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Friday, January 11, 2013
Notes From Management Meetings - JPM13
By Jason Napodano, CFA
On Sunday, January 6, 2013, I arrived in San Francisco, CA for the annual JP Morgan Healthcare Conference, as well as the parallel Biotech Showcase and OneMedForum Conferences. This was the seventh year in a row that I made the trip to San Francisco for these events, which are a must-attend for serious healthcare investors.
During my three days in San Francisco, I conducted 29 one-on-one meetings with various managements of small and mid-cap biotechnology companies. Below are notes from some of these meetings.
Cipher Pharmaceuticals (CPHMF) - Meeting with Larry Andrews (CEO) and Norm Evens C.A (CFO). The key takeaway from my meeting with Cipher is that the fourth quarter should be a very good quarter for the company. In May 2012, Cipher received U.S. FDA approval of Absorica, the companys novel, patented and branded formulation of the acne medication isotretinoin. In November 2012, Ciphers U.S. commercial partner for the drug, Ranbaxy Labs, officially launched the product. I suspect that Ranbaxy shipped at least $10 million into the channel for the launch. Thus, Cipher should record meaningful royalty revenue on Absorica when it reports 4Q12 financials in February thanks to this inventory stocking, as Cipher is entitled to a mid-teen royalty payment on Absorica sales. Cipher posted revenues of $5.6 million during the first nine months of 2012, with profits each quarter summing to $1.1 million, or $0.05 per share. Thanks to the expected jump in royalties from Absorica in the fourth quarter, I believe the company will post revenues near $3.0 million and net income north of $1.4 million, or $0.06 in EPS. Absorica is a product I believe has peak sales in the U.S. of roughly $200 million and sets off a major transformation for the company. In 2013, I model $14 million in revenues. Net income should double to $7 million. Net income could double again in 2014. Its an impressive ramp, and investors should get a better idea in February of whats to come.
DARA BioSciences (DARA) - Meeting with David Benharris (VP Sales & Marketing). I came away from my meeting with David Benharris confident that the turnaround at DARA Bio continues. This is a company that had a rocky 2011, but made significant changes in both management and focus early in 2012. I turned bullish on DARA late last year after the company announced it had launched both Bionect and Soltamox, and was preparing to launch yet another product in Gelclair in 2013. Soltamox is the companys flagship product, an oral liquid formulation of the breast cancer drug tamoxifen. Current clinical practice guidelines from the American Society of Clinical Oncology recommend women with estrogen receptor positive (ER+) breast cancer stay on tamoxifen for five years. However, data from a new study published in The Lancet and presented at the San Antonio Breast Cancer Symposium in December 2012 showed that women taking tamoxifen for 10 years (ATLAS, n=12894) cut their risk of mortality by 29% when compared to women stopping treatment after five years. This is clearly good news for DARA and Soltamox. Soltamox is an oral liquid bioequivalent formulation to tamoxifen. DARA has conducted market research showing that up to 10% of women on tamoxifen prefer an oral liquid formulation due to dysphagia, perhaps the result of oral mucositis. Roughly 225,000 women take tamoxifen yearly, so just 5% market share for DARAs Soltamox would be significant revenues for the small company. Additionally, the company is expecting to hear back from the U.S. FDA on the orphan drug application on KRN5500 in March or April 2013. I believe orphan drug designation for KRN5500 would be huge for DARA. Finally, I was pleased to see the company secure enough cash to fund operations into 2014. DARA is set up to perform well this year.
