The Life Sciences Report: BioWatch News is a biotech stock analysis company. You quote Albert Einstein, "If you can't explain it simply, you don't understand it well enough," and that's what you endeavor to do for subscribers. How do you explain biotechnology to investors?
Alan Leong: People who want to invest in biotech need to understand what we call the investable milestones well enough to know how they affect the relative valuation of a biotech company. We try very hard to explain things in analogous terms—sometimes simple terms—drawing from other fields to paint a picture of how a technology works.
On another level, there are people who I refer to as the Popular Science generation. They love the science, and they want to know more about it. We also try to satisfy them. At the very least, we try to present a competitive ecosystem in terms of the technology and the investment.
TLSR: Nobel Laureate Paul Nurse told me once that you can oversimplify science to the point that you think you understand it, but you really don't. Do you see that danger in relating biotech research to investors?
AL: Yes, but a greater danger is that it's not actually explained well. There's a quote from the film, The Karate Kid—and this really dates me—where Mr. Miyagi says, "No such thing as bad student, only bad teacher. Teacher say, student do." I really take that to heart. But once in a while I do see someone oversimplifying technology. What I want to know is, do they bounce their explanations off of someone who's smarter than they are? I seek out smart people who will ask the tough questions and be skeptical. That way I can get a critique of my thoughts.
I get really concerned when I see someone, especially an analyst, who is sure about a company. An investor has to have a certain amount of humility when approaching the science. The science has to be respected. That means you have to be skeptical and disciplined, and you can't assume anything. That's the scientific method.
We as investors are going to make mistakes. Scientists also make mistakes, but you know the work—either scientific or investment research—is going to be consistently good if there is a curiosity and humility about it.
TLSR: Micro caps are a major focus for you. Do you make personal visits to the companies you follow—especially the micro caps, which are inherently more risky because they are the most immature? Can you initiate coverage on a company without actually talking to the investigators and management?
AL: That depends. But it isn't so much about the size; it's more about the location of the company and its critical mass. We have a number of micro caps under coverage. Most I see as very promising. If I have a cluster of companies in one place, it's easy to justify visiting that city to visit them all. If a company is isolated in a place, it's clearly much harder to get out there with any frequency. It's definitely situational.
TLSR: Most micro caps are binary event stories, so if a program goes bad, the company's shares are demolished. What happens when an investment theory fails on you?
AL: We are talking about biotech here, and sometimes you fail as an investor. This industry is so volatile that the batting average is different, and you have to approach it differently. Whenever something goes awry, you try to do a postmortem.
"ContraVir Pharmaceuticals Inc.'s experienced management team knows how to present well, and investors are responding."
For example, take the story of Corcept Therapeutics Inc. (CORT:NASDAQ). The company discontinued a Phase 3 study of mifepristone in psychotic disorders last May. What I appreciate about Corcept CEO Joe Belanoff is that he doesn't mince words. He's very clear about why things went awry. He had a conference call scheduled immediately after this negative Phase 3 information was reported. For many CEOs, this is a signature event, and it's emotionally devastating, and they probably want a little distance before talking to people with hard questions. But he went in and took the questions from a large group, and he was straightforward. I was impressed.
The company also has a cancer indication with mifepristone. I feel an obligation to keep covering Corcept because so many of my clientele are invested in it. Corcept's share price has pretty much recovered after the Phase 3—not totally, but pretty much. Now its prospects are as good as ever. That doesn't always happen. Sometimes it's time to move on and focus elsewhere. In this case, the company is planning another Phase 3 trial in 2016 for breast cancer—specifically triple-negative breast cancer, which could be a very interesting unmet or poorly met need.
Also, the company has growing sales for mifepristone, which is approved and branded as Korlym in Cushing's syndrome. The company is anticipating around $50 million ($50M) in sales for 2015. That's not huge, but it's a nice chunk of change to help relieve dilution. My guess is that, if the diagnostic category gets widened over the next year or two, the market size for the drug actually may be larger than we originally anticipated. So Corcept's prospects are brighter than we thought.
TLSR: If Korlym is going to do $50M in revenue, doesn't that translate to at least a $0.5 billion ($0.5B) market cap?
