Sunday, 25 May 2014

Over-Skepticism: 3 Biotech Companies Trading Too Close To Their Cash - Bioassociate Latest for Seeking Alpha

Below is Bioassociate's latest article for Seeking Alpha, "Over-Skepticism: 3 Biotech Companies Trading Too Close To Their Cash", which covers AMBICNAT and TRGT:

(Read the original article here)


  • The recent sell-off in the biotech sector resulted in several companies with market caps very close to their cash levels. Three such companies that have near-term catalysts are reviewed.
  • Ambit Biosciences, which develops Quizartinib – a FLT3 positive AML drug in Phase III.
  • Conatus Pharmaceuticals, which develops Emricasan as a treatment for a variety of liver diseases and is currently running three Phase II studies.
  • Targacept, which develops neuronal nicotinic receptor modulators for the treatment of Alzheimer's disease and overactive bladder.
The recent sell-off in the biotech sector didn't leave any company unscathed - big or small, they all toppled, some more than others. The risk/reward ratio in the biotech sector was reshuffled, and new, as well as old, opportunities are emerging.
In the last couple of weeks, we have been looking for companies with solid technologies, clear and meaningful catalysts and a market cap relatively close to their cash levels. In our view, this represents an attractive investment opportunity that mitigates some of the built-in risks of the biotech sector. Nevertheless, it's important to note that even though the enterprise value of the companies mentioned below is small, failures in the upcoming catalysts could drive their stock prices further down, below the companies' cash levels.
The three companies that we are looking into are Ambit Biosciences (AMBI), Conatus Pharmaceuticals (CNAT) and Targacept (TRGT).
Ambit Biosciences : Market cap - $115M; Cash - $62M
Ambit Biosciences develops kinase inhibitors for the treatment of cancer and autoimmune diseases. The company's lead drug candidate is Quizartinib, an orally-administered inhibitor of FMS-like tyrosine kinase-3 (FLT3), developed as a treatment for acute myeloid leukemia (AML).
FLT3 mutations are the most frequent mutations in AML (34% of adult patients - over 6000 patients in the US), and studies have shown that AML patients with the FLT3-ITD (internal tandem duplications) mutation have poor survival outcome, mainly due to relapse. Quizartinib, which is the first FLT3 inhibitor in clinical development, is designed to inhibit the kinase activity of FLT3-ITD and consequently cause cell death.
Quizartinib can be integrated into FLT3-ITD positive AML therapy in several treatment lines and patient populations:
1. As monotherapy in relapsed/refractory patients
2. As frontline therapy in combination with chemotherapy (the current standard of care).
3. As maintenance therapy, following either consolidation therapy or a hematopoietic stem cell transplant (HCST)
In two Phase II studies (high dose study and low dose study), Quizartinib has shown encouraging activity in heavily pre-treated AML patients, achieving a composite complete response (CR) of 44-47%, of which most responders had incomplete hematologic recovery (CRi). Importantly, one third of Quizartinib-treated patients were stabilized for long enough to enable HCST - the most efficient AML treatment available.
Following a dialogue with the FDA, Ambit neglected its original plan to submit a NDA for accelerated approval for Quizartinib, and instead advanced the clinical program to show a survival benefit in a Phase III study.
Ongoing clinical programs
1. Ambit recently announced the initiation of the QUANTUM-R pivotal Phase III study, comparing Quizartinib monotherapy to chemotherapy in relapsed/refractory FLT3-ITS positive AML patients.
The QUANTUM-R trial is designed to demonstrate a 2-month survival benefit of Quizartinib. An important part of the study's protocol is the eligibility of Quizartinib-treated patients who proceed to HSCT to reinitiate treatment with Quizartinib following the transplant. The use of Quizartinib as a maintenance therapy following HSCT has the potential to extend overall survival in these patients.
2. Ambit also announced initiation of the Phase II cohort in the MD Anderson Cancer Center-sponsored Phase I/II study of Quizartinib in combination with chemotherapy.
3. Ongoing study of Quizartinib as maintenance therapy in AML patients post HCST.
2014 catalysts
Ambit's Phase III study was launched only recently and is not expected to provide news until 2015. However, several smaller catalysts are anticipated during the remainder of 2014:
1. A number of company and investigator-sponsored studies are planned or ongoing. These include combination trials in newly diagnosed patients and post-transplant maintenance trials. In the Q1 2014 results conference call, the company's management stated they expect to present new data at a scientific conference later in 2014.
