Summary
Summary
- The biotech sector had a fantastic 2014; the broader index climbing 35%. The index was up 60% in 2013.
- Below we provide quick analysis on 15 biotech names (within our coverage universe) where investors can look for positive returns in 2015.
- We are big fans of Neuralstem, Cynapsus, Nuo Therapeutics, Amarantus, Lipocine, Neurocrine Bio, Auspex, and Protalex, among several others listed below.
The biotechnology sector had another great year in 2014. Despite a Christmas week sell-off thanks to pricing concerns brought on by Express Scripts' (NASDAQ:ESRX) exclusive deal on a new Hepatitis C drug from AbbVie's (NYSE:ABBV), squeezing out Gilead Sciences (NASDAQ:GILD), the iShares Nasdaq Biotechnology Index (NASDAQ:IBB) still closed up 35% for 2014. The move in 2014 followed an even more impressive 60% move higher in 2013. Given the greater than 100% return for biotech stocks over the past two years, investors may be wondering what's in store for 2015?
Much of the impressive run in the IBB over the past two years is due to large-cap stocks like Gilead, Celgene (NASDAQ:CELG), and Biogen (NASDAQ:BIIB). Oncology stocks have also had an impressive run, especially when we include some recent IPOs like Kite Pharma (NASDAQ:KITE) and Juno Therapeutics (NASDAQ:JUNO). I focus on small- and micro-cap biotech stocks, the majority of which are not included in the IBB. I also don't cover oncology. For picks on oncology and immunotherapy you'll have to ask my colleagues Grant Zeng andAnthony Schwartz. Nevertheless, David Bautz and I have put together a list of 'Fifteen Biotech Thoughts For 2015'. These include some bullish data read-out predictions, some business models we see taking off, and some stocks we believe are meaningfully undervalued and poised for a great year.
These Companies Should Have Big Moves Higher
Neuralstem (NYSEMKT:CUR): Back in early November 2014, we called Neuralstem one of our 'Best Ideas for 2015'. Since that time, the shares are… flat. Okay, maybe we didn't do a good enough job in explaining why we think Neuralstem will have a huge move higher in 2015. Neuralstem has all the 'Cs' we tell investors to look for when picking biotech stocks - Cash, Catalysts, and Charisma. Let's start with the cash position. Neuralstem should have exited 2014 with approximately $28.5 million in cash. The cash position was recently just strengthened in October 2014 through a $10 million loan and security agreement. Based on a projected quarterly burn rate of ~$3 million, we see the current cash balance as sufficient to fund operations, less debt repayments, into the third quarter of 2016.
Next let's talk about catalysts. There's maybe no bigger catalyst in our coverage universe than Neuralstem's Phase 2 ALS data expected in the first quarter of 2015. The Phase 2 study (NCT01730716), being conducted again by Eva L. Feldman, MD at Emory University in Atlanta, and at two additional sites at the Massachusetts General Hospital in Boston and the University of Michigan in Ann Arbor, began in September 2013 and just recently treated the last patient in early August 2014 (patient #15). The trial will continue until six months past the final surgery, at which point the data will be evaluated. Based on management guidance, we are expecting top-line results from the trial during the first quarter 2015. We note the American Academy of Neurology meeting will take place in late April 2015 in Washington, DC, which seems like the ideal venue for full data presentation of the Phase 2 results. BrainStorm Cell Therapeutics (NASDAQ:BCLI), a fellow developer of cell therapy for ALS, saw its shares double in anticipation of Phase 2a data. The Brainstorm data showed a > 50% slowing in disease progression six months after treatment. We expect similar results from Neuralstem. This is a major catalyst and it's coming in a month or two.
Now for the charisma! Long-term follow-up data from the Phase 1 trial and new anecdotal evidence of the Phase 2 data suggests Neuralstem's NSI-566, human spinal cord stem cells, is working. There's no better evidence of NSI-566 working than looking at the results of the three patients in the final cohort (cohort #5) of the Phase 1 trial. These were the highest dosed patients who received both lumbar and cervical injections. Long-term follow-up analyses of these patients suggest disease stabilization three years since their initial surgery. For ALS, a disease that kills 50% of patients at two years post diagnosis and has a three-year survival rate of less than 30% (Forbes, RB et al., 2004), results of Neuralstem's Phase 1 are outstanding.
As for the anecdotal evidence leaking out from the current Phase 2 trial, we have been tracking several patient blogs highlighting patients' recoveries post treatment with NSI-566. The most prolific of these is from April Moundzouris. Ms. Moundzouris notes being enrolled in Neuralstem's Phase 2 study and having the surgery in October 2013. She points to initial signs of improvement in December 2013 and January 2014. Her blog from February 2014 really gives an impressive glimpse into the gains she's made. Her most recent post was in August 2014.
In conclusion, we think when Neuralstem reports top-line results from the ongoing Phase 2 study during the first quarter 2015, the results will be positive. We expect full results in April 2015 at AAN. We think these results have the potential to double Neuralstem's stock given that they are the market leader in this indication. Neuralstem is also testing NSI-566 in spinal cord injury and stroke. We predicted in 2014 that NSI-566 would receive Breakthrough Designation from the U.S. FDA. We still believe that will be the case, and we think with the progress from the pipeline, Neuralstem is absolutely one of our best ideas for 2015.
InVivo Therapeutics (OTCQB:NVIV): If there is one stock that has the potential to have a big move higher in 2015, it is InVivo Therapeutics. InVivo's Neural Spinal Scaffold (NSS) is a biocompatible medical device surgically placed around a damaged spinal cord following a traumatic complete injury. InVivo's stock hit a high of $6.20 back in the summer of 2013 when videos ofonce paralyzed monkeys running in cages sparked broad media coverage of the company. The story began to unravel rather quickly in September 2013 when the former founder and CEO resigned. Since that time, the company has hired a new management team and has been rebuilding its brand.
InVivo's stock carries a lot of baggage, most of which is tied to the former founder and CEO. But now that the human pilot study (NCT02138110) has begun, it's finally all about the data. It still remains to be seen whether or not InVivo's device is a gimmick, a miracle cure, or somewhere in-between. What is clear, however, is that the FDA is paying attention to this trial and has been very cooperative with InVivo over the past several months. For example, on October 29, 2014, InVivo announced that the FDA had approved various changes to the protocol expanding the number of allowable clinical sites from 6 to 20, along with broadening the eligibility criteria. And in December 2014, the agency allowed InVivo to dramatically expedite enrollment.