Tonix Pharmaceuticals (TNXP) - Meeting with Seth Lederman, MD (CEO) and Leland Gershell, MD, PhD (CFO). The key takeaway from my meeting with Tonix was that management is confident in the intellectual property around TNX-102-SL, and the product is significantly differentiated from generic cyclobenzaprine to suggest that we are not looking at another Silenor situation. I took a hard look at Tonix back in October 2012, and found that the fibromyalgia market was enormous, with three branded products Pfizers (PFE) Lyrica, Eli Lillys (LLY) Cymbalta, and Forest Labs (FRX) Savella generating over $1 billion in cumulative sales. Yet, none of these products focus on improving sleep in patients with the disease. Lyrica is primarily dosed for pain, and Cymbalta/Savella primarily for mood. Tonixs TNX-102-SL fits nicely in the already generally accepted poly-pharmacy approach for fibromyalgia. At that time, my two biggest concerns were intellectual property (IP) and cash. On IP, management referenced the companys three issued patents: two method and composition patents that expire in August 2020, and one method of use patent that expires in June 2021. Management likened these patents to Purdue Pharmaceuticals intellectual property around OxyContin, or Transcepts (TSPT) protection around Intermezzo. Purdue has been enormously successful in protecting the IP on OxyContin, and interestingly enough, also licensed Intermezzo from Transcept. These types of pharmacokinetic patents have held up well in court, and Tonixs patents around TNX-102-SL follow a similar design and construction. With respect to their cash position, Tonix secured almost $3.3 million in cash in December 2012 through private placements with institutional and inside investors. I suspect that management will look to secure a little more cash in early 2013, and then push forward into phase 3 trials with TNX-102-SL in the second quarter 2013. Data should be available late 2013.
Trius Therapeutics (TSRX) - Meeting with Jeff Stein, PhD (CEO) and John Schmid (CFO). Not much new to report on Trius that hasnt already been said. I think the stock is cheap and the bears have it wrong. That said, I did attempt to narrow the window a little around when we can expect data from the companys second Phase 3 clinical trial, ESTABLISH-2, with tedizolid. ESTABLISH-2 is an oral step-down study in which patients begin on intravenous medication and step-down to oral tablets at physician discretion. Im confident in the outcome of ESTABLISH-2 given the strong results seen in ESTABLISH-1. With respect to the timing for ESTABLISH-2 data, management reported completing enrollment in ESTABLISH-1 on September 15, 2011. Just over three months later, on December 19, 2011, top-line results were reported. Enrollment in ESTABLISH-2 completed on December 10, 2012. If we assume a similar three months, that would put data in mid-March 2013.
Acadia Pharmaceuticals (ACAD) - Meeting with Uli Hacksell, PhD (CEO), Thomas Aasen (CFO), and Roger Mills, MD. (CMO). Perhaps management with the biggest smiles on their faces was Acadia, and deservingly so. Data from the pimavanserin -020 study in Parkinsons Disease Psychosis (PDP) reported in late November 2012 was a Home Run for the company. The key takeaway from my meeting was that the confirmatory program, -021, will be an exact replication of -020; management is not getting cute here. The design changes that lead to the success of the -020 study worked beautifully, so dont expect management to stray from that protocol. Ive been asked by some investors if I think pimavanserin actually works, or did management just design a perfect trial. I can honestly say, I think the drug works, and the key reason is this: There was one primary endpoint of the -020 study, antipsychotic efficacy as measured using the SAPS-PD scale and two key secondary endpoints reported in caregiver burden and sleep improvement. The primary SAPS-PD endpoint was assessed by independent (off-site) readers blinded to the data, and the data shows the drug works. The secondary endpoint of caregiver burden was assessed by the attending physicians, and data show that the drug works. The changes in sleep (nighttime sleep and daytime wakefulness) were reported by the patient, and the data show that the drug works. Thats three separate qualitative and quantitative analyses done by three separate groups all saying the same thing this drug works. Yes, it may have been the perfect trial, but I feel pretty good about pimavanserin and Acadia right now.
InVivo Therapeutics (NVIV) - Meeting with Frank Reynolds (CEO) and Sean Moran (Director of Finance). I always enjoy meeting with the team at InVivo. No one is more passionate about what they do than Frank Reynolds at InVivo, and rightfully so. Frank spent five years of his life in a wheelchair. The key takeaway from my meeting with the team at InVivo is that management is confident human studies will begin in the next few months for their biopolymer scaffolding product. In an October 2012 letter to shareholders, Frank Reynolds noted that the FDA has confirmed the regulation of the scaffold product as a device. In December 2012, InVivo filed a request with the U.S. FDA for a Humanitarian Use Device (HUD) designation for its biopolymer scaffolding product for the treatment of acute spinal cord injury. The request comes after an April 2012 meeting in which InVivo and the FDA discussed the requirements for the HUD designation and the potential for the device to be regulated and distributed under a Humanitarian Device Exemption (HDE). A HUD designation and a subsequent approved HDE would enable InVivo to commercialize the device in the U.S. faster than the Pre-Market (PMA) approval process. InVivo is guiding to start the 5-person human study in the next few months, with data rolling out two months later. If the trial works, I think InVivo will request HDE approval by the end of the year. That could send InVivo shares soaring. This is certainly a stock to watch in 2013.
