Could gene therapy become biotech’s growth driver in 2017?

Despite bouncing off a 2-year low, biotech is still an unpopular sector and investors are rightfully concerned about its near-term prospects. Recent drug failures, growing pricing pressure and the potential impact of biosimilars all contribute to the negative sentiment, but the main problem is the lack of growth drivers for the remainder of 2016 (and potentially 2017).

The biotech industry relies on innovation cycles to create new revenue sources. This was the case in the 2013-2014 biotech bull market, which was driven by a wave of medical breakthroughs (PD-1, HCV, CAR/TCR, oral MS drugs, CF etc.). These waves typically involve new therapeutic approaches coupled with disruptive technologies as their enablers.

In oncology, for example, the understanding that cancer is driven by aberrant signaling coupled with advances in medicinal chemistry and antibody engineering led to the development of kinase inhibitors and monoclonal antibodies as blockers of signaling. A decade later, insights around cancer immunology gave rise to the immuno-oncology field and PD-1 inhibitors in particular, which are expected to become the biggest oncology franchise ever.

Gene therapy ticks all the boxes

While there are several hot areas in biotech such as gene editing and microbiome, most are still early and their applicability is unclear. Gene therapy, on the other hand, is more mature and de-risked with tens of clinical studies and the potential to treat (and perhaps cure) a wide range of diseases where treatment is inadequate or non-existent. The commercial upside from these programs is huge and should expand as additional indications are pursued.

As I previously discussed, the past two years saw a surge in the number of clinical-stage gene therapies, some of which already generated impressive efficacy across multiple indications. This makes gene therapy the only truly “disruptive” field which is mature enough not only from a technology but also from a clinical standpoint. Importantly, most studies are conducted by companies according to industry and regulatory standards, in contrast to historical gene therapy studies that were run by academic groups.

To me, the striking thing about the results is the breadth of technologies, indications and modes of administrations evaluated to date. This versatility is very important for the future of gene therapy as it reduces overall development risk and increases likelihood of success by allowing companies to tailor the right product for each indication. Parameters include mode of administration (local vs. systemic vs. ex vivo), tropism for the target tissue (eye, bone marrow, liver etc.), immunogenicity and onset of activity.

Building a diversified gene therapy basket

Given the early development stage and large number of technologies, I prefer to own a basket of gene therapy stocks with a focus on the more clinically validated ones: Spark (ONCE), Bluebird (BLUE) and Avexis (AVXS).

Bluebird and Spark are the most further along (and also the largest based on market cap) gene therapy companies and should be the basis for any gene therapy portfolio. With two completely different technologies, the two companies have strong clinical proof-of-concept for their respective lead programs.

Avexis is less advanced without a clinically validated product, but recent data for its lead program are too promising to ignore.

Spark – Clinical validation for retinal and liver indications

Spark’s lead programs (SPK-RPE65) will probably become the first gene therapy to get FDA approval. In October, the company reported strong P3 data in rare genetic retinal conditions caused by RPE65 mutations, the first randomized and statistically significant data for a gene therapy. The company is expected to complete its BLA submission later in 2016 which should lead to FDA approval in 2017. Spark’s second ophthalmology program for choroideremia is in P1 with efficacy data expected later in 2016.

Earlier this month, Spark released an encouraging update for its Hemophilia B program, SPK-9001 (partnered with Pfizer [PFE]). A single administration of SPK-9001 led to a sustained and clinically meaningful production of Factor IX, a clotting factor which is dysfunctional in Hemophilia B patients.  All four treated patients experienced a clinically significant increase in Factor IX activity from <2% to 26%-41% (12% is predicted to be sufficient for minimizing incidence bleeding events). Due to the limited follow up (under 6 months), durability is still an open question.

Spark intends to advance its wholly-owned Hemophilia A program (SPK-8011) to the clinic later in 2016 with initial data expected in H1:2017. Results in the Hemophilia B should be viewed as a positive read-through but Hemophilia A still presents certain technical challenges (e.g. missing protein is several fold larger) which required Spark to use a different vector. Hemophilia A represents a $5B opportunity compared to $1B for Hemophilia B.

