Sloan Kettering Cancer Center.

While TCARS are very interesting from a scientific and intellectual standpoint, you have to think about how you commercialize this technology when it's patient-specific, is done at the site and is not something that you can put in a vial or make a pill out of. While I think TCARS will be important, my guess is that it's going to be for patients whose cancers have gone past all conventional therapies.

TLSR: It would have to be very high in efficacy to justify that kind of expense per patient, wouldn't it?

MK: It's not just the expense. Think about it: If you can sit home and take your Imbruvica (ibrutinib; Pharmacyclics Inc. [PCYC:NASDAQ]) for five years and feel good, control your chronic lymphocytic leukemia (CLL), not go to the hospital and not have to undergo a procedure that's going to make you feel like death for a few days, you probably want to do that. But when the disease starts to gain an advantage over your immune system and you don't have a lot of bullets left in the medicine cabinet, then you want to go down to Penn or over to Memorial Sloan Kettering and have your T-cells armed.

TLSR: Are you following any companies currently involved in the TCAR technology platform area?

MK: There's really nobody out there per se. It's either Novartis or the private companies. I do monitor the technology because from time to time it comes up as a potential competitor to Imbruvica, to Gilead's idelalisib or to Infinity Pharmaceuticals Inc. (INFI:NASDAQ) IPI-145.

TLSR: Let's talk about some companies. You're following a very interesting non-oncology company, OvaScience (OVAS:NASDAQ). It's in the fertility market. Could you address it?

MK: Yes. We wrote on OvaScience on Feb. 24, and reiterated our Market Outperform rating. I think this is going to be a good year for the company. When it went public in 2013, it had two technologies—Augment (autologous germline mitochondrial energy transfer), which is the company's lead program, and OvaTure. It now has two more programs: OvaXon, a joint venture with synthetic biology company Intrexon Corp. (XON:NYSE), and OvaPrime, its newest proposed fertility therapy, through which a clinician will be able to isolate a patient's EggPCs (egg precursor cells) and then deliver them back into her ovaries before a normal in vitro fertilization (IVF) procedure.

"A lot of people are looking at small-cap ways to play the craze for cancer immunotherapy."

Management has done a great job building up the core product offerings of the company, and has added some very important people to its advisory board and board of directors. It has added David Stern as executive vice president of global commercial operations; he joined the company in February. He has tremendous bona fides for taking OvaScience's product offerings ex-U.S., where the market opportunity is larger. I was astonished to see that Japan has almost twice as many IVF procedures as the U.S. does—and it only has about one-third to one-half the U.S. population. The use of IVF procedures is much larger in Japan per capita. The opportunity in the European Union (EU) is quite large as well. The opportunity to commercialize ex-U.S. is enormous.

TLSR: The U.S. market is nothing to sneeze at, but there are some regulatory questions with its lead program, Augment, aren't there?

MK: In the U.S., Augment is stuck in a bit of regulatory limbo, but I think that will resolve itself fairly soon. Though Augment will launch in four global regions before the end of this year, some investors have worried that the U.S. Food and Drug Administration (FDA) will not approve Augment in the U.S. There was a FDA panel meeting on Feb. 25; the panel was more about mixing DNA from different donors in a single egg cell, which I don't think would ever fly in the U.S. And that is not what Augment is all about.

Once that confusion lifts, I think the stock will take off nicely. The market cap is about $175M. The company is very well funded, with almost $45M in cash.

TLSR: Mike, you've talked about the opportunity in Japan and the EU, but when Augment is ready in the U.S., do you see it as a large market? The overhang is that this is a cash business, and group insurance policies may not cover this.

MK: Augment has an enormous market opportunity ahead of it because of the demographics. Many women have decided to delay pregnancies, but still want children. Women just don't have kids at 19 and 21 years old anymore—they're having children when they are 30, 35. I have seen the clinics here in New York, and I can tell you they are absolutely mobbed—weekdays and weekends. There is tremendous demand.