AL: It often does, but I think, for Corcept, the valuation is going to lag because it has this history of trial failure with psychotic depression. But the interesting thing about Corcept is the type of investors who have since gone into the stock. The people who were in for the psychiatric story have been replaced by those following oncology stocks. The dynamics of that stock have begun to change because the oncology investors are going into it.
TLSR: Could you go to another name, please?
AL: RepliCel Life Sciences Inc. (RP:TSX.V; REPCF:OTCQB) is an interesting micro cap. The company is based in Vancouver, British Columbia, and it's in the regenerative medicine space. It has proprietary technology for hair restoration, treating tendon injuries, and treating sunburned skin and skin wrinkles. It is now going into proof-of-concept trials in these indications.
There are two things I like about RepliCel. First, the science is surprisingly solid for such a small micro cap. Second, the way the technology is implemented makes sense from what we call best-of-breed science, but can be executed in a way that becomes commercially feasible in terms of its potential cost of goods sold (COGS). RepliCel also has a major partnership in place with Shiseido Company Ltd. (4911:TSE) in Japan.
"Investors in biotech need to understand what we call the investable milestones well enough to know how they affect the relative valuation of a biotech company."
These proof-of-concept trials will have early results in 2015 and 2016. If these results are good, you're looking at a company with a market cap of only about $24M today that might become a leader in its niches. On the down side, RepliCel is traded on one of the minor exchanges and is outside the U.S. But that isn't fatal. This is definitely a speculative name, but it also has a very interesting tack in potentially dominating those niches. Also, it has a very candid and thoughtful management team.
TLSR: You wrote that even with good results on these proof-of-concept trials, you would not be surprised if the market didn't react favorably. Does that have to do with that fact that this name is not traded on a major U.S. exchange?
AL: Yes. I think the exchange is very important. That usually determines who follows a stock and who invests in it. But to tell the truth, when a company delivers good news but doesn't move upward, that's exactly the situation you want when you're an investor. Yes, it does require patience, but when you're making an initial investment, you want to see good news that has not yet been "discovered."
TLSR: This company has two types of cells. One is RCT-01 (autologous nonbulbar dermal sheath [NBDS] cells isolated from the hair follicle sheath) for tendon repair. The other is RCH-01 (autologous dermal sheath cup cells isolated from the hair follicle) for hair regeneration. These are both autologous, which means the patient donates to herself/himself. Are you satisfied with the preclinical and early Phase 1 science having to do with these cells?
AL: I like RepliCel's approach. If you look at the whole regenerative field, you will find research using adipose (fat) cells or generic stem cells that can be injected into patients. Sometimes these methods get good results. But what I'm looking for are technologies that are particularly made for addressing the market, and that will have decent COGS. When we did our initial due diligence on this company, I was surprised by the great comments from scientists about the people associated with RepliCel. The process looks rational. If you look at the two technologies—RCH-01 and RCT-01—they aren't stem cells in the classical sense, but they are uniquely suited for their indications.
If you look at the RCT-01 cells, which are being applied to the tendons, they express the right type of collagen for helping with tendon repair, and a very favorable amount of that collagen goes toward repair of the tendon. If you look at the competitive technology, it is utilizing gene therapy to make the cells express the same type of collagen. I'm always a little nervous when there's an additional step. You raise the COGS when you use gene therapy to modify cells, and it gets a bit more dicey in that there is another level of regulatory oversight and more time to market. Why would you do that when you can get the same results from a patient's native cells, and the COGS remains at a sane level? That's what I like about RepliCel's technology.
TLSR: RepliCel's Phase 1 trial in Achilles tendinosis was done with adipose-derived cells, not the NBDS cells being used in the Phase 2 proof-of-concept studies. Eleven of 12 patients in the Phase 1 study had satisfactory outcomes with the adipose cells. With results like that, why didn't RepliCel stick with adipose-derived cells?
AL: For a couple of reasons. One is that the company is going for a best-of-breed solution. Because of the way that the NBDS cells will be harvested, there is more standardization. The U.S. Food and Drug Administration (FDA) and other regulatory bodies will be happier. Theoretically, with what we've seen in the experiments up to now, the NBDS cells should provide at least as good, or probably a better, solution for the patient.
