The past six months have not been kind to microcap biotech stocks, as it is hard to find a lot of love in today’s market for tiny, high risk, cash burning biotech companies. Honestly, who can blame investors for throwing stocks that offer a distant dream with minimal success rates and heavy spending? Surprisingly (or not), the negative sentiment also presents unprecedented opportunities in the microcap arena, as some microcaps are making tremendous progress, which is not yet reflected in their stock prices.
There are quite a few companies with market cap under $100M active in the fields of oncology and inflammatory diseases, the two fastest growing segments in the pharmaceutical industry. Hypothetically, these companies represent huge upside potential in the form of imaginary returns over a period of several years. The issue with these companies is that they usually have only one or two drugs in very early stages, the vast majority of which are doomed to eventually fail. While identifying the right drugs based on concrete clinical data is complicated but possible, evaluating drugs based on earlier results is even more challenging. The idea is therefore to identify companies who have already reached proof of concept in humans, thus facilitating better visibility to investors. Since investors today focus primarily on risk mitigation, they typically ignore potential reward and shrug off any positive developments. This, in turn, may result in an “arbitrage-like” situation, where companies with a potential success rate of 25% are traded as if they had a potential success rate of 10%, simply because the progress they have made is not factored into stock price.
In order to identify some of these companies, two primary criteria should be employed. First, the company must be financially stable (as much as a cash burning biotech company can be), with cash reserves for at least one year of activity. The next thing investors should look for is a drug candidate with clear signs of activity as a single agent. This is highly important because when an investigational agent is given in combination with another drug it is very hard to evaluate each drug’s contribution to the activity. In oncology, the most important early sign of activity is tumor shrinkage, although it does not necessarily mean the drug can lead to real benefit in the form of prolonged survival or slower disease progression. On top of these two criteria, there are obviously the usual factors such as the indication for which the agent is designated, registrational path, competitive landscape and management team.
We managed to identify two companies that meet these pre-requisites: Curagen (CRGN), and Curis (CRIS). These companies have promising agents with early signs of activity and a broad market potential, coupled with a cash position that should last for at least 18 months. The two companies are still highly speculative plays, but at current prices, both represent an attractive risk/reward ratio.
Curagen has only one drug in clinical development, CR011-vc-MMAE (CR011), an antibody-drug conjugate (ADC) currently evaluated in two phase II studies, one in metastatic melanoma and the other in advanced breast cancer. The company identified GPNMB, a novel target which is highly expressed on some tumor cells and tried to hit this target with an antibody. In preclinical studies, the antibody did not demonstrate any anti-cancer capability, so instead of abandoning it in favor of other candidates, Curagen took a bold step by arming the antibody with Seattle Genetics’ (SGEN) ADC technology, which was still not validated back then. This step turned out to be brilliant, as the initially ineffective antibody became a potent anti-cancer agent and one of most advanced ADCs in the clinic.
CR011 entered the clinic in the summer of 2006, only two months after Genentech (DNA) had launched the phase I study for T-DM1 and approximately five months before Seattle Genetics’ SGN-35 entered the clinic. The first indication Curagen was going after was metastatic melanoma. CR011 demonstrated impressive activity in a phase I study, including multiple cases of tumor shrinkage and a dose dependent response. I discussed the data in some of my previous articles here and here. Several months ago, Curagen announced initial results from a 40 patient phase II study that were very encouraging as well.
Originally, CR011 suffered from two major drawbacks. It was directed against a novel target with no prior validation and relied on a non-validated ADC technology. This has dramatically changed by 2008. Curagen showed that targeting GPNMB not only results in some sort of clinical benefit, but is also very safe, whereas the ADC technology was validated by Seattle Genetics’ SGN-35, which employs the exact same conjugation technology of CR011. Despite the promising signs, I remained cautious about Curagen’s prospects since metastatic melanoma is considered the toughest cancer indication in the industry, with a 100% failure rate to date. Many of the drugs that failed had demonstrated good activity in early testing, which could not be reproduced in large comparative trials. It was the clinical development in breast cancer that turned CR011 into a promising agent.
Shortly after announcing initial clinical data in melanoma, Curagen launched a trial in metastatic breast cancer patients. Data from the trial will be presented later this year at ASCO, and according to remarks made by the company, there is a good chance of a positive surprise.
