News Column

Biotech Investors Need to Focus on Catalysts

June 11, 2014

The Life Sciences Report

When progress is made in drug development, value is created. Investors recognize that progress by purchasing shares in companies when milestones--which act as catalysts--are met. The Maxim Group's Senior Managing Director and Head of Healthcare Jason Kolbert lives by catalysts, and urges his investor clientele to understand there is no other reason to buy a stock except in anticipation of new information that creates value. In this interview with The Life Sciences Report, Kolbert discusses six names that have immense regenerative power for portfolios.

The Life Sciences Report: You follow some mid- and large-cap biotechs, in addition to small ones. Why did biotech shares pull back so severely starting in March?

Jason Kolbert: We had a tremendous rally in biotechnology in January and February, and then the bubble burst. Some of that is evidenced in the diatribe directed at Gilead Sciences Inc. ($GILD). Gilead is a large-cap leader in the world of biotechnology, and there was a lot of negative publicity directed at the company focused on the pricing of Sovaldi (sofosbuvir), its innovative therapy for hepatitis C. That seemed to be the straw that broke the biotech bubble. Gilead actually pulled back very sharply, to the low $70s per share.

Then the company reported Q1/14 earnings. Not only were the earnings good, but the Sovaldi numbers were the best we've ever seen for a new drug launch in the history of pharmaceuticals. The company reported total sales of $5 billion ($5B) for Q1/14, but total antiviral product sales increased to $4.51B, which is up from $2.06B in Q1/13. That dramatic increase was due mostly to sales of Sovaldi, which launched in December 2013.

Here we have a large-cap biotech company that is knocking the cover off the ball in terms of a product launch--in revenue, size and scope. In hindsight, what a great buying opportunity we had, because right now Gilead is trading at about $81/share.

But back to your question. Why did biotech pull back? What was the underlying reason? It wasn't pricing on Sovaldi: That was just the trigger. I think it has to do with the rate of growth in the sector. Over the past couple of years, people have been very concerned about economic growth. One of the places an investor could reach for growth was in biotech. When we have economic recovery, the need to reach out for growth is less. The reality is that, in a recovering economic cycle, we have dollar rotation out of high-growth, high-risk sectors like biotechnology into lower-risk, lower-growth companies that tend to do better in an economic recovery.

TLSR: What does that mean going forward? What are institutional investors telling you now about their plans? Will they continue to invest in biotech?

JK: We know that toward the end of the biotech bubble we had generalists building their exposure to the biotech sector. Generalists are the last ones in, and they're the first ones out, because biotech is relatively complicated, and investors need to understand the science to understand the probabilities of success. It's not just about chasing momentum. Portfolio managers who are generalists are telling me they're done with biotech for a while, but the biotech-specific funds see the hiccup as just that, a hiccup, and their bullish viewpoint overall hasn't changed.

People are a little bit more cautious as to what they invest in. They want to make sure that the fundamentals are good and that catalysts will occur within the timeframe that they're seeking for performance. I think that you will still see initial public offerings over the coming year, but they will be at lower valuations.

On balance, we remain very positive on the biotech sector. We think the worst part of the correction is over, and as we head into the summer, we look toward what might be the next major catalyst in the space, the results of the Vertex Pharmaceuticals Inc. ($VRTX) trials in cystic fibrosis (CF). If we were to get good data from those trials, that could spark something we rarely see, which is a summer biotech rally.

TLSR: With the generalists out, do you see the biotech market as being less volatile?

JK: I don't think anyone who's a seasoned, experienced analyst in biotech will ever say they see the sector as less volatile. Biotech will always be volatile because it's driven by a lot of binary events. Investing in biotech is about managing that volatility. As we go up in terms of market cap, we think the volatility goes down. Even so, remember that Gilead stock virtually doubled over the last year. There has been volatility both to the upside, as well as to the downside, but ultimately the fundamentals exert themselves.

TLSR: Since the generalists have gone to dividend-producing stocks, and the specialists are still bullish on biotech, does this imply that investors need to be more selective now in their biotech stock choices?

JK: I love your question because everyone always says, "Well, you know, it's a stock picker's market." When is that ever not true?

Clearly, in a bull market, everybody looks like a genius and everybody's right. But for me as an analyst, it's all about the mathematics of modeling and the probabilities of success. It's a stock picker's market no matter what the cycle. At the end of the day, whether you're a buyside analyst, a sellside analyst or sector specialist, your burden is always to be picking stocks. Fundamental analysis is what creates edge for biotechnology investors--being able to adjudicate the probabilities of success of any given therapeutic in development.

TLSR: Do investors have to be more solidly focused on catalysts now?