Bluebird

Despite being one of the worst biotech performers, Bluebird remains the largest and most visible gene therapy company.  In contrast to most gene therapy companies, Bluebird treats patients’ cells ex-vivo (outside of the body) in a process that resembles stem cell transplant or adoptive cell transfer (CAR, TCR). Progenitor cells are collected from the patient, a genetic modification is integrated into the genome followed by infusion of the cells that repopulate the bone marrow.  This enables Bluebird to go after hematologic diseases like beta thalassemia and Sickle-cell disease (SCD) where target cells are constantly dividing.

Sentiment around Bluebird’s lead program, Lenti-globin , plummeted last year after a series of disappointing results in a subset of beta-thal patients and preliminary data in SCD, which represents the more important commercial opportunity. Particularly in SCD patients, post-treatment hemoglobin levels were relatively low and although some increase has been noted with time, it is still unclear what the maximal effect would be. Market reaction was brutal, sending shares down 75% in just over a year.

Next update for Lenti-globin is expected at ASH in December.  Despite the disappointing efficacy observed in SCD and beta-thal, I am cautiously optimistic about Bluebird’s efforts to optimize treatment protocols and regimens. These include specific conditioning regimens and ex-vivo treatment of cells that may improve transduction rate and hemoglobin production in patients. Some of these modifications are already being implemented in newly recruited patients and hopefully longer follow up will lead to higher hemoglobin levels in already-reported patients.

The only clinical update so far in 2016 was for Lenti-D in C-ALD, a rare neurological disease that affects infants in their first years. Results demonstrated that of 17 patients treated to date (median follow-up of 16 months), all remain alive and free of major functional deterioration (defined as major functional disabilities, MFD). The primary endpoint, defined as no MFD at 2 years, was reached for 3/3 patients with sufficient follow-up and assuming the trend continues Bluebird may be in a position to file for approval in H2:2017.

Lenti-D’s  commercial opportunity is limited (200 patients diagnosed each year in developed countries) so investors understandably focus on  Lenti-globin, which is being developed for beta –thal (~20k patients in developed countries) and SCD (~160k patients).

Bluebird is expected to end 2016 with ~$650M in cash. Current market cap is $1.7B.

Avexis

Avexis is developing AVXS-101 for Spinal muscular atrophy Type 1 (SMA1), a rapidly deteriorating and fatal neuro-muscular disease. SMA1 is characterized by rapid deterioration in motor and neuronal functions with 50% of patients experiencing death or permanent ventilation by their first anniversary. Most patients die from respiratory failure by the age of two. SMA Type 2 and Type 3 are also caused by SMN1 mutations and are characterized by a later onset and milder disease burden (but unmet need is still significant in these indications). The US prevalence of SMA is 10,000, 600 of which are SMA1.

In contrast to Bluebird and Spark, Avexis does not have conclusive proof it can lead to expression of the missing protein (SMN1)  in the target tissue nor does it have randomized clinical data but the results generated to date are simply too provocative to ignore.

At the most recent update, Avexis presented data for 15 patients who received AVXS-101 in their first months of life. 3 patients were treated with a low dose and 12 were treated with a high dose. Strikingly, none of the children experienced an event (defined as ventilation or death), including patients who reached 2 years of age. All 9 patients with sufficient follow up, reached the age of 13.6 months without an event in contrast to historical data that show an event-free survival of 25%. AVXS-101 also led to a dose dependent increase in motor function which had a quick onset especially at the higher dose.

RGNX

As with any results from an open label study without a control arm, these data should be analyzed with caution, as they need to be corroborated by large controlled studies (expected to start next year). Still, the data point to an overwhelming benefit in a very aggressive disease.   One of the most exciting aspects of this program is the fact that it is given systemically via IV administration, which implies the treatment reaches the neurons in the CNS. Avexis plans to start a trial in SMA2 in H2:16 using intrathecal delivery (directly to the spinal canal). This decision is surprising given the results with IV administration in SMA1 and the fact that the “BBB immaturity” hypothesis in babies is not considered relevant anymore. (See this review)

AVXS-101’s main competitor is Biogen’s (BIIB) and Ionis’ (IONS) nusinersen, an antisense molecule that needs to be intrathecally injected 3-4 times a year. As both drugs generated encouraging clinical data in small non-randomized studies, it is hard to compare them, however, AVXS-101 has an obvious advantage of being a potentially one time IV injection. Nusinersen is in P3 with topline data expected in mid-2017.