During a business update call last week, Curagen’s CEO, Timothy Shannon, said they are seeing early signs of activity in the breast cancer study, including tumor shrinkage. Despite the vague nature of this remark, it instantly turned CR011 into a very interesting drug, for several reasons. First and foremost, we now know there is some sort of single agent activity in breast cancer, a huge indication with a multi-billion dollar potential and a relatively high success rate (especially compared to that of melanoma…). The strong activity in the melanoma studies further supports CR011’s activity and serves as a prior validation of GPNMB as a relevant target in cancer. Finally, as a targeted agent, CR011 enjoys a good safety profile, so there is no limit on the cycles patients can receive. This bodes well for the durability of responses and perhaps for turning minor tumor shrinkage into objective responses over time.
Since CR011 is a targeted agent, one of the most intriguing questions is whether there will be a correlation between high levels of GPNMB and tumor shrinkage, thus implying that patients likely to respond to CR011 could be identified in advance. The breast cancer trial was not limited to patients whose tumors express GPNMB and it is still unclear what portion of breast cancer patients express this target, but the activity at such an early stage of the study may imply that this portion is substantial. Assuming a correlation is observed, Curagen will probably target only this patient subpopulation going forward, which will dramatically improve chances for approval. This strategy is the basis for Herceptin’s huge success, with annual sales of $5 billion.
GPNMB is believed to be expressed on advanced breast tumors, particularly bone metastases, and is associated with poor prognosis in some studies. In addition, it has been commonly found in a subgroup of patients with “triple negative” breast cancer. These patients represent the highest unmet need in breast cancer, as they do not benefit from the two most important breakthroughs in targeted therapy for breast cancer: hormonal therapy such as Tamoxifen, and Her-2 targeted drugs such as Herceptin and Tykerb.
The breast cancer study commenced in June 2008, so by last week’s call, Curagen probably had efficacy data for 10-15 patients. Seeing tumor shrinkage in just one or two of these patients will be very encouraging, considering the unselected patient population and the advanced stage disease. Just to put things in perspective, as a single agent, Herceptin leads to tumor shrinkage in 25% of Her-2 positive patients. Her-2 positive patients account for about a quarter of all breast cancer patients, so theoretically, Herceptin’s activity in unselected patients is roughly 7%.
Unlike naked antibodies, which may work by various mechanisms, ADCs have one primary mechanism of action: They bind specific targets on tumors, get into cancer cells and release their toxic payload. This may enable drug developers to accurately identify the right patient population solely based on a particular target’s expression profile. With naked antibodies such as Herceptin and Erbitux, things are more complex, as their mechanisms of action entail multiple factors that cannot always be identified and examined in every patient. For example, several studies show that genetic variations in patients’ white blood cells affect the potency of Herceptin, even if their tumors express Herceptin’s target, the Her-2 protein. With T-DM1, which comprises Herceptin and Immunogen’s (IMGN) ADC technology, these variations, which account for many cases of Herceptin resistance, are irrelevant. Likewise, if GPNMB is a relevant target, identifying the right patients for CR011 should be straightforward.
There is no doubt that CR011 is still a speculative bet, miles away from approval, as no data from the breast cancer study has been officially published. Curagen’s remarks about activity in breast cancer will have to be supported by actual results and larger trials, which may not live up to expectations. Nevertheless, the fact the company is seeing activity so early in the trial, the strong data in melanoma and the novelty of the target all make CR011 an intriguing candidate that could turn into the next big thing in breast cancer over night.
With respect to financial stability, Curagen ended 2008 with $88 million in cash and 19 million worth of convertible debt. The company burns approximately $ 4 million per quarter, so it can remain independent of the equity markets for several years at the current burn rate. Evidently, the further CR011 advances, the more expensive its development will be, but assuming the data at ASCO June support the initiation of large trials, Curagen will probably strike a licensing deal with a large partner. Investors assign minimal value to CR011 and its potential. With a current market cap of $36 million, Curagen is traded for less than its cash balance, despite the clear clinical activity in melanoma and the positive signs from the breast cancer program. In that sense, Curagen is ridiculously cheap.
Curis has been getting a lot of attention these days, owing to its collaboration with Genentech for Curis’ GDC0049, a drug that is garnering a lot of interest in the industry. GDC0049 is a kinase inhibitor that inhibits the hedgehog pathway, a signaling pathway that is strongly associated with a variety of cancers. This signaling network is also believed to be activated in cancer stem cells, which have the ability to initiate new tumors and survive the most aggressive chemotherapy treatments, making GDC0049 ideal for combination regimens.