Starting the trial and then having the FDA twice allow management to make changes to enhance the enrollment parameters pushed InVivo's stock from a low of $0.47 in September to a recent high of $1.60 in December. But the biggest reason we think InVivo's stock could have a massive move higher in 2015 is because there is evidence, albeit from only one patient so far, that NSS is working. Twenty-five year old Jordan Fallis was the first patient treated in InVivo's trial back in October 2014. At the time of the surgery, Jordan was completely paralyzed from the belly-button down due to a motorcycle accident. He has no feeling or sensation from his pelvis down, including his penis. He also had no control of his bowel or bladder.
According to an independent, early December 2014 interview with Jordan(which we have confirmed to be authentic), Jordan is making amazing progress. Feeling has returned to areas above his thighs, including some feeling to his penis; and he can now control his bowels and bladder. He states his goal is to, "Swing my leg over the seat of my motorcycle" in six months and to ultimately walk again. The most recent update as of December 22nd notes that Jordan is now able to, "Pivot his hips and move his legs through the water." Those are impressive results!
Patient number two should be eligible to enroll in InVivo's pilot study by the middle of January 2015. Patient number three should be eligible to enroll a month after number two. By the summer of 2015, all five patients could be enrolled in the study. Updates on Jordan's progress, along with new evidence from patients two through five should be leaking out throughout the year. Sure, investors will be skeptical of the hype and one patient making impressive gains in a highly variable outcome does not make a blockbuster device. But InVivo seems to be making progress in an area where almost all prior treatment options have failed, and that has the potential to be very big for the company and investors.
Amarantus BioScience Holdings, Inc. (OTCQB:AMBS): Come on, you didn't really expect us to write an article on biotech stocks in 2015 without mentioning Amarantus did you? Our take on the story is that there is simply too much going on at Amarantus to keep the stock under ten cents for much longer. Throughout 2014, Amarantus CEO Gerald Commissiong built a pretty impressive pipeline of products. In 2015, it's time to start delivering on stated goals. We'll take them one at a time for investors.
For the diagnostic LymPro, a rapid blood test to predict risk and onset of Alzheimer's disease, the goals are simple: generate sales from the clinical and research use market. Amarantus launched LymPro into this market in late 2014. We've done some back of the envelope calculations on the size of the "RUO" market and conclude it's roughly a $180 million opportunity. If Amarantus can capture 10% of the market, then LymPro has roughly $20 million in sales potential on this initial launch. Management's goal is to expand LymPro under CLIA, a potential $500 million opportunity, and eventually seek PMA approval for LymPro into the broader market. With PMA approval, LymPro could be a blockbuster diagnostic, but that is a long-way away. For 2015, if the company can generate meaningful sales into the RUO market, we think it helps drive the stock higher. Amarantus is talking about spinning out LymPro into a separately traded diagnostic division in 2015. To do that, we believe the company needs to package LymPro with another rapid diagnostic product in CNS. This will be something to watch for investors.
For eltoprazine, a product that Amarantus only acquired about a year ago, the goal is to start Phase 2b study in Parkinson's disease levodopa-induced dyskinesia (PD-LID) imminently. Eltoprazine is a selective 5-HT1A/1B partial receptor agonist previously studied for the alleviation of involuntary movements, including dyskinesias, in Parkinson's disease patients who experience side-effects of their levodopa medication. In fact, the Michael J. Fox Foundation (MJFF) has funded human clinical proof-of-concept studies with eltoprazine as recently as 2012. We think starting the Phase 2b trial legitimizes Amarantus as a clinical research story. Prior to eltoprazine, the only therapeutics under development at Amarantus was MANF, which we discuss below. With eltoprazine, the company can now talk about generating late-stage human data with an asset that could eventually be worth more than the entire company is trading for right now. We do not know if Amarantus will have data from the Phase 2b study with eltoprazine in 2015, but starting the trial at least gives investors a real reason to invest in the story.
The same can be said about the recently acquired Engineered Skin Substitute (ESS) product. ESS, previously known as PermaDerm, is a tissue-engineered skin substitute prepared from a patient's own (autologous) skin cells. It is a living-tissue human-derived product; not synthetic or harvested from human cadavers or derived from animals. It is also the only skin substitute product available that contains both epidermal and dermal layers of skin. Amarantus' goal is to initiate a Phase 2a clinical study with ESS in the second quarter 2015. This trial has already been listed on ClinicalTrials.gov (NCT01655407). This is an Orphan Drug.
Similar to eltoprazine, proof-of-concept is there, but it is hard for us to predict whether or not ESS will be a success. But also similar to eltoprazine, we think just starting the trial is a positive step forward for the company. Amarantus' CEO has done an excellent job of rolling-up out-of-favor assets for very little upfront cost. But now it is time to execute on the strategy of generating clinical data for inflection, and you can't have data if you don't have a trial! So the fact that Amarantus plans to start both a Phase 2b with eltoprazine and Phase 2a with ESS speaks volumes to us about credibility. Investors are not going to invest in a story where the pipeline is stagnant. We think valuation inflection from eltoprazine and ESS clearly come with the data, but for investors in Amarantus' stock - currently trading at eight cents - it's a major positive to see clinical trials initiated.
Speaking of credibility, the recent news that the U.S. FDA granted MANF an Orphan Drug designation for Retinitis Pigmentosa (RP) in late December 2014 was a huge win for Amarantus. The company prepared and filed the application itself, and received a positive response from the agency in impressive time. Amarantus no doubt seeks additional Orphan Drug indications for MANF in ocular indications. In fact, an application for retinal artery occlusion (RAO) is currently pending.
The more management can deliver on these goals, the better we expect Amarantus' stock to do in 2015. Amarantus is now loaded with catalysts. Certainly the company could use more cash, but at eight cents a share we simply feel there is too much going on to keep this stock down for much longer.
Cynapsus Therapeutics (OTCQX:CYNAF): In early 2014, we called Cynapsus our "Top pick" for 2014. We posted an article on Seeking Alpha outlining our thesis on why the stock will soar. It was a pretty good call, netting around 250% return. The primary catalyst for the surge in stock price at Cynapsus was the top-line data from a Phase 2 clinical trial with APL-130277 released in mid-November 2014. APL-130277 is the company's fast-acting, sublingual, thin film strip formulation of apomorphine designed to be used by Parkinson's patients for the management of "off" motor symptoms.