2. The efficacy of Quizartinib-chemotherapy combination in newly diagnosed elderly AML patients will be assessed in the NCRI AML-18 trial. This European Phase III AML study is expected to begin enrolling in second half of 2014.
3. Ambit will present data at the upcoming ASCO meeting, including the final data analysis and sub-group analysis from the Phase IIb Lower Doses of Quizartinib doses study in relapsed/refractory AML patients.
Quizartinib bares characteristics of a very promising cancer drug candidate: it is targeted at a specific mutation with a well-defined biomarker, it addresses a disease with a great unmet need, and it's a first in class drug.
Ambit's current market cap and cash position mean that Quizartinib's value is less than $60 million - an incredibly low valuation, even when using very conservative success assumptions. Considering a $100k annual treatment price and a potential US market size of $600m, even a 20% market share will reflect annual sales of $120m.
Ambit's cash balance is sufficient for approximately 6 quarters - enough to take the company through the planned Phase III interim analysis in the second half of 2015 and possibly to complete the study. Combined with the low market cap, this makes Ambit a very attractive M&A target, with a fully-owned promising cancer drug and the funds for its Phase III program.
Conatus Pharmaceuticals : Market cap - $88M; Cash - $50M
Conatus's pipeline contains a single drug - Emricasan, a first-in-class, orally active pan-caspase inhibitor. Conatus is developing Emricasan as a treatment for a variety of liver diseases. By reducing the activity of caspases, which are involved in cellular pathways of both programed cell-death (apoptosis) and inflammation, Emricasan may potentially slow down the progression of liver diseases.
In both pre-clinical and clinical studies, Emricasan has been shown to reduce levels of the liver enzymes, Aspartate aminotransferase (AST) and Alanine aminotransferase (ALT), as well as of circulating caspase-cleaved cytokeratin-18 (cCK-18), an apoptosis marker. In several Phase I studies, Emricasan was well tolerated and did not have an effect on baseline levels of liver enzymes.
Ongoing clinical programs
Conatus currently has 4 in-house clinical programs with Emricasan:
1. Acute-on-Chronic Liver Failure (ACLF) - An acute deterioration of liver function in patients with cirrhosis, usually associated with a precipitating event, which results in the failure of one or more organs and high short term mortality. ACLF is an orphan disease.
CNAT is currently running a placebo-controlled, multicenter Phase IIb trial in ACLF patients, designed to assess the pharmacokinetics, safety and clinical outcomes of Emricasan treatment. During last January, the trial was expanded to clinical sites in the US.
2. Chronic Liver Failure (CLF) - Advanced liver cirrhosis causing the liver to lose its ability to function and regenerate. CLF patients either need to buy time while waiting for a liver transplant or need to regain sufficient health to qualify for a liver transplant.
Initiation of a CLF Phase II trial is expected in the second half of 2014.
3. Liver fibrosis post-orthotopic liver transplant due to hepatitis C virus infection and sustained viral response following anti-HCV therapy (POLT-HCV-SVR) - Patients who receive liver transplants as a result of hepatitis C virus (HCV) infection are at risk of residual HCV still being present in the patient's blood, which can immediately infect the new liver, resulting in accelerated development of fibrosis and progression to cirrhosis of the transplanted liver.
Conatus recently initiated a placebo-controlled Phase IIb trial to assess the efficacy of Emricasan in 60 POLT-HCV-SVR patients over a 24-month treatment period.
4. Non-alcoholic fatty liver disease/Nonalcoholic steatohepatitis (NAFLD/NASH) - NAFLD describes a range of conditions caused by a build-up of fat within liver cells. In some people, NAFLD can lead to a serious liver disease, such as NASH, which in turn may progress to liver fibrosis and irreversible liver damage.
In March 2014, CNAT launched a placebo-controlled proof-of-concept Phase IItrial in NAFLD and NASH patients. The study will test the efficacy of Emricasan following 28 days of treatment by measuring changes from baseline of liver enzymes and other liver damage biomarkers.
2014 catalysts
During the second half of 2014, Conatus is expected to publish results from the ACLF Phase IIb study, along with data from two small, supportive Phase I studies in renal impairment and hepatic impairment patients. Pharmacokinetic and dose response data from these experiments, along with a positive trend in efficacy parameters should support the initiation of a Phase III ACLF study.