A statistic from one of the professional societies states that in 2012, the percentage of IVF procedures as a percent of all live births in the U.S. hit a record high. I don't think there's any slowing down from here. I think OvaScience is a great way to play this burgeoning demographic trend.

TLSR: What would be the next catalysts for OvaScience?

MK: It would be the commercial launch of Augment ex-U.S. David Stern is ready to go, so we'll see how that proceeds. If we get some regulatory clarity in the U.S., that would be a positive catalyst too.

TLSR: Which company did you want to discuss next?

MK: Synta Pharmaceuticals Corp. (SNTA:NASDAQ) is one of the names we like for 2014. The company has a market cap of about $369M. Synta has a heat shock 90 protein (Hsp90) inhibitor called ganetespib that could be useful for a variety of oncology applications.

The company has created a lot of controversy around itself, which I wouldn't say is undeserved. One school of thought holds that ganetespib is basically a dressed-up placebo, but I would submit it is far from that: I think ganetespib will have a positive result in the ongoing GALAXY-2 trial (NCT01798485). GALAXY-1 (NCT01348126) was a phase 2 study meant to select a patient population in which to perform the phase 3. This has caused confusion because a lot of investors have tried to apply phase 3 thinking to the phase 2 trial.

A phase 2 trial is a signal- and dose-seeking trial. The point is to figure out the appropriate patient population, the one in which a drug will create the greatest benefit, and then take that knowledge to a larger study in phase 3. I would say, in Synta's case, the company probably thought it had an agent that would produce greater effects in the lung cancer patient population that was being studied, but it has turned out to be a fair bit less effective. That doesn't mean the drug is ineffective at all. The statistics that ganetespib has shown so far strongly suggest the drug has a benefit in overall survival and progression-free survival.

In the phase 3 GALAXY-2 study, Synta is intelligently looking at overall survival as its key outcome metric, its primary endpoint. When the GALAXY-2 results are out, which will be late 2014 at best, or more likely early 2015, I think this stock will float up to a valuation that's more reflective of a peer group valuation, which is several hundred-million dollars higher than where the stock is today. What's important for investors to understand is that a subset of a subset of a subset in lung cancer is still a very large market opportunity. Adenocarcinoma of the lung in patients who have had an inadequate response in first-line therapy is still a very attractive commercial market.

"We've seen very good reception to companies in the molecular oncology space."

In addition, at least two other studies are being conducted with ganetespib at no cost to Synta and its shareholders, other than drug supply. These are studies in triple-negative breast cancer and acute myeloid leukemia, which are being funded by governmental sources.

I see multiple opportunities to drive value from the clinical data with ganetespib, and there is some evidence that the tumor-targeting approach Synta is taking with synthetic Hsp90 inhibitors could work. At some point—and, hopefully, that is in 2014—Synta will find itself a corporate partner for its tumor-targeting technology and, thus, build credibility to its story. I'm not building a partnering agreement into my expectations because I think that is a fool's errand, but this tumor-targeting approach has garnered a lot of interest of late.

TLSR: Mike, the GALAXY-2 phase 3 study is in 500 patients, twice the enrollment of GALAXY-1, and randomized. Is this powered well enough?

MK: The company recently said it's going to increase the size, so it will more likely enroll 700 patients. If trial size had remained 500 patients, the data would almost assuredly have been out in 2014. Adding that extra 200 patients pushes read-out to later in 2014 and, potentially, even into 2015.

TLSR: The GALAXY-2 trial is open-label, not blind. Does that mean that a pivotal trial must be run after GALAXY-2?

MK: No. Many cancer trials are open-label because their trial designs prohibit blinding of studies. Being an open-label study shouldn't matter because overall survival is the primary endpoint.

TLSR: You're saying, then, that a placebo effect won't lengthen life?

MK: That's right. Overall survival is an endpoint that you can't fake.

