The Life Sciences Report: We’ve had a terrific run in small and mid-cap biotech over the last few years, but a lot of very small companies haven’t kept pace. Indeed, many have gone backward. Is this a case of going unnoticed? Is it fear of micro caps? Is it about bad data?

Joseph Pantginis: Actually, I think it is a mixture of all three. At ROTH, we focus on institutions. From an institutional investor’s standpoint, a company might have great technology, but size does matter. A fund might like a micro-cap company, but that company might not fit into the charter of the fund based on the stock price, and the market cap may be so low that it precludes an institutional investment. 

It could be too early as well. And there could have been a bad data blowup in the past that caused the stock to fall precipitously,

which is something we are all very familiar with in the biotech space. 

There’s another thing too: A stock can become a micro cap simply on lack of news flow. News flow is very important in the biotech industry. A couple of years ago—and I won’t name the company here—there was a very popular initial public offering (IPO) that had very good institutional participation, and we think the fundamentals have remained unchanged, if not improved. Then, in 2014, the company literally went radio-silent, without any news whatsoever, and the stock plummeted. News flow is critical.

TLSR: Joe, I just returned from the 2015 LD MICRO invitational conference in Los Angeles. Some biotech names there had fallen into single-digit market valuations, and I asked several of CEOs why they didn’t just take their companies private. That way they could get out of the public light, not have to file quarterly reports, and just focus on restructuring. Several CEOs told me that they do indeed think about going private, but they don’t actually do it. Why don’t we see companies go private more often?

JP: That’s a good question, because there is a cost to a public listing and financial filings. But the fact is that a lot of companies like the exposure and visibility of being public. The factors that I’ve mentioned—lack of news flow, bad data, low share price—come into play and can keep a stock down, but overall, companies like the exposure of being public. They like having marketable shares, trading volume and the potential for liquidity, all of which can bring more investors in. These factors drive the valuations of micro-cap and all other publicly traded stocks. 

TLSR: You are a molecular geneticist by training, and that gives you a rare advantage in the biotech investment world. It enables you to go behind crowd noise to discern good science from bad. Do you go to peer-reviewed literature when you begin due diligence on a new name? Is it important to have that kind of validation before you follow a new biotech stock?

JP: Yes—the science is always very important, especially with emerging biotechs. Another cliché that I’ll throw out there is you can’t just drink the company’s Kool-Aid. You have to go to the peer-reviewed literature. You need a starting point to base your opinions on—first on the science, and then on how the science can translate to preclinical models. You have to have good models, and seeing these published is always a good thing. The catch-22, especially in oncology, is that even though there may be very good due diligence and good experiments may have been done in preclinical models, many times those just don’t translate to human efficacy. That’s why, overall, 1 in 10 drugs—or fewer, depending on the indication—actually make it to market.

TLSR: Sometimes companies are cut in half, and sometimes worse, on bad data. Can names like these be salvaged?

JP: We see this situation frequently. A lot of times it depends on the strength of a company. After bad data, it goes back to what can be gleaned from the data that might be positive. Is there something a company can use to claw back into the good graces of investors—some positive data that might not have been so obvious at first? Are there other indications being developed for the drug? A company might say, “OK, this drug didn’t work in this indication, so we are going to try something else.” I can give you a
couple of cases in point.

Genentech’s (a unit of Roche Holding AG [RHHBY:OTCQX]) Avastin (bevacizumab) is a major blockbuster monoclonal antibody in the cancer arena, but there have been more failures with this product than there have been successes. Obviously, with Roche, you have to have the money to go after all the indications that might be possible, and certainly Genentech was a significant biotech enterprise even before Roche finished acquiring all its shares. Avastin was first approved in metastatic colorectal cancer, and now it is approved in several oncology indications, including non-small cell lung cancer, a type of ovarian cancer, and more.

When you look at the inflammatory arena, Amgen Inc.’s (AMGN:NASDAQ) anti-TNF fusion protein Enbrel (etanercept) and Johnson & Johnson’s (JNJ:NYSE) anti-TNF antibody Remicade (infliximab) were approved for rheumatoid arthritis (RA), and then in psoriasis, but they failed miserably in cardiovascular disease. A lot of times I asked people to imagine what would have happened to these pharma companies if they had gone after cardiovascular disease before RA?

