Mid-Issue Special Supplement. In This Issue. June 2015 Vol. 1 Issue 2 Special Supplement. Fellow Investor,

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1 Mid-Issue Special Supplement Fellow Investor, In our special supplement to the June issue of Biotech Gems, we are adding two new promising but speculative small cap stocks to the Shotgun Investing small cap part of the portfolio. Before we profile those two new additions, I would like to take a quick update regarding two of the existing small cap positions within our portfolio. In This Issue XOMA Corporation (XOMA)... 2 psivida Corporation (PSDV)... 4 Portfolio Standings... 7 First the good news. Synergy Pharmaceuticals (NASDAQ: SGYP) has taken off since our original recommendation at $4.90 a share. The catalyst to this rally is that one of its two main drug candidates plecanatide just completed successful Phase III trials as a treatment of patients with chronic ideopathic constipation. This triggered the first analyst activity on the stock in seven months. A five star analyst at Cantor Fitzgerald raised his price target to $14.00 a share from $8.50 a share. The same day another five star ranked analyst at Canaccord Genuity reiterated his Buy rating with a $19.00 a share price target. The analyst further noted We have consistently stated for years that we think Linzess (a competitor in this space) can be a $2 billion drug. And now with this impressive data in hand, we see no reason why plecanatide couldn t have equal magnitude in the hands of the RIGHT marketing partner. Obviously I am pleased with identifying an early winner in the portfolio but still feel like analysts that the stock still has upside. Given the amount of M&A activity in the biopharma space in 2015, don t be surprised if Synergy now finds itself a buyout target. Just remember to implement the Jensen Rules when culling some profits on this highflyer especially if it shoots higher from here. On the flip side, IntelliPharmaCeutics International Inc. (NASDAQ: IPCI) has pulled back some due to a picayune decision by the FDA around its generic version of FocalinXR. After receiving the tentative nod from the agency in November 2013, the regulator has now informed the company that it needs to demonstrate bioequivalence of the 40 mg strength with Focalin XR under its new bioequivalence criteria. This only impacts certain dosages of the drug and I expect the firm to quickly and diligently address and rectify this issue. Okay, with that quick update let s move on to highlighting our two new ideas for the portfolio. Bret Jensen Editor Bret Jensen s Biotech Gems 1

2 XOMA Corporation Our first stock for this special supplementary edition of Biotech Gems is a small concern called XOMA Corporation (NASDAQ: XOMA). The company has several potential upcoming catalysts upcoming and just got a huge price target put on the stock from an analyst that has been very positive early on several of my big winners in the past. It is a high risk/high reward play that also seems to be showing some technical strength recently as well. The company recently received Orphan Drug status from the FDA on one of its key products and its lead drug candidate is being tested for many indications or the shots on goal I like in this space. For more on XOMA, please read on. Company Overview: XOMA Corporation is a late-stage biotechnology company with expertise in allosteric modulation and a diverse portfolio of innovative therapeutic monoclonal antibodies. The stock currently has a market capitalization of approximately $500 million at current levels. The stock has spent most of 2015 in a relatively narrow trading range for an equity from a high beta sector of the market. However, the shares have shown some recent strength and could be poised for some sort of breakup from their previous range. the global market. The companies are conducting a global Phase 3 study in people with Behçet s disease uveitis and non-infectious uveitis. Important Trial: The Phase 3 study called EYEGUARD-B is evaluating gevokizumab for the treatment of Behçet s disease uveitis (BDU). Phase 3 EYEGUARD-A and EYEGUARD-C trials, from which we may see results later this year, are evaluating gevokizumab for the treatment of noninfectious uveitis (NIU). Uveitis refers to an inflammation in the uvea, the pigmented part of the eye. Inflammations (aka exacerbations ) vary in both frequency and strength. A severe exacerbation can cause permanent blindness. Recurrent lesser exacerbations can cause cumulative damage and gradual loss of vision. The approximate addressable BDU market for gevokizumab is 6,000-11,000 patients new cases are reported annually. The addressable NIU market is much larger. In the US, NIU has a prevalence of cases per 100,000 people, or about 150,000 total cases. We do not yet know how gevokizumab will be priced, but it will probably cost much more than generic azathioprine or the INF-α and TNF-α inhibitors that are used off-label to treat BDU. Its adoption will therefore depend on remission rates. XOMA's flagship compound is gevokizumab, an IL-1 beta modulating antibody. XOMA has partnered with SERVIER, a global pharmaceutical company based in France, to develop and commercialize gevokizumab for 2 Upcoming Catalysts: XOMA is a high risk/high reward play. In the short term, the market will react sharply to the results of the Phase III EYEGUARD-B Study. Though EYEGUARD-B pertains only to BDU, the market may interpret the results as predictive of gezokizumab's performance in EYEGUARD- A and EYEGUARD-C, which pertain to a much larger addressable market. EYEGUARD-B compares the time until first acute ocular exacerbation for two groups of patients. One group is receiving gevokizumab and one is receiving a placebo, each administered once monthly on top of the standard

