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By Douglas Murphy-Chutorian, MD

For certain viruses, it is difficult to create a vaccine that will induce significant antibody response. Healthcare investors and biotech investors have invested huge sums in pursuit of such products. Many vaccine products on the market are major revenue-generators for major pharmaceutical stocks, but notably few of these are therapeutic vaccines. In general, the vaccines that have been successfully commercialized by medical companies are intended to prevent infection.

Inovio (INO) has taken a novel approach which might appeal to the medical stock investor. Although their technology platforms might launch multiple products, for this discussion, just two approaches will be described, one therapeutic and the other preventative. The first key technology is a device that enhances the uptake of the vaccine into cells. Known as electroporation, the product creates an electic field in the area of injection which ‘opens’ the membranes of cells allowing entry of the product into the cytoplasm which in theory significantly enhances vaccine effectiveness. Used in conjunction with DNA vaccines which are notoriously problematic in terms of cell uptake, in multiple studies, INO believes its data supports this claim. Specifically, INO is furthest along in clinical trials to create a therapeutic product for human papilloma virus (HPV), the scourge of cervical cancers in women and head/neck cancers in men. Currently, Merck has a very successful HPV vaccine that is preventative, but is not useful for the hundreds of millions with chronic HPV infections. INO makes both the vaccine and the electroporesis delivery device. INO’s data in Phase I trial of VGX-3100 in HPV at its lowest doses showed 50% of patients developed cytotoxic T-cell responses and 10 of 12 had strong antibody responses.

In addition to enhanced delivery of vaccine, INO has a technology that intends to deliver an on-the-shelf universal flu vaccine. Currently, as new flu strains are identified each year, the bio-vaccine community rushes to develop the new flu vaccine for that year. INO has taken many of the antigenic components of flu over the years, and believes it is creating a product that is able to treat the new combination of antigens that comprise this year’s flu. The product will made in advance, so it is a major advantage to the current mad scramble for a product. Pre-clinical data looked promising and clinicals have begun.

INO’s strategy was to develop new products, take them through Phase I of clinical trials and then partner the product with a larger company. Because of their platform approach to vaccine development, this strategy enables INO to take many shots on goal without the need to raise cash. More recently, the CEO is reassessing the strategy in light of the tremendous partnership deals that companies like Nektar have made for drugs that have successfully completed Phase II trials. In the latter case, INO will need to do another financing to support the later stage trials.

There are many catalysts over the 12 months for INO, e.g. more clinical data and potential partnerships. Sell-side analysts have target prices of about $2 per share. Stock price is $0.87 and market cap is $89 million. For the patient investor, INO may have considerable upside, perhaps entered now and added to post a secondary offering.

Disclosure: Long INO at the time of writing.

By Douglas Murphy-Chutorian, MD

30 million migraine sufferers are the kind of market that raises the pulse rate of the pharmaceutical and biotech industries, not to mention the interest of the healthcare stock investor. When migraine patients are in dire straits and need emergency attention, they go to hospital to receive ergot drugs, which, until now, had to be administered by injection by a medical professional.  MAP Pharmaceuticals (MAPP) has developed an inhalation form of dihydroergotamine intended to treat acute attacks of migraine, a product that can be self-administered and routinely used.

Biotech investors should be aware that drugs commonly used to treat migraine are triptans and the U.S. market is about $2.5B annually.  The MAPP drug, Levadex, is given via an inhaler and for some patients it might work faster and provide more relief than triptans.  Data from the Phase III trial of Levadex were released in May 2010 and were positive. More importantly, the FDA ruled that MAPP didn’t need to complete a second Phase III trial, which speeds up the pathway to approval.

Next, MAPP tested the drug in smokers versus non-smokers and saw no lung problems.  On-going open label study of the drug in the patients who participated in the Phase III trial will provide more safety and pulmonary information after 12 months on drug.  Other studies to rule out any cardiac effects of the drug are on-going. To date, there has been no cardiovascular risk seen from Levadex use. Both studies should be completed by year end, at which time the final application for FDA approval will be prepared for submission.

MAPP’s success is based on novel formulation and delivery system technologies.  The company has $55 million in cash and spends about $40 million per year.   The stock trades at $13 per share down from its highs for the year.  Potential partners in big pharma are showing interest in MAPP but if a deal doesn’t materialize by year end, one would expect that MAPP does another equity financing.  Market cap is a hefty $350 million, but migraine is a huge opportunity.  Likely price per year for the drug to treat the patient who has multiple episodes of migraine has been estimated at $1,000.  The selling proposition is a faster and long-lasting relief from debilitating pain.  With 30 million migraine sufferers, the potential market size is staggering.

