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From Acorns Mighty Biotech Trees Can Grow: Laidlaw's Jim Molloy DRRX, PTIE, CTRV, CERC, GILD
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Jim Molloy After a devastating start to 2016, biotech stocks have snapped back. Laidlaw & Co. analyst Jim Molloy likes the resurgence he's seeing in biotechnology share prices, but cautions that confirmation of a recovery will require cash-laden drug developers to begin acquiring smaller biotechs trading at depressed market valuations. In the meantime, Molloy says, individual and small institutional investors can still buy growth stories at bargain prices. In this interview with The Life Sciences Report, Molloy mentions three names with near-term catalysts that, with good data, can bring a needed lift to biotech portfolios.

The Life Sciences Report: A lot of factors worked against biotech last year, and especially in the first month of 2016. A couple of drug pricing issues became very public even in nonfinancial media, and that news became a showcase for politicians. We had a Federal Reserve tightening, and the threat of more tightening. To top it off, we saw an implosion of the Chinese capital markets in January, and that was contagious. Do you feel the smoke has cleared for biotech by now?

Jim Molloy: It's hard when you're in the middle of the smoke to see whether it is clearing. But it seems that more sentiment on the Street leans toward the belief that the worst may be behind us, and that we may be reaching the bottom. One of the things I think would demonstrate the turnaround is for some of the larger pharmas to step in and make acquisitions of smaller biotechs at these depressed levels. That would tip us off that we've achieved a bottom in the space.

"The winds are blowing in favor of DURECT Corp.'s Remoxy this go-around."

There have been some announcements. One company I follow, Intercept Pharmaceuticals Inc. (ICPT:NASDAQ), was up 30% a couple of weeks ago on a Street rumor that it is exploring a sale, which was vigorously denied by Intercept—which all companies do, whether they're exploring a sale or not. I think that showed what people are looking for in this market before they have the conviction to start buying.

TLSR: You have one name in your coverage that started as a specialty pharma/drug delivery company spun out of Alza Corp. (acquired by Johnson & Johnson [JNJ:NYSE] in 2001). This company is now moving into biotech. Could you discuss that, please?

JM: Sure. I've had the pleasure of covering DURECT Corp. (DRRX:NASDAQ) for a number of years. It's one of those names that has gotten caught in the derisking (market decline), and for valid reasons. The company has been around for a long time, and it has yet to get a drug across the finish line. It has hit multiple roadblocks at the FDA, and when that happens, people tend to sell first and ask questions later. But on Wall Street, things can go too far in one direction—both on the positive side and the negative side.

People are looking at DURECT's past, and that is obscuring what could be a transformative 2016/early 2017. The company's key asset, Remoxy (oxycodone), represents $2.50, or more than half, of our $4/share valuation for the company. It's an abuse-deterrent opioid product. I think investors, possibly for good reason based on the past history of Remoxy, are discounting this product, but perhaps too much at this point. Remoxy has been to the FDA and been rejected a couple of times. It's going back to the FDA for a third time in Q1/16. Remoxy is partnered with Pain Therapeutics Inc. (PTIE:NASDAQ), which is running the filing process. Our understanding is that Pain Therapeutics will get Remoxy filed in March, followed by a six-month response time. Pain Therapeutics plans to partner this product with a larger pharma. It is not going to launch Remoxy itself.

"More sentiment on the Street leans toward the belief that the worst may be behind us."

It's not unusual for products to get dinged, and that's particularly true for abuse-resistant products when they go to the FDA. This was one of the first abuse-resistant products that went to the agency. I was covering DURECT back then, and I remember there were questions about whether Remoxy's abuse resistance was even something wanted in the marketplace. The winds have shifted almost 180 degrees now—in fact, the FDA put out a public statement saying if you submit an opioid without abuse resistance, it is going to call a panel and figure out whether that should be approved. The winds are blowing in Remoxy's favor this go-around.

