Sample Alert 2

Biotech Insight Alert 5/31/2017

Biotech has been beaten down as money has rotated out of the small-cap biotech sector. There are a number of reasons for this mostly political with probable pricing pressure and now a Supreme Court decision that could impact pricing if products are allowed to be re-imported. I think both of these factors have exaggerated the decline. My feeling is that truly differentiated products will be able to maintain a premium price structure.

I will mention a few things I have done recently in regards to ASCO.

PUMA (PBYI)

Risky but I played PBYI for a big fall by buying puts when the underlying was at the $79 level—safer than just going short the stock (I wrote this portion on 5/30 and the stock is down more today).

This company’s main drug, neratinib, just got a favorable vote from the FDA panel. The drug is slated to be used in the adjuvant setting in Her2+ breast cancer after the SOC which includes one year of Herceptin. This would extend adjuvant therapy by 2 more years with a small increase in absolute PFS and the price is pretty bad diarrhea (although the company has mitigation protocols in place). I just don’t see oncologists using this much in the adjuvant setting and I don’t see women wanting to put up with another two years of diarrhea.

The stock ran up after the favorable vote by the FDA panel—it came down some on Monday as all biotechs fell. On June 5th Roche/Genentech will present the results of the APHINITY trial –a large adjuvant trial again in Her2+ breast cancer. This trial adds Perjeta to the SOC regimen (so one year of Herceptin and Perjeta together after chemotherapy). We already know the trial was statistically significant but the company is holding full data for ASCO. My bet is that this will show a PFS at 3 years of 93-94% or better thus establishing a new SOC. If that happens no one will use neratinib (unless there is some substantial differential in efficacy in patients who are both Her2 and ER (estrogen receptor) positive in favor of neratinib.

So what did I do? I made a trade late last week. I was too chicken to short PBYI—can always be surprised by biotech. However, I did buy some June 70 puts for about $4/share (I can’t remember exactly the price)–so in the money if the PBYI drops below $66. My thesis is that if APHINITY is a very positive trial Puma tanks. It is also conceivable the FDA will recognize this to be the SOC and make PBYI run a trial adding to neratinib after the year of combined Her2 antibodies.

Cascadian (CASC)

How does the above thesis play out with CASC? I have always thought that Cascadian has a better drug than Puma –both have oral small molecule Her2 antagonists. However, CASC’s drug has a much better side-effect profile—much less diarrhea and may have better CNS penetration—that remains to be proven. CASC has the benefit of starting their trials with current SOC drugs but the flip side is that they are later to the table and are going for late stage disease. If I had to bet I am placing my money on CASC but we will all have to wait. If FDA looks at the evolving standard of care as may be modified by the APHINITY trial that could be a boost for CASC because it may be that neratinib doesn’t get approved in the adjuvant setting. On the other-hand the success of APHINITY may mean less patients for Cascadian to treat. I remain long CASC.

Bluebird (BLUE)

I own some Blue but recently sold the July $60 puts—doubt it will get down to that level so will keep some premium but I wouldn’t mind owning it at $60 either.

I like the science and the truly transformational technology—this company will eventually take gene therapy into the mainstream.

BLUE will report on more patients (originally reported on n=9) in the multiple myeloma (MM) trial with dose-escalation data, response data and more information on durability from the original cohort. They use a CAR-T technology targeting BCMA, an antigen on plasma cells. So far even with all the great new drugs we rarly cure MM and everyone eventually fails. The latest and greatest MM drug is daratumumab (dara) but in the type of patients that BLUE is treating CR rates even with dara are dismal (around 4%). What particularly impressed me with the original data was the lack of any neurotoxicity issues and no grade 3 cytokine release syndromes—my guess is the better safety profile may have to do with manufacturing issues. In any event the data will inform a registrational trial. Reading between the lines of the last hosted presentation it would appear that the new update won’t reveal any new toxicities and I am betting we see some durability in responses. Other CAR-T companies (Kite, Juno, Novartis) also have BCMA programs but BLUE seems in the lead and has the backing of the pre-eminent myeloma company, Celgene. Also, data from University of Pennsylvania with their BCMA program showed some severe neurotoxicity in 2/9 patients and severe cytokine release syndrome in 3/9 patients.

