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Insight & Intelligence™ : Oct 21, 2013

Stock Watch: Five Firms with Potential

Biotech investor highlights developmental biopharmas he thinks can deliver long-term.
  • Scott Matusow

At stockmatusow, we have compiled five of our best end-of-year and long-term small-cap developmental biopharma companies we feel have an excellent chance to be long-term "multibaggers." By multibaggers, we mean that we feel these stocks can bring back three to 10 times the return of investment over time. However, because these companies are in the developmental stages, greater risk comes into play, but as the old adage goes, "higher risk, higher reward".

Sarepta (SRPT)

Sarepta focuses on the discovery and development of RNA-based therapeutics for the treatment of rare and infectious diseases. Its lead product candidate is eteplirsen, an antisense PMO-based therapeutic, which is in Phase IIb clinical development for the treatment of individuals with Duchenne muscular dystrophy (DMD).

DMD is a very rare disease that affects 1 in 3,600 boys—a potential cure for any form of MD would be on par with Jonas Salk's discovery of the polio vaccine in my strong opinion. DMD is classified as a recessive X-linked form of muscular dystrophy, and the disorder is caused by a mutation in the dystrophin gene.

Dystrophin is a rod-shaped cytoplasmic protein, and a vital part of a protein complex that connects the cytoskeleton of a muscle fiber to the surrounding extracellular matrix through the cell membrane. This complex is variously known as the costamere or the dystrophin-associated protein complex. Many muscle proteins such as α-dystrobrevin, syncoilin, synemin, sarcoglycan, dystroglycan, and sarcospan colocalize with dystrophin at the costamere.

Dystrophin deficiency has been definitively established as one of the root causes of the general class of myopathies collectively referred to as muscular dystrophy. The large cytosolic protein was first identified in 1987 by Louis M. Kunkel, after the 1986 discovery of the mutated gene that causes DMD.

Some analysts have put a $50 price target (which is too low in our opinion) on Sarepta, and on potential approval next year, it's my opinion the stock will surpass $75, at least temporarily, so traders and investors might consider selling any large gap, as it's likely the stock will likely settle back down to the mid to low $50 range. Remember, should the FDA approve, a lot of investors and traders will be realizing massive profit, and are likely to take that profit. In turn, I would expect short sellers to take advantage of this and sell the gap as well.

The company plans to meet with the FDA soon to discuss the path forward to an NDA filing for eteplirsen, which is likely by January of 2014. However, it's possible an NDA filing could come earlier, based on the 96-week data.

Sarepta is a very volatile stock, so it might be a good idea to consider hedging any long position by considering buying puts.

Halozyme (HALO)

Halozyme engages in the research, development, and commercialization of human enzymes. Its research focuses on human enzymes that transiently modify tissue under the skin to facilitate the delivery of injected drugs and fluids, or to alter abnormal tissue structures for clinical benefit. The company’s products are based on the Enhanze technology, a patented human recombinant hyaluronidase enzyme that enables the subcutaneous delivery of injectable biologics such as monoclonal antibodies and other therapeutic molecules.

Halozyme's platform uses hyaluronidase, a naturally occurring human enzyme. It is released by the acrosome of the sperm cell to aid in penetrating the outer wall of the ovum, allowing fertilization. While animal forms of this enzyme have been used for decades, it was not until Halozyme began producing human recombinant hyaluronidase, or rhupH20, that the pure enzyme has been applied to multiple clinical targets, mostly via the subcutaneous space.

Pegylation is simply the addition of a polyethylene glycol moiety to any therapeutic molecule. In the case of rhupH20, that addition creates PEGPH20. The aim of this process is to enhance the delivery of the enzyme as an IV medication. Given as an enhancing agent with intravenous chemotherapy, PEGPH20 could reach a tumor and alter its environment in a unique and targeted two-pronged approach.

