Looking for Innovative Small-Cap Biotech Companies: George Zavoico
Source: George S. Mack of The Life Sciences Report (3/22/12)
High-quality science underlies successful drug development companies, even those that turn one company's discarded junk into biotech treasure. That's an example of one compelling investment strategy being employed by Senior Analyst and Managing Director George Zavoico of MLV & Co. In this exclusive interview with The Life Sciences Report, Zavoico lays out a number of solid ideas predicated on good science that growth seekers can leverage for real gains.
The Life Sciences Report: George, do you have a theme or areas of specific interest you could tell us about?
George Zavocio: I have a Ph.D. in physiology and I've worked for a number of pharmaceutical and biotechnology companies, including Bristol-Myers Squibb Co. (BMY:NYSE), Alexion Pharmaceuticals Inc. (ALXN:NASDAQ) and T Cell Sciences, which is now Celldex Therapeutics Inc. (CLDX:NASDAQ). In addition to physiology, my interest and experience lies in pathology and biochemistry and particularly in signal transduction pathways-how messages signal from the outside to the inside of the cell. That segues into diseases that depend on signaling transduction for their pathogenesis, and they include cancer, autoimmune disease and inflammation. I follow companies that discover and develop drugs for these indications and for treating cardiovascular diseases. I'm also interested in molecular diagnostics. Medicine is moving beyond just diagnosis and prognosis to predicting how individual patients will respond to drugs and how their disease will progress. That, in a nutshell, is my theme.
TLSR: Is there a key focus?
GZ: Oncology is one of my key focuses. There are more oncology companies out there than practically any other type of disease-focused company, so it's easy to pick oncology companies-or at least to screen them to find some that I like. The autoimmune/inflammation space is less well populated by companies, with the exception of companies developing vaccines. I have gravitated toward vaccine companies to some extent, including cancer vaccines, since new discoveries and technologies are making it possible to produce effective vaccines for diseases for which there are no currently available vaccines.
TLSR: You have some companies under coverage that approach a billion dollars in market cap, but you're basically in the small-cap space. Your companies are small enough to give investors doubles and potentially triples, yet large enough for mutual funds to own. I'm wondering if this is a conscious part of your theme at MLV, or did it just happen that way?
GZ: It is a conscious effort for me and for MLV in the healthcare sector. I find that I can approach the science, the investigators and the academic researchers developing innovative drugs mainly through smaller-cap companies. The larger-cap companies tend to be far more secretive about their early-stage development projects and are less open to speaking with analysts about the science. It is hard to get close to people involved in drug discovery at a large pharmaceutical company. I find the small-cap, micro-cap and even the private company space to have a wealth of very interesting research. The most interesting have the potential of changing the standard of care for some diseases.
TLSR: George, we have had a lengthy period of about three-and-a-half years where biotech has stagnated in the public markets, and shares have not been reactive to any reports of progress in pipelines. Does biotech have the wind to its back now?
GZ: Instead of saying biotech stocks have the wind to their backs I'd say maybe they have a strong breeze to their backs.
TLSR: Is the market ready to buy these stocks now?
GZ: I think it is. Many companies that have been well funded-or funded enough-through this rough period have continued to make progress and built up their fundamental values. Some have started, and some have completed, important clinical trials. This is despite the fact that their stock prices may have declined. Once you get into proof of concept Phase 2b trials, and certainly into Phase 3 trials, then you're looking at a much shorter time horizon to potential commercialization, partnership or outright acquisition by a larger pharmaceutical company, and you begin to see investors adding value to those particular companies.
TLSR: The U.S. Food and Drug Administration (FDA) is taking longer to grant approvals. The more we learn, the more biologic complexity we see. Is diligence taking longer because of increased complexity, or is there something else going on, such as bureaucracy?
GZ: It could be a little bit of both. Yes, the biological complexity is daunting. You're talking about diagnostics and personalized medicine and being able to tailor drugs specifically to certain diseases, especially polygenic (multiple gene involvement) diseases. One example is Genomic Health Inc. (GHDX:NASDAQ), whose product, called Oncotype Dx, is a multigene assay to first determine the risk of a 10-year recurrence of breast cancer and also whether chemotherapy will likely be effective for some of those patients, or a waste of time.