3 treatments of immunosuppressant therapy and oral corticosteroids. Xoma said it expected to publish topline results 6-8 weeks after the last exacerbation event, which was announced on May 28. Results should therefore be released between July 9th and July 23rd. In Phase II trials, every Behçet s uveitis patient responded positively to a single dose of gevokizumab, so anticipation is high that the results of Phase III will also be good. Having lagged behind the biotech sector, XOMA is finally beginning to run. XOMA's flagship compound is in trials for several indications. Gevokizumab has the potential to be indicated for up to 11 conditions at the current moment: 1. Non-infectious uveitis (NIU) 2. Behçet s disease uveitis (BDU) 3. Pyoderma gangrenosum (PG) 4. Erosive osteoarthritis of the hand (EOA) 5. Moderate-to-severe acne, Non-infectious scleritis 6. Autoimmune inner ear disease (AIED) 7. Diabetic nephropathy 8. Polymyositis/dermatomyositis 9. Schnitzler syndrome 10. Giant cell arteritis (GCA) XOMA technology is also intriguing on many levels. The company s XMet platform has three classes of selective insulin receptor modulators (SIRMs) designed to treat patients with abnormal metabolic states. XOMA 358, the fully human allosteric monoclonal antibody that is the focus of the XMetD program, is being tested for treatment of a rare condition called congenital hyperinsulinism (HI). XMetA is intended to treat Type 1 & 2 diabetes mellitus. XMetB is intended to treat Type 2 diabetes mellitus. XOMA 358 has just received Orphan Drug Status: The U.S. Food and Drug Administration (FDA) Office of Orphan Products Development (OOPD) grants orphan status to new drugs or biologics that treat diseases affecting fewer than 200,000 United States patients. Developers of orphan drugs receive tax credits against costs of clinical research, access to grants, assistance in designing clinical research trials, waiver of prescription drug filing fees, and seven years of marketing exclusivity in the U.S. The FDA has granted Orphan Drug Designation to XOMA 358 for the treatment of congenital hyperinsulinism (HI). Insulin is the hormone most responsible for lowering blood sugar levels. Patients with HI secrete excessive insulin, which in turn causes excessively low levels of blood sugar, or profound hypoglycemia. Profound hypoglycemia can lead to brain damage, epilepsy and even death. According to the Chief Medical Officer at XOMA, many HI patients can manage their condition only by continuously ingesting glucose or by having a pancreatectomy. A recently completed Phase I study suggests XOMA 358 acts against the insulin receptor, which means it has potential to treat endogenous overproduction of insulin. A Phase 2 study will test the potential of XOMA 358 to treat congenital hyperinsulinism. Analyst & Manager Support: Kingdon Capital recently expressed confidence in XOMA by purchasing an additional 3.25 million shares, taking its stake to just under 11 million shares, or slightly over nine percent of shares outstanding. XOMA also has increasingly positive analyst support. Following the announcement of the final ocular exacerbation in the Phase III EYEGUARD-B trial, Wedbush reiterated its Buy rating with a $17.00 price target. Quite the upside for a stock trading at just over $4.00 a share currently. In addition, it came from one of my favorite analysts in the space who has a five star rating from TipRanks. RBC Capital also currently has a Buy rating and $9.00 a share price target on this promising small cap concern. 3