TLSR: Another name?

MK: We've been a bit cool on Infinity Pharmaceuticals. We rate it Market Perform. We're cool on the company for two reasons. One is because we're concerned that Infinity is getting sandwiched between two 800-pound gorillas—Pharmacyclics on the one side and Gilead on the other. Pharmacyclics now has approval for Imbruvica in CLL, although it is trying to expand the CLL patient population that's eligible for therapy with the drug. The point is, Imbruvica is on the market.

The other potential competitor is idelalisib, the Gilead drug, which has a September Prescription Drug User Fee Act IV (PDUFA) date. Infinity’s IPI-145 is in the same category as idelalisib: It inhibits phosphoinositide-3-kinase (PI3K)-delta, and the data suggest that IPI-145 might be a more potent drug than idelalisib. But IPI-145's development becomes problematic when there are two drugs already approved and on the market. If I'm a CLL patient, why would I want to go on an experimental drug if I know I can get an approved drug that will be reimbursed?

Another point is that Infinity is burning a lot of money. It has guided to spending $170–180M this year, versus a cash balance at the end of 2013 that was in the $214M range. Infinity is going to have to raise money at some point this year, or find a partner. Partnering would be a preferable route in one respect, because the company wouldn't have to dilute the shareholder with more shares. However, Infinity would be diluting its interest in IPI-145. Partnering would also be a credibility-building step for Infinity; I think its star is a little tarnished because of the halting way in which the company has brought IPI-145 forward so far.

TLSR: You mentioned that IPI-145 may be more efficacious than idelalisib. What is the evidence for that?

MK: The evidence is a very high complete response rate in indolent non-Hodgkin's lymphoma patients. The numbers are small, but those data were reported in December 2013 at the American Society of Hematology (ASH) meeting. We have to wait and see if that exciting efficacy holds up. You can also look at some of the preclinical data. We know that IPI-145 binds its target more avidly than idelalisib does. That's not the be-all and end-all, but when you connect the dots, there is at least some suggestion that IPI-145 could be a best-in-class PI3K-delta inhibitor.

TLSR: There is also a PI3K inhibitor being developed by TG Therapeutics Inc. (TGTX:NASDAQ). Do you know that product?

MK: It's TGR-1202, also in hematologic cancers. It's early stage. One advantage that TG has over Infinity is the benefit of a monoclonal antibody that it can study in combination. That's TG's competitive edge.

TLSR: You have a diagnostic platform company that you're following with huge oncology exposure—Navidea Biopharmaceuticals Inc. (NAVB:NYSE). Could you address that?

MK: Navidea is struggling for respect. It has a great product that is living up to its hype. Many drugs and products on the market today have claimed to do one thing and not fulfilled expectations. In contrast, Navidea's diagnostic agent Lymphoseek (technetium Tc 99m tilmanocept) does everything it's supposed to do. However, there has been a history of awkward financings at the company, which has served as an overhang on the stock. That's unfortunate because, again, I think this company has very sound products.

"If you're a growth manager, then you have to pay attention to the biotech space."

Lymphoseek is approved as an intraoperative diagnostic to detect cancerous lymph vessels and nodes draining primary tumors in breast cancer and melanoma. It guides the surgeon in dissecting and excising cancerous tissue and sparing healthy tissues. The company also has a pipeline of imaging agents, including NAV4694 (fluorine-18 labeled radioisotope) for imaging Alzheimer's disease and the Huntington's disease, which it picked up for next to nothing. This agent could add a lot of value to the stock. Investors just have this concern about whether Navidea is adequately financed or not. It is doing a very good job with the launch of Lymphoseek, but it will take time to get uptake.

TLSR: Are there competing agents to Lymphoseek? What are they? How do they compare?

MK: I think it's game over as far as the competition is concerned. There are two competitors to Lymphoseek, both of which are more difficult to use. Just based on that, Lymphoseek should be a very easy sell.