The primary objective of the Phase 2 CTH-105 study was to evaluate the efficacy, tolerability, and safety of single treatments of APL-130277 in 16 patients with Parkinson's disease (PD). The primary endpoint was the efficacy based on "time to on" using the percent change in UPDRS. According to management, all five doses of APL-130277 used in the study (10, 15, 20, 25, 30 mg) resulted in patients moving from "off" to "on". Out of 16 patients treated with APL-130277, 14 converted from "off" to "on" time, with an average dose of 18.4 mg required to convert patients to "on". Mean baseline UPDRS III scores for the pool group was 41.4. The maximum mean change from baseline was 18.4. This data compares well with published literature for subcutaneous apomorphine.
Cynapsus reported that onset to clinically meaningful improvement was seen in as early as 10 minutes and lasted up to 90 minutes (the last measured time point). Mean "time to on" was 22 minutes. Below is a graph showing the mean change in UPDRS Part III from baseline over the study period for patients converting from "off" to "on" time. Take note, even at 90 minutes patients were still "on", suggesting that APL-130277 could act as a bridge between regular oral levodopa dosing (typically 4x daily).
Cynapsus reported that treatment with APL-130277 was safe and well tolerated. Nausea, reported by three subjects at doses of 10, 15 and 20 mg, looked to be the most common side effect. One of these patients also experienced a mild episode of vomiting. There were no reports of nausea at higher doses of 25 and 30 mg. There were no reports of local irritation or hypotension in any subject treated. A total of 60 doses of APL-130277 were administered to the 16 patients who completed dosing in the CTH-105 study.
We continue to believe that Cynapsus' stock represents an attractive opportunity for investors. We believe APL-130277 is a superior drug in design, safety, and mechanism of action to CVT-301, a drug recently acquired by Acorda Therapeutics for $525 million in cash. We estimate that Cynapsus is approximately 2-4 months behind Acorda in Phase 3 development of their respective drugs, but would not be surprised to see Cynapsus pass Acorda when it comes to final approval.
Off time is a significant problem for patients with advanced Parkinson's disease. In the U.S., there are an estimated one million PD patients (4-6 million globally). According to a recent survey by the Michael J. Fox Foundation, more than 90% of PD patients report having "off" episodes each day. Roughly two-thirds have "off" time greater than two hours, with 20% experiencing "off" time of greater than four hours. This is a significant problem for PD patients and an enormous unmet medical need. Our modeling shows that APL-130277 has peak sales in the U.S. of approximately $400 million, with another $350 million potential outside the U.S.
We do not know whether or not Acorda approached Cynapsus with a potential buy-out to acquire APL-130277 prior to its decision to scoop-up Civitas for $525 million. What we do know is that Cynapsus, on a basic sharecount basis, is currently worth only $80 million. If Civitas was worth $525 million, Cynapsus is worth more. As such, we could be looking at an eight-fold increase in valuation for Cynapsus over the next 2 years.
Protalex, Inc. (OTCPK:PRTX): Protalex is a name that most investors are not paying attention to; we believe that will change in 2015. We had been following the Protalex story for a year now, but what really drew our attention to the name last quarter was data in November 2014 presented at the American College of Rheumatology (ACR) meeting from a Phase 1b study with PRTX-100 for the treatment of rheumatoid arthritis [RA].
PRTX-100 is a highly purified form of Staphylococcal A (SPA) protein. The data presented included pharmacokinetic analysis, evaluation of anti-drug antibodies (ADAs), and disease activity assessed using ACR response. Full analysis of the data can be found in our article published in early December 2014. However, below we provide a quick recap of the disease activity results see from Cohorts 1-5 of the Phase 1b study. The following table shows the two month ACR20, ACR50, and ACR70 values for Cohort's 1-5 along with the ACR20 data for up to six months.
As investors can see from the data above, approximately 50% of patients from Cohorts 1-5 achieved ACR20 two months after treatment began (Day 57). This is quite comparable to ACR20 response rates seen in patients treated with AbbVie's blockbuster drug, Humira. In addition to comparing quite favorably to the Humira ACR20 response rates at two months, the six-month ACR20 response rate for Cohort 5 patients dosed with 420 μg PRTX-100 is quite similar to the ACR20 response rates seen with Humira, Amgen's Enbrel, and J&J's Remicade.
There are a couple of points to keep in mind when comparing the data between PRTX-100 and the leading biologic treatments for RA:
1) The number of patients treated with PRTX-100 was very small (n=6). This is in comparison to the Phase 3 trials for Humira, Enbrel, and Remicade that contained 207, 59, and 86 patients, respectively. In addition, each of the biologics was tested in at least one other Phase 3 trial that showed very similar results for each of those products.
2) Keeping in mind that it was a very small number of patients, it is still quite encouraging to see such a high ACR20 response rate in the PRTX-100 Cohort 5 group.
3) The amount of drug needed to achieve the ACR20 response rate at six months in the PRTX-100 treated patients is at least two orders of magnitude less than the amount of drug needed for ACR20 responses when treating with Humira, Enbrel, or Remicade.
In addition, the cost of goods to produce PRTX-100 is going to be at least 100 times less than for Humira, Enbrel, or Remicade, which means that: A) PRTX-100 could be brought to market in less developed areas of the world where most individuals cannot afford the $15,000 or more per year it costs to be treated with Humira, Enbrel, or Remicade and B) PRTX-100 could be utilized in conjunction with Humira, Enbrel, or Remicade as an inexpensive add-on therapy.
On November 4, 2014, Protalex entered into a new Credit Facility Agreementwith Niobe Ventures, LLC, a limited liability company controlled by Arnold P. Kling, Protalex' president and director. Under the terms of the agreement, Protalex may borrow up to $5.0 million in the form of secured loans at any time prior to December 31, 2015. Each loan made to Protalex will be represented by a senior secured promissory note with an interest rate of 3%. The same day, Protalex borrowed $0.3 million under the new agreement. We remind investors that Niobe Ventures and management own approximately 81% of the company. As we've stated previously, we have little concern about the ongoing financial needs of Protalex. Investors should note, management is betting on PRTX-100 with its own money.