JK: No. I'm going to answer that question like I did the previous, which is to say that biotech analysts and investors should always focus on catalysts. You never have the luxury of not being focused on catalysts. The same emphasis remains in force. The reason investors should be looking at biotech companies is precisely because there are so many events in the space, and their ability to handicap those events is how they make money.

TLSR: Let me go to stem cells and regenerative medicine. You know the space as well as, or better, than anyone. I'm looking at a long list of stem cell and regenerative medicine companies, and comparing their market caps, which range from micro caps valued at less than $1 million ($1M) to Mesoblast Ltd. (MSB:ASE)($MBLTY), with a current market cap of about $1.5B. Only two names-- Pluristem Therapeutics Inc. ($PSTI) and Neuralstem Inc. ($CUR)--have $200-350M market valuations, and the vast majority are under $200M, with a bunch under $100M. Why such low valuations? Have disease indications been too tough, like lysosomal storage diseases, advanced neurodegenerative disease, stroke and refractory ulcerative colitis, where we just witnessed a failure? We know, from preclinical proof-of-concept studies, that there is going to be a place for cell therapies. How do you see the underperformance in this space?

JK: Good questions, and a nice overview of the space. If we look at Athersys Inc.'s ($ATHX) results in ulcerative colitis, which you just referenced, this trial was run by Pfizer Inc. ($PFE) over the last five years. The thinking five years ago was to give a massive dose of these allogeneic (donated from same species but not from the patient him- or herself) multipotent adult progenitor cells, which Athersys has branded as MultiStem, and see if they would quiet the immune system and manifest as an improvement in the symptoms related to ulcerative colitis. In hindsight, this was an incredibly high watermark to hit. But did the trial fail, or did the product fail? That's the key question. I believe that the trial failed, not the product.

TSLR: Tell me what you mean about the trial failing, and not the product.

JK: It may have been naÏve to think that people who have had a disease burden for 10 years could be successfully treated with just one dose of cells. You wouldn't try to test a biologic that way. You wouldn't try to use a steroid that way. Why did we use stem cells that way?

We're going to see results of a Phase 3 trial in a related indication, Crohn's disease, from the original Osiris Therapeutics Inc. ($OSIR) trial with Prochymal (allogeneic adult human mesenchymal stem cells; [remestemcel-L]), now being run by Mesoblast. Mesoblast acquired rights to Prochymal back in October 2013. What if the results of this Phase 3 trial in Crohn's disease are good? I view Athersys' MultiStem and Mesoblast's Prochymal as more similar than dissimilar. If those data are good, and if I'm Pfizer, then I'm thinking I ran the wrong trial. Maybe I should have run additional dosing. Maybe I should have enrolled patients with slightly different entry criteria.

If the Mesoblast trial data are positive, I would conclude that the failure was not MultiStem, but rather the trial design. Is that any different than the experiences we've had with monoclonal antibodies, or with even small molecules? The answer is no. Remember that Avastin (bevacizumab; Genentech/Roche Holding AG [$RHHBY]) had failed multiple trials and was not looking like a very good drug, but is now a multibillion-dollar oncology-based therapeutic. Are the disease indications too tough, you asked? No, I don't think the disease indications are too tough.

TLSR: The failure of the ulcerative colitis trial was reported after an eight-week look at the data. Now we're awaiting the 16-week data, which nobody expects will be improved. What is your growth theory for Athersys?

JK: I think the stock is a very compelling value. MultiStem didn't fail; the clinical trial failed. It's that simple. If NeoStem Inc. ($NBS) has good autologous data in its Phase 2b trial in ST-segment elevation acute myocardial infarction (STEMI), that's very positive for Athersys, which is also pursuing myocardial infarction. If Mesoblast has robust data from its congestive heart failure (CHF) trial or orthopedic degenerative disk disease trial, or if Pluristem shows great data as it embarks on its preeclampsia trial, that bodes very well for Athersys. Athersys has a robust cell.

Stroke is the next indication and catalyst for Athersys. Enrollment in this Phase 2 trial should be complete by summer, and we are set to see data in the fall. Stroke is a completely unmet medical need. The reason most therapies for stroke have failed over the last few years is because the goal was to treat patients within the golden window, the first few hours after the stroke. That's not what Athersys is doing. It is looking to patients in the 24- to 72-hour post-stroke period. It is looking to shut down the inflammatory response that exacerbates the initial ischemic insult. If it is successful, and patients end up with better recoveries, then we have a new therapy that pretty much every stroke patient is going to get. If that turns out to be true, Athersys ends up being very exciting. This, in hindsight, will have been a great buying opportunity.