TLSR: Has the proposed Phase 2 trial with RCT-01 in Achilles tendinosis actually begun yet?
AL: RepliCel has gotten clearance for it from Health Canada and it is winding through clearance at the trial site. It should begin within weeks.
TLSR: What about the Phase 2 trial with 160 patients using RCH-01 cells in androgenic alopecia (male pattern baldness)? Has that begun?
AL: RepliCel management reports being "on track" for a Phase 2 clinical trial in Q3/15. Shiseido will be conducting its own trial with RepliCel's technology; it is scheduled to launch in late spring 2015.
TLSR: What would be the next milestones for investors?
AL: The real milestone is the speed of the enrollment in these two trials. The company should be giving guidance as to when enrollment will be complete. After that, results will come over the next two years. The company is hoping to speed things up to get to one year. I always say it takes a little longer. I'd say 18 months to two years.
TLSR: I know you have more names to mention. Go ahead.
ContraFect's technology involves lysins, or enzymes, which are an extremely powerful new class of antibiotics. They are bactericidal, not just bacteriostatic. They digest and destroy bacterial cell walls on contact, and unlike traditional antibiotics and cytotoxic agents, they do not require the bacteria to undergo cell division and metabolic activities to be effective. They just kill on contact.
"An investor has to have a certain amount of humility when approaching the science."
If you look at the literature and talk to scientists, some of them never thought the FDA would allow lysins to go into humans. Because they have such powerful capabilities to destroy, or lyse, bacterial cell walls, the FDA had this fear that they would have some toxic effects in humans. ContraFect delighted us by getting clearance—an investigational new drug (IND) application for CF-301—from the FDA in late December to move into human trials. We will see launch sometime in early March. CF-301 will be targeting the super Staphylococcus infections that people have been getting.
I suspect that once the FDA has its safety concerns satisfied, we could be looking at a whole new class of antibiotics to bring to the market, eventually. This is important because so many bacteria are already resistant to standard-of-care antibiotics. The company is also working on other technologies, but its lysin platform is what caught my attention.
TLSR: Have you heard any discussion about CF-301, or other lysins, being less prone to stimulating mutations that would give rise to resistant strains of bacteria?
AL: There are a number of discussions around the subject that it is much more difficult for bacterial strains, including currently drug-resistant strains of Staphylococcus, to become resistant to the lysins. I'm sure that the FDA had that on its mind when the IND was approved. These are very powerful because of the way cell walls are destroyed. Lysins also eradicate biofilms.
TLSR: Biofilms, or aggregates of bacteria colonized together, are a major problem for patients because bacteria are much more difficult to destroy. An effective therapeutic platform against biofilms would be something akin to the Holy Grail, wouldn't it?
AL: Yes. Biofilms are not easily resolvable. Lysins can actually meet them head on. This lysin category and platform is a significant development in biofilm infections.
TLSR: Alan, the other advanced preclinical program at ContraFect is CF-404, which is a cocktail of monoclonal antibodies that the company believes will attack various types of influenza. It could be a universal type of influenza therapeutic. Did that also get your attention?
AL: It did, but that therapy is a little further out. The current plan is to file an IND for CF-404 at the end of 2015, and to initiate a Phase 1 trial in early 2016.
CF-404 is positioned to be a universal flu treatment because it attacks the regions of the flu virus that are common through the different mutations—these are the regions highly conserved by evolution. ContraFect has a research agreement with the National Institute for Viral Disease Control and Prevention, China's version of the Centers for Disease Control. We'll keep our eye on CF-404 when it gets closer to 2016.
TLSR: You mentioned ContraVir Pharmaceuticals. Go ahead with that name.
AL: ContraVir has a new management team that is very interesting. For such a small micro cap, it brought in an experienced management team that includes CEO James Sapirstein. He has been at a number of larger entities, but the one to look at is his work at Gilead Sciences Inc. (GILD:NASDAQ), where he led the global marketing strategy for Viread (tenofovir disoproxil fumarate).