PEGPH20 works by improving the blood flow to the tumor. It does this by removing hyaluron from the body of the tumor, physically debulking it. Since hyaluron is highly hydrophilic, its removal also removes water from the tumor, thereby decreasing the interstitial pressure surrounding the arterioles being used to deliver chemotherapy to the tumor. This reduction allows the arterioles to expand and more effectively deliver the treatment. Since pancreatic cancer is a high hyaluron-producing tumor, Halozyme chose this form of cancerous tumor to test the effectiveness of PEGPH20. Other types of malignancies that have high hyaluron content include bladder, ovarian, and some forms of breast cancer. Of great interest is that high levels of hyaluron are found more in metastatic than in primary lesions. As a component of the extracellular matrix, it promotes spread by acting as a scaffold for tumor migration. So, by removing hyaluron, PEGPH20 should allow for more intense chemotherapy and reduces one means of tumor spread.

Halozyme has initiated a Phase II multicenter, randomized clinical trial evaluating PEGPH20 in combination with nab-paclitaxel and gemcitabine to confirm the combination treatment effect (ORR, PFS, and OS) based on HA levels. The study plans to enroll approximately 124 patients with stage IV pancreatic ductal adenocarcinoma. Halozyme is also developing an HA diagnostic tool to be used in this study to evaluate the potential treatment benefit based on tumor HA levels at baseline. This diagnostic approach may enable additional PEGPH20 combination clinical studies in other HA-rich tumor types.

We should see some data in a few months from this study. If successful, PEGPH20 could be a lifesaver for those suffering from hard to treat cancers—especially pancreatic cancer. Halozyme owns 100% of this technology and plans to "go it alone" with this treatment.

The company also has two near-term catalysts approaching; the first one expected is an update from its partner Baxter International (BAX) which plans to announce an update in an earnings conference call on October 17th concerning Hylenex recombinant launch details for Germany and Scandanavia, plus an FDA refiling of the drug.

The second is a much bigger catalyst when the Committee for Medicinal Products for Human Use (CHMP) convenes October 21–24 to decide whether to recommend MabThera Subcutaneous (MabTheraSC) to the European Medical Agency for approval.

The CHMP is like a European version of an FDA Advisory Committee Meeting (ADCOMM), in the sense that a recommendation or opinion is given for approval or rejection.

In June, the CHMP announced a positive opinion for Herceptin, and the stock rallied nearly $2 in one day. A similar situation could be setting up for Halo with MabTheraSC, and we feel it has yet to be valued into the stock.

Halozyme is our best small-cap long-term speculative investment pick, as we feel a stock price over $20 in the next year is likely, and potentially over $50 in the next three years or so. One biotech investor I have spoken with has indicated to me that he holds two million shares of Halozyme and agrees with our assessment of Halozyme's future prospects.

Baker Brothers also holds over six million shares of Halozyme, which is also very bullish. The Bakers are well-known throughout the market as top-notch small-cap biotech investors. They have done very well over the last year, and their record is well documented. With multiple drugs approved already, Halozyme could be net cash positive next year, and if PEGPH20 continues to show positive results, Halozyme could be touching $100 a share in five years or so. Jazz Pharma (JAZZ) was once a stock selling $3 just five years ago, and currently sells for over $84 a share, with a recent all-time high of over $93. We believe Halozyme could see similar price appreciation in time.

Acadia (ACAD)

Acadia focuses on treatments that address unmet medical needs in neurological and related central nervous system disorders. The company has a pipeline of product candidates led by pimavanserin, which is in Phase III development as a potential first-in-class treatment for Parkinson's disease psychosis (PDP).

PDP is a debilitating psychiatric disorder that occurs in up to 40% of patients with Parkinson's disease and is associated with increased caregiver burden, nursing home placement, and increased mortality. Psychotic symptoms include visual hallucinations and paranoid delusions.

According to the company's website, pimavanserin is a small molecule that can be taken orally as a tablet once-a-day. Pimavanserin selectively blocks the activity of the 5-HT2A receptor, a drug target that plays an important role in psychosis. We hold worldwide rights to pimavanserin and have established a patent portfolio, which includes numerous issued patents covering pimavanserin in the United States, Europe, and several additional countries.