TLSR: What are some of the next events in the stem cell space that could get investors' attention?

JK: I think the next event will involve an acute intervention with an autologous (cells or tissue donated by the same patient) cell therapy. It's going to be NeoStem with its AMR-001 (autologous bone marrow-derived CD34+ /CXCR4+ enriched cells) in STEMI. I believe that NeoStem's Phase 2b PreSERVE AMI trial is well designed and well run. The company has hired some of the top talent in the industry to develop its technology.

If this trial has a good result, it's very positive for the industry. But I worry about NeoStem's business model, which is based on autologous cells, not off-the-shelf allogeneic cells. I believe that if allogeneic cells work equivalently to autologous cells, allogeneic wins, though there are some exceptions to that rule.

But the trial design is smart. There is more chance for success with STEMI, because you're not dealing with CHF, a more difficult disease indication that's built up over a period of a decade.

TLSR: Speaking of CHF, Mesoblast is doing a large Phase 3 study with Revascor (mesenchymal precursor cells) in that indication. Give me your thoughts on this study.

JK: For a disease like CHF, you may need multiple doses of cell therapy to change the outcome. So I can understand why Mesoblast's partner, Teva Pharmaceutical Industries Ltd. ($TEVA), is apprehensive about moving forward with Revascor in this global, 1,700-person clinical trial. However, Teva is contractually bound to complete the trial. Even though Teva talks about the first interim analysis as a potential stopping point, the reality is that the clinical hurdles are so low at that first interim analysis that it is not likely to qualify as a stopping point.

I am more excited when I look at cell therapy's potential as an intervention in an acute setting, which is where a single dose could have a dramatic impact on a patient's health, whether it's a STEMI or a stroke, versus multiple doses for a chronic disease state, like CHF or ulcerative colitis. Mountains of data suggest this stuff works, but proving that clinically, with statistical significance of robust efficacy in a large pivotal trial, is critical.

TLSR: Jason, I note that you follow Cesca Therapeutics Inc. ($KOOL). Could you give me background on this one?

JK: Cesca is the result of the merger of Thermogenesis Corp., a device company, with a well-designed, well-built contract research organization (CRO) called TotipotentRX Corp., which operates in India. This name is a pure device-type play.

Cesca Therapeutics processes point-of-care bone marrow. It doesn't add anything. That is significant. It is different than a company like Cytori Therapeutics Inc. ($CYTX), which adds an enzyme to digest adipose tissue to produce its adipose-derived stem and regenerative cells (ADRCs). By doing that, Cytori loses the qualification of non-manipulated tissues, although the cells are minimally manipulated.

The Cesca product meets the strictest definitions of minimally manipulated. It is processed on-site with a device; nothing external is added to the product. It has a very low cost of goods, and could be as cheap, if not cheaper, than allogeneic, off-the-shelf cells. In fact, Cesca's technology could be an Achilles heel for the entire industry. What's neat is the likelihood that, with one clinical trial, modestly powered for efficacy in a disease indication like critical limb ischemia (CLI), Cesca could become the first company with an approved product to market in that area. Cesca is looking at multiple opportunities beyond CLI.

Cytori is running much more along the lines of a biologics license application, where Cesca is running along the lines of a premarket approval for a true device pathway. On the other side of the spectrum, we have a company like Mesoblast that, with partner Teva, is going to run a definitive trial in CHF with 1,700 patients, powering its product as a true biologic. And we are really only talking about the regenerative side of the cell therapy space, because the other side has to do with cancer and immunology--companies like Dendreon Corp. ($DNDN) and ImmunoCellular Therapeutics Ltd. ($IMUC).

TLSR: You say Cesca's technology could be the Achilles heel of the stem cell industry. Would you elaborate on that?

JK: If Cesca can demonstrate point-of-care processing of a small amount of bone marrow at a cost of goods of just a few hundred dollars, do you need an asset that's 4, 5, 10 or 20 times more expensive? We project the manufacturing cost of the NeoStem therapy at between $10-15,000 per unit. If the manufacturing cost of the Cesca product is a few hundred dollars per unit, then even if NeoStem has good data, could it compete?

With those economics and speed to marketplace, Cesca could surprise everybody and get a therapy to the marketplace years ahead of Mesoblast. It sounds crazy, but the reality, as we understand the device pathway, is that it could happen.

At the end of the day, we believe cell therapy works, and I don't know that we need to have an enriched sample of CD34+ cells, which is NeoStem's autologous cell model. I don't know that we even need to have an expanded allogeneic product. If an inexpensive processed autologous bone marrow aspirate will work, then it will work. Having the tools and the equipment present on-site to provide the therapy is something that I think the medical community would rapidly adopt. That's what I mean when I say that Cesca represents a potential Achilles heel in the industry.