Later in June we will see the first data from thalassemia patients using the new transduction method—I’ll be not only looking at transfusion independence, hemoglobin levels but also vector copy number, and % of cells expressing the new beta-globin gene. Patients with the beta zero, zero genotype which are the most difficult to treat won’t be presented in June but at ASH in December. Also at that meeting we can expect to see some early sickle results using the new transduction technology and a new transplant regimen. If this technology pans out, which I think it will, it’s a game changer. Other treatments only mitigate some of the symptoms and require life-long therapy. Investors have questioned whether gene editing technologies could supplant gene transplant therapy—I don’t see it happening. The gating factor is the number of stem cells either transduced or edited (there are issues with both technologies that are too complicated to go into here but my money is on BLUE).

I remain long BLUE and would be a buyer at the current level.

Immunogen (IMGN)

I think the stock keeps trending up. The company is collecting money so they may avoid dilution in completing the FORWARD study in ovarian cancer. They must have a good feeling to place this bet. We will see data on about 36 patients at ASCO that mirror the type of patients eligible for the FORWARD study—this should give us some indication of efficacy and durability. I have a big legacy position in IMGN at about $6/share.

Flexion (FLXN)

FLXN has tanked since my last alert. I thought it was a good buy around $20 and I bought more for my personal account at that level. So, what is wrong? I think some of it was the sell-off in biotech in general. There was also an article in a recent JAMA edition that basically showed in a 140-patient trial that intra-articular fast acting steroid injections were no better than placebo at pain control and that after 2 years of repeat injections there was some cartilage loss by MRI. The problem with comparing this trial to Zilretta is that the effect of short acting steroids wear off by 3 months when pain scores were measured—so I wouldn’t expect any difference. However, the Zilretta trial clearly showed a difference in pain control at multiple time points. The problem of cartilage loss remains an issue that hasn’t been explored by FLXN—in the current repeat dosing study the protocol calls for an x-ray at the beginning and end of study (52 weeks). A plain x-ray would be inadequate to show a small loss of cartilage.
I believe Zilretta gets approved and used widely in orthopedic practices.
My main concern is whether the FDA raises CMC issues—I don’t believe the manufacturing plant has been inspected yet (at least no comment to that effect from management). We will see data from patients with diabetes at the ADA meeting in June 11th. The repeat dosing study should read-out early 2nd half of ’18. I did talk with management and they claim there is no problem with the manufacturing plant (company) being acquired.

Esperion (ESPR)

Nothing has changed with this company—please see the alert archive for full information from my last note. I think the possibilities are huge and the FDA giving clearance for approval using a surrogate marker (LDL level) is a huge de-risking event. Now the main worry is that some toxicity issue will turn up as more patients go over a year on therapy. I remain long ESPR.

Array (ARRY)

This company should be trading a lot higher. They have hit many highpoints especially the 2 recently announced combination trials with the biggest immuno-oncology players Merck and Bristol. MEK inhibitors may very well be one of the many combinations that potentiate PD1 blockade and ARRY has the most advanced MEK inhibitor that doesn’t belong to a major pharma (the two approved MEK inhibitors belong to Novartis and Roche). Again, the real money will be in treating colorectal cancer (CRC) with BRAF mutations—the trial is ongoing. After that an even bigger win would be if the combo PD1 inhibitor/MEK inhibitor works in non-BRAF mutated CRC—these trials are out in the distant future. We will see full Columbus 2 data shortly and I fully expect the combination to be approved in melanoma.

I am not sure why this company is so undervalued except that their two main drugs are follow-ons to two already approved combinations. However, Array’s combination looks superior—it will just take time to prove it. Also, the pipeline is under-appreciated. Shortly we will get the first indication if the CSFR1 target is valid—Five Prime will have results with their antibody. If successful it will be positive for Array—they are testing a small molecule inhibitor for the same target.

I remain long Array but one certainly could have done much better selling at $13 and re-entering now—oh if we could just time the market.

Portola (PLTA)

Nothing has changed—please search the alert archive for more information.

MEI Pharma (MEIP)

Good news on the PI3K delta kinase inhibitor (ME-401) in CLL—so far good efficacy at the minimum dose with no toxicity. Only 6 patients but enough to know the drug works—it is toxicity that can potentially differentiate this drug from other inhibitors of the target. More data to follow.
We will also see some genomic data from the Phase II AML trial at ASCO. This was the reason I originally invested but Helsinn has been very slow getting the Phase III up and running—presumably they have been very thorough. The coming approval of IDH inhibitors may change the landscape some.

I remain long MEIP. Please search the archives for more information.

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