Wedbush Securities' Liana Moussatos on the Art and Science of Picking Biotechs with Upside
Interview

The Life Sciences Report: Since mid-April, the biotech indices have regained some of their strength, but the rising tide didn't seem to lift all boats. Do you believe the biotech stock market has changed its character since late February/early March, when we had that rather steep correction?

Liana Moussatos: Part of the correction was due to world events, and not so much about the biotech industry. However, biotech has some high-beta names, and when negative world events occur, people run to more stable companies—those with revenues and earnings.

TLSR: Has there been a shift in emphasis? Are institutional investors abandoning the small- and mid-cap names?

LM: The generalist portfolio managers have told me that if they weren't in biotech last year and earlier this year, they would have a hard time beating their benchmarks. You mentioned the dip: Well, that's when these portfolio managers started calling me to ask about good names going forward. The generalists weren't necessarily avoiding biotech stocks; they just wanted high-quality names with great management and a catalyst in the near future that they were comfortable with. They realized they needed to increase their exposure to biotech.

As far as institutional investment is concerned, it really depends on the fund and whether it can invest in small- and mid-cap names.

TLSR: You can segment your answer to this next question between the generalist and the specialist biotech investor if you wish. Can institutional investors see out beyond six months, or are their time horizons generally shorter these days?

LM: As you inferred, it depends on the type of investor. Some long-term investors will hold on for long time frames, no matter what. It could even be a couple of years. However, a lot of institutional investors look to Dec. 31, because that's when their bonuses are determined. Especially with the initial public offerings coming out now, these investors will ask about the catalysts that could propel a stock to the upside instead of down between now and year-end.

TLSR: All biotech sellside analysts are catalyst-focused, but you seem to have made a science out of looking at catalysts. In looking at your research, I see that you have scenarios expressed as a probability ratio of some specific event occurring. For instance, I see a 60:40 probability that a specific drug will be approved and launched by year-end. You have also quantified the upside/downside potential share price movement—expressed as a percentage—based on certain catalysts or milestones being met. Is this something of an art based on your experience, or more science? Is there some software involved?

LM: There is no software involved. I look at a combination of experience, technicals, where the stock is trading now, and the type of investors paying attention to the upcoming catalysts. All these factors can affect the upside and downside. I do look at where the stock is trading when my note comes out, and do a little math to get my price target.

"There's more to Omeros Corp.; the company has quite a pipeline."

Investors also want to understand the effect of a catalyst. You might expect the stock to go up a lot on a favorable catalyst, but maybe it starts going down—and could even end the day in the red on news of a catalyst being achieved. Then, over the next few days, the stock starts rising again. We saw this with Omeros Corp. (OMER:NASDAQ) when it got its drug Omidria (phenylephrine + ketorolac) approved on May 30 for cataract and other intraocular lens replacement surgeries. The company announced the approval on June 2. A lot of fast money sold on the catalyst, but just a few days later, Omeros started rising. That's because the longer-term investors had done their homework, had gotten comfortable with the market potential of Omidria, and had started buying the stock.

I've noticed some general trends over the years. The release of Phase 3 data can be a large catalyst. You can see 40% or more downside in a stock if the catalyst comes out negative. But if the data are expected to be positive and come through positive, you might not see the same amount of upside. When you get a surprise with good data, that's when you see the biggest moves up.

TLSR: How should investors deal with selling on good news?

LM: More experienced investors will not wait for a catalyst. They pick a price target, and if they are disciplined enough, they will sell on that target and wait for the catalyst. In fact, that's what I recommend investors do. Catalysts are a general guideline. Instead, pick a sell price, whether it's below or above where the stock was purchased, and then be disciplined in selling—unless you get more information or you're a real long-term investor.

TLSR: Omeros is up about 180% versus one year ago, but it's only up about 14% over the past six months. Is this now a story about Omidria revenues?

LM: We won't get any meaningful revenue reporting on Omidria until 2015, because it hasn't launched yet. The company says it will launch sometime in the middle of H2/14. You have to give a launch a couple of quarters before you understand how it's going.

There's more to Omeros than Omidria. The company has quite a pipeline. It has two significant Phase 2 trials that will provide data around the end of this year. One is the company's human monoclonal antibody OMS721 for thrombotic microangiopathies, such as atypical hemolytic uremic syndrome and thrombotic thrombocytopenic purpura. Those are rare diseases that Alexion Pharmaceuticals Inc.'s (ALXN:NASDAQ) monoclonal antibody Soliris (eculizumab) treats; the cost of Soliris is more than $500,000 ($500K)/year for a single patient. Omeros' other pipeline drug is OMS824, a phosphodiesterase 10 inhibitor for Huntington's disease.