AVXS-101 is based on an AAV9 vector developed by REGENXBIO (RGNX), which licensed the technology to Avexis. Beyond the 5%-10% in royalties REGENXBIO is eligible to receive, data for AVXS-101 bode well for the company’s proprietary programs in MPS-I and MPS-II, two other rare diseases with neurological involvement where BBB penetration is crucial. These programs are also based on REGENXBIO’s AAV9.

Beyond AVXS-101, REGENXBIO has an impressive partnered pipeline which includes collaborations with Voyager (VYGR), Dimension (DMTX) , Baxalta and Lysogene.

Portfolio updates – Immunogen, Marinus, Esperion

June was a rough month for three of my holdings. Immunogen (IMGN) had a disappointing data set at ASCO, Marinus (MRNS) reported a P3 failure in epilepsy and most recently, Esperion was dealt a regulatory blow from the FDA that may push development timelines by several years. I am selling Immunogen and Marinus due to the lack of near-term catalysts although long-term their respective drugs could still be valuable. I decided to keep Esperion as I still find ETC-1002 very attractive and hope that PCSK9’s CVOT data will soften FDA’s concerns about LDL-C reduction as an approvable endpoint.

Three additional companies with important binary readouts in the coming months are Array Biopharma (ARRY), SAGE (SAGE) and Aurinia (AUPH). Array will have P3 data for selumetinib (partnered with AstraZeneca) in KRAS+ NSCLC. SAGE will report data from a randomized P2 in PPD following a promising single-arm data set.  Aurinia will report results from the AURA study in lupus nephritis patients, where there is a strong rationale for using the company’s drug (voclosporin) but limited direct clinical validation.

Portfolio holdings – July 4, 2016

portfolio - 4-7-2016- after changes

biotech etfs - 4-7-2016

149 thoughts on “Could gene therapy become biotech’s growth driver in 2017?

  1. Thanks for your thoughts on the editing companies. Agree with your price targets. Are you still bearish on IBB? It has had a big run since end of JUne from 240 to 298. looks like sentiment is positive and many bios closed at HOD. I
    Thanks again for your opinion

    Like

  2. steve (ACAD) – Sorry, don’t know them well.

    Dan (SAGE) – Thanks for providing the link, I wasn’t aware of this program. In any case, I don’t think it should be viewed as a competitor for SAGE because SAGE is developing NMDA agonists whereas AV-101 functions as an NMDA inhibitor.

    Lgonber (IBB) – Yes I am still bearish on IBB as I think the fundamental challenges (pricing, biosimilars, few big drug launches) will take their toll.

    curiousgeorge (EXEL) – Numbers were very good imo, implies a strong launch and dispels concerns about Opdivo geting all the 2nd/3rd line patients. If we factor in inventory buildup and the 9 weeks on the market, annualized run rate is $100M, which is pretty nice.
    Hard to speculate about a deal in Japan, don’t know why it’s taking them so long but the quarterly numbers should give EXEL leverage at the negotiation table imo.

    Al (EXEL) – Thanks. Now we need to hope the company will use the opportunity to pay back some of the convertible debt later this month.

    Ohad

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  3. $EXEL What is your price target this month for Exelixis and towards the end of the year ? How do you anticipate the arbritration battle ? I think Exelixis will win it by the way, the lower price on Cobi is quite obvious. Do you think they will pay them back in stock or cash or a combination of both ? Can they pay them back in 2019 with just the amount they borrowed ?