TLSR: It's interesting to note that DURECT is up ~35% over the past four weeks, which is phenomenal. The relative strength is far above the biotech indices, which are also strong right now. But I didn't see any particular news that moved these shares. Has a catalyst spurred DURECT over the past month?

JM: I think the increase was driven by word getting out that Pain Therapeutics was going to file the Remoxy new drug application (NDA). It's a near-term event now, and caught people by surprise.

TLSR: In your financial model, more than half of the company's implied valuation is attributed to Remoxy. But the company seems to be positioning its small molecule epigenetic inhibitor, DUR-928 for metabolic disorders, as a growth driver. Will DUR-928 be the market-moving candidate from this point on?

JM: DUR-928 certainly represents the nearest data we can expect. We're looking for multiple-ascending-dose Phase 1 data in Q1/16. We're also looking for Phase 1b data for DUR-928 in a nonalcoholic steatohepatitis in H2/16, and we expect initiation of a Phase 1b in acute kidney injury, with data, in H2/16. Some active data points will be coming around.

But DUR-928 is only $0.25 of our $4/share price target. It's a smaller part mostly because it will be a long time before this program sees the light of day in pivotal development. While it could be a dramatic growth driver for the company, there are other, nearer-term catalysts that are worth more to investors.

TLSR: If you look at the company's pipeline on its web page, DUR-928 is the first program listed, even with a couple of nearer-term NDAs in the wings. Do you have any thoughts on the emphasis the company seems to be giving this molecule?

JM: CEO Jim Brown likes to talk about DUR-928. There's not much new to say on Remoxy, which is really out of the company's hands now. Posimir (SABER-bupivacaine) for post-surgical pain is in Phase 3, so until those data come out, there's not really much news on that either.

"Larger pharmas stepping in to make acquisitions of smaller biotechs at these depressed levels would tip us off to a bottom in the space."

That said, the market potential for Posimir has been demonstrated by Pacira Pharmaceuticals' (PCRX:NASDAQ) Exparel (bupivacaine liposome injectable suspension), which has driven Pacira to more than a $1.7 billion ($1.7B) valuation, with $240 million ($240M) in sales last year. Before this market-derisking period, Pacira had more than a $3.5B valuation. Posimir could be a better product. It is not a liposomal formulated product like Exparel. It is not injected or infiltrated into the surgical wound; it is squirted on the wound. The analgesic effect could last for a couple of days, versus Exparel's duration of about 24 hours. Posimer could reduce the amount of narcotics patients are given after surgery. Those are points DURECT has been making all along, but nothing has really changed the valuation dramatically.

The newest change in its portfolio is DUR-928, and so the company is trying to get that word out to people. It is something new to talk about.

TLSR: Could we talk about the next name, please?

JM: We initiated on ContraVir Pharmaceuticals Inc. (CTRV:NASDAQ) with a Buy rating and a $6/share price target back in early November. The company has two compounds: FV-100 in late-stage development for acute shingles and post-herpetic neuralgia (PHN), which is associated with shingles, and CMX-157 for hepatitis B virus (HBV), a very large market opportunity.

TLSR: FV-100 is in a large Phase 3 trial for treatment of acute shingles pain and prevention of PHN. How does a company with a Phase 3 asset have a ~$27M market cap?

JM: The challenge here is the shingles-associated PHN. It is seen as less exciting. It's $1 of our $6/share valuation, as opposed to $4.50 for the hepatitis B product, CMX-157. That is because the FV-100 study is a long, 825-patient Phase 3, and there is the challenge of getting patients not previously treated into the trial. It's also expensive, and the company, quite frankly, does not have the cash to run it right now. That could be why people are discounting this product, and the company overall. It's easy to get into Phase 3; the challenge is getting out of Phase 3 with good data.

TLSR: Why is it so difficult to get patients enrolled?

JM: Part of it is you have to get people early on in the disease, and make sure they don't take anything else for it. It's hard to find those patients. That's part of why it's likely going to take so long to enroll.