Sometimes, investors need more than one catalyst to get comfortable with a company. That's why I think the Phase 2 data from either one of these trials could solidify Omeros, since some investors aren't sure how big Omidria could be yet.

TLSR: I want to stay with Omidria for a moment. Given the problems that we've seen with compounding pharmacies and the home brews they have made for patients and physicians, isn't it a sure thing that ophthalmologists will use this product?

LM: Nothing is 100% sure. Eye surgeons are notorious for making their own home brews, taking bottles of mydriatic (pupil-dilating) agents—eye drops—or non-steroidal anti-inflammatory drugs, and splitting them among patients on surgery day. The U.S. Food and Drug Administration (FDA), for sterility reasons, has been inspecting eye surgeons to inform them they can't do that anymore.

These new regulations increase the cost of standard cataract surgery, I'm told, by about $300, maybe more. Omidria is a great fit for the gap that the FDA has created. But some ophthalmologists are going to keep splitting bottles of drops until the FDA actually inspects them. Omeros is going to have to do some work educating the surgeons.

TLSR: A year ago Omeros submitted a marketing authorization application to the European Medicines Agency (EMA) for Omidria. Would a decision from the EMA move these shares?

LM: It could. It depends on where the stock is trading, and the mood of the market at the time. Approval in the U.S. usually has more of an impact than approval in the European Union by the EMA. Investors know that Omeros does not yet have a sales force for Europe. That's going to take money and time. I'm not sure EMA approval will be as big of a catalyst as I originally thought, but it could end up being a good catalyst on the right day.

The launch of Omidria, which should happen soon, is a catalyst that investors should focus on. And I think the data from either one of the two trials—for OMS824 and OMS721—if they're positive, can have more of an impact than European approval.

TLSR: Could we talk about some other names in your coverage? Could you pick one to discuss?

LM: Pacira Pharmaceuticals (PCRX:NASDAQ) reported Q2 results on July 31. Even though the stock is not cheap, it is also not too expensive. This company has excellent management. I've known CEO Dave Stack for a long time. He's one of those money-follows-people guys, because he knows all the players involved—all the academics and surgeons. He's such an expert on hospital drugs that private companies who want to get into this space ask us for introductions because they want his advice.

"Pick a sell price, whether it's below or above where the stock was purchased, and then be disciplined in selling."

Dave Stack was able to see that Pacira's Exparel (bupivacaine liposome injectable suspension) was going to fill a huge, unmet need for pain medication in the surgery space. The idea is to reduce opioid use and opioid side effects in the first couple of days after surgery. He worked out the manufacturing and intellectual property issues, and now Exparel is growing beyond sellside projections. That's why this stock may be up on days when most biotech stocks are down.

This is one where I tell people to trust Dave to get the problems worked out. Go overweight on this stock, and buy it on dips.

TLSR: Exparel is a local anesthetic product in a liposome formulation for injection. Local anesthesia typically lasts for a few hours. What makes this formulation so special?

LM: The liposomes make the pain-relieving activity of bupivacaine last longer. It can last as long as 48–72 hours. With this drug, when the patients wake up after surgery, they're not in pain, and they don't have to take opioids, or opioid use is minimized.

TLSR: What kind of surgery is this used in typically?

LM: Right now, Exparel is approved for use as an infiltration agent, where it is injected into soft tissue in cardiothoracic, orthopedic and other surgeries. In May, the company submitted a supplemental new drug application to use the drug as a nerve block agent. Instead of infiltration around incisions, an actual nerve trunk that supplies sensation to a wide area would be deadened. An example of that would be a femoral nerve block for total knee arthroplasty (replacement). Another would be an intercostal nerve block for thoracotomy (incision through the chest wall). The Prescription Drug User Fee Act (PDUFA) date for the nerve-block indication is March 5, 2015.

TLSR: I'm wondering about Pacira's value proposition. This company already has a $3.7 billion ($3.7B) market cap. What could Exparel be worth?

LM: It can easily get to over $1B in sales, and could hit $2B depending on whether surgeons adopt it for outpatient indications. But we haven't modeled that yet.

TLSR: Another name you might mention?

LM: Pacira is about to become profitable, but the only name I'm covering right now that's already profitable is United Therapeutics Corp. (UTHR:NASDAQ). It develops and markets drugs for pulmonary arterial hypertension (PAH), but is diversifying with a chimeric monoclonal antibody, ch14.18 MAb, which could get approved around year-end for pediatric neuroblastoma. The company's big focus is developing different delivery mechanisms for treprostinil, a prostacyclin analogue, for PAH.

TLSR: I'm noting that the company has four formulations for treprostinil. Are they all being marketed in the U.S.?

LM: Yes.

TLSR: Could United Therapeutics be thought of as the expert in pulmonary arterial hypertension? Is it the ax in PAH?