Again, the question of salvaging a company—or your investment in that company—might go to what’s left. Are there other indications that might make more sense based on the science, preclinical models or early clinical signals? It comes down to whether a company can continue development in different directions and new indications. Often small biotechs cannot do that.

TLSR: Could we go ahead and talk about some names? 

JP: Right now we have Can-Fite BioPharma Ltd. (CANF:NYSE.MKT) rated Neutral, but the interesting thing about this company is that it follows on what we have been talking about. The company had a big blowup with regard to recent psoriasis data for its lead compound CF101. What’s left following a setback like this? The company has come up with some encouraging scientific and clinical answers.

But Can-Fite has had setbacks before. CF101 was initially tested in an RA study. There were some issues with that study, and the company realized those issues had to do with prior disease-modifying treatment with methotrexate, which actually reduces expression—almost to zero—of the receptor that CF101 is targeting. Then it came back and did another study without methotrexate pretreatment in a randomized Phase 2 trial in RA. That study was nicely positive. The company then conducted a Phase 2/3 in psoriasis. An interim analysis showed some interesting trends in the Psoriasis Area and Severity Index (PASI) scores, but then the company announced that the 12-week data missed the primary endpoint. 

This is a good example of a company saying, “OK, what’s left to discover in this drug?” Recall that the company got some good, science-based data looking at receptor expression in RA patients. Now the company is going back and looking at the Phase 2/3 psoriasis data, and investigators are seeing that, following the 12-week endpoint, the drug continued accumulation and the responses have become much better, showing meaningful differences in PASI scores relative to control.

But now the company has to undergo major efforts in convincing investors that CF101 is showing a real clinical benefit. It appears to be real to me. Can-Fite has to go to regulators, design another study, and then conduct that study. We’re talking a much longer development pathway than originally anticipated. You have science-based answers, and you also have clinical-based answers, but each of the studies, in RA and psoriasis, have hit bumps in the road.

TLSR: What does the company have to do to get back into your good graces and become a Buy again?

JP: Can-Fite is certainly in my good graces now. The Neutral rating is because of the increased risk profile around CF101. The company has to make compelling arguments now that the follow-up psoriasis data are real. I think one of the very important things to look at here is the fact that these patients did not seek subsequent therapies, which is a good thing. Otherwise investors might say the effects seen past 12 weeks were based on subsequent therapies—but that’s not the case here. I think we’re looking to get some solidification of the clinical benefit and regulatory visibility on the path forward.

TLSR: Go to another name, please.

JP: Celator Pharmaceuticals Inc. (CPXX:NASDAQ), luckily, has not experienced any issues with regard to bad data. I think this is a derisked play. What the company has suffered from, I think, is a function of time. When I launched coverage of Celator, which I have Buy-rated, there was very little news flow. We were about two years away, almost to the day, from seeing the first Phase 3 data come out. That time was viewed as risk by investors, and that’s hurt this stock, in my belief.

Celator is improving the current standard of care in acute myeloid leukemia (AML), the 7+3 protocol, which is three days of daunorubicin and seven days of cytarabine, an induction therapy in AML. Celator has optimized this formulation in a proprietary manner, using its CombiPlex platform to lock these two agents in place in a synergistic ratio. The drug is CPX-351 (cytarabine + daunorubicin).

TLSR: Joe, you referred to Celator as a derisked story, but the market cap is only about $90 million ($90M). It doesn’t sound like progress has been baked into the valuation. How is the company derisked?

JP: I call the story derisked because the company has done things you rarely see in earlier-stage biotechs. It has conducted two randomized Phase 2 studies with CPX-351, which have been published, and the data are very nice for these AML patients. Now the company has completed enrollment in a relatively large, 300-patient, open-label Phase 3 study in secondary (untreated, high-risk) AML patients. 

