KaloBios Pharmaceuticals (KBIO) is a small-cap company focused on developing patient-targeted, first-in-class monoclonal antibodies using its proprietary Humaneered technology platform, with the intent to significantly improve the lives of seriously ill patients with difficult-to-treat diseases. Currently, the company's primary clinical focus is treating infectious and respiratory diseases and cancer. KaloBios has two antibodies in Phase II clinical testing for the treatment of severe/persistent asthma and cystic fibrosis (CF) and prevention of ventilation-associated pneumonia (VAP). It also has a third antibody in Phase I clinical testing for hematological malignancies.
The Company's Pipeline:
1. Humaneered technology - The Humaneered technology forms the basis of the company's drug discovery and development. The technology first uses conventional methods to identify initial antibody leads (typically in the form of a mouse antibody). Subsequently, the Humaneered process improves on the antibody's immunogenicity, affinity, specificity, solubility and production ability. Once these physiochemical modifications are made, the Humaneered antibodies are tested in the clinic. In addition to having three Humaneered antibodies in clinical trials, the technology was further validated in 2007 when Novartis paid $30 million for a nonexclusive license.
2. KB001-A - KB001 is partnered exclusively with Sanofi (SNY) and is being developed for the prevention and treatment of Pseudomonas aeruginosa (Pa) infection. Sanofi is pursuing a ventilator associated pneumonia (VAP) prevention indication in the intensive care setting, and top-line results from Phase IIb study are expected in 2015. Additionally, KaloBios has retained rights for the cystic fibrosis indication and has initiated a 180 patient Phase 2 study in CF subjects with chronic Pa infection in the U.S. Top-line results from this study are expected in the second half of 2014.
In January 2010, KaloBios signed an agreement with Sanofi granting Sanofi exclusive worldwide rights to develop and commercialize KB001-A in the VAP prevention setting, with an opt-in clause for the setting of CF once the Phase II data comes out in 2014. As one of the most-experienced vaccine/infectious-disease-focused companies in the world, Sanofi is an ideal partner for KaloBios with regard to KB001-A. Under an agreement between the two companies, KaloBios received an up-front payment of $35 million in January 2010, along with an additional payment of $5 million on August of 2011. KaloBios is also eligible to receive contingent payments of up to $250 million if certain clinical, regulatory and commercial events are achieved, including $5 million upon initiation of a Phase II clinical trial in VAP prevention and $20 million upon successful completion of the study. Upon commercialization, KaloBios is entitled to tiered royalties from 12% to 17% of worldwide KB001-A VAP prevention sales.
3. KB003 - KB003 is a Humaneered antibody targeting granulocyte macrophage colony-stimulating factor (GM-CSF). GM-CSF is an important cytokine protein that is known to mediate an inflammatory cascade that stimulates white blood cells. While GM-CSF is crucial for the clearance of infections, the same protein is also involved in tissue damage associated with various autoimmune diseases. KB003 is currently in Phase II clinical studies for the treatment of severe/persistent asthma. Because GM-CSF is involved in the differentiation, proliferation and enhanced survival of both eosinophils and neutrophils (two inflammatory cell types), some believe that a reduction of excess GM-CSF could be a potentially effective treatment for both allergic and non-allergic asthma. The trial is expected to be completed by the first quarter of 2014, with data soon after.
4. KB004 - KB004 is a monoclonal antibody that targets EphA3, a receptor tyrosine kinase implicated in driving invasion and progression of numerous hematologic malignancies (leukemia and myeloma, for example). KB004 has the potential to kill tumor cells by direct apoptosis, antibody dependent cell-mediated cytotoxicity (ADCC) and/or disruption of the tumor vascular compartment. KB004 is in a Phase 1 clinical trial to evaluate the safety and maximum tolerated dose of the drug in patients with hematologic malignancies who are unsuitable for standard of care treatment. Top-line results from the dose-expansion portion of Phase I/II study are expected in 2015.