LM: Of all companies, I think United Therapeutics treats the most PAH patients. But Switzerland-based Actelion Pharmaceuticals Ltd. (ACT:FSE; ATLN:SIX) is very good, and is United Therapeutics' biggest rival.

TLSR: Going back to the antibody for neuroblastoma for a moment, the Phase 2 trial has only 28 patients. How much information will we get on the drug's efficacy?

LM: Neuroblastoma is an orphan disease—very rare. We don't have much data on it at all. The company has indicated that it could see approval around year-end, now that it has passed a Phase 3 safety study and submitted a biologics license application to the FDA. But United Therapeutics hasn't gone into detail. This is a very small market, so from a valuation point of view, this is not as material as some of the other therapies the company is working on.

TLSR: You have a target price of $119/share on United Therapeutics. It's currently about $93/share. Is that a one-year target price?

LM: We recently raised our price target on United Therapeutics to $133/share. And yes, this is a one-year target price.

TLSR: Another one you wanted to mention, please?

LM: XOMA Ltd. (XOMA:NASDAQ) has pulled back and hasn't really recovered. Because of that, it is attractive to investors who like big catalysts.

The company is conducting its first Phase 3 trial for gevokizumab in noninfectious uveitis—and specifically in Behçet's uveitis. Because this is an events-driven trial, we can't be exactly sure when data will be released until the last event is announced. The company recently estimated data could come out in Q4/14 (with the events-driven caveat).

"The release of Phase 3 data can be a large catalyst. . .When you get a surprise with good data, that's when you see the biggest moves up."

We saw two Phase 2 studies with 7 and 21 patients, and all responded to one dose of gevokizumab. Servier (Les Laboratoires Servier; private) is running the ex-US studies with this antibody. Because the two Phase 2 trials were really good, I think this first Phase 3 (called EYEGUARD-B) has the highest probability of success. There are two more EYEGUARD Phase 3 trials (A and C), for which we estimate data release in 2015. Given that the stock had pulled back and hasn't recovered, I think there's a lot of upside.

TLSR: Liana, XOMA has a $470M market cap. As you say, it has had low relative strength, and it would not be hard to move this stock if investors want to come in. But given that gevokizumab is partnered with Servier, will good data move the share price?

LM: XOMA will get all revenues from the U.S. Servier doesn't want to do any business in the U.S., because it got burned in the fenfluramine/phentermine (fen-phen) litigation. This product is definitely material for XOMA. The frequency of Behçet's uveitis outside of the U.S. is much higher, so to enroll a Phase 3 trial, most of that work must be done outside the U.S., which is why Servier is doing it.

TLSR: Is there another one you might talk about?

LM: There are two more. I'll start with Intercept Pharmaceuticals Inc. (ICPT:NASDAQ). As almost everyone knows, the company had some pretty interesting data come out of its Phase 2b FLINT study in nonalcoholic steatohepatitis (NASH) in early January. The FLINT trial was sponsored by the National Institute of Diabetes and Digestive and Kidney Diseases' NASH clinical research network. The trial was stopped a year early because of lack of progression of liver fibrosis. At that time, the company's therapy showed efficacy in terms of stabilization of fibrosis.

Then there was big controversy about elevated low-density lipoprotein (LDL), and whether that would limit the potential of its FXR (farnesoid X receptor) agonist obeticholic acid (OCA). The company conducted a follow-up on the FLINT trial, and recently disclosed top-line results that were better than expected, in that LDL peaked at 12 weeks and then declined. The LDL was only transiently elevated, there was no elevation in cardiovascular events and, surprisingly, fibrosis not only was stabilized, as was seen initially, but improved.

TLSR: What is your impression of this LDL elevation?

LM: What I noticed in the initial Phase 2b data was that despite the elevated LDL, there was not an elevation in cardiovascular events. The fear with high LDL is that patients will have a stroke, heart attack or sudden death—a serious adverse event (SAE). We didn't see an elevation in any of those SAEs, and those events generally happen when LDL is chronically elevated, not when it's transiently elevated. My impression is that the LDL elevation is transient because OCA is basically a detergent that washes lipids out of the liver, and some of those lipids will inevitably spill into the blood. I believe LDL could be elevated until a patient reaches a steady state with OCA as a chronic therapy.

TLSR: Liana, your target price on Intercept is $493, which implies a double from where the stock is trading today. How do you derive that?

LM: That's not a 12-month price target. When I came up with that target, the stock was all over the place.