The FDA is a government organization, so clearly there is political influence there. It has become a large organization so there is the issue of bureaucracy. I always think of the FDA as being understaffed, overworked and underpaid, but FDA staffers really try, and I think overall they do a very good job. Certainly FDA has improved over the last several years despite the fact that the approval process has become more complicated, with NDAs (new drug applications) and BLAs (biologic license applications) now being submitted in multiple volumes.
TLSR: The application of cell technologies seems limitless. You have some coverage here.
GZ: Right now I'm following one cell therapy company: Aastrom Biosciences Inc. (ASTM:NASDAQ). I remember writing about cell therapy 10-15 years ago, and there was a tremendous amount of interest and hype, mainly in stem cells. At the time, the science had not matured and we really didn't know how to go about it properly. It took time to really understand how stem cells work, what they do and how to grow them to a commercial scale. Aastrom is one of the companies leading that field.
TLSR: It's an autologous (using the patient's own cells or tissue) mesenchymal stem cell technology being used for critical limb ischemia (CLI). Can you judge efficacy from what you've seen?
GZ: Based on conversations with physician investigators, as well as looking at the data from Aastrom's clinical trials, I believe responses to their patient-specific Ixmyelocel-T (mixture of autologous bone marrow-derived mesenchymal and monocytic stem and progenitor cells, including certain types of activated macrophages) treatment are clinically relevant and beneficial, and they look better than with any other currently available therapies. While some of the conversations were anecdotal, I think the Phase 2 trial was positive and returned quite promising results, which is why Aastrom is going into a large, well-designed Phase 3 trial for CLI.
TLSR: What are the other applications of this product?
GZ: It's also being developed for dilated cardiomyopathy. This is heart failure following an ischemic heart attack (myocardial infarction). Cells are injected directly into the ventricles of the heart by catheter through a leg artery, and they are finding improved heart function over a relatively short period of time.
TLSR: With your background in biology, I know you like to evaluate unusual technology with broad applications.
GZ: I like to look at the science and see if I can be convinced that it could work. I like companies that are looking at targets that might be more broadly effective and overlooked by others. The best example of that right now is Threshold Pharmaceuticals Inc. (THLD:NASDAQ). Their TH-302 is a hypoxia (oxygen deficit)-activated prodrug (a molecule activated or metabolized into its active form following administration). The activated drug is bromo-isophosphoramide, which is structurally related to cytotoxic nitrogen mustard drugs. Just about all tumors have regions of hypoxia, where traditional chemotherapy is ineffective because it can't diffuse into that region. But TH-302 is activated in areas of tumor hypoxia. This is an example of a potentially broadly applicable product.
The company was rewarded with very positive results from a Phase 2b trial in pancreatic cancer, where patients were treated with TH-302 in combination with gemcitabine. The idea here is to use the gemcitabine to kill the cells that are in the normoxic (normally oxygenated) region, and use the TH-302 to reach deep into the tumor to kill the cells that are hypoxic. Results showed a 63% improvement in progression-free survival in patients taking the combination. Pancreatic cancer is exceedingly difficult to treat, and I think there have been no drugs since gemcitabine that have shown any comparable level of efficacy. Of course, the final results are going to be about overall survival.
TLSR: When will we hear about overall survival?
GZ: Those results are going to be reported toward the end of the year.
TLSR: This stock is up 421% over the last 12 weeks. Is it still a Buy?
GZ: I believe so.
TLSR: What positive news spiked Threshold's stock over the past three months?
GZ: There were two pieces of news. The first, in early February, was an announcement that the company had struck a partnership agreement with Merck KGaA (MKGAY:OTCPK) of Darmstadt, Germany. The total value was over $500 million (M) upfront and in development and commercial milestones. Then there was the data from the pancreatic cancer trial.
TLSR: What else is attractive to you?
GZ: Peregrine Pharmaceuticals (PPHM:NASDAQ) has a lead compound, bavituximab, a monoclonal antibody, targeting the phospholipid phosphatidylserine (PS), which is normally not present on the outside surface of the cell membrane. It's sequestered on the inside or cytosolic surface. But in tumor cells and tumor vasculature it flips over to the outside surface, and that provides a very specific and selective target for antibodies that can then flag the tumor cells for destruction by the immune system.