ContraVir has two different products. It has FV-100, which is an oral nucleoside analogue antiviral for treating shingles-related pain, and it has CMX157, another nucleoside analogue, which is a highly potent analog of Gilead's tenofovir that will target hepatitis B. Both of these molecules are prodrugs, so the base drug is encapsulated in such a way that it optimizes delivery and absorption into the human body. A prodrug is metabolized and activated when it gets into the system.
I view the company's business model as being akin to, but not identical to, a 505(b)(2) pathway, where you're taking a well-known or familiar drug and repackaging or redelivering it in a more potent or absorbable way. The advantage is that you increase likelihood of regulatory approval and help to bring cash into the company. In terms of the CEO, this is right up his alley.
TLSR: This stock is up more than 170% over the last three months. What has caused this kind of investor interest?
AL: Two things. One is that the experienced management team has been very assertive about getting this story out. The team knows how to present well, and I think investors are responding. You can tell these guys have been around the block when they make a presentation and have discussions with investors. Also, as I watch my own clientele look at different companies, many retail investors are picking ContraVir out of the list. The story seems to resonate well with these investors. They like the idea of the low-hanging fruit, and the experience of the management team.
TLSR: The stock was $4.34/share on March 3. Even though the market cap is only about $100M, do you imagine that this share price discourages day traders—those who typically delve into penny stocks?
AL: Yes, to a point. But micro caps can have unpredictable behaviors. In this case, I think the investors getting into ContraVir are more experienced hands. It doesn't mean that the stock won't have temporary pullbacks. That is often true with stocks that move up so quickly.
TLSR: I note that you are also interested in a company developing an agent for nonalcoholic steatohepatitis (NASH). I'd like to hear your take on it.
AL: Sure. Galmed Pharmaceuticals Ltd. (GLMD:NASDAQ) was identified when we did our review of companies trying to treat NASH or non-alcoholic fatty liver disease (NAFLD). In the early stages, part of the liver has a high composition of fat, and it gradually begins to interfere with functioning. If allowed to progress, you'll see structural changes to the liver that can be quite damaging. This is a crowded space. I call it a horse race for NASH.
TLSR: What other companies have you looked at in the NASH space?
AL: Everyone's darling from last year was Intercept Pharmaceuticals Inc. (ICPT:NASDAQ), with its candidate obeticholic acid. French company Genfit SA (GNFT:Euronext), with GFT505, and Galmed with aramchol, are right on its heels. Both GFT505 and aramchol are going into late-stage trials later this year—Phase 2b and follow-up with a Phase 3 afterward. Unlike Intercept's drug, GFT505 and aramchol have very clean safety profiles, and they also do more than take care of the liver. You also see beneficial effects on cholesterol, weight and glucose tolerance. In Galmed's case, you still have a very low market cap—about $100M—which makes it much more enticing than either Genfit, with a $1.6B valuation, or Intercept, with a $5.2B valuation.
"Whenever something goes awry with a biotech investment, try to do a postmortem."
When I differentiate between these companies, I also look for other indications. In Galmed's case, it is also going after an orphan indication for a group of patients who have cholesterol gallstones. It would have this indication all to itself. Management intends to move just as vigorously in this indication as it is with NASH. For me, that was key, because NASH is going to be a battle with these other companies.
TLSR: My understanding is that Genfit is ahead of Galmed. But you believe the valuation disparity is the investment hook, right?
AL: Yes. Genfit is only ahead by a few months—and I do like Genfit. I think it is going to give Intercept all sorts of fits if GFT505's drug profile—especially with superior safety—holds.
Galmed is currently running a small, well-controlled trial for the treatment of cholesterol gallstones in weight-loss surgery patients. The primary results are expected in Q2/15. Animal models and early clinical studies are favorable, but we're especially interested in these results. Interim results for the Phase 2b NASH trial will read out toward the end of this year.
TLSR: Galectin Therapeutics Inc. (GALT:NASDAQ) and Conatus Pharmaceuticals (CNAT:NASDAQ) are also in the NASH space. That makes five companies. We ought to get at least one good drug out of this group for NASH, shouldn't we?