We are about to remove a large chunk of the time risk because we’re going to get secondary endpoint data from the Phase 3 study, which are the induction CR (complete response) and CRi (complete response with incomplete recovery of neutrophils or platelets) rates, this month (June 2015). The primary endpoint/overall survival data will be released in Q1/16. When you consider that there has been no new AML drug for about 30 years, this is very promising for AML patients, especially since CPX-351 was shown to have a more favorable safety profile than 7+3 in the Phase 2 studies. This is something that our physician discussions have highlighted as well. 

TLSR: Joe, can you talk about another company that got hit hard but has the possibility of coming back? 

JP: ImmunoCellular Therapeutics Ltd. (IMUC:NYSE.MKT) is a very intriguing name for me, and has been for a very long time. It has undergone a couple of management changes and also happens to fall into the “failure/bad data” category. This story links very nicely to discussing what’s left in a stock after a bad data release, and the kinds of questions that are asked in Phase 2. 

In this case, the company has been very thorough in the types of questions it asked when designing the Phase 2 study of its therapeutic glioblastoma vaccine, ICT-107 (autologous dendritic cells pulsed with immunogenic peptides from tumor antigens). Although the overall primary endpoint data didn’t pan out when released in December 2013, the questions that were asked gave the company a pretty clear path forward in showing efficacy for the drug. But the stock plummeted to basically penny-stock range.

When the data were later analyzed, they showed that the HLA (human leukocyte antigens) status of the patient was going to have a major impact on whether the drug worked or not. This analysis was given at the American Society of Clinical Oncology annual meeting in June 2014. If the patient’s status was HLA-A1, ICT-107 didn’t work at all, and it turned out that a very high percentage of patients in the study had that status. But in patients who were HLA-A2, we saw an encouraging survival benefit with ICT-107 and a path forward.

Since this analysis was completed, the company has gone to regulators, both the FDA and the European Medicines Agency (EMA), and together they have discussed and agreed upon the trial design for the Phase 3, which now looks like it will start by the end of 2015. This study will confirm what has been shown based on the prospective questions asked in the Phase 2. The caveat is that the Phase 2 study was relatively small, with 124 patients, double-blind, placebo-controlled, and was divided into subpopulations. The group that showed a survival benefit was very small.

TLSR: Could you go to the next name?

JP: Rexahn Pharmaceuticals Inc. (RNN:NYSE.MKT) is a very intriguing company. I really like the management team, which is very thorough in its thinking and approach to clinical studies. This name does not fall into the category of a beat-up stock. Looking at its pipeline, Rexahn falls into the category of an early-stage company. It needs to generate more clinical data, and as it does, you would expect to see things start to fall in lockstep with regard to attracting more institutional investors. 

As I mentioned, the size of the company could make it a nonstarter for many institutions, and with roughly a $126M market cap, this is where Rexahn falls right now. Essentially all of its drugs are in Phase 1. Although lead candidate Archexin (antisense oligonucleotide inhibitor of Akt-1) is in a Phase 2 trial, it is still at a relatively early stage. It is being tested in renal cell carcinoma, but more data are needed.

I have done due diligence regarding Rexahn’s science, and I’ve spent time looking at the peer-reviewed journal articles. As an example, RX-3117 (fluorocyclopentenylcytosine) is a nucleoside analog. It is tumor-cell specific and works in models that are resistant to Gemzar (gemcitabine), which is a pancreatic cancer chemotherapeutic agent. I think RX-3117 has the potential to go after the Gemzar market, and for that reason I think there is potential partnering interest around this drug.

In addition to Archexin and RX-3117, the company also has Supinoxin (RX‐5902), an RNA helicase inhibitor of phosphorylated-p68. Rexahn is playing in the right space of targeted therapies. The low valuation is a function of the company being early stage, in my belief. But based on the science and the thoroughness of management in terms of asking good questions and designing good studies, I think the company should be able to be on a successful path going forward. 

TLSR: Go to the next name.

JP: Like Celator, which is targeting a market that hasn’t seen a new drug for AML in about 30 years, Sunesis Pharmaceuticals Inc. (SNSS:NASDAQ) has been developing Qinprezo (vosaroxin) in AML for a very long time now. The company showed some intriguing Phase 2 data for the therapy, and ran a somewhat large Phase 3 study, with more than 700 patients, called VALOR. Sunesis is an early adopter of the adaptive design trial, where at an interim point in the study it can address a certain data point. An independent data monitoring committee can look at the data and ask questions: Does the profile or efficacy of the drug fall into a futile zone? Does it fall into an unfavorable zone? Does it fall into a neutral zone? Or does it fall into a favorable zone? 