Protalex continues to generate very intriguing data in regards to the use of PRTX-100 for the treatment of RA. We would be remiss, however, if we did not remind investors that PRTX-100 is still early in development as it has only been tested in Phase 1 clinical trials thus far in a limited number of patients. With that said, the fact that the results are on par with the major biologic treatments, with a much better safety profile, is highly encouraging. The aforementioned Humira and Enbrel are two of the best selling drugs in the world. The company will be moving PRTX-100 into Phase 2 clinical trials for RA in 2015, which will involve a larger numbers of patients. We anticipate that the results obtained so far will be reproducible in a larger cohort of patients.
If PRTX-100 continues to produce results that are on par with multi-billion dollar drugs like Humira, Enbrel, and Remicade, along with continuing to exhibit a clean safety profile, then Protalex would have a blockbuster medication for the treatment of RA. In conclusion, we believe there is sufficient proof-of-concept data and access to capital to justify getting into the stock, and think Protalex shares could double in 2015 as PRTX-100 moves into Phase 2 studies for the treatment of RA.
These Data Read-Outs Should Have A Big Impact On These Stories
Titan Pharmaceuticals (OTCQB:TTNP): In November 2014, Titan announced enrollment in the company's Phase 3 clinical study to support resubmission of the NDA for Probuphine had completed. The pace of enrollment was impressive, from first patient to 178 patients in only five months. The Phase 3 study (NCT02180659) is a randomized, double blind, double dummy design testing Titan's Probuphine vs. placebo in stable patients who are receiving maintenance treatment with an approved sublingual formulation of buprenorphine at a daily dose of 8 mg or less. Patients will be treated for six months, and the primary analysis will be a non-inferiority comparison of responders in the two arms.
With enrollment taking place slightly ahead of our original thinking, we now believe the study will complete in June 2015, with data a few weeks after in July or August 2015. If all goes well, we expect to see a refiling of the NDA in the second half of 2015. We expect that the FDA will respond to the application in six months, potentially putting a new PDUFA in the first quarter 2016. If the Phase 3 trial above is positive, we expect approval at that time.
We suspect that the price of Probuphine will run roughly the cost of 7-8 months of what it cost for Suboxone, or around $1,500 on launch, with price increases taking the product to $2,000 five years after launch. We assume the average patient will have 1.75 procedures per year (assumes one implant for six months with about 75% of the patients receiving re-implantation during removal of the first implants). Accordingly, we see peak U.S. sales of Probuphine at approximately $175 million (50,000 patients x $2,000 x 1.75). We note that Titan is in discussion with potential partners about Probuphine outside the U.S. We are comfortable saying that if Probuphine generates $175 million in U.S. sales, the global opportunity easily meets a range between $250 and $300 million.
We have built a detailed U.S. model of Probuphine sales in an attempt to value Titan Pharma. We model a 20% royalty payment on sales at Braeburn, assuming this is the third (and highest) tier for Titan. We apply a 15% discount rate to these cash flows given that Braeburn seems strongly committed to the product and already owns nearly 11% of the company. Our NPV analysis shows that Titan shares are fairly valued today at roughly $1.50 per share. That would be a nice return from the $0.47 price today, and it is all depending on the Phase 3 data coming summer 2015.
Neurocrine Biosciences (NASDAQ:NBIX): Data from the first Phase 3 study with elagolix for the treatment of endometriosis at partner AbbVie Inc. is expected in January 2015. Violet Petal (NCT01620528) is a 24-week, multinational, randomized, double-blind, placebo-controlled study designed to evaluate the safety and efficacy of elagolix in 875 women, age 18 to 49, with moderate to severe endometriosis-associated pain. Approximately 160 sites in the United States, Puerto Rico, and Canada are conducting this study, which completed patient recruitment and randomization during the second quarter 2014. AbbVie is also conducting the second Phase 3 study, Solstice (NCT01931670), of elagolix for endometriosis. This study is similar in design to the Violet Petal Study and will assess 788 women, age 18 to 49, with moderate to severe endometriosis-associated pain at more than 200 sites globally.
Elagolix is a novel, oral gonadotropin-releasing hormone (GnRH) antagonist developed by Neurocrine Bio, with worldwide rights licensed to Abbott Labs(now AbbVie Inc.) in June 2010. We are confident in the design of the Phase 3 trial Violet Petal study based on the efficacy and safety previously seen with elagolix in Phase 2b. In total, Neurocrine has presented data from 12 Phase 1 programs and 6 Phase 2 programs (2 Phase 2a and 4 Phase 2b) on roughly 1,000 patients. Results from the Phase 2b (n=137) Daisy Petal program first released in May 2010 provide the best proof-of-concept data for the ongoing Phase 3 trial. Results were statistically significant in all primary and secondary endpoints.
Data from Solstice is expected late 2015. Our previous analysis of the Phase 2b data on elagolix leads us to believe the drug is a blockbuster, with potential sales in the $1.5 billion range. Elagolix is also being evaluated in women with uterine fibroids. AbbVie is conducting a Phase 2b clinical trial (NCT01817530) evaluating the change in menstrual blood loss of 520 women, age 18-51, with heavy menstrual bleeding associated with uterine fibroids. Data on this study is expected mid-2015.
Neurocrine Biosciences : This isn't a typo! Neurocrine Bio shows up on our list of important data read-outs twice in 2015, this time for NBI-98854, a wholly-owned VMAT-2 inhibitor under development for the treatment of tardive dyskinesia (TD). Phase 3 data from Kinect-3 (NCT02274558) with NBI-98854, also known as valbenazine, for the treatment of TD is expected during the second half of 2015. Valbenazine is a purified active metabolite prodrug of the (+)-alpha isomer of tetrabenazine.
Kinect-3 is a randomized, parallel-group, double-blind, placebo-controlled trial of approximately 240 patients with moderate to severe TD and an underlying diagnosis of mood disorder, schizophrenia, or schizoaffective disorder. The trial will consist of a six-week treatment period of 80 mg and 40 mg NBI-98854 dosed once daily against placebo. This will then be followed by a 46-week long-term safety assessment where all study subjects will be randomized in a blinded fashion to either 80 mg or 40 mg NBI-98854. The primary endpoint for the Kinect 3 trial is change from baseline in the Abnormal Involuntary Movement Score (AIMS) as measured by blinded central raters, just as was done in Neurocrine's previous and successful Kinect 2 study (see our analysis of Kinect-2 here).