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  4. $EXEL
    Hi Ohad, Congrats to all in Exel. Finally I was able to put MRNS and ESPR mess behind. I decided to hold all my shares in Exel. The only thing bothers me is what’s gonna happen in the short term IF they convert 2018 debt with ALL stock conversion. The co’s valuation will stay the same,but what about the valuation of my holding? 10 – 20% cut? Is my concern legit? I’d like your opinion in sp move in case of ALL stock conversion. TIA. Gene

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  5. $EXEL
    http://m.news.bms.com/press-release/bristolmyers/bristol-myers-squibb-announces-top-line-results-checkmate-026-phase-3-stu
    Thoughts:
    1) BMY will look at EXEL more closely for combinations due to their 1L failure in lung cancer using Opdivo. RCC, and Lung are two top markets for IO drugs and Exelixis presumably works in both. There was a mention of potential in lung cancer combination trial during the earnings call.
    2) Japan deal could be made now that earnings are out, they might be asking for more money due to Cabosun now being pursued for FDA approval for 1L RCC albeit confidentially.
    3) After Japanese deal, and Ipsen European payment Exelixis might have a larger sum of money to pay down the convertible debt in cash and stock combination.
    4) Potential bidding war for Exelixis between BMY, Pfizer, and Roche.

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  6. $EXEL
    1) BMY will look at EXEL more closely for combinations due to their 1L failure in lung cancer using Opdivo. RCC, and Lung are two top markets for IO drugs and Exelixis presumably works in both. There was a mention of potential in lung cancer combination trial during the earnings call.
    2) Japan deal could be made now that earnings are out, they might be asking for more money due to Cabosun now being pursued for FDA approval for 1L RCC albeit confidentially.
    3) After Japanese deal, and Ipsen European payment Exelixis might have a larger sum of money to pay down the convertible debt in cash and stock combination.
    4) Potential bidding war for Exelixis between BMY, Pfizer, and Roche.

    Like

  7. $EXEL Cabosun being pursued as 1L was mentioned in the earnings call without them directly saying they are filing for approval so i am assuming they are doing it confidentially to set lower expectations and reveal the outcome only when it is there. This has been their practice since the Comet failures.

    Like

  8. curiousgeorge (EXEL) – It depends on whether they can get money from EU approval or Japan deal and repay a significant portion of the convertible debt. If they do, the stock could continue to climb towards 13-14 imo.

    Gene H. (EXEL) – IMO it would be inconceivable to repay the debt in shares when they have so much cash and burn rate will be reduced dramatically this year.

    James Eslea MacDonald (BMY) – Amazing, that’s probably the biggest biotech news in 2016 to date. It was clear all along that PD-1 antibodies have differential efficacy based on PD-L1 expression, BMS relied on the effect in PD-L1 high expressers to be strong enough to push the entire population to a stat sig benefit and got it wrong.

    curiousgeorge (EXEL) – Not sure BMY’s failure will have an impact here. Agree about te strong launch being able to lead to a rich deal in Japan. It is still unclear whether they will be able to file in 1L RCC based on CABOSUN, to me they sounded quite cautious on the call.

    Ohad

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  9. Bespoke Investment Group analysts note that the bear market for biotech is now over. Since June 27, the industry index is up 22.6%, which is above the +20% threshold for a new bull market. The analysts note the recent bear market was the longest on record for Biotech at least going back to 1993. The median bull has been a 51% gain. Biotech bulls have historically lasted roughly one year — which bodes well for the current bull, since it’s just 37 days old.

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  10. Ohad, Thanks for your great comments. Any opinion on Heat Biologics (HTBX). It’s recently doubled but still way down for the year. Earnings out this week. Thanks

    Like

  11. $EXEL If they were to pay back in cash what do you think is the payback amount ? When do you think they will be able to pay back that amount given their cash flow, and existing cash reserves ?

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  12. $EXEL Assuming Japanese deal is at 100 million upfront payment, and 60 million from Ipsen that is 160 million. Assuming they make 60 million for 1 quarter that comes to 240 million. Assuming cash repayment is around 300 million, that leaves 60 million short. It means they might want to increase the Japanese upfront payment to 160 million or Genentech is told by JAMS to cough up $150 million and give 20 percent royalties on exUS for contract breach regarding Cobimetinib, that gives them plenty of room to repay the debt in cash. All in the realm of optimistic possibilities. Realistically, it is fairly obvious that Genentech intentionally lowered the price of Cobimetinib to an unfair amount so my gut tells me that they will win the JAMS claim. The question is how long does it take for JAMS to decide on arbritration ? What do you think of all the scenarios i have posted ?

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  13. $EXEL I don’t really know how JAMS settles this disputes so the $150 million punitive charge and 20 percent royalty ex US is a guess based on some news articles about other companies having settled such disputes before.