The company then has the ability to take the answer from the independent data monitoring committee and upsize the study with regard to patient enrollment. Fast forward to when the VALOR study data came out. The data did not reach statistical significance with regard to overall survival, which was the primary endpoint. But I think Qinprezo definitely falls into the category of questioning what’s left following bad data and a missed primary endpoint in a Phase 3. The data did show a significant survival benefit when censored for stem cell transplant in AML patients. A group of patients who achieved only a CRi and then went to transplant did not fare as well as patients who achieved a CR. Additionally, the intriguing component of the study, in my belief, is that a nice survival benefit was seen in patients 60 years and older, and these data were highlighted at the recent American Society of Clinical Oncology (ASCO) conference. Similar to Can-Fite, Sunesis now has to convince the markets that these data are meaningful.

We had a Neutral rating on this stock after the VALOR blowup last October, but as we look at the data more, we’re becoming cautiously optimistic. We now have Sunesis Buy-rated. The company is engaging the FDA and the EMA. It was recently assigned rapporteurs in the EMA to look at potential regulatory filings. The FDA is going to be looking at potential pathways as well. In a couple of our notes we make the prediction, based on cautious optimism, that the FDA will allow the filing. I think it then will run an advisory committee to discuss these data, and maybe identify a smaller label, so that the drug could be approved on a potential accelerated path for patients 60 years or older, but not for the entire VALOR population. 

TLSR: Joe, retrospectively mining those patients for a filing would be rare, wouldn’t it?

JP: Yes. But this subgroup of 60-and-older patients was prospectively done. What’s interesting about this rare aspect of drug filing is that a company would normally be very hard-pressed to convince an advisory committee, let alone the FDA, to approve a drug based on subpopulations mined out of a clinical study. However, we have what I consider to be a much friendlier regulatory environment today.

TLSR: Is there precedent for this?

JP: Yes. Two important precedents have been set, which could give Qinprezo a clearer path forward. The first drug is Farydak (panobinostat) from Novartis AG (NVS:NYSE). It received accelerated approval this year, and that was after the drug was turned down with a negative vote from the advisory committee. The drug was then approved for a subgroup of patients. The second drug is AstraZeneca Plc’s (AZN:NYSE) Lynparza (olaparib), which was also approved on a subpopulation after the Oncologic Drugs Advisory Committee voted 11-2 against that drug due to concerns about basing the approval on a subgroup analysis. We have two drug precedents where even the advisory committees voted against approval of the drug, but the FDA made the approvals on subpopulations. 

We are projecting that an advisory committee will be modestly positive in favor of approving Qinprezo in this over-60 subpopulation, but the company then will also be required to run a confirmatory study following the accelerated approval in this subgroup. I think the environment right now is quite friendly, especially considering the dearth of new drugs approved for AML over the last three decades.

TLSR: Thank you for your insights, Joe.

Joseph Pantginis, Ph.D., is the head of biotechnology research as well as a senior research analyst. Dr. Pantginis joined ROTH Capital Partners in 2009. Prior to joining ROTH, Dr. Pantginis was a senior biotech analyst at Merriman Curhan Ford. Dr. Pantginis was also a senior biotechnology analyst at Canaccord Adams, focusing on the oncology, inflammation and infectious disease spaces. Prior to Canaccord Adams he was a biotech analyst at several firms, including JBHanauer & Co., First Albany Corp., Commerce Capital Markets and Ladenburg Thalmann & Co. Inc. Prior to his tenure on Wall Street, Dr. Pantginis served as an associate manager/scientist of Regeneron Pharmaceuticals’ Retrovirus Core Facility. Dr. Pantginis received an M.B.A. in finance from Pace University; a Ph.D. in molecular genetics and a master’s degree from Albert Einstein College of Medicine; and a bachelor’s degree from Fordham University.