The company announced in April that the FDA has agreed to allow the company to file a New Drug Application (NDA) for pimavanserin, which means that FDA approval for the drug could come as soon as mid-2015.

Acadia might have the most upside percentage wise here, but we believe it also has the most risk. Pimavanserin has already experienced two failures in Phase III trials. However, in November 2012, Acadia announced successful top-line results from its pivotal Phase III trial.

The nondopaminergic blocker of serotonin 5-HT2A receptors still has to show it works as designed in the drug. If proven successful, the company plans to submit a New Drug Application (NDA) to the FDA, which it expects to do in late 2014.

The market potential of pimavanserin is in the billions, and big pharma loves drugs with potential, which in our opinion makes Acadia a prime takeover target—after the drug proves to be successful. While all signs look good so far, to reiterate, the risk is very high here, but so is the potential reward. It's also worth noting that the Baker Brothers hold nearly 20 million shares of Acadia

Antares Pharma (ATRS)

Antares Pharma focuses on developing and commercializing self-administered parenteral pharmaceutical products and technologies. Antares received approval from the FDA yesterday for Ortrexup, a product for the delivery of methotrexate using Medi-Jet technology for the treatment of rheumatoid arthritis, polyarticular-course juvenile rheumatoid arthritis, and psoriasis.

“Ortrexup seems to be misunderstood by many biotech writers, and perhaps most by one I have a great deal of respect for,” biotech/drug stock columnist Adam Feuerstein has said.

Adam states in his most recent article on Antares:

If you believe Antares' sales pitch—the convenience of Otrexup (patients can self-inject at home) will convince doctors to increase their use of injectable methotrexate (MTX) for treating rheumatoid arthritis patients. If oral methotrexate is no longer effective, some patients might try Otrexup.

The above seems to be a misunderstanding of what Otrexup is. First off, patients currently can self-dose MTX at home, but using a "classic" needle. This causes certain issues for patients who suffer from rheumatoid arthritis (RA). Many patients with RA suffer from bent fingers and hands that causes them trouble using a classic needle, making it harder to self-dose. Otrexup makes it much easier, as it is designed to do so. Also, Adam is mistaken about oral MTX in that Otrexup is not designed to replace oral MTX, but supplement it. Many patients need a much higher dose of MTX to gain an effective level of treatment. Too much oral MTX can be very toxic on the stomach and liver. Since Otrexup is subcutaneous (injected), this bypasses the liver and stomach, allowing for more of the drug to enter the system, while being safer at higher doses.

Biologics are used in conjunction with lower dose levels of oral MTX in order to achieve the desired effective results. However, biologics are very expensive—this is why Antares considers Otrexup a "prebiologic."

Adam feels insurance companies will not support Otrexup, but I feel otherwise, because it will be more cost effective. Doctors can now prescribe the easier to use Otrexup product, along with oral MTX to reach an effective dose to treat patients with RA, at a fraction of the cost of a combo oral MTX and biologic, notwithstanding that some patients will no longer need to receive an injected dose at the doctor's office, which should help with patient backlog.

Adam goes on to state:

Don't expect Otrexup sales to roar out of the starting gate. This is a me-too drug, perhaps a bit more convenient. Rheumatologists and insurance companies aren't likely to embrace Otrexup.

I do tend to agree that the drug will not "roar out of the gate," but once doctors fully understand what I explained above, I do expect the device to do very well, perhaps reaching peak sales of $200 million if marketed correctly. Otrexup, for the reasons I mention is not a "me-too" device, but rather a "hey, I'm easier to use than a standard needle for both patients and care givers, plus I'm biodegradable, so I'm easier on the environment."