All biotech investments and healthcare investments involving clinical trials and new drugs is risky business.  With successful Phase III trials already announced, no need for a second Phase III trial (a good FDA prognostic sign) and a huge potential market size, MAPP might be the kind of medical stock investment worth taking a look at.

Of note, Allergan is looking for approval of Botox for Chronic Migraine Patients.  This drug is not a direct competitor to MAPP because it does not treat acute migraine events.  Basically, if Botox decreases annual frequency of migraine attacks from 15 per year to 10 per year, the huge market becomes a little smaller, but the compelling nature of the investment is not changed.

There are many catalysts over the 12 months for MAPP, e.g.  more clinical data, potential partnership, the FDA submission and the FDA response. Sell-side analysts have target prices of about $19-20 per share.  For the patient investor, MAPP may have considerable upside.

Disclosure: Long MAPP at the time of writing.

By Douglas Murphy-Chutorian, MD

The pharmaceutical and biotech industry are in an eternal quest to produce cancer drugs that don’t have side effects against normal cells. Medical investments of considerable research dollars want therapeutic cancer killers that are non-toxic. One Canadian healthcare stock in the biotechnology space (Oncolytics Biotech – ONCY.TO) is developing such a product, Reolysin.
Reovirus is a virus that preferentially replicates in cells with an activated Ras pathway. This pathway is activated in some cancer cells, but not in normal cells. This is the basis of the oncolytic potential of Reolysin.

ONCY has an on-going Phase IIIa clinical trial of its product in refractory head and neck cancer. Combined with cis-platinum, Reolysin showed a 43% partial response in early studies which compared favorably to the 6% partial response rate observed with Erbitrux. The current study is 80 patients with a blinded controlled to be followed by Phase IIIb study of 200 patients. Endpoint will be survival at three months. Expect to see data in 15 – 18 months.

What is exciting about ONCY, is that the new cancer treatment might also be effective in other cancers. Trials are being done to treat cancer in skin (melanoma), lung, colon, pancreas in both U.S. and Europe. Expect to hear about interim data from Phase II non-squamous cell lung cancer in the fall, and more head and neck cancer Phase II data by year end.

Market cap is $193 million and stock price is $3 per share. $25 million in cash and ONCY is using $1.5 million per month. Two evident possibilities are that ONCY does another equity financing, perhaps after the fall data release, and/or signs a geographically limited partnership agreement with double digit royalties and milestone payments. It might be prudent to have a position and then look to increase that position when the equity financing causes a dip in stock price. On the other hand, positive data in the lung study could boost the stock higher than current pricing, even with a subsequent equity offering.

Since this is a longer term small cap medical company investment, ONCY is the kind of stock that one puts away for 18 to 24 months and has an expectation for a doubling of the stock price.

Disclosure: Long ONCY.TO at the time of writing.

By Douglas Murphy-Chutorian, MD

Many drug and biotech companies are developing antibiotic treatments for infections. These medical investments must overcome the issue of resistance, i.e. the bacteria evolve to become less affected by the drug, thus emerging as ‘super-bugs’. One healthcare stock in the biotechnology space (Novabay – NBY) is taking a different approach. Based on a naturally occurring chemical produced by white blood cells to fight infection, the Aganocide compounds protect against invading pathogens that may be bacterial, viral or fungal. These products are more powerful than antiseptics and less likely to develop resistance than antibiotics.

NBY has on-going clinical trials of its products in various areas. Phase IIb to treat viral conjunctivitis (partnered with Alcon) with results expecting year-end, there is currently no treatment available for this disease. Phase II study to treat acne (partnered with Galderma) is expected to report year-end. Just announced, successful phase IIa data in impetigo study which is unpartnered but Galderma has an option on that expires this year. Successful phase II study on treating chronic in-dwelling urinary catheters is also currently unpartnered. Clinical goal is to show better catheter patency than seen with saline flushes, the current standard of care.

Market cap is $50 million and stock price is $2.17 per share. $13 million in cash and NBY used none over the past 15 months as of March 31st 2010. Milestone payments are the source of revenue. Either Alcon and Galderma make progress in the clinical trials and provide the payments required to cover cash flow, or one or both are delayed/disinterested which exposes a $1 million per month burn rate. It would not be surprising to see NBY conduct an equity sale sometime next year, to provide some breathing room.

Royalty payments vary from program to program, rising as high as 30%. Market size might be $175 million for viral conjunctivitis, $150 million for impetigo, $250 million for urologic applications and very large for acne treatment. Of note, there are many other potential medical applications for these products, should the on-going trials prove successful.