Genentech started a phase I in January 2007 and following a dramatic response in a patient with basal cell carcinoma (BCC), decided to initially focus on BCC. According to results published last year, GDC0049 is very active in BCC, as 6 partial responses and 4 cases of stable disease were reported in 11 patients (response rate of 55%). BCC is very common, but can be easily cured in the vast majority of cases, so the commercial potential of this indication is limited. Nevertheless, the trial is very important because it serves both as a clear proof of concept for the drug’s anti cancer activity as well as a validation of the hedgehog pathway as a relevant target in cancer.
Encouraged by the drug’s clear activity, Genentech embarked upon an aggressive development plan, which includes 3 large phase II studies in BCC, colorectal cancer and ovarian cancer. This type of aggressive development plan is a testament to Genentech’s enthusiasm with the compound, which can also be echoed in the company’s presentations. For example, at the recent JP Morgan conference, Genentech’s CEO, Art Levinson brought up GDC0049 as the first example for innovative agents in Genentech’s pipeline, speaking at length about its promise and the role of the hedgehog pathway in cancer biology.
In contrast to most phase II agents, one can safely assume that GDC0049 will hit the market, but in a tiny indication, estimated at less than $100 million worldwide. Because Curis licensed GDC0049 as part of an early stage deal, it will receive low royalties in the 5-8% range, so the real potential is in additional indications.
Genentech decided to jump straight to randomized placebo controlled phase II trials in ovarian and colorectal cancers, which is uncommon for such an early stage drug. It is always harder to generate good data in randomized trials, but it also enables companies to reach proof of concept earlier or discontinue a program prior to long and costly phase III studies. It will not be surprising if Genentech launches additional trials, given the high prevalence of hedgehog activity in most types of solid tumors, from pancreatic to prostate cancer. The ability to pursue multiple paths in parallel is the most important advantage of having a large partner, especially an active one such as Genentech.
One disadvantage in Curis is the competitive landscape it operates in. There are several inhibitors of the hedgehog pathway under development. To date, GDC0049 is the only one with clinical data, but results from a phase I trial of Bristol-Myers Squibb (BMY) and Exelixis’ (EXEL) compound are expected this year. Another hedgehog inhibitor that recently got into the clinic is Infinity’s (INFI) IPI-926.
Curis’ value is derived mainly from the Genentech collaboration, however, the company has been developing a line of wholly-owned candidates based on a unique disruptive technology, which could transform the tiny company into an oncology powerhouse. Without going too deep into technical details, these agents are hybrid drugs with two sites of activity, leading to a dual mode of action. For example, the most advanced of these compounds is CUDC101, a drug that inhibits an enzyme called HDAC with one side of the molecule, and EGFR with the other side.
The concept of simultaneously hitting multiple targets has been all the rage in oncology lately, with two basic ways to inhibit more than one target: Multi-targeted kinase inhibitors, whose active site fits several targets, or a combination of several compounds, each one specific for its target. Curis’ approach is unique in its ability to inhibit more than one target with one compound, but in two different sites on the drug. This platform may represent the potential advantage of targeting a kinase and a non-kinase with the same drug. Furthermore, Curis’ compounds may be advantageous over multi-targeted kinase inhibitors due high selectivity, which may lead to a better safety profile and higher maximal doses.
The company will get its first shot of proving the platform in the middle of 2009, when results from a dose escalation phase I study of CUDC101 are published. So far, the company says it observed encouraging biomarker signals among patients who received lower doses of the drug, and that it hopes to see clinical effect at higher doses. If the data is positive, Curis will have a 100%-owned promising agent, and more importantly, a set of novel agents it could license for a high price.
Biotech portfolio updates
We are initiating new positions in both Curagen and Curis, as we believe that at current valuation, their risk/reward ratio is attractive. Both stocks face transformational events this summer with virtually non-existent expectations. Curagen will report results from its breast cancer study and Curis should report preliminary phase I data for its novel platform. In both cases, the market does not expect much, leaving room for a meaningful upside. In addition, we are buying Threshold Pharmaceuticals (THLD), another microcap with a promising agent, but with limited financial resources, which is why we are buying only a small portion. Also on our buying list for this week is one of Europe’s best biotech companies, Crucell (CRXL) and biotech giant, Genzyme (GNZM), both considered top acquisition targets in the biotech industry.
We are selling our position in Genentech, as we believe the risk for near volatility surpasses the chances of seeing a sweetened offer from Roche in the coming months. We are also selling our Novartis (NVS) holdings.
In the next article we will present another promising European biotech, Morphosys (MOR.DE). Involved in tens of development projects with some of the leading pharma giants, this profitable company can be viewed as a diverse ETF for the global antibody market.
Portfolio Holdings as of February 22nd, 2009