TLSR: The market has not been receptive to Peregrine. It's been on a steady decline over the past year, and is down 37% over the past month.
GZ: I view it as a buying opportunity. The company returned equivocal results in a Phase 2 trial in a very difficult patient population. However, there is strong evidence of efficacy in earlier-stage trials. Peregrine has undergone a number of changes. I think bavituximab may potentially be a broadly effective drug, but of course that remains to be seen.
TLSR: This is a very exciting idea.
GZ: Yes, it is. I also look at companies with novel protein kinase inhibitors, and I look for some twist to the typical approach. ArQule Inc. (ARQL:NASDAQ) is an example. It has a c-Met inhibitor that doesn't work at the catalytic site-the ATP-binding site-but rather at the allosteric site, away from the active site. It doesn't appear to hit off-target kinases, and that makes it safer.
Another example I'm looking at is Curis Inc. (CRIS:NASDAQ), which is developing a targeted kinase inhibitor in combination with a histone deacetylase (HDAC) inhibitor in a single molecule (CUDC-101). The movement in cancer is toward cocktails of drugs, not single drugs, and if you can put everything on one molecule, that seems to make sense. I'm optimistic about both of these kinds of unusual targeting technologies.
Curis just had its lead compound, Erivedge (vismodegib), an oral medication, approved in January for basal cell carcinoma. It's partnered with Genentech (a unit of Roche Holding Ltd. [RHHBY:OTCPK]), and this could be a $1-2 billion (B) drug. Curis should be able to sit back and collect royalties while it develops its own pipeline.
TLSR: Another idea?
GZ: Agenus Inc. (AGEN:NASDAQ CM) has an adjuvant, QS-21 (a type of saponin) that is an important part of multiple GlaxoSmithKline plc (GSK:NYSE) vaccines. Some data on this is getting ready to come out. We expect more results from GSK's vaccine trials this year, and that has driven Agenus' stock up since the beginning of the year.
TLSR: Agenus is indeed up, more than 60% over the past month.
GZ: We see more upside there.
TLSR: What else are you talking to investors about?
GZ: Another interesting area is pain management, because there haven't really been any new interesting pain medications in a while. Neuronal signaling is dependent on ion channels through cell membranes. There are as many ion channels as there are kinases, if not more. I think we're going to find certain ion channels in neurons (nerve cells) that, if targeted, are great for dulling pain without going to the brain with opioids, which are, of course, addictive. I think we're going to see some interesting new drugs for the treatment of pain. Zalicus Inc. (ZLCS:NASDAQ) is one of those companies that have promising compounds in development.
TLSR: So we're talking about nonopioid analgesia for oral delivery.
GZ: Yes, it's an orally available small molecule.
TLSR: A non-addictive oral analgesic should have good uptake by physicians who are managing pain. What else did you want to speak to?
GZ: Resverlogix (RVX:TSX.V) is developing drugs for cardiovascular diseases, specifically plasma lipoprotein abnormalities. An RVX-208 Phase 2b trial, called SUSTAIN, recently fully enrolled high-risk patients for recurring cardiovascular events. We think RVX-208 has demonstrated promising changes in plasma lipid dynamics in patients with low high-density lipoprotein cholesterol (HDL-C), a high-risk group of patients with heart disease. If RVX-208 rebalances patients' plasma lipids, including cholesterol, then this would set the stage for a pivotal trial, especially if another RVX-208 Phase 2b trial also underway, called ASSURE, demonstrates reduced plaque in carotid arteries. We know that these plaques predispose patients to ischemic strokes and other cardiovascular events. We expect results from both trials in the second half of this year.
On another note, I'm also interested in finding drugs that have been overlooked or discarded and that can be repurposed through innovation. To that end I like Spectrum Pharmaceuticals Inc. (SPPI:NASDAQ). This company has gone from almost nothing in valuation 10 years ago to around $750M based on finding drugs that were discarded or distressed for whatever reason. Spectrum acquired these for a song, overcame the difficulties and is now a profitable company. It has two marketed drugs and two more that could be approved either later this year or in early 2013. Companies that can effectively and economically repurpose drugs have great potential. Spectrum is one of the best companies at that.