4 Obviously any investment in a small biotech company hinges on the results of a clinical trial is by nature speculative. Gevokizumab may not prove to be as effective against BDU as patients hope. However, I am increasingly liking the risk/reward profile on XOMA at current levels. Outlook: With positive results in Phase II trials of a compound that has the potential to be indicated for 11 different conditions, XOMA is a compelling if speculative play. Its Xmet platform gives it multiple other shots on goal, including one (XOMA 358) that has Orphan Drug status, with all the benefits that entails. The market has not yet begun to price in XOMA's potential, but it is beginning to bid up the stock in anticipation of positive results in EYEGUARD-B. Recommendation: Buy XOMA up to $5.00 a share. Position: Long XOMA psivida Corporation Our second addition is somewhat similar to XOMA as it has products focused on the eyes as well even as it is taking a different approach in the space. The name of the company is psivida Corporation (NASDAQ: PSDV) which has a market capitalization of approximately $120 million at current levels. While many biotech companies work on discovering new compounds to treat diseases, psivida Corporation is focused on improving how drugs are delivered into the body. The company s sustained release products enable the long-term delivery of therapeutics. So far psivida has found success in ophthalmology and has two FDA approved products on the market. 4 Many potential drugs exist to help improve conditions like posterior uveitis and age related macular degeneration. Delivering those drugs in the right concentration to the correct point of an eye without causing collateral damage is the difficult part. psivida s sustained release drug delivery technology enables the treatment of eye conditions without recurring and invasive operations. Let s break down the firm s existing products before discussing its up and coming pipeline candidates, which include one treatment currently enrolled in Phase III clinical trials. Ophthalmology Expertise: psivida launched its newest product Iluvien in the first quarter of The treatment is for Diabetic Macular Edema (DME) and is an injectable, non-erodible implant that releases the drug fluocinolone acetonide for up to three years. DME is typically managed with either laser therapy or repeated intra-articular injections of medication as often as every month. Iluvien s applicable length represents a huge advantage over the other two treatment options and a big relief to patients. DME affects about one million people in the U.S. alone and can lead to blindness or vision deterioration. psivida licensed its product to Alimera Sciences (NASDAQ: ALIM), and will receive 20% of the net profits on sales of the treatment. So far the firm has brought in over $55 million in licensing fees and milestones, though that number will increase as the product gains traction in the U.S. and the 17 European countries it s approved in. Most importantly, Iluvien s approval validates the firm s ability to create novel injectables that can deliver drugs for multiple years and are less invasive than other treatment options. psivida s oldest approved product is Retisert for the treatment of posterior uveitis, a disease that inflames the back lining of the eye and is the third leading cause of vision loss. The world s first approved intravitreal drug implant for this condition; Retisert came to market in 2005 and is licensed to Bausch & Lomb. The product itself is a very small device, about the size of a grain of