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  14. Howard Partner – Agree about sentiment being much better but I still don’t see how the field can grow in the coming 6-12 months.

    Wood Beal (HTBX) – Don’t know them well but in general I am not a big fan of their approach.

    curiousgeorge (EXEL) – I hope they will repay at least $150M of debt (60M from Ipsen after EU approval and 100M from cash position). Burn rate will go down dramatically going forward with the potential to reach break even next year so I am not concerned about cash position in the short run.

    Ohad

    Like

  15. Hi Ohad
    Congrats on EXEL and thanx again for your invaluable help.
    I’d like to revisit a past comment I made months ago about the down side of investing rather than trading in BIS.

    On 1/12/2016 IBB closed@ 296.20 and BIS@ 36.96
    On 8/04/2016 IBB closed@ 296.15 and BIS@ 30.87

    That’s some serious loss due to time decay.

    Regards
    Gene

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  16. Gene Mc (IBB/BIS) – Thanks. You are correct, using leveraged short ETFs have this inherent drawback. I still think it’s a plausible “hedge” if one believes the sector will underperform in the near future.

    Ohad

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  17. Ohmsonite (ARRY) – Thanks, CRTh2 has been around for a long time but couldn’t really take off, not sure why as the rationale and preliminary clinical evidence are there. In any case , Array has other issues to deal with today…..

    curiousgeorge (ESPR) – There is always a regulatory risk especially in ESPR’s case although expectations today are so low that I doubt there can be meaningful negative surprises. Most important data point is CVOT with PCSK9 early 2017.

    Ohad

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  18. Dan/Mark (ARRY) – Have to admit I believed the P2 data were reliable…at a market cap of 500M given the long term debt and lack of dramatic near term catalysts I prefer to get out of the stock.

    Ohad

    Like

  19. HI Ohad, regarding ARRY, what about phase 2 ARRY 797 data in September. If its positive, it could recover some of today’s loses don’t you think? Aren’t you optimistic about that data readout?

    Like

  20. Ohad
    LOXO now has 100M larger cap than ARRY including 170M cash – shows the higher value of the targeted therapies. Sad, but ARRY mgmt lacks vision.

    Like

  21. Alex (ARRY) – At this market cap and following the NSCLC failure I don’t think it’s likely.

    Ruhu (ARRY) – I actually think it has a decent chances of getting approved but commercial value is still limited imo.

    Lgonber (ARRY) – Agree, that could be a true wild card.

    Andrey (ARRY) – Agree about LOXO’s strategy of going after highly selective inhbitors of tumor drivers. All of their molecules were created at ARRY but the commercial implications are limited.

    Ohad

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  22. Looks like EXEL has no desire to pay convertible debt down with cash. I dont understand how this is good for the common shareholder. Upside is I think they are a strong buyout candidate.

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  23. @JH: It sounds like the deal they negotiated w/ a couple of large holders doesn’t mention paying the remaining outstanding interest on those bonds; I wonder if that means they are now spared those cash payments on the ~$168mm face.

    If you read the prospectus for the bonds, a redemption of the bonds by Exelixis triggers a bond holder’s right to convert to stock (within a 2 day window), so they wouldn’t have saved the shareholder from that dilution upon redeeming.

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  24. I would have to see how much money in interest they saved. I Still dont view it positively. But I will be happy if they pay off the remaining 100+ million in cash. Overall they need to really clear out debt and sign Japanese deal.

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  25. $EXEL It seems to me their aim might be to get rid of the convertible completely. SO they might have selected bond holders like Bakers Brothers to negotiate with and give them common shares, and use new money coming to be able to pay the rest of it. It is actually a good move. Because the average 50 day share price will not be that high if that is what is used to calculate the payback amount to the remaining bond holders in cash. Dilution might lower the price, and hence lower their eventual payout after the Japan deal happens and before ESMO.

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  26. Ohad, I came across a recent Swiss IPO called GeNeuro that is targeting a human retrovirus for MS. They think it could be a fundamental cause of MS. Have you heard of such an approach and do you think it has any merit? They are partnered with Servier but kept U.S. and Japan rights.

