In a field characterized by binary “make or break” events, Avalanche Biotechnologies (AAVL) is a poster child. The company derives the majority of its valuation ($819M) from AVA-101, a gene therapy treatment for wet AMD (age-related macular degeneration) currently in phase 2. Top line results are expected within 1-2 months and should have a dramatic impact on the stock as well as the entire ophthalmology industry.
AVA-101 is a gene therapy that is injected directly to the eye and is designed to deliver the gene encoding sFlt-1, a natural inhibitor of VEGF. If successful, AVA-101 could substitute anti-VEGF treatments (Lucentis, Eylea) which are highly effective but have to be locally injected every 1-3 months. Avalanche’s goal is minimizing or even replacing local injections for a period of several years.
Although available data are from a tiny phase 1 (8 patients) and despite the meaningful risk of failure, the stock represents an attractive risk/reward profile.
I view AVA-101 as a de-risked program for several reasons:
MOA validation – VEGF inhibition has proven efficacy in wet AMD based on experience with Lucentis and Eylea which are very effective but have to be administered indefinitely. AVA-101 encodes a different protein but its function is essentially the same. Therefore, if AVA-101 is able to produce sufficient amounts of sFlt-1 in the eye, clinical effect is likely. AVA-101 has the potential to be superior to existing agents because it may lead to a constant level of VEGF inhibitor in the eye vs. the fluctuations that occur with periodic injections.
Source : Avalanche Biotech
Phase I data – AVA-101 demonstrated a clear efficacy signal in a small trial (8 patients), in which patients were randomized to three arms: High dose, low dose and control. Patients were followed up for 1 year and were offered rescue treatment with Lucentis as needed. The high and low dose groups had an improvement in visual acuity of 6.3 and 8.7 letters, respectively, whereas the control group lost 3.5 letters.
Source : Avalanche Biotech
Patients on AVA-101 required a dramatically lower amount of rescue injections compared to patients on the control arm (0.33 vs. 3 injections per year). Importantly, the effect was most notable in patients with a long history of anti-VEGF treatment prior to entering the study. The active arms included four such patients (19-29 prior injections), of whom only one had to be rescued once throughout the study period.
Source : Avalanche Biotech
The rescue injections represent a more reliable and clinically meaningful endpoint as they are less subjective and variable, and were based on a decision by a blinded evaluator. Acknowledging the very small sample size and the lack of a clear dose dependent response, the study generated a clear efficacy signal.
Read-across from other programs – There is long term experience with gene therapy for other ophthalmic indications, especially Spark Therapetuics’ (ONCE) RPE-65 program currently in phase 3. Early results from Spark and other RPE-65 programs clearly show that gene therapy using similar vectors (adeno-associated virus, or AAV) can be safely administered to the retina and produce a long term clinical effect. Although recent findings indicate the effect may be lost after several years, this experience should be viewed as a proof of concept that gene therapy can lead to long lasting protein expression in the eye.
Avalanche is ideally positioned in a lucrative market…
Anti-VEGF drugs for ophthalmic indications represent a multi-billion dollar opportunity. Combined, the two approved agents (Lucentis and Eylea) are expected to generate $4B in sales in the US alone this year. This figure under-represents the real opportunity as many patients are treated with off-label Avastin and penetration into new indications (DME, CRVO) has just begun. Therefore, the US opportunity is probably more in the $8B-$10B range.
If AVA-101 reaches the market with similar efficacy to available drugs, it is likely to capture a meaningful market share, especially in “frequent users”. This could turn it into the biggest franchise in ophthalmology with $3B-$4B in global sales using conservative assumptions (lower pricing and competing gene therapy products).
What makes AVA-101 even more interesting is the competitive landscape of the VEGF market which is controlled by 3 players (Roche, Regeneron, Novartis) who are fighting for dominance and would be willing to pay a lot for such a disruptive product. Avalanche has a broad collaboration with Regeneron (REGN) on multiple indications, the most advanced of which is XLRS (a rare genetic disease). As part of this collaboration, Regeneron also has a right of first negotiation for AVA-101 upon completion of the ongoing trial. This right gives Regeneron a slight advantage over other potential suitors but it is unlikely to prevent a bidding war to acquire Avalanche.
…but market continues to evolve
Next-generation programs beyond VEGF add another layer of complexity. Many companies are developing anti-PDGF agents that may further slow vision loss when added to anti-VEGF treatment. Ophthotech’s (OPHT) and Novartis’ (NVS) Fovista (anti- PDGF aptamer) is in P3 for AMD based strong efficacy in P2. Fovista has to be given as a different injection on top of the anti-VEGF agent, which increases the number of overall shots. Regeneron is developing an anti-PDGFR antibody it is evaluating in combination with Eylea. Although Regeneron’s anti-PDGFR is years behind Fovista, Regeneron plans to co-formulate it with Eylea and administer the two agents in a single shot. If both AVA-101 and anti-PDGF agents reach the market, patients may still need to receive local injections of anti-PDGF with AVA-101 as background. From a patient convenience standpoint, AVA-101 + anti-PDGF may be similar to Regeneron’s co-formulation of Eylea + anti-PDGFR. Therefore, in the long run Avalanche may have to develop a dual gene therapy targeting both the VEGF and PDGF pathways.
Favorable risk/reward going into P2 readout
I view Avalanche as an attractive stock with a favorable risk/reward ratio based on the preliminary efficacy data, the external validation for retinal gene therapy and VEGF as a proven target. I assign a 50% likelihood of a positive outcome in the Phase II (i.e. a significant reduction in anti-VEGF rescue treatments and a 6-letter improvement in visual acuity). Although this means I believe the trial has an equal likelihood of failing, I expect the stock to have a ~200% move (~$2.5B market cap) with good news vs. -80% in case of a failure.
We are adding a second position in Avalanche going into “mid-2015”data readout. It is important to note that this is a high risk binary bet so overall exposure should be limited (<5% of portfolio).
Portfolio holdings – May 10, 2015