Market Opportunities:
Ventilator-Associated Pneumonia (VAP) - VAP is a sub-type of hospital-acquired pneumonia (HAP) which occurs in people who are receiving mechanical ventilation. Based on projections made in Critical Care Medicine, there are roughly 1 million cases of mechanical ventilation occur each year in the U.S., with about 25% of these considered at high risk for bacterial colonization.
William Blair analysts conservatively estimate that 41,000 mechanical ventilations in the U.S. could qualify for treatment with KB001-A to prevent VAP. In addition, when taking into account current costs associated with VAP treatment, they believe KB001-A could be priced at about $10,000 per dose. In total, this could generate a yearly U.S. market opportunity of more than $500 million, with about $75 million going to KaloBios, based on the company's royalty structure with Sanofi. Importantly, this is a conservative estimate, based on the lower end of mechanical ventilation cases and pricing for biologics.
Cystic Fibrosis - CF is a genetic disease that causes severe lung and digestive problems, resulting in early death. Pulmonary decline is responsible for the greater share of morbidity and mortality in patients with CF. According to the Cystic Fibrosis Foundation (CFF), 30,000 children and adults in the U.S. and 70,000 worldwide (35,000 in Europe) have CF. The most-prevalent respiratory bacterial pathogen in patients with CF is Pseudomonas. Chronic Pseudomonas lung infection is the cause of much of the morbidity and most of the mortality in CF patients, with about 80% having chronic Pseudomonas infection.
William Blair analysts estimate that 24,000 U.S. patients ($50,000 per patient per year) would qualify for KB001-A therapy, leading to a market opportunity of $1.2 billion in the U.S. alone. The market size should be similar in Europe, with pricing constraints offsetting the slightly higher population of patients.
Severe/Persistent Asthma - Asthma is a respiratory condition in which pulmonary airways become inflamed and constricted, usually in response to one or more environmental triggers. Although serious and potentially fatal if left untreated, asthma is usually managed with a variety of drugs and by avoiding disease triggers. The American Academy of Allergy Asthma and Immunology estimates that there are about 25 million adolescent and adult asthmatics living in the United States, with roughly 10 million currently on some type of treatment. Of the 10 million patients on therapy, medical literature has suggested that about 40% (4 million individuals) suffer with moderate or severe disease, with half of these individuals having persistent/uncontrolled asthma that is unresponsive to standard-of-care inhaled corticosteroids and beta agonists. KaloBios is interested in targeting this persistent/uncontrolled severe asthma population as the first indication for KB003 because of the high unmet medical need.
Hematological Malignancies (HM) - HM are the types of cancer that affect blood, bone marrow and lymph nodes. Approximately 140,000 people were diagnosed with a hematologic malignancy in 2011 in the U.S. The increasing number of cancer diagnoses and the approval of new cancer treatments are expected to continue to fuel the growth of the worldwide market for cancer drugs. Products targeting specific cancer-related molecules are the fastest-growing market segment in the pharmaceutical industry and are driving much of the cancer market growth. Data Monitor forecasts a compound annual growth rate of up to 9.8% between 2008 and 2018 and estimated worldwide sales of approximately $45 billion in 2018.
Financial Position
At the end of first quarter 2013, the company had about $70 million in cash and cash equivalents. Before February's IPO, which generated $70 million in cash for KaloBios, the company in early September last year closed on a $10 million debt financing, with an option to take another $5 million. The primary purpose of the financing related to the company's IPO was to allow KaloBios to have enough cash to last it into the end of 2014.
Conclusion
Based on historical valuations involving other antibody platform companies, such as Seattle Genetics (SGEN), ImmunoGen (IMGN) and Micromet, which reached valuations of greater than $400 million after positive proof-of-concept Phase II data, KaloBios shares could perform well following Phase II results over the coming 12-18 months. Therefore, based on the company's current market capitalization, KaloBios shares seem to be relatively undervalued.
Additional disclosure: Biomed Group is a group of investment professionals and writers. This article was written by Amit Cohen. This information is not to be construed as an offer to buy or sell any security mentioned on this article.
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