Let me take you through this. The company still has to do a natural history trial, where it follows patients who are treated over a long period of time. If OCA seems reasonably safe, and if we don't see elevated cardiovascular events, and if the company is able to work through any other little kinks, including FDA decisions on trial design and primary endpoints for NASH in Phase 3, then I think big pharma will look at Intercept as a takeout target. That's because nothing has worked, or been approved, for NASH before. If OCA is safe—and because it has worked in every trial so far—I think it has the potential to be a multibillion-dollar product.

TLSR: Galectin Therapeutics Inc. (GALT:NASDAQ) is a potential competitor, with its galectin inhibitor GR-MD-02 (galactoarabino-rhamnogalaturonate). How have Galectin's results in NASH compared to Intercept's?

LM: For Galectin, the only results we've seen recently are biomarker data. These are early-stage data, and they are mixed. Galectin hasn't worked out the trial design and dosing for GR-MD-02 in NASH yet. We've seen clinical data with hard clinical endpoints for Intercept's OCA.

The two therapies really can't be compared, but I'd say OCA is much better. Galectin is not the next NASH company. A French company called Genfit (XUP:FSE) is supposed to have Phase 2b data with its GFT505 in NASH by the end of this year. Genfit is the next competitor as far as clinical progress is concerned.

TLSR: There's one last name you wanted to mention. Go ahead.

LM: People who've been around know about the old La Jolla Pharmaceutical Co. (LJPC:OTCBB). That company was working on lupus with a drug called Riquent (abetimus sodium), which did not work. The current CEO, Dr. George Tidmarsh, was the CEO of a private company, and has used the La Jolla shell as a way to go public. La Jolla now is not at all the same as the old La Jolla. The company is working on completely different indications with different drugs, and has different management. That's the number one thing that I have to tell investors.

Number two: La Jolla is working on life-threatening unmet needs. The lead candidate, GCS-100, targeting galectin-3, is similar to Galectin's GR-MD-02. But La Jolla's lead indication is chronic kidney disease (CKD). The company got some decent initial Phase 2a data in CKD earlier this year. La Jolla is also working on a more potent oral formulation of GCS-100, called LJPC-1010, for which it has announced preclinical data that look good for NASH. The company has raised money, but it doesn't appear that a Phase 1 trial with LJPC-1010 is in the 2014 plan.

There will be follow-up CKD data from GCS-100, which is being dosed intravenously. We'll see these data in November at the American Association for the Study of Liver Diseases meeting, and then we will see the Phase 2a extension study data around year-end. Those are the two catalysts for La Jolla.

La Jolla is also developing a completely separate product, LJPC-501 (synthetic angiotensin II), for hepatorenal syndrome (HRS). That's a serious condition that patients can get when they have cirrhosis of the liver, or late-stage cirrhosis. As the name of the disease implies, the kidneys start going downhill as well. There are two types of HRS. The average life span with type 1 is two weeks, and with type 2 is six months, so it is difficult to enroll patients for a trial. If La Jolla can enroll both type 1 and 2 patients, we might even see a survival benefit by year-end, especially in type 1s. We could see something interesting there.

TLSR: We're talking about a Phase 1 trial with 15 patients. With that small number of patients in the study, I think it could be very interesting to see a survival benefit.

LM: With a condition where the average life span is just two weeks, it's a long shot, but it's not impossible under those circumstances. These would just be interim data, not final data.

TLSR: The company plans to start a Phase 3 trial with LJPC-501 in catecholamine-resistant hypotension by early 2015. Could that be a catalyst for this stock?

LM: Starting a trial usually is not. The data release is the big catalyst. But it might be a modest catalyst. It's easier to identify catecholamine-resistant hypotension patients. They are already in a critical care unit, typically on a ventilator, and they start having a hypotensive crisis. Over time they have become resistant to the catecholamines used to treat them. Another therapy, such as LJPC-501, is needed.

TLSR: Thank you for your time today, Liana.

LM: Thank you very much.

Liana Moussatos joined Wedbush Securities as a managing director and senior research analyst from Pacific Growth Equities, where she was a senior research analyst. Previously, she was director and portfolio manager of the UBS Global Biotech Funds at UBS Global Asset Management. Moussatos also was with Bristol-Meyers Squibb, where she was a manager in University and Government Licensing, External Science and Technology. She also worked with Sloan-Kettering Cancer Institute in the Office of Industrial Affairs, and with the National Cancer Institute in the Office of Technology Development. Moussatos received a bachelor's degree in entomology and a master's degree in zoology and biochemistry from Clemson University. She also earned a Ph.D. in plant pathology from the University of California, Davis, and completed a postdoctoral research fellowship in cellular and molecular physiology at the Yale School of Medicine.

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DISCLOSURE:
1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Omeros Corp. Streetwise Reports does not accept stock in exchange for its services.
3) Liana Moussatos: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Omeros Corp., Pacira Pharmaceuticals, Intercept Pharmaceuticals Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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