TLSR: There was a Cesca Phase 1/2 trial in CLI, where the primary endpoint was to prevent limb amputation. The final data from this trial were to be collected in September 2013. The idea was to use the Cesca technology to process marrow cells and inject them intramuscularly into the region of the disease. Do I have that right?

JK: Cesca's technology produces a processed bone-marrow aspirate from a small sample--just 50 ccs--that results in a heterogeneous mix of stem cells. Then those stem cells are injected intramuscularly to promote revascularization and restore circulation to a limb. If left untreated, these patients face amputations.

The company did a proof-of-concept study with 17 patients, all of whom had no other options and were 24 hours away from leg amputation. This study saw an approximate 90% improvement in the gangrene sores, and reported an amputation-free rate, post-survival, of 85%. Those numbers are amazing. The question is, can Cesca replicate that data in a larger study? If it can, then Cesca will come onto the radar screens of every portfolio manager.

What investors have to understand is that because Cesca is going through the device pathway, it could run one modestly powered trial, demonstrate efficacy, use its Indian CRO to control costs and get patient numbers enrolled, and surprise everybody with data. Cesca could accomplish what Aastrom Biosciences Inc. ($ASTM) failed to do with ixmyelocel-T (expanded populations of monocytes, macrophages and mesenchymal stromal cells), which was to run/execute its Phase 3 REVIVE trial in CLI. Aastrom shut that program down in March 2013.

TLSR: Jason, you're talking about a lot of potential, but this company is just a micro cap.

JK: The irony is that Cesca is very small, with a $55M market cap and a modest cash balance. But this is a new mission for the company. For the last 10 years Cesca was an equipment manufacturer and never really hit critical mass. The epiphany that management had was that it needed to become a therapeutic company. By picking up a CRO in its merger with TotipotentRX, and focusing on the development of data in the clinical trial process, the company is going to reemerge as a therapeutic player focused on multiple new indications.

TLSR: What is the next catalyst for Cesca?

JK: I think that 2015 will be transformational, as Cesca gets ready to show us top-line data and potentially approval toward late 2015 or 2016.

TLSR: You have a $7 price target on Cesca, which would be an outstanding implied return for investors. Is that a one-year target price?

JK: Yes. The target is based on this company being in clinical trials and in a position to report proof-of-concept data in any of its multiple indications: critical limb ischemia, myocardial infarction, nonunion fractures and bone marrow transplantation.

What we do is estimate the potential revenues associated with those indications. Then we use a maximum risk reduction rate of 30%, and calculate a net present value. Those calculations triangulate back to $7/share. We assume these products can potentially start generating revenues by 2017. This company already has a $15-20M revenue rate from sales of its devices. The revenues associated with those devices help reduce the company's burn rate and the need to raise additional capital, although we assume that this company will be raising additional capital as well. We assume dilution in our estimates.

TLSR: You just briefly mentioned Pluristem. Could you address this company please?

JK: Pluristem is like Mesoblast and Athersys in that it has an allogeneic, or pills-in-the-bottle model, but it is different in two areas. One is that the cell source for Pluristem's PLX-PAD (full-term placenta-derived adherent stromal cells) cells is the placenta, while Mesoblast's and Athersys' cells are expanded mesenchymal cells from adult donors. With Pluristem, we have something radically different. The Athersys product and the Mesoblast product are essentially pure, or one cell type, whereas the Pluristem product is heterogeneous--multiple cell types as expanded from the placental environment. It's a different flavor among the allogeneic players.

Pluristem has signed a deal with CHA Bio & Diostech in South Korea, and is evaluating these cells in CLI. It also has a deal with United Therapeutics Corp. ($UTHR), where it is looking at pulmonary arterial hypertension. It is also about to embark on a U.S. clinical trial that will focus on preeclampsia, or the hypertension that occurs in pregnant women. Right now, preeclampsia is an unmet medical need, and the only treatment is the delivery of the child. It is a very exciting indication, and Pluristem has the potential to completely change how we treat this insidious disease.

TLSR: There is another player in this placenta-derived cell market, Celgene Cellular Therapeutics (a unit of Celgene Corp. [$CELG]). Do you have any knowledge of how these technology platforms are differentiated?

JK: I really don't know. Celgene, unlike the micro-cap biotech companies, doesn't talk a great deal about what it's working on and what the doses are. We believe that Celgene pulls its cells from a slightly different place in the placenta. I do know that, in the case of Pluristem, its cells are pulled from the decidua--the maternal side of the placenta--but I don't know if that's true with Celgene. We know that Celgene is working on Crohn's disease. If Celgene were to announce data, again, that would be positive for everyone in the industry, because it would suggest that other companies' products work as well.