NBY seems suitable for the investor with at least an 18-month outlook looking for a doubling of their investment.

Disclosure: Long NBY at the time of writing.

By Douglas Murphy-Chutorian, MD

Buying healthcare stocks especially drug or biotech companies can be unnerving in that certain events can drive the stock price up or down in dramatic fashion. Some of these medical investments are especially attractive at this time because the down market of 2010 seems to be technically driven and therefore has ignored very good news about specific healthcare companies.

For example, DYAX Corporation markets a new drug, Kalbitor, which was recently approved for treatment of acute attacks of hereditary angioedema. The symptoms include dangerous swelling of the larynx and other parts of the body. These episodes occur 10-20 times per year and the affected patient must seek emergency room treatment immediately. Until now, treatment was usually IV steroids and perhaps a stay in the hospital. Some patients are taking a new drug, Cinryze, hopefully to decrease the number of attacks, but this drug costs $400,000 per year and does not treat acute attacks. So DYAX looks like they are providing a much needed drug for a poorly treated disease.

Without going into a detailed analysis of all the factors germane to healthcare investing and healthcare stocks that impact DYAX, it is worth noting that the stock price has fallen since FDA approval this year from $4 per share to $2 per share. Current enterprise value is about $200 million. Estimate of market size range from $200 to $350 million WW annually. Generally speaking, a price to sales ratio of 3-5x is often seen in biopharma stocks, so DYAX has a potential market cap of $600 million to $1.5 billion based on the projections of sell-side analysts. In other words, the potential is for DYAX stock price to appreciate 3x – 7.5x as it penetrates the hereditary angioedema market.

The investors in DYAX might have sold on approval and until the company demonstrates a successful product launch, new investors might be hesitant to jump in. In the environment where all stocks have fallen considerably over the past two months, DYAX may be a neglected, poorly followed stock that represents substantial value to soon be unlocked.

With cash in the bank, a new sales force targeting a small number of practices who treat the patients with this genetic disease, look for the population of those taking Kalbitor to increase over the next two years. Assume that DYAX stumbles out of the gate with its product launch, so sales grow but are not immediately spectacular. Until there is a better drug for acute hereditary edema attacks, DYAX is nice stock to tuck into your portfolio for the next few years.

Disclosure: Long DYAX at the time of writing.

By Douglas Murphy-Chutorian, MD

Several years ago, a prominent cardiothoracic surgeon who had been chief at Columbia University was asked to evaluate at company named SIGA. His commentary was not particularly complimentary, except for a profound respect for the group of virologists that the company had assembled. At the time, they were a minor part of SIGA. As it turns out, the expert’s advice was heeded, because SIGA was reorganized and focused on the output of this virology team. Moreover, the board convinced Dr. Eric Rose to sign on as CEO even though he still heads the Mount Sinai School of Medicine CV surgery program.

SIGA has a number of interesting compounds for treating viral diseases but only one will be mentioned here. Smallpox is a scourge that has been eradicated around the globe, but the potential exists for its use as a bioterrorist weapon. The U.S. government would like a treatment for this vaccinia-like virus, in addition to its smallpox vaccine capability. ST 246 (tecoviramat) is such a drug.

Animal trials show the drug is effective. The first human safety trial shows it is safe. Three humans to date contracted a vaccinia (non-smallpox) infection, were gravely ill, and requested ST 246 as a compassionate use pre-commercialization. All three patients recovered.

There is a request for proposals from the U.S. government which SIGA responded to. The contract calls for an initial order of 1.7 million courses of therapy and ultimately 12 million course stockpile. Best guess is that SIGA will price each course at $400. So the initial order could be worth $700 Million revenue. Also, the drug will likely have 90% gross margins and will be produced by a contract manufacturer.

It would be expected that all countries that fear bio-terrorism would also order the smallpox drug. The initial contract expected to be awarded in 2009 has dragged into 2010 and may even not be awarded until 2011. It looks like there is no comparable alternative to SIGA’s product from competitors.

SIGA has an enterprise value of $316 Million at a stock price of less than $8 per share. It has numerous government research contracts that pay for much of its research programs (about $5M per month), so it enjoys a low burn rate of about $1 million per month. Cash position is about $16 million. There is annoying legal suit from a potential suitor who was spurned in 2006, which might end up in settlement, but does contribute to cash burn.

SIGA plans to complete a second safety trial and submit a NDA to the FDA in 2011. It is not necessary to have FDA approval for the government and the military to purchase the smallpox remedy. On the other hand, the drug does appear to be safe, but there is no practical way to test efficacy because the disease has been eradicated and it is unethical to expose anybody to smallpox virus.