Also in the second half of 2014, the NAFLD Phase II study is expected to readout. Emricasan's effects on the clinical endpoints of this study - reduction of ALT, AST and cCK18, have been repeatedly proven in past studies. The data from this study, together with Emricasan's safety and PK data from other programs, will support the advancement of the NAFLD/NASH clinical program once regulatory guidance for this indication will become clearer.
CNAT's share price spiked following Intercept's (ICPT) success in its Phase II NASH study back in January, and shared ICPT's stock decline when safety and regulatory issues started spoiling the NASH party. Amidst the NASH hype, investors forgot that Conatus is more than just about NASH, and that its orphan liver-related indications bare value too.
Although Emricasan currently has only limited proof of concept efficacy data, CNAT's enterprise value should be higher than the current $38m. With funding to take the company though 2015, Conatus is tremendously undervalued. At the current market cap, the risk/benefit of Conatus is favorable, especially when taking into consideration that the upcoming data readouts are expected to provide positive outcomes.
Targacept : Market cap - $126M; Cash - $132M
Targacept's drug candidates are neuronal nicotinic receptor (NNR) modulators. These drugs selectively target and modify the activity of this receptor family, which regulate neuronal functions.
Targacept hasn't been enjoying much success in recent years, seeing its clinical programs fail repeatedly. The biggest hit for the company was the failure of the huge TC-5214 Phase III depression program, which drove Targacept's then development partner, AstraZeneca (AZN), to abandon this program. The company's latest failure, the Phase IIb with TC-5619 in schizophrenia patients in December 2013, drove its stock price to under $4 - the lowest in years.
Targacept is now down to 2 clinical programs - TC-5214 for the treatment of overactive bladder (OAB) and TC-1734 for Alzheimer's disease (AD).
Ongoing clinical programs
1. OAB is a disorder that causes a sudden and often uncontrollable urge to urinate. OAB is a very common disorder, with 17 million individuals afflicted in the US and more than 100 million worldwide. 2012 OAB drug sales were just over $2 billion.
TC-5214 has been found to modulate nicotinic receptors located in the bladder, including its target - the α3β4 NNR subtype. Since TC-5214 is largely eliminated unchanged through the bladder, it has the potential to be an effective oral OAB treatment.
In May 2013, TRGT initiated a Phase IIb clinical study of TC-5214 in 750 OAB patients. The study tests 3 twice-daily doses of TC-5214 (0.5mg, 1mg or 2mg) vs placebo during 12 weeks of treatment. The study is powered to show a reduction of 1 event per 24h vs placebo in both primary endpoints: urination frequency and urinary incontinence.
2. Alzheimer's disease pathology has been long known to involve nicotinic receptors. This has spurred Targacept and AstraZeneca to develop TC-1734, a α4β2 NNR subtype modulator, as a treatment for cognitive decline. Following a successful Phase IIa study in age-associated memory impairment and a failed Phase IIb study in mild-to-moderate AD, AstraZeneca gave up on this program, leaving Targacept to continue the development on its own.
In late 2011, TRGT initiated a head-to-head Phase IIb study comparing the efficacy of TC-1734 with donepezil (Aricept - an approved AD drug) over a 12-month period. The study is subject to a Special Protocol Assessment (SPA) agreement with the FDA and is a potential registration trial.
2014 catalysts
OAB: On February 10, 2014, TRGT announced that the Phase IIb OAB study is fully enrolled. Given the 12-week treatment period, this means the study was completed in late April 2014. Targacept announced it expects to report top-line results from the study in mid-2014.
AD: On April 29, 2013, TRGT completed recruitment of patients in the Phase IIb study of TC-1734 as a treatment for mild to moderate Alzheimer's disease. Like the OAB study, the AD study was completed in late April 2014 and is expected to report top-line results in mid-2014.
Targacept is set to report top-line results from two Phase IIb studies in mid-2014. Given the company's previous failures, investors' expectations are low. The current market cap, which is more or less equal to the company's cash, indicates deep skepticism of either study's success.
However, the risk/reward ratio for holding a position in TRGT into the double data release is positive: if the company fails both experiments, the downside is fairly limited due to the cash balance. On the other hand, positive results in either study, especially in the AD trial, are likely to send the TRGT stock sky-high.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

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