On October 30, 2014, Neurocrine announced that the U.S. Food and Drug Administration (FDA) had granted Breakthrough Therapy Designation for NBI-98854 in tardive dyskinesia. The breakthrough therapy designation is granted for a drug that is intended to treat a serious or life-threatening disease or condition and preliminary clinical evidence indicates that the drug may demonstrate substantial improvement on clinically significant endpoints over available therapies. The FDA had previously granted Fast Track status to NBI-98854 for TD. Breakthrough therapy designation is quite similar to the Fast Track designation in that both programs are designed to expedite the development and review of drugs, which includes the following:
- Increased number of meetings with the FDA throughout the development of the drug,
- Maintaining an interactive dialogue with the FDA regarding drug development to ensure the sponsor is obtaining the proper nonclinical and clinical data necessary for approval expeditiously,
- Working with the FDA to ensure the clinical trials are being run as efficiently as possible,
- Rolling review and priority review.
- Maintaining an interactive dialogue with the FDA regarding drug development to ensure the sponsor is obtaining the proper nonclinical and clinical data necessary for approval expeditiously,
- Working with the FDA to ensure the clinical trials are being run as efficiently as possible,
- Rolling review and priority review.
Neurocrine is also testing valbenazine for the treatment of Tourette syndrome in a Phase 1b study, with data also expected during the second half of 2015. Between the pending Phase 3 results in TD with valbenazine, the Phase 3 data on elagolix at AbbVie, and the recent expansion of its clinical program to include a new molecule for congenital adrenal hyperplasia (CAH), we believe Neurocrine stock has the potential to double or triple in value in 2015, pending positive data from all active programs.
Auspex Pharmaceuticals (NASDAQ:ASPX): Neurocrine Bio will not be the only company releasing Phase 3 data in TD in 2015. Fellow San-Diego-based Auspex Pharma, hot off releasing 'Home Run' data in Huntington's chorea with its improved tetrabenazine formulation, SD-809, is also expecting Phase 3 data in TD around the middle of 2015. Auspex's SD-809 is a deuterium-substituted version of the established neurological drug tetrabenazine under development for treatment for movement and neurological disorders such as Huntington's disease (HD), TD, and Tourette syndrome (TS).
We believe tetrabenazine has a number of important shortcomings that are potentially addressed by Auspex's SD-809. HD, TD, and TS are all disorders of excessive, uncontrollable movement associated with excess dopaminergic activity in the brain. Tetrabenazine provides symptomatic relief of movement disorders by inhibiting VMAT-2, a transporter that packages dopamine and other neurotransmitters into vesicles for release into the synapse. This reduces synaptic dopamine levels, thus relieving overstimulation of dopamine receptors and reducing symptoms of HD, TD, and TS. Tetrabenazine was approved in the United States for the treatment of chorea (uncontrollable movements) associated with Huntington's disease in 2008 and is sold as Xenazine by Lundbeck. Sales of Xenazine totaled approximately $253 million in the U.S. in 2013, with an annual cost of approximately $75,000 per patient per year thanks to its Orphan Drug designation.
Despite the strong sales of Xenazine, penetration is low due to the significant side effects and poor tolerability of the drug. These include somnolence, insomnia, Parkinsonism, severe depression, fatigue, anxiety, and irritability, as well as an FDA "Black Box" warning for depression and suicide risk. Auspex has designed SD-809 to offer Xenazine like efficacy with improved safety and tolerability.
The thesis was confirmed with data from a Phase 3 clinical trial called First-HDin December 2014. Investors can read about the results of that trial and our analysis of the outcome separately. However, what is important to note for this article is that SD-809 has been granted Orphan Drug designation in Huntington's diseases and that we believe the drug has peak sales in HD of $550 million based on the improved safety and tolerability compared to Xenazine (see table we put together below).
The positive results from First-HD and a second Phase 3 study, dubbed Arc-HD, lead us to believe results from two ongoing Phase 3 trials in TD will also be positive. The Arm-TD and Aim-TD clinical trials are studying SD-809 in TD, with data from the first around the middle of the year. Published literature shows that response rates for tetrabenazine in TD are similar, if not superior to HD (Kenney et al, 2007). Data from the Aim-TD study is expected in 2016. Phase 1b data in Tourette syndrome are also expected around the middle of 2015. Auspex management anticipates filing the U.S. FDA for SD-809 in HD by the middle of 2015. We remind investors that Auspex will seek approval for SD-809 via the 505(b)(2) pathway.
We have conducted a discounted cash flow analysis inputting our sales assumptions for SD-809 along with the following additional assumptions: 12% CoGS, R&D and G&A expenses that bottom out at 7% and 10% of gross revenues, respectively, 32% effective tax rate beginning in 2017, 22% discount rate. Based on our assumptions, we calculate a fair value for Auspex Pharmaceuticals of approximately $1.9 billion, or $60 per share. We think positive Phase 3 data in TD around the middle of 2015 has the potential to add $10-15 to our price target.
Nuvo Research, Inc. (NRI.TO) (OTCPK:NRIFF): Nuvo Research has had a very good run in 2014; the stock rose by roughly 200%. The stock has more than doubled since our article on Seeking Alpha in June 2014 predicting a move higher by the end of the year. The catalyst for the impressive performance by Nuvo was the settlement of ongoing litigation with Mallinckrodt over rights to Pennsaid 2% in September 2014 and the subsequent out-license of recently recovered U.S. rights to Horizon Pharma in October 2014. The settlement agreement with Mallinckrodt netted Nuvo Research $10 million in cash and full unencumbered rights to Pennsaid 2% in the U.S. The subsequent sub-license to Horizon netted Nuvo another $45 million in cash, plus manufacturing mark-up on transfer from Nuvo's facility to Horizon for commercial sale in the U.S. Nuvo retains all rights to Pennsaid 2% outside the U.S. and is actively seeking additional alliances to monetize the osteoarthritis drug. We see Pennsaid 2% as a $50 million product in the U.S. for Horizon Pharma.
As a result of the above two Pennsaid 2% transactions, Nuvo Research is nowsitting on a pile of cash, estimated at around $60 million. This is very close to the company's current market capitalization. So what do investors get for all that money and about $4 to $5 million in revenues from Pennsaid 2% and the rest of the product suite? How about Phase 2 data from allergy drug WF10 coming in the first quarter 2015. Nuvo began enrolling patients for a Phase 2 clinical trial of WF10 for the treatment of allergic rhinitis in March 2014. The trial completed enrollment at 179 patients in December 2014. The trial is a 16-week, randomized, double-blind, placebo-controlled study to assess the efficacy, safety and tolerability of a regimen of five infusions of either WF10 or its main constituents (sodium chlorite and sodium chlorate) relative to saline control in patients sensitized to multiple airborne allergens who suffer from refractory allergic rhinitis.