TLSR: What about the other agent, CMX-157 for HBV? It's Phase 2-ready, and the market is very large. But it sounds like you don't think ContraVir is going to be able to start the Phase 2 because of its cash position. What's the story here?

JM: The company hasn't filed its investigational new drug (IND) application for U.S. trials. It's very expensive, and ContraVir is trying to generate positive data to demonstrate the promise of this drug, which will then allow it to raise the capital it needs to fully fund a U.S. trial, or even to be purchased outright by someone who wants to be in the HBV space.

TLSR: CMX-157 is an analog of a very successful antiviral, tenofovir (Viread; Gilead Sciences Inc. [GILD:NASDAQ]), which is used in HIV and HBV. My understanding is that CMX-157 has better bioavailability and is 97-fold more active, in vitro, than tenofovir. Shouldn't this be getting some attention from investors and potential partners?

JM: I'm sure it is getting attention right now. Being 97 times more potent than tenofovir in vitro is certainly exciting, but you want to back that up in vivo and in human trials. Hopefully, these Thailand data will be able to show that very thing.

TLSR: Is there another company you wanted to talk about?

JM: Another very interesting company is Cerecor Inc. (CERC:NASDAQ). It has a very small market cap of $38M, and is an early-stage company. But remember, Gilead was under $10/share once. From acorns mighty trees can grow. We have a Buy rating on Cerecor with a $10/share price target. The company is currently trading at $3.53/share. It had an OK run recently with a snap-back, along with a lot of other smaller companies.

"All companies deny talking about potential M&A partners, whether they're exploring a sale or not."

Cerecor has two assets in Phase 2. CERC-301 is an adjunctive therapy for depression, which is a massive market that has long been genericized. A lot of smaller companies are taking another look at this indication as the science improves, and as new neurotransmitters are discovered in the brain that perhaps could have activity in depression. CERC-301 has a much quicker onset of action. In early trials, it seems to show very good efficacy for treating depression in patients who are refractory to standard-of-care therapies.

The second product is called CERC-501. This is a kappa opioid receptor antagonist addressing substance abuse, and is in a 56-patient, double-blind, Phase 1b/2a study. It would also be used as an adjunctive therapy in depression. Animal models generally aren't worth too much, but in the central nervous system—and in addiction, in particular—they have translated very well into humans. Humans and rats show similar responses to drug treatment for addiction.

The expectation is that the company will study this drug in both depression and smoking cessation. It is in trial for smoking cessation first. Pfizer Inc.'s (PFE:NYSE) smoking cessation product Chantix (varenicline) has sold $6B over the last eight years, so this is a massive market. We'll have data on CERC-501 in H2/16.

TLSR: Jim, Patients taking Chantix have had some psychological/emotional flare-ups. Is CERC-501 is trying to address that off-target effect?

JM: Indeed, it is. There's a black box label on Chantix for depression and suicide. So far, in early trials, CERC-501 has not shown any similar effects, and there have been no other adverse effects. Obviously, we'll have to see what the human trials show.

TLSR: Jim, it was a pleasure meeting you.

[Editor's note: The article has been revised since publication.]

Jim Molloy brings over 15 years of sellside experience to Laidlaw, having covered specialty pharmaceuticals and biotechnology for a diverse group of Wall Street investment banks. Prior to Laidlaw, Molloy was a managing director at Summer Street Research Partners and Janney Montgomery Scott; prior to that he was a senior analyst at ThinkEquity Partners, Caris & Company, Oppenheimer, and Leerink Swann & Company. Molloy has been ranked by Forbes/Starmine for earnings accuracy. He received his master's degree in business administration from the FW Olin Graduate School of Business at Babson College, and his bachelor's degree from the University of Colorado, Boulder.

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DISCLOSURE:
1) Dr. George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences 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: DURECT Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) James Molloy: 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 a financial relationship with the following companies mentioned in this interview: Laidlaw participated in financings for both ContraVir Pharmaceuticals Inc. and Cerecor Inc. in the past year. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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