Lymphoseek also fits routinely into the surgery center's standard practice, so clinicians don't have to alter their practices. Often, when new technologies come along, the physician community has to adapt its practice, rather than the new product fitting into the practice. Lymphoseek fits the practice. I think Navidea has done a great job with that.

I do think Lymphoseek will ultimately be successful. Navidea has partnered with Cardinal Health Inc. (CAH:NYSE), which is the largest distributor of imaging agents in the country. I think Navidea has all the elements in place. We just have to get some momentum behind the sales.

TLSR: Do you feel like Cardinal is doing a good job of showing this product to surgeons?

MK: Yes, it would appear that way. I wouldn't say I have the world's best visibility into the sales right now, but Cardinal has every incentive to do so. The sales people are properly incentivized to get the product out there. The Cardinal sales team has an established relationship with its customers.

TLSR: Lymphoseek was approved nearly a year ago. Navidea's shares are down 40% since that time. It seems counterintuitive, especially when you look at the survival of patients and the tissue-sparing surgeons can do with a product like this. Is Navidea now a market-penetration and revenue story?

MK: Yes. To your comment about the stock performance being counterintuitive. . .it is somewhat counterintuitive, but at the same time, the short-to-launch approach is fairly common in the biotech space. Since Lymphoseek was never going have huge hockey-stick performance right out of the box, it was pretty easy for that short-to-launch crowd to win on that argument.

That doesn't mean Lymphoseek won't ultimately be successful, because I think the value of sentinel node scanning is clear. I don't know if you saw the New England Journal of Medicine article published on Feb. 13, 2014, entitled "Final Trial Report of Sentinel-Node Biopsy versus Nodal Observation in Melanoma," which showed that melanoma patients who undergo sentinel lymph node biopsy live longer than those who do not.

I don't know what else you need to improve adoption of this technology. Of the different options that are there, Lymphoseek has the best sensitivity and specificity, its ease of use is superior and the price is right. Adoption will come. It will take time because old practices die hard.

TLSR: I'm wondering if you could think of this stock as a value play currently, since Navidea does have an actual marketed product?

MK: I guess you could say that. I haven't looked at it that way. I'm familiar with value plays in biotech, although given the market that we've had lately, they are fewer and far between.

TLSR: There is also a PDUFA date in mid-June for Lymphoseek as an intraoperative diagnostic agent in squamous cell carcinoma of the head and neck. Could this be a catalyst? Will there be a huge uptake for surgeons in that setting?

MK: It's clearly important. I think the likelihood of approval is very high, but I think melanoma is where you're going to get the most significant economics.

But these head-and-neck procedures are just barbaric. If you can spare someone having their neck laid open along the carotid artery from the ear to the collarbone—I mean, no brainer. Absolutely, you'd use Lymphoseek to avoid that.

TLSR: Mike, thank you. It's been a pleasure.

MK: Yes; good to talk to you.

Michael G. King Jr. is a managing director and senior biotechnology analyst at JMP Securities. King comes to JMP from Rodman & Renshaw LLC, where he was managing director and senior biotechnology analyst. He has more than 17 years of experience as a leading biotechnology equity research analyst, consistently ranking at the top of Institutional Investor magazine's annual sellside research survey, in addition to being named that publication's "Home Run Hitter" in 2000. King also served as senior vice president of corporate development and communication at ZIOPHARM Oncology (ZIOP:NASDAQ). Prior to joining ZIOPHARM, King was a managing director and senior biotechnology analyst at Wedbush Securities. He holds a bachelor's degree in finance from Baruch College.

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DISCLOSURE:
1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He 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 its services or as sponsorship payment.
3) Mike King: I or my family own 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: Acceleron Pharma Inc., Epizyme Inc., Karyopharm Therapeutics Inc., Navidea Biopharmaceuticals Inc., OvaScience, Synta Pharmaceuticals Corp. 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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