We are optimistic on WF10 because the drug covers a broad range of allergens vs. traditional immunotherapy that targets only a single allergen. For example, in the previous Phase 2 study, patients were sensitized to multiple antigens and the data on WF10 shows the drug to be more effective than placebo after just five days of treatment, with a therapeutic effect potentially lasting for 2 years. Traditional immunotherapy requires weekly or monthly injections to maintain persistent efficacy. The results of the Phase 2 trial showed that there was a response rate of 70-90%. For immunotherapy, there is typically a modest clinical benefit that takes a long time to manifest. WF10 also has a favorable safety profile, with no SAEs seen in the previous Phase 2 trial. Immunotherapy is generally well-tolerated, but there are possible rare serious side effects such as anaphylactic shock that could lead to death.
We see an investment in Nuvo as relatively low risk with the potential for a large upside should the allergic rhinitis clinical trial with WF10 succeed. The current market capitalization is supported by an approximate equal amount of cash and modest royalties on Pennsaid 2% sales and manufacturing transfer agreements. If the Phase 2 on WF10 succeeds, we believe the drug has potential to post peak sales in the $800 million range. That should allow Nuvo's stock to double in price again in 2015.
Lipocine, Inc. (NASDAQ:LPCN): Shares of Lipocine went on a wild ride in 2014. The market was initially skeptical of LPCN-1021, the company's oral testosterone replacement therapy (TRT); but, in September 2014, the company announced positive top-line results for the Study of Oral Androgen Replacement ("SOAR") Phase 3 clinical trial. Overall, the study was a success, showing positive results with respect to the primary efficacy endpoints, no serious adverse events, and generally meeting FDA pre-specified targets for maximum serum concentrations. SOAR enrolled 315 hypogonadal males (serum testosterone < 300 ng/dl) at 40 clinical sites, randomizing 210 to LPCN-1021 and 105 to Androgel 1.62%, the active control, for 52 weeks. Not only did LPCN-1021 compare favorably to Androgel 1.62%, they also compared well to a fellow competitor's Phase 3 drug, Rextoro (see below):
Lipocine shares reacted well to the positive Phase 3 data with LPCN-1021, roughly doubling in value. However, when privately-held Clarus Therapeutics, the developer of Rextoro, received a negative recommendation from a Joint Meeting of the Bone, Reproductive and Urologic Drugs Advisory Committee (BRUDAC) and the Drug Safety and Risk Management Advisory Committee (DSRM) in September 2014, the market good spooked into believing that the FDA would reject all oral TRT drugs. Shares sold off significantly and now sit almost 50% below where they traded before the positive Phase 3 SOAR data was released.
This was a surprise to us. We started telling people to buy Lipocine ahead of the Phase 3 data. We made a good call on the data but got side-swiped by how the market would interpret competitor miss-steps. Lipocine has released relatively good news over the past six months on LPCN-1021 and the FDA has knocked its chief competitor back several years. Lipocine has also released very strong Phase 2a data for LPCN-1111, a next-generation oral TRT that looks even better than LPCN-1021. So with the stock down to $5.20 today, we think 2015 could be a good year for the company as they continue to present data from SOAR - all eyes will be on the 12-month safety follow-up data this summer - and eventually seek approval through filing a new drug application.
Lipocine trades with a current market cap of only $70 million. As of September 30, 2014, the company held $31 million in cash. This is bafflingly low for a company with positive Phase 3 data for a compound that will enter a market in excess of $1 billion. In addition to the negative sentiment regarding oral TRT drugs, the stock is also being weighed down by the negative sentiment expressed in regards to the TRT market following the September 2014 FDA advisory committee meeting regarding the appropriate indicated population for TRT as well as the potential for adverse CV outcomes associated with the use of TRT. Admittedly, there are a number of unanswered questions at this point in regards to how the FDA will ultimately view TRTs and LPCN-1021:
- Will Lipocine have to perform an additional CV safety study?
- Will the data generated in the Phase 3 trial of LPCN-1021 be enough to gain approval?
- Will there be labeling restrictions on TRTs as a group?
- Will there be additional restrictions on oral TRTs?
However, even with these uncertainties, we feel that investors have overreacted to the September 2014 FDA AdCom meeting and that the "sky is not falling". We see a very reasonable probability of approval on LPCN-1021 based on the results of SOAR. We are extremely excited about the next-generation product, LPCN-1111. We believe the market will start to value Lipocine meaningfully higher as more safety data and results from SOAR are presented throughout the year. We think long-term safety data coming this summer has the potential to double the shares. We believe Lipocine offers in excess of 100% upside based on a turn in sentiment for the stock. Regardless, at today's price we believe the shares are too attractive to ignore.
These Business Models Should Take Hold In 2015
Within our coverage universe are biotechnology and pharmaceutical companies that sell actual products - what a novel idea! We think 2015 could be a breakout year for some of these firms based on improving fundamentals and favorable valuations.
Nuo Therapeutics (OTCQX:NUOT): The past year has no doubt been frustrating for Nuo shareholders. The change to CMS Medicare / Medicaid coverage for Aurix (formerly AutoloGel) took place in 2013 and 2014 was supposed to be the year of the "hockey stick" ramp in sales. As it turned out, 2014 was more a positing year for Nuo. The company spent most of the year rebranding both its corporate name and the Aurix product, building its sales force, and ironing out the kinks of launching an established product with new reimbursement codes. We told people to buy Nuo Therapeutics in May 2014. That call was too early, and we're underwater to the tune of roughly 25%. But we're still bullish on Nuo for 2015. Here's why:
- Angel, a previous $10 million per year run-rate for Nuo, is now in the hands of Arthrex, Inc., one of the world's largest providers of minimally invasive orthopedic medical products. Nuo previously promoted Angel with only a handful of part-time sales representatives. The Arthrex sales force is 1,500 strong, and the product will be coupled with existing Arthrex products to help drive awareness and uptake. Arthrex also took a healthy increase in average selling price. We estimated that previous net profit margin on Angel at Nuo was around 20%. Nuo is now receiving a "low-teens" royalty on sales at Arthrex, which we believe will ultimately prove to be 6-8x what Nuo was doing by itself. In short, we expect royalties on Angel will outpace what Nuo was reporting in net margin by the end of 2015. We think Angel is a $75 million product in the U.S.