TLSR: Spectrum is up 60% over the past six months.
GZ: Sales of one of its drugs, Fusilev (levoleucovorin) for metastatic colorectal cancer and osteosarcoma, rocketed when there was a recent acute shortage of generic leucovorin. The FDA said if leucovorin is unavailable, then go ahead and use Fusilev. The company certainly leveraged that to its benefit, but it also provided patients with a drug without which they couldn't be treated.
TLSR: Spectrum also has Zevalin (ibritumomab tiuxetan, an anti-CD20 monoclonal antibody conjugated to a radioisotope) approved for non-Hodgkin's lymphoma (NHL).
GZ: Zevalin was approved for another indication. It's a radioimmunotherapy, and there were a number of issues with delivering it. You had to order the radioisotope separately from the antibody and combine the two, which was somewhat cumbersome. It was up against Rituxan (rituximab; from Genentech) a hugely successful drug. But Zevalin, I think, has a number of advantages-including cost and efficacy-over Rituxan, and it just remains to be seen how well Spectrum will be able to educate physicians and convert some of them. If Zevalin can take a 10%-market share, or even less, of a multibillion dollar market, it's still going to be a windfall for a company of this size. I think that's certainly doable.
TLSR: What's your favorite stock, George?
GZ: My favorite stock? I put them into two buckets. For example, there are companies that are underappreciated and have potential for short-term gains. Peregrine Pharmaceuticals falls into that bucket. There are also two other related companies, Keryx Pharmaceuticals (KERX:NASDAQ) and AEterna Zentaris Inc. (AEZS:NASDAQ). Keryx is like Spectrum in a way. It licenses drugs relatively inexpensively and completes their development. It has a drug called KRX-0401 (perifosine) in Phase 3 for colorectal cancer and multiple myeloma right now, and that will read out in the next month or two, hopefully. Perifosine was licensed from AEterna Zentaris, which is an unusual company in that its research is in Germany, but its corporate headquarters are in Québec City, and its clinical development group is in New Jersey. AEterna Zentaris has a robust drug discovery program in Germany for a variety of indications, mostly cancers, that is very impressive. I think AEterna Zentaris has tremendous potential. Novavax (NVAX: NASDAQ) is another company that falls into this category. It's a vaccine company, and has a robust clinical development plan developed in collaboration with the Biomedical Advanced Research and Development Authority (BARDA). I think it will be rising steadily as it executes on trials and delivers results. For the short term I see these companies as being somewhat more risky, but also likely to provide short-term returns.
In the second bucket are companies that I think have tremendous potential for steady, increasing value accretion. I put Threshold and Spectrum in this category. Curis is also in this bucket. It can sit back and collect royalties on Erivedge from Genentech while it develops its own pipeline.
TLSR: I've enjoyed speaking with you very much.
GZ: Thank you.
George B. Zavoico, Ph.D., has more than six years of experience as a life sciences analyst writing research on publicly traded equities. He has most recently worked at Westport Capital Markets and Cantor Fitzgerald in their research departments, and has received The Financial Times/Starmine Award two years in a row for being among the top-ranked earnings estimators in the biotechnology Sector. His principal focus is on biotechnology, biopharmaceutical, specialty pharmaceutical and molecular diagnostics companies engaged in discovering, developing and marketing drugs and value-added diagnostics for the diagnosis and treatment of cancer, cardiovascular and inflammatory/immune diseases and disorders. Prior to working as an analyst, Dr. Zavoico established his own consulting company, serving the biotech and pharmaceutical industries by providing competitive intelligence and marketing research, due diligence services and guidance in regulatory affairs. He also wrote extensively on healthcare and the biotech and pharmaceutical industries for periodicals targeting the general public and industry executives. Dr. Zavoico began his career as a senior research scientist at Bristol-Myers Squibb Co., moving on to management positions at Alexion Pharmaceuticals, Inc. and T Cell Sciences, Inc. (now Celldex Therapeutics, Inc.). He has a bachelor's degree in biology from St. Lawrence University and a Ph.D. in physiology from the University of Virginia.
1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Resverlogix Corp. Streetwise Reports does not accept stock in exchange for services.
3) George Zavoico: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise for participating in this story.
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