Aastrom Biosciences (ASTM) - Meeting with Daniel Orlando (CEO) and Brian Gibson (VP. Finance). It was good to meet Aastroms new CEO, Dan Orlando. Aastrom is a company that I believe faces some challenges, and that could keep a lid of the shares in 2013. My primary concern with Aastrom is the high burn rate and lack of near-term catalysts. In the past when I spoke with former CEO Tim Mayleben on the opportunity for financings and partnerships in 2013, the company seemed dead-set on pushing forward in both critical limb ischemia (CLI) and dilated cardiomyopathy (DCM) alone. This ultimately maximizes the profits to Aastrom, but if the company struggles to get there because of cash constraints and a low-stock price, then the point is moot. That being said, the key takeaway from my meeting is that Aastrom now seems to be talking more about partnering ixmyelocel-T, at least in CLI, this year. Management has spent the past few months doing market research and looking at why enrollment in the companys Phase 3 REVIVE-CLI trial is proceeding so slowly. I do not think we will see Aastrom change any of the inclusion/exclusion criteria for REVIVE. This is an incredibly well-designed program with significant feedback (special protocol assessment) from the FDA. Aastrom does not want to stray from its SPA agreement. However, what I think we will be seeing Aastrom do throughout the next few months is changing the lexicon around the inclusion/exclusion criteria. For example, instead of calling it critical limb ischemia, we may start hearing more severe peripheral artery disease, or instead of using the term Rutherford-5″, we may start hearing more confirmed tissue loss. These are the same patients, but with a more widely acceptable or obvious classification. Aastrom also seems to be dropping the no option phrase for a low confidence in revascularization phrase. Again, same patient only with more understandable terminology. Finally, with respect to partnering, I did not get a sense of when a deal would get done, only that management is now clearly looking at this option for 2013 rather than for post-data in 2015 or beyond. A major partnership for ixmyelocel-T moves me from the sidelines back into the stock.
Zalicus (ZLCS) - Meeting with Mark Corrigan, MD (CEO) and Justin Renz (CFO). Management was truly surprised with the failure of Synavive in September 2012. That caused a pretty significant sell-off in the shares. But investors that actually took the time to value the rest of the pipeline where able to scoop-up a pretty cheap stock. The leading pipeline candidate now at Zalicus is Z160. The drug is currently in two Phase 2a programs, the first in lumbosacral radiculopathy (LSR) initiated in September 2012, and the second, in post-herpetic neuralgia (PHN), initiated in January 2013. The mechanism of action for Z160, an oral, state-dependent, selective N-type (Cav2.2) calcium channel blocker, has management pretty excited. Its a mechanism that has been validated by ziconotide, only Zalicus drug has superior route of administration (oral vs. intrathecal injection), tolerability, and potential application. Picture a drug with the market opportunity of gabapentin or pregablin, or potentially even larger given that Z160 does not seem to carry the neuro-psychiatric side-effects, dizziness, and somnolence seen with Pfizers two aforementioned blockbusters. The key takeaway from my meeting with Zalicus is that Z160 development remains on track, with data from the LSR study expected in the third quarter 2013 and PHN in the fourth quarter 2013. Partners are already knocking on Zalicus door for Z160. I think with two positive Phase 2a trials in hand, Zalicus will be able to secure a very lucrative deal, one that will rival the previous $475 million deal with Merck (MRK) prior to the formulation issues that sent Zalicus (Neuromed) back into preclinical studies in 2007.