    P.S. I decided to bail on ARQL in front of pivotal P3 tivantinib data. I don’t like how management barely even discusses the pending data anymore and the shift to focus on discussing the early-stage drugs seems like a bit of a red flag to me. But, we’ll see…you never know I guess. The clincher was they seemed to guide that there won’t be any meaningful new data reported on their other drugs in front of the pivotal tivantinib data.

    Like

  27. jh (EXEL) – I am also quite frustrated by the fact they issued shares at such a low price but I want to believe they didn’t have a choice according to the agreement they had with the debt holders. I think it will take 6-12 months until they become a buyout candidate as one of two things needs to happen: Strong RCC launch with >170M in 2017 sales OR positive HCC data (still a long shot but I am more optimistic following rego’s data).

    Wildbiftek (EXEL) – Since they can technically repay notes in cash only from Aug 15, I hope they will announce some redemption of debt next week but that’s pure speculation.

    curiousgeorge (EXEL) – To me, getting rid of the debt is a top priority and as you mentioned, the 2016 setup has plenty of catalysts to leverage for that (EU approval milestone, Japan deal, ESMO and potentially HCC data).

    mcbio316 (ARQL) – Haven’t heard of GeNeuro, quite a provocative approach…

    Re ARQL – I tend to agree there and also plans to reduce exposure prior to P3 readout and then get back in for the Akt and FGFR readouts in 2017.

    Ohad

    Like

  28. ARQL: I think the valuation of ARQL is already low. Everybody thinks that P3 tivantinib will fail. So maybe this will be no major event and the P3 tivantinib readout is at least an interesting lottery ticket.

    Ohad, a question to the German biotech Medigene. For some time they try to find a partner for the solid tumor indication with their TCR technology. But there is no success message until today. What is your opinion about this fact?

    Thanks.

    Like

  29. Hi Ohad,

    EXEL: Note that they said on the conference that they would be transparent about the interims for CELESTIAL (so they haven’t occurred yet.) They will presumably be consistent with what they have done in the past and announce full enrollment as well.

    RESORCE (OS over 33 month time frame): began May 2013, enrolled 573 (2:1 over 178 locations) and read out by May 2016. (7.8 months median OS for placebo arm 10.6 months median OS for regorafenib arm)

    CELESTIAL (OS over 38 month time frame): began August 2013, will enroll 760 (2:1 over 106 locations), and targets 621 events (so interims at 310 and 465 events.) Has not fully enrolled and first interim at 310 hadn’t occurred as of early Aug 2016.

    It’s hazy at present but CELESTIAL is probably going to fully enroll soon and it seems like a good sign for efficacy that the first interim hasn’t occurred yet. They originally planned on a readout this October and this has since been pushed into 2017.

    Like

  30. Hey Ohad
    How. Ome you are not con in ed. Y HTBX technology? Their ComPact platform seems like an elegant solution, providing the possibility to enable wide antigen targeting combinations with just one therapeutic. Moreover, considering BMY’s recent p3 failure, isn’t it obvious that such technologis will be added to checkpoint inhibitors? ThAnks! Dan

    Like

  31. Hi Ohad,

    AUPH has had a bit of a run-up into data expected later this month. What do you see as the expected range for the stock upon read out? Given that they need to raise money before the end of the year, how much upside do you think is left?

    Thanks,
    sherk

    Like

  32. Ohad, just curious where your 5-10% royalty rate RGNX is due from AVXS on AVXS-101 is from. Has RGNX formally disclosed that or is that your best guess? Also, do you think that is typically the rate they are due on their other partnered programs?

    Like

  33. Peter – $EXEL It keeps the redemption value of the remaining bonds low so they can redeem the bonds at a lower payout. You would have to read the terms of the bonds in the prospectus to try to figure it out, it is complicated.

    $OCUL – What is your opinion ? Do you think the product is useful ? Can their single center trials pass FDA ?

    $ARQL – Aren’t there any meaningful third quarter catalysts ? I think there are based on FGFR inhibitor data coming out in 3Q.

    $LIFE – What do you think of their platform, insider buying, and Bakers position ?

    Like

  34. $LIFE Tang Capital Management LLC increased stake by 47% He has a profile of picking bullish biotech stocks. Checkout insider monkey.

    Like

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