5 rice, and contains a corticosteroid. Once surgically implanted into the eye, the device releases precise amounts of the medication each day for just over two years. Retisert only generates about $1 million in revenue for psivida because the firm receives a small portion of sales, and because it requires a surgical operation. The treatment looks like it will be made obsolete in the near future, however, by another product being developed by psivida. strong. psivida hopes to file a NDA in the first half of The firm is optimistic that its candidate will receive approval because it already went through this process with Iluvien, which is essentially the same product but for a different indication. If the drug gets approved it could help reduce a disease that causes blindness and has no efficient treatment options. The company is also developing Durasert, a fully bioerodible, long-term sustained release implant. The candidate releases latanoprost, the most commonly prescribed drug for ocular hypertension and glaucoma. Like Medidur and Iluvien, Durasert is less invasive than current options. psivida is partnered with Pfizer on this opportunity, and if the product moves on to Phase II trial it will trigger a $20 million milestone payout. I expect the company will round out its efforts with Medidur first before tackling this opportunity with Pfizer (NYSE: PFE). Pipeline Opportunities: The treatment that may replace Retisert for posterior uveitis is called Medidur, and it utilizes the same exact technology approved by the FDA for Iluvien. In fact, Medidur even uses the same drug and release rate to provide three years of treatment from just one injection. The FDA agreed to allow a new drug application (NDA) to be filed pending results from a Phase III clinical trial with a 12-month endpoint, a second Phase III trial lasting just six months, and data referenced from the already completed Phase III Iluvien trial. The company reported positive safety data after three months of Medidur s first Phase III trial. One of the biggest challenges in treating posterior uveitis is managing the side effects of prolonged steroid use, so it s encouraging that the safety profile of Medidur is 5 Outlook: psivida ended March with cash or cash equivalents of just under $32 million, enough to fund operations into That money should cover the two Medidur trials and progress that candidate along towards commercialization. Net income for the nine months ending March 2015 was slightly over $11 million. This income relates primarily to milestone payments prior to the third quarter, in which the company posted a loss of 17 cents per share. Medidur offers some potential milestones over the coming year, and any more positive news regarding the treatment s progress should serve as a catalyst for share prices. The analyst at MLV & Company just reiterated her Buy rating on psivida, setting a price target of approximately $7.00 a share on this stock. She noted the firm s relationship with Pfizer as a potential advantage in the long run. The other two analysts that follow the company have price targets of $6.50 and $10.00 a share. The firm currently trades at about $4.00 per share, so the average analyst price target represents a nearly 100% potential upside.

6 I think psivida is a solid play on a niche market. The firm independently owns one treatment candidate that s working its way through a few critical Phase III clinical trials. Medidur is essentially the same product as the already approved Iluvien but targets a different disease, so the safety profile should pass FDA standards and it essentially becomes a matter of whether or not efficacy levels are positive enough. The current share prices represent a good entry point because investors can capture any appreciation that comes with positive news from the Medidur program. The opportunity to develop Durasert with Pfizer only sweetens psivida s outlook and serves as another reason why I m long PSDV. I like the fact that psivida has partnerships with a couple of partners which is a vote of confidence in its pipeline, its underlying technology as well as providing funding sources for trials through milestone payments. Given its small size and focus area, one cannot rule out a buyout by a larger concern the way M&A activity is sizzling in this sector recently. I like the company just fine as a standalone entity as well. Recommendation: BUY PSDV up to $4.50 a share Position: Long PSDV 6

7 Current Portfolio Company Entry Date Entry Price Recent Price Buy Up To Returns psivida Corporation (PSDV) 06/22/15 $4.03 $4.03 $4.50 N/A XOMA Corporation (XOMA) 06/22/15 $4.28 $4.28 $5.00 N/A Heat Biologics (HTBX) 06/05/15 $6.51 $6.70 $ % Synergy Pharmaceuticals (SGYP) 06/05/15 $4.90 $8.27 $ % Gilead Sciences (GILD) 05/08/15 $ $ $ % Pacific Biosciences of Calif. (PACB) 05/08/15 $6.09 $5.36 $ % Protalix BioTherapeutics (PLX) 05/08/15 $2.17 $2.05 $ % Inovio Pharmaceuticals (INO) 05/08/15 $8.01 $8.98 $ % Notes: Entry price is determined by the last "Close" price at the closing of the market on the day before publication, which also serves as the Entry Date. Recent price is determined by the last "Close" price at the closing of the market on the day before publication; most recent update: 06/22/15. Buy Up To is the upper share price limited recommended for buying new shares. Returns data is share price appreciation or depreciation between entry price and recent price. This is not real-time data and should not be interpreted as such. All data is subject to change without notice Investors Alley Corp. All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from Investors Alley Corp., 41 Madison Avenue, 31 st Floor, New York, NY or For complete terms and conditions governing the use of this publication please visit 7