Durect (DRRX) - Meeting with James Brown, DVM (CEO) and Matt Hogan (CFO). In September 2012, I told investors to go out and buy shares of Durect (at $1.15 per share) because visibility on Remoxy was improving. For a month I looked like a genius, as Durect shares hit $1.71 on October 17, 2012. Unfortunately, Pfizer made some comments on its third quarter conference call on November 1, 2012 that spooked investors. The key takeaway from my meeting with Durect management was that Pfizers comments were misinterpreted, and that we should have a better sense of the Remoxy re-submission after Pfizer meets with the U.S. FDA in March 2013. It seems that Pfizer got some data from its two BE/PK studies last year that it wants to confirm so that it can present a complete package to the FDA in March. Investors were expecting this to take place in December 2012 instead. The fact that Pfizer mentioned ALO-02 as a potential back-up candidate to Remoxy also seemed to spook investors. Yet, ALO-02 uses the same manufacturing and delivery system as the much maligned Embeda. There are clearly IP issues with Embeda as well. I see Remoxy as a far superior product to ALO-02. Pfizer would only push forward with ALO-02 if Remoxy had no chance for approval. Investors need to be patient with Remoxy for a few more months, but the upside that I outlined back in September 2012 remains. Another key takeaway is that Durect management seems pretty confident in its decision to file a new drug application (NDA) on POSIDUR. I expect this application to be submitted later in the first quarter under the 505(b)(2) pathway, meaning the FDA should make a decision ten months later. The market has written off POSIDUR, but I think odds of a first-cycle approval are 50%, and that could lead to upside in Durect shares in 2013 as more investors start to come back to the story.
Depomed (DEPO) - Meeting with Jim Schoeneck (CEO) and August Moretti (CFO). I met with management at Depomed for over an hour. I made sure to schedule plenty of time because this company has so much going on. Investor attention over the next few weeks will be on the upcoming FDA Reproductive Health Drugs Advisory Committee meeting to be held on March 4, 2013, and subsequent Prescription Drug User Fee Act (PDUFA) action date for Serada on May 31, 2013. Discussion around Serada warrants a separate analysis, so Ill instead note two important takeaways from my meeting with respect to Gralise. The first is that management took a 12% price increase on Gralise on December 14, 2012. Gralise now costs $2.52 per pill, or a $7.56 per day. Surprisingly, thanks to Pfizer raising the price of Lyrica by 9% on January 1, 2013, Gralise is still around 10% cheaper than Lyrica. For the purpose of my model, weve been using a blended price per prescription of around $135. I note the blended price includes the lower-price titration pack for new prescriptions and some couponing and sampling to drive awareness and uptake. Given the new price increase, I will be raising my revenue forecasts for 2013 and beyond. The second key takeaway is that management continues to make progress on the formulary front, winning its first Medicare Part D listing with CVS Caremark for broad Tier-2 reimbursement. This is an important win because the majority of PHN patients are of Medicare age, and Medicare does not allow discount coupons. The listing of Gralise as Tier-2 with CVS 6+ million lives opens up a meaningful opportunity for management. In total, there are roughly 30 million lives covered under Medicare Part D that have been disadvantaged to Gralise due to lack of coverage. If Depomed can follow this up with additional Medicare wins in 2014, Gralise prescriptions (and sales) are set to soar.
Organovo (ONVO) - Meeting with Keith Murphy (CEO). Kudos to Organovo for cleaning up its balance sheet at the end of 2012 through a stock warrant tender offer. I wrote back in December that the tender offer was designed to accomplish three key objectives: Clean up the balance sheet by removing the derivative liability; raise cash through the exchange of warrants; and seek an uplisting by moving the company toward qualifying under the minimum stockholders equity and share price bid requirements. Prior to the tender, Organovos stock was trading at around $2.15 per share and struggled every time it got near that $2.50 call ceiling from the companys bridge, investor, and private warrants. Removing the warrant overhang has allowed the stock to freely trade above $2.50 per share. It stands at $3.25 as of the writing of this article. The key takeaway from my meeting with Keith was that Organovo remains squarely focused on building shareholder value and seeking an uplisting to the NASDAQ-CM. Moving to a national exchange could be huge for the stock in 2013.