Antares is also developing Vibex QST, a quick shot testosterone self-injector. Vibex-QST is designed to offer a once-a-week subcutaneous injection solution for those suffering from low testosterone (Low-T). Antares is seeking to prove in clinical trials that Vibex-QST will offer better efficacy and cost effectiveness in comparison to Low-T gel solutions, which are applied on a daily basis. If Antares is successful with Vibex-QST, this product can be a monetary "blockbuster" for the company within five years.

Additionally, as brought to my attention by long-time Antares investor, "lokodude" (Lokodaug on Yahoo boards) the company holds patents to, and is developing the following products:

  • Ovaleap pen (Follitropin alfa)—Pat # 8376993 - "Multiple Dosage injector"
  • Valebo (Teriparatide)—Pat # 8376993 - "Multiple Dosage injector"
  • Lonquex (Lipegfilgrastim)—US 20130018354 - "Cammed ram Assembly" injector
  • Alazmia-Balugrastim—US 20130018354 - "Cammed ram Assembly" injector
  • Granix (tbo-filgrastim)—US 20130018354 -"Cammed ram Assembly" injector

In addition to these patents, Antares has a patent for scopolamine, which is a tropane alkaloid drug with muscarinic antagonist effects. In other words, the drug is designed to potentially treat depression.

While it's too early to say what Antares will do specifically with its scopolamine patent, it will be interesting to watch how the company proceeds in time. We believe that Antares is a safer long-term investment, which could also be acquired in the short term due to its connection with Pfizer (PFE).

AcelRx (ACRX)

AcelRx is focused on the development and commercialization of innovative therapies for the treatment of acute and breakthrough pain. Its lead product, ARX-01 (Zalviso), is designed to address intravenous (IV) PCA problems, which can cause harm following surgery. This includes side effects of the invasive IV route for morphine delivery and inherent potential programming and delivery errors associated with the complexity of infusion pumps.

The post-operative pain market in the United States, Europe, and Japan has been growing steadily over the last few years and is expected to reach $6.5 billion by 2018. Acelrx' NanoTab® tech could potentially grab a significant piece of this market.

ARX-01 has the potential to address many of the key disadvantages of IV PCA, which also include:

  • Reducing the incidence of drug-related side effects,
  • Eliminating the risk of IV PCA-related infections, reducing analgesic gaps and enhancing mobility, and
  • Eliminating the risk of pump programming errors.

Three Phase III trials have been completed rendering positive results. Top-line data from the final pivotal trial treating pain after knee or hip surgery was released in May.

Phase III data was impressive in several ways. Patients experienced better, longer lasting, and more complete pain relief after orthopedic surgery. Additionally, nurses reported that it was much easier to use the NanoTab system. Traditional IV PCA is known for its confusing administering program, and patient deaths have even resulted in a small percentage of cases.

According to PropThink's December 2012 article, the post-operative pain market is a multi-billion dollar opportunity, and we agree. With a current market cap of $343.69 million, we strongly feel AcelRx is very undervalued here and makes for a nice entry point for both a short-term trade and a longer-term speculation investment.

Conclusion

Our best overall pick is Halozyme, because of its mainly de-risked status, royalty revenue stream from potential billion dollar products, and its 100% proprietary ownership of PEGPH20, which could end up being a huge blockbuster solution for hard-to-treat cancers such as pancreatic cancer.

Our safest pick is Antares Pharma, as we feel it's a good bet the company can become a full-fledged pharma within five years, and because the company deals mostly in medical devices rather than experimental drugs. We think of Antares as a potential Boston Scientific (BSX) in the making.

Our riskiest pick is Acadia, because there is a chance its latest Phase III could fail. Although we feel this chance is small, a failure with pimavanserin would devastate the stock price, but success could mean a four-bagger or more from its current price level.

Sarepta is our "breakthrough" pick as any treatment that can help young boys live a more normal life with DMD is a potential Nobel Prize winner. Sarepta has the best chance to literally change the lives of many young boys who suffer from this disease for the better. We think any company with this potential is worth a serious look from investors and especially philanthropist investors.