TLSR: Would you mind addressing Omeros Corp. ($OMER)?

JK: I really like following Omeros. It is a specialty pharma coupled with a true biotech company, and is working on a couple of exciting products. Dr. Greg Demopulos, the CEO, is an orthopedic surgeon--he's brilliant.

Omeros has just received approval of Omidria (OMS302; phenylephrine + ketorolac), which was developed for intraocular lens (IOL) replacement. We think Omidria can be reasonably successful. It allows the ophthalmic surgeon to retain both a dilated surgical field, as well as reduce the inflammation and pain associated with the surgery. It provides a convenience factor and a better outcome for what tends to be an elective procedure. There is the potential for Omidria to be a couple-hundred-million-dollar product, and to build free cash flow for the company. That would fund the development of Omeros' pipeline.

TLSR: What's the story with the pipeline?

JK: This is where Omeros gets really interesting. I'd highlight OMS721, a human monoclonal antibody that potentially addresses human atypical hemolytic uremic syndrome (aHUS), a form of thrombotic microangiopathy. We think that's a very significant indication. If OMS721 is selectively developed, it is in a position to challenge Alexion Pharmaceuticals Inc.'s ($ALXN) monoclonal antibody product, Soliris (eculizumab), which also targets aHUS. Since it was commercialized in 2007, Soliris has generated more than $400M in global sales, so we think that's an exciting prospect for Omeros. It's gearing up for Phase 2 as we speak, so we're going to be looking at Phase 2 proof-of-concept data in patients. This is the type of indication where you're not going to have to treat a lot of patients to get a good idea about whether the therapy is effective.

On another front, Omeros' phosphodiesterase 10 (PDE10) program has just entered the clinic. We note that program has tremendous potential in a host of disorders, but the most interesting might be Huntington's disease. It's still early days--these are Phase 2 programs--but if we come out of them with significant data, investors are going to have to start taking the Omeros clinical pipeline more seriously.

TLSR: Omeros' PDE10 inhibitor program has multiple indications, including cognitive disorders and schizophrenia. Why are you so positive on this Huntington's program?

JK: Because this seems to be a more selective inhibitor. There may be something dynamic related to how it's binding and its on/off time. So far, in dosing studies, we have not seen some of the traditional side effects associated with other PDE10 inhibitors, like the extrapyramidal tremors. It has the potential to be significant.

TLSR: The next catalyst and driver at Omeros would be the launch and revenue build for Omidria, correct? Are we still expecting launch in Q3/14?

JK: Yes, and we could see sales build by Q4/14. We're modeling more significant revenues to begin in Q1/15. As I said, the good news for investors is that Omidria becomes the cash engine that allows Omeros to develop its pipeline.

TLSR: Omidria is a combination of phenylephrine + ketorolac. Aren't ophthalmologists currently using these drugs in their practices during IOL replacement surgeries?

JK: Yes. We published an interview with a key opinion leader who voiced his concern: Why pay $100 for a bundled product if an ophthalmologist could coformulate this for just a few dollars? He was very skeptical. We've seen this type of reaction before. But once the product is built, the compounding pharmacy tends to go away. We believe that once the product is off-the-shelf ready, backed with clinical data, backed with a label and supplied by Omeros, it will be used. We've seen that the U.S. Food and Drug Administration (FDA) tends to shut down compounding pharmacies once there's an approved product in the marketplace.

TLSR: Jason, thank you for taking the time.

JK: Thank you.

Jason Kolbert has worked extensively in the healthcare sector as product manager for a leading pharmaceutical company, as a fund manager and as an equity analyst. Prior to joining Maxim Group, where he is managing director, Kolbert spent seven years at Susquehanna International Group, where he managed a healthcare fund and founded SIG's biotechnology team. Previously, Kolbert served as the healthcare strategist for Salomon Smith Barney. He is often quoted in the media and is a sought-out expert in the biotechnology field. Prior to beginning his Wall Street career, Kolbert served as a product manager for Schering-Plough in Osaka, Japan. He received a bachelor's degree in chemistry from State University of New York, New Paltz, and a master's degree in business administration from the University of New Haven.

Source: George S. Mack ofThe Life Sciences Report

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DISCLOSURE:

1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Pluristem Therapeutics Inc., Neuralstem Inc., Athersys Inc., Cytori Therapeutics Inc., Cesca Therapeutics Inc., Omeros Corp. and NeoStem Inc.Mesoblast Ltd. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services.

3) Jason Kolbert: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.

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