- Aurix is a product we always believed had fantastic efficacy and safety data. What Aurix lacked was broad-scale reimbursement and favorably economics. Prior to CMS granting CED, we believe Nuo was selling Aurix essentially at cost. The effort was primarily on long-term acute care facilities and on finding private insurance or pre-negotiated avenues for coverage. With CED, Aurix will be reimbursed at $430 per treatment in 2015 to the millions of Medicare beneficiaries that have diabetic foot ulcers, venous leg ulcers, and pressure ulcers. We believe this equates to a healthy 70% gross margin. Similar to Angel, Nuo is ramping up its sales staff and partnering with data collectioncompanies like Net Health and Intellicure. Sales to Medicare beneficiaries prior to CED were virtual nil for Nuo. Today we think the playing field has been leveled, and Aurix is a product that can complete effectively with and even replace expensive skin-substitute products like Dermagraft, Apligraf, EpiFix, and Grafix. Ultimately, we think Aurix peak sales are $100 million in the U.S.
Over the past several months, Nuo has been building the necessary infrastructure and staff to prepare for the re-launch of Aurix. As far as the required clinical programs under CED, all things look to be on track. In the next 2-3 quarters, we expect the company to have over 1,000 patients enrolled in all four programs combined. We remind investors that the four CED programs include one randomized clinical trial (RCT) seeking to enroll 280 patients with varied wounds, and then three separate registry programs each seeking to enroll up to 750 patients with diabetic foot ulcers, venous legs ulcers, and pressure ulcers, respectively. These programs should enroll and report data in 2015. Similar to any clinical program, implementing the protocol includes obtaining IRB approval at each site. The company is targeting 120 sites right now. We continue to believe by the end of 2015, Nuo will have one of the largest data sets in the entire wound care market.
To value Nuo Therapeutics, we are doing a simple "sum-of-parts" valuation for the two drivers of the top-line: Aurix sales and Angel royalties. We believe Aurix is a $100 million product for Nuo. We believe Angel is a $75 million product for Arthrex, Inc., of which Nuo gets low-teens royalty. We apply no value for ongoing clinical programs with ALD-301 in peripheral arterial disease or ALD-351 in glioblastoma. Based on our sales forecasts, our NPV analysis pegs the valuation of Aurix at $1.05 per share. We think Angel is worth $0.35 per share. Summing these parts two parts together we believe Nuo Therapeutics shares are fairly-valued right now at $1.40 per share. We think 2015 will be the year Nuo Therapeutics shines.
Vericel Corp (NASDAQ:VCEL): Vericel is another company that spent much of 2014 rebranding and refocusing. The biggest transformation came in June 2014 when Vericel, then known as Aastrom Biosciences, acquired the cell therapy and regenerative medicine (CTRM) business unit at Sanofi - formerly known as Genzyme Biosurgery. We think this fundamental change in business strategy at Vericel is a positive for shareholders, and recent trends are clearly headed in the right direction.
We site evidence over improving fundamentals coming from the company'sfinancial results for the quarter of 2014 ending September 30, 2014. Results in the quarter included a full quarter of operations for the recently acquired CTRM business. Total revenues in the third quarter were approximately $9.7 million, and were comprised of approximately $7.5 million of net sales of Carticel implants and surgical kits, approximately $1.8 million of net sales of Epicel grafts and biopsy kits, $0.2 million sales of MACI, and $0.2 million of revenue from commercial sales of bone marrow generated by Marrow Donation, LLC.
Revenues in the quarter were flat with the same period in 2013, only we note that Vericel was able to achieve these revenues with slightly fewer sales representatives than what Sanofi had at the end of 2013, thus improving margin. For example, gross margin in the third quarter was 42.7%. We expect continued improvement in the gross margin line over the next several quarters as Vericel gains efficiencies on manufacturing and scale at the Cambridge facility. Ultimately, we believe Aastrom can see gross margin approach 60% in 2016. We expect a strong uptick in revenues in the fourth quarter 2014 for a number of reasons, primarily due to year-end insurance deductibles being met, flexible spending accounts needing to be used, seasonality, and pricing increases.
In the third quarter 2014, Vericel reported that CTRM provided $1.0 million in positive cash contribution. This number would have been $1.4 million without the Denmark facility. Denmark will be fully shut-down by the end of 2014. We also expect profitability of CTRM to improve in the coming quarters as Vericel increases promotion and gains efficiencies in manufacturing. We had previously believed that CTRM would do +$5 million in EBITDA in 2015. Based on the $1.0 million that was reported, and likely $1.4 million that would have been reported backing-out Denmark, this number now looks too conservative. We think it is possible CTRM does $6-7 million in positive EBITDA in 2015. For 2015, we project near $50 million in revenues from CTRM. If these numbers hold, then Vericel is vastly undervalued today.
For example, the pharmaceutical industry average Price/Sales ratio is 5.5x based on trailing twelve month numbers. The ratio for Price/EBITDA is 16.0x based on trailing twelve month numbers. This would seem to suggest that CTRM, should it generate $50 million in revenues and $6.5 million in positive EBITDA in 2015 is worth between $80 and $105 million in value. The current market capitalization is only $70 million.
Vericel also has the ongoing Phase 2b ixCELL-DCM clinical program with ixmyelocel-T enrolling. We expect enrollment to wrap up in the very near future. Data the company has generated to date with ixmyelocel-T in ischemic DCM shows utility. This is a large market opportunity, with an estimated 170,000 patients seeking treatment, and "sweet-spot" focus for ixmyelocel-T positioned as an alternative to LVAD or heart transplantation. Assuming enrollment is completed shortly, we expect top-line data from ixCELL-DCM during the first quarter of 2016. If the data are positive, Vericel will be able to partner ixmyelocel-T with a larger pharmaceutical company for handsome economics. The drug has been granted orphan drug designation by the U.S. FDA. On a probability-adjusted basis, we see the ixCELL-DCM program adding another $30 million in value to our NPV.