To summarize, should SIGA get the proposed contract for its smallpox drug, it might achieve a multi-billion dollar valuation which is a multi-fold increase from its current market cap. The downside risk is more government delay or indecision. For some investors, SIGA will be parked in the portfolio for the next few years, awaiting these outcomes.

Disclosure: Long SIGA at the time of writing.

By Douglas Murphy-Chutorian, MD

In general, successful micro-cap companies labor on for years before achieving any recognition (i.e. analysts and investors) for their efforts.  Meanwhile, these inexpensive stocks might rise 100% or more in share price, as it takes only a little interest to move the needle.  And should the company emerge into the spotlight of sell-side analysts and hedge fund investors, substantially bigger gains are possible.  On the other hand, failure to execute on the business plan leads to anonymity and disregard.

This periodic publication will attempt to identify the hidden gems among publicly-traded healthcare microcap stocks with a higher than usual likelihood of success.  The write-ups are intentionally concise and not exhaustive to better focus on the key factors that favor the company’s growth prospects.

Isoray (ISR) has FDA-cleared products that are radioactive seeds used in cancer treatment.  Heretofore, these seeds were made with radioactive iodine.  Now, ISR has substituted radioactive cesium, which has considerably shorter half-life than iodine.  The shorter half life of an isotope allows patients to go home sooner without fear of irradiating their families because the radiation has dissipated. Also, the release of the radiation faster means the cancer gets more dose in less time which may improve outcomes.  See data below from the company’s web site.

The seeds are incorporated into many types of delivery systems, for example, bioabsorbable surgical sutures that can be sewn in place and absorbed by the body without the need for removal.  In the case of iodine, some concern exists should the seeds migrate and irradiate other parts of the body.  Shorter half life of cesium means this is less of a risk.

Cesium-I3I has delivered 90% of the intended dose 33 days post implant, compared to 32% of the I-125 dose. Cesium-I3I has delivered 99.8% of the dose at 90 days, when bioabsorbable sutures/mesh have most likely dissolved, compared to 65% of dose delivered for I-125. Cesium-I3I delivers uniform and symmetrical radiation penetration for a homogeneous lung implant.

For the first 26 days after implant, the dose rate from Cs-I3I is greater than from I-125. After 26 days, the dose rate from I-125 implant exceeds that of Cs-I3I. With Cs-I3I, radiation safety precautions can be discontinued much sooner than with I-125.

ISR initially launched its product in the prostate cancer market and now does about 1,500 cases per year.  However, the company believes the use of cesium in breast cancer where it might reduce trips to the hospital from 5 to 1 is a more important application.  Also, the product is being used in lung surgery where recurrence of tumor might be reduced from 20% to 3% or less.

ISR’s most recent press release details an agreement with Hologic (HOLX) for rights to a FDA-cleared in-dwelling catheter device for brain cancer therapy.  ISR has made a liquid form of its radioactive cesium which it hopes to instill in the catheter placed near the brain tumor.  HOLX’s core focus is women’s health.  The brain cancer product came with the acquisition of a breast cancer catheter product and doesn’t fit with HOLX.  Of interest, the brain cancer catheter had sales of $8 million in 2007.

Currently, ISR does about $5 million in annual revenue, has a burn rate of $300,000 per month and has $2 million in cash.  Price per patient is about $4,000.  Its largest expense is the monthly contract purchase of bulk radioactive cesium, but its products only use a fraction of what is bought.  Gross margins are minimal but will improve steadily as revenue grows. Breakeven is projected by sell-side analyst at $8 million revenue by 2011. Market cap is $33 million.  Only one analyst covers the stock.  The stock price is currently $1.45 with a 52-week high of $2.06 per share.

It is apparent that ISR will need to raise additional capital in 2010, which usually depresses the stock price.  However, ISR has a slew of potential positive news events related to new customers, increased sales and more clinical data which could raise the stock price both prior to and after the effect of an equity offering.

The sales goals are simply to hire more salespeople to convince more surgeons and radiation oncologists at existing customer sites to employ cesium instead of iodine in more tumor types.  Also, the sales team is trying to start up new customer sites.

In conclusion, ISR is a micro-cap that one might tuck into the stock portfolio and hold for a year or two waiting for its sales to grow and for it to be discovered by the Street.  In the interim, one owns a revenue-generating company with low burn rate, FDA clearance to market its products for all tumor types, growing sales presence and a solid, dependable management team.  Also, ISR might be an interesting tuck-in acquisition for a number of larger companies.

Charts source: http://www.isoray.com/lung_cancer_treatment.asp

Disclosure: Long ISR at the time of writing.