AL: We will. There are others, too. If you list the whole group of private and public companies, there are eight. That's why I have looked for depth in the pipeline with other indications.
TLSR: Another name?
AL: I'll mention PlasmaTech Biopharmaceuticals Inc. (PTBI:NASDAQ), but I'm still looking through the books on this one. My first reaction was to write it off because it provides therapeutic biologics—proteins—that are extracted from plasma. This whole subindustry is a commodity business. Furthermore, if you look at PlasmaTech's background, it needed to clean up its capital structure, and it also has new management. The company is trading now at a paltry $72M market cap.
The company is making the case that it has a much better way—a proprietary method—of getting the desired proteins from plasma—so much more efficient that PlasmaTech claims it can get pharmaceutical margins while charging less for its proteins. The company wants to get into therapeutics because it's able to isolate proteins that would be necessary for treating orphan diseases, and it has approached the FDA about that.
I have a couple of concerns. One is that I want to understand the proof of concept a bit better. I have no reason not to believe it, but I want to verify it. The other is that I think it will be a while before the market will reward this company. I think it has to get one product to market, because PlasmaTech as "just a commodity business" is entrenched in the minds of the investment community.
But keep your eye on this company. If it's successful, it could then move easily into a dozen different orphan diseases and clean up.
TLSR: Did you have another name you wanted to mention?
AL: Sorrento Therapeutics Inc. (SRNE:NASDAQ) concluded a deal in December with Conkwest Inc. (private), which is developing a natural killer cell line platform. This is a new response to the CAR-T-cell (chimeric antigen receptor T-cell) therapies that are hot right now in target cancer therapies. For CAR-Ts, you think of Juno Therapeutics (JUNO:NASDAQ), which got huge private investments and has generated excitement in the blood cancer area, and also Kite Pharma (KITE:NASDAQ), among others. As much as the CAR-T therapies have been getting a noisy reception, there are drawbacks to them. There are possibilities for giant side effects—an inflammatory cascade that can result in a very severe reaction that could be fatal.
Sorrento uses a different approach. It has a license to combine its antibody-drug conjugate platform with the Conkwest technology to develop a new type of immunotherapeutic agent that it is calling CAR-TNK. It involves attaching special natural killer cells to antibodies to help go after the tumors. I would call it natural killer cells, but the company has its own term, Neukoplast.
TLSR: Sorrento's shares have more than tripled in the last three months. What's that about?
AL: Patrick Soon-Shiong, founder of Abraxis BioScience, which he sold to Celgene Corp. (CELG:NASDAQ) in 2010 for $4.5B, made a huge investment in Sorrento because of this technology, and now the two parties are in a joint venture, with Soon-Shiong owning 19.9% of the company. That's generated a lot of hubbub around the stock. When I asked scientists to compare CAR-T to CAR-TNK, a couple said they think this Sorrento technology will produce more value. It has a broader application than the CAR-T technology. CAR-TNK has been in Phase 1 trials, and is going into a Phase 2 trial.
TLSR: Thank you, Alan.
Alan Leong is the cofounder and CEO of BioWatch LLC. The company's services and monthly journal, BioWatch News, are for those who invest and have a fascination with seeing what's next in the biotech industry. It features individual companies and also introduces readers to edgy topics and sectors. Past issues featured alopecia, metabolic syndrome, the future of biotech and pet meds. Before BioWatch, Leong was cofounder of Biotech Stock Research (BSR), a boutique service for life science investors. He published more than 1,500 pages for BSR and wrote more than 45 main feature stories, plus numerous alerts, company updates and annual reviews. Leong has also been an award-winning instructor within the University of Washington system, teaching courses in entrepreneurship, technology forecasting and early-stage investing.
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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 he 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: RepliCel Life Sciences Inc., ContraVir Pharmaceuticals Inc. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Alan Leong: I am not paid by any of the companies. My company has no financial relationship with any of the companies. I own, or my family owns, shares of the following companies mentioned in this interview: RepliCel Life Sciences, Sorrento Therapeutics, Corcept Therapeutics, Galmed Pharmaceuticals, ContraVir Pharmaceuticals, ContraFect, and PlasmaTech Biopharmaceuticals. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. 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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