We believe the company is executing on its aggressive plan. For 2015 we project $49.1 million in revenues and $6.5 million in positive EBITDA from CTRM. We model that Vericel will exit 2014 with roughly $35 million in cash on the books. We suspect operating burn in 2015 will be around the $10 million mark, meaning that cash at year end 2015 should still be $25 million. If the CTRM business ramps to our expectations, Vericel may be in position to report breakeven operations in 2016. This is something both new and long-term investors should be excited about, and the primary reason we continue to be positive on the stock. Summing up our NPV calculations for CTRM and ixmyelocel-T, we think Vericel stock is worth $6.50 per share. That's more than a double in 2015 if the business model plays out as we expect.
Depomed, Inc. (NASDAQ:DEPO): Depomed, Inc. had a very good 2014, up 50%. The stock was one of our top-ideas for 2014. One of the main reasons for the gains in Depomed stock has been management's ability to effectively grow the business through a combination of organic sales and product in-licensing. We think this strategy continues to play out over the next several quarters, and that keeps the impressive run in the stock price going in 2015. Below is a slide showing the recent deal-making at Depomed:
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Third-quarter financial results verify that the strategy is working. Total revenues in the quarter were $51.5 million, up 37% from the third quarter of 2013, handily beating our estimate and Wall Street expectations. For the full-year 2014, management has provided total product sales guidance of $113 to $117 million range. Total revenue guidance for 2014 is now $232 to $242 million. Revenues are being driven by Gralise, an extended-release gabapentin molecule with improved side-effect profiles. Gralise should post sales in 2014 of around $60 million on strong pricing gains and effective promotion. For 2015, we think Gralise can approach $85 million. Zipsor and Cambia, two in-licensed diclofenac products, fit nicely within the Depomed sales structure and are piggy-backing off Gralise gains. Both products should around $30 million in 2015. TIRF product, Lazanda, rounds out the commercial pipeline.
Besides a nicely growing product suite, the top-line at Depomed is driven by royalties, licensing, and collaborative revenues. In 2014, these line items accounted for over half of the total revenue at around $125 million. Depomed's proprietary drug delivery and formulation technology has allowed the company to strike deals with Mallinckrodt, Merck, Johnson & Johnson, Boehringer Ingelheim, and Ironwood. Depomed gets a royalty on two approved drugs, J&J's Nucynta-ER and Mallinckrodt's Xartemis XR. In 2015, Depomed should start receiving royalties on another Mallinckrodt product, MNK-155.
In September 2014, Depomed closed a convertible note offering resulting in net proceeds of $334 million. We think Depomed exited 2014 with around $565 million in cash. Operating results are tracking just above breakeven cash flow. For example, during the third quarter 2014, non-GAAP net income totaled $2.1 million, or $0.03 per share. That means the company has significant cash available to make more product acquisitions. Investors can read our article on Seeking Alpha back in September predicting what the company will do with 'Half-A-Billion' in cash. To summarize, we think the companies previous transactions to bring in Zipsor, Cambia, and Lazanda, provide clear precedent on what future deals may look like. Key attributes include pain/neurology focus, reasonable price, long and solid exclusivity, and meaningful opportunity to grow.
We think Depomed, a new deal notwithstanding, will do approximately $250 million in revenues in 2015. We continue to believe Depomed represents a nice core holding in the specialty pharma sector. Based on a price-to-sales ratio of 4.5X 2015 revenues, Depomed would be fairly-valued at $18 per share. Adding in another net $230 million in cash (backing out the debt) raises this value to $22 per share. Ultimately, it is what Depomed will do with that cash that will determine just where the stock goes in 2015. Past results are no guarantee of the future, but we like betting on this story again.
Epirus Biopharmacuticals (NASDAQ:EPRS): Epirus Biopharmaceuticals is a new name for which we recently initiated coverage. Epirus is a global biopharma company focused on developing, manufacturing, and commercializing biosimilar therapeutics in various jurisdictions worldwide. The company utilizes a tailored approach that takes into account the different regulatory, legal, and commercial barriers in each market. The current strategy is to focus on launching biosimilar products in the developed markets (U.S., Europe), accessing growth in local production markets through strategic partnerships (Brazil, China) and generating initial cash flows through the early launch of products in accessible emerging markets (India, Asia, South America).
Epirus currently has three biosimilar products at different stages of preclinical and clinical development. The lead product is BOW015, a biosimilar version of Remicade (infliximab), a monoclonal antibody that is primarily marketed by Johnson & Johnson for the treatment of inflammatory diseases including rheumatoid arthritis [RA], Crohn's Disease, ankylosing spondylitis, psoriatic arthritis, and psoriasis. The other pipeline products, BOW050, a biosimilar version of Humira (adalimumab), and BOW070, a biosimilar version of Actemra (tocilizumab), are in preclinical development.
Epirus has performed an extensive amount of bioanalytical and physicochemical comparisons between BOW015 and Remicade. This includes data from both a Phase 1 clinical trial performed in the United Kingdom and a Phase 3 double blind comparator study conducted in India. As a result of the aforementioned Phase 3 trial, BOW015 has received marketing and manufacturing approval in India for the treatment of rheumatoid arthritis. The data generated to date by Epirus (see chart below) show that BOW015 is as effective as infliximab, only Epirus plans to charge around half the price. This should allow for meaningful market share gains in the above targeted markets.
Management still has a little more work to do before they can begin seeing meaningful revenue growth with BOW015. For example, in Europe and the U.S., there will need to be additional clinical work (Phase 3) performed. For local production markets, Epirus is partnering with established companies in each country that are familiar with the regulatory and commercial landscape. These countries include Brazil and China. While China requires clinical trials to be conducted in the local population, there is a chance that Brazil will accept the Indian regulatory package for approval of BOW015. In accessible markets, BOW015 has received manufacturing and marketing approval in India and there are a number of countries that will accept the Indian regulatory package to allow for immediate revenues. These countries are located in northern Africa, southeastern Asia, and Central and South America (not including Brazil).
Sales of Remicade in the U.S. were approximately $4 billion in 2013. While the U.S. market is likely to be the largest overall for biosimilar products, it may not be the largest opportunity for Epirus given the competition. Outside the U.S., Remicade was another $3.5 billion drug and management is aggressively pursuing various commercialization strategies. We have performed a detailed analysis of the market opportunity for BOW015 and Epirus, and our calculations give us a net present value for the company of $140 million. This equates to approximately $8.00 per share, roughly 40% higher than today.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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