Avalanche Biotech – approaching the moment of truth

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.

De-risked program

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.

Sustained release

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.

P1- BCVA

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.

Rescue injections

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.

Portfolio update

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

biotech portfolio - 10-5-2015 - after changes

biotech etfs - 10-5-2015

63 thoughts on “Avalanche Biotech – approaching the moment of truth

  1. Ohad, have you ever looked at Proteon Therapeutics? Any thoughts?

    ZFGN is well off its highs? Do you still find it overvalued?

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  2. Ohad,

    As for OCAT you probably are aware of this preliminary study which reports fairly positive results. It is only four patients with seemingly dramatic improvement in three. It is relatively recent with online publish date of April 30, 2015

    http://www.cell.com/stem-cell-reports/fulltext/S2213-6711(15)00105-8

    The full article is illuminating. No pun intended.

    And for anyone who might be interested here is Charlie Rose’s presentation including Dr. Stephen Schwartz who directed the P1 study for OCAT’s RPE cell transplantation. Schwartz’s input starts at 31:45.

    http://charlierose.com/watch/60378567

    As you say very intriguing and with the February dustup over financing don’t you think this may be a good entry point, or are you waiting for more corroboration of the concept?

    Thanks again and best regards,

    Pete

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  3. A link enclosed here makes reference to OCATA’s previously published results in the Lancet (Oct. 2014.) The more recent results cited by Pete above are for 4 Asian patients, and they are pretty much a confirmation of the data from 2014. The company went through a name change (formerly Advanced Cell Technology), so there might be some difficulty in tracking their progress.

    http://irvaronsjournal.blogspot.com/2014/10/stem-cells-in-ophthalmology-update-27.html

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  4. Hi Ohad,

    Do you have an opinion on Galapagos? They recently had the 3rd largest biotech ipo ever on nasdaq which was very succesfull. 24 week results of filgotinib DARWIN1 and DARWIN2 phase IIb are expected in july/august. 12 week results were excellent. It could be a blockbuster but there is competition in RA. Baricitinib is 2 years ahead, and Abbvie has their own ABT494 although not as an monotherapy. GLPG looks to have an promising pipeline. Really curious about your opinion on the other side of the Atlantic. Im long in GLPG by the way. Nice trackrecord by the way.

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  5. Great article and discussion about $AAVL. I am long. A couple of points:
    1) The 3yr follow up data from Ph1 is also expected mid-year. I have some concerns regarding this data given recent discussion about durability of AAV therapies. I think this could negatively impact stock even in Ph2 is ‘positive’.
    2) It is is apparent from above discussion and from analyst reports that the market is a little unclear on what will constitute a Ph2 success. It is quite possible that the small nature of this study and the less severe baseline characteristics of the included patients will make it hard to demonstrate a statstically signficant difference in terms of number of re-injections. However, I am long, because I think the Ph1 data showed that, even in severe patients, the drug could effectively abolish the need for any breakthrough treatment. Therefore, I expect that in the Ph2 there will be very little breakthrough treatment in the treated arm. For me this is much more impi

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  6. Great article and discussion about $AAVL. I am long. A couple of points:
    1) The 3yr follow up data from Ph1 is also expected mid-year. I have some concerns regarding this data given recent discussion about durability of AAV therapies. I think this could negatively impact stock even in Ph2 is ‘positive’.
    2) It is is apparent from above discussion and from analyst reports that the market is a little unclear on what will constitute a Ph2 success. It is quite possible that the small nature of this study and the less severe baseline characteristics of the included patients will make it hard to demonstrate a statstically signficant difference in terms of number of re-injections. However, I am long, because I think the Ph1 data showed that, even in severe patients, the drug could effectively abolish the need for any breakthrough treatment. Therefore, I expect that in the Ph2 there will be very little breakthrough treatment in the treated arm. What I am less clear on is what breakthrough rates we can expect in the control arm with baseline VAs of 63. Any thoughts?

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  7. Richard – Sorry don’t know PRTO well. I still think ZFGN is expensive, will wait for a better entry point.

    Pete/Hillary (OCAT) – Thanks for providing this info, indeed quite encouraging. Agree that valuation is attractive.

    Bert (GLPG) – I have been following them for a long time, they have are significantly de-risked following initial DARWIN results. I am waiting to see their safety profile, which could be a major differentiator vs. Xeljanz and baricitinib. At their last quarterly call, INCY said they don’t think GLPG is differentiated.

    binary (AAVL) – Thanks. Agree about the recent RPE65 data as an overhang. This is clearly a risk for all AAV-based gene therapies although it’s important to note not all gene therapy treatments are created equal from an efficiency/potency standpoint. In addition, Anti-VEGF may not necessarily behave as other gene therapies as this is a classic decoy approach.
    As far as expectations from the P2a, I at the stricter side of the spectrum, as I believe the number of rescue shots should be dramatically reduced (from 4-5 to ~1) in order to support broad acceptance. Completely agree this is the most important metric.

    Richard (CYCC) – No value there imo.

    Ohad

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  8. Hi Ohad,

    Good to see you already follow GLPG for a long time. The CSO of Galapagos said the following about safety: “Its selective inhibition of JAK1 also leads to a differentiated safety profile, as measured by an improvement in hemoglobin and overall lipid profile”.

    It will be interesting and i agree safety profile might be the key to success. Whats your strategy on GLPG, you wait on the 24-week results or even longer to decide if its a buy? Maybe till Abbvie decides is they take the license and pay $200 million or results of Filgotinib in Crohn’s Q1 16?

    Anyway, i will surely keep following your blog, best of luck to you.

    Like

  9. Hi Ohad,
    I am new to your blog but I will enjoy following it. I have a question for you with regard to AAVL. You estimate a positive response of 200% with a successful trial and a drop of 80% with a negative trial. Would you be so kind as to share your understanding about how you come up with these numbers.
    Secondly since your initial writeup on May 10 an article was published on Seeking Alpha by Lowenthal Capital as a result of an interview with the “entire team” of management at AAVL.(http://seekingalpha.com/article/3205796-avalanche-management-addresses-wall-streets-concerns-ahead-of-binary-catalyst) Among the many comments are that this trial is not powered enough to determine the efficacy of the secondary endpoints ( I assume less deterioration in vision and less rescue injections). If you have a chance to read this article I would appreciate any update on your thoughts, if any, about AAVL.
    Thanks for your blog.
    Mike

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  10. Mike (AAVL) – Thanks. Stock reaction to news is very tricky to predict so obviously my prediction is very subjective and is as good as anyone else’s. Basically, the rationale was that if AVA-101 obviates the need of injections it will become a ~$3B drug down the road. Given the clear head start, the competitive pressure in the field and the potential to generate additional treatments with their platform, a~$2.5B valuation makes sense.
    Regarding the SA article, management is understandably cautious in terms of expectations and a good safety profile is the first requirement for a drug like AVA-101. I still believe the trial should generate a clear efficacy signal (reduction in frequency of anti- VEGF administration) if AVA-101 is doing what it is expected to do.

    Ohad

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