Complimentary MTSL Issue

Biotech Sector Analysis

SENTIMENT — Wait Until That Deal Comes Round

— Biotech stocks have moved steadily upwards since earnings season began. After adjusting for negative currency, Top Tier biotech earnings were not that bad. Expectations were lowered after JNJ’s pharmaceutical miss, but the AMGN, BIIB and CELG earnings reports were stable enough to keep their stocks flat. ALXN posted a strong quarter, but GILD – which was the last of the big boys to report – missed again. However, strong earnings were not the main driver of biotech stocks and the indices higher. The impressive rollouts of VRTX’s Orkambi, BIIB/IONS’ Spinraza and REGN/SNY’s Dupixent, in particular, has given the sector solid evidence that new blockbusters are out there, and forecasts are moving higher in the early days of their respective launches. Since most sellside analysts value biotech companies by discounting peak drug sales, a “short the launch” approach to new drug approvals has been commonplace among traders/aggressive investors. Hence, the early “Dupi” momentum has improved sector sentiment, reversing the bearish launch strategy. After earnings, ASCO abstracts will be out on 5/17 and that often leads to a seasonal rally before summer begins.

As we went to press, on Thursday the House of Representatives narrowly passed a new version of the health care bill that is meant to repeal and replace Obamacare. It goes to show, you don’t ever know, but House Speaker Paul Ryan convinced Republican members to deliver on their campaign promise even before Congress received an estimate of the bill’s effects from the CBO. While the bill barely squeezed through the House, the American Health Care Act will face a much harder vote in the Senate. As we’ve mentioned several times before, despite a defeat the first time around, health care as a political and investment hotbed will not go away, and stops and starts like the recent “win” will keep the sector’s volatility very high and traders trading. Nonetheless, to us the favorable vote is a sign of political (if not moral) progress.

Stocks with positive catalysts are being well rewarded and the IBB levels are overall healthy. Both the short- and long-term charts are above their moving averages and the sector since the end of April has included its list of winners and losers. With the recent Big Pharma comments on M&A, the group may be stuck in a trading range until a real deal comes around (IBB 285-300). With traders moving to super hot tech stocks, bios have in general been out of the spot light. Look at the weekly IBB trend line – the 200-week MA has risen steadily in 2017 – with Regeneron driving that train.

The ongoing dearth of any major M&A transactions, we believe, has led event players/arbitragers out of the biotech sector for the time being.  On Pfizer’s first quarter call (5/2), the Company described why M&A is on hold. The comments led to a recent sell-off in the group, in takeover-related stocks in particular and has taken some of the deal speculation out of the group for now. But if biotech investors know anything, things can change quickly. There are a number of political arenas that are still up in the air that Trump may be able to change, although there is not a lot of hope out there that such giant, complex areas can be fixed anytime soon or at all. Health care reform, tax reform, European elections are some key ones mentioned in the PFE call. But at the core of biotech investing is the belief that new drugs will work better and be safer than old drugs, new diseases will be treated and possibly cured. The biggest question that continues to hang over the biopharmaceutical sector is “who’s gonna pay?” If the above launches are any indication, select companies will continue to be successful and so should their respective stocks. One thing we know for sure is that Big Pharma/Big Biotech balance sheets are growing daily – and eventually a chunk of the cash will buy the innovators for their potential blockbusters. In the meantime, as Dead & Company begin their Spring tour (Hollywood Bowl for us :)), we need to “…wait until that deal comes round…” (https://www.youtube.com/watch?v=PKtrz_fvmoc).

ALKS – Q1 Call & Clinical Progress

ALKS reported Q1:17 revenue of $192 million, just slightly below consensus of $198 million. Non-GAAP EPS was ($0.18) compared consensus of $0.00/($0.07). The topline line miss was not very big – about $2-3 million each from lower than expected Vivitrol and Aristada sales. These drugs are still undergoing either a new launch (A) or a renewed launch/new contracts (V) so quarterly fluctuations are non-unexpected and the trends of both are favorable. Vivitrol sales were $58.5 million, just below consensus of $62.5 million. Sales of recently launched Aristada (now in its sixth quarter on the market) were $18 million vs. consensus $20.4 million. Guidance was $18-21 million, and sales are up from the $17.3 million in Q4:16. ALKS reiterated its previously provided guidance of total 2017 revenues of $870-920 million.

BMRN – FDA Approves & EMA Gives Positive Opinion for Brineura

The FDA recently approved BMRN’s Brineura for the treatment of CLN2 disease in patients age three and older on its PDUFA date of April 27. This is in contrast to last week’s CHMP opinion that recommended approval in all CLN2 patients regardless of age, though is not surprising considering the trial used for registration was conducted in patients ages 3-8. The company intends to conduct a trial in patients under two years of age to expand the US label and satisfy the CHMP request for a similar study in this population. The label also included data out to 96-weeks, further confirming the drug’s robust activity, with 95% of patients on Brineura not experiencing a decline in motor function compared to 50% for natural history.

Commercial Plan and Target Market

While the promotion will begin immediately, Brineura will not be commercially available for six weeks (early-June).  BMRN will marginally increase the size of sales force to target pediatric neurologists. The initial commercial efforts will be focused on promoting awareness, and increasing testing and early diagnosis of patients. Per management, the majority of market (80-85%) is outside the U.S. Approximately one-third of the total market is in Ex-U.S./EU countries.  Seven sites (including a couple in the U.S.) participated in the clinical trial program (including expanded access program).

CELG – Solid Quarter Overall With Key Compounds Advancing

CELG reported Q1:17 solid results with sales up 18% Q/Q and ESP up 27%, respectively.  The Company reiterated full year 2017 guidance for total revenue ($13.0 billion-$13.4 billion) and key products, including Revlimid ($8.0B-$8.3B), Pomalyst ($1.6B), Otezla ($1.5B-$1.7B) and Abraxane ($1.0B). CELG increased guidance for 2017 adjusted EPS ($7.15-$7.30 from $7.10-$7.25) and operating margin improvement (46.0% from 45.5%). CELG reiterated 2017 Otezla guidance despite Q1 sales coming in at $242 million and below consensus $341 million. There was contraction in the overall market exiting the quarter but there was a rebound recently and the drug continues to capture share. Revlimid was in line. The stable and steady growth of Revlimid was a major plus in the Company’s quarter earnings report

ESPR – Reports Q4 Financials

ESPR recently reported their Q1 financials and provided a corporate development update.  In June, the company expects to announce the clinical development and regulatory pathway for the doublet pill, the fixed dose combination of bempedoic acid 180 mg and ezetimibe 10 mg (BA+EZ).  Given ESPR’s recent positive meetings with the FDA regarding the Phase III development program for BA we except a positive outcome from this meeting also.

ESPR Events for the Second Half of 2017:

• Initiate and announce the design of a Phase 2 study of bempedoic acid added-on to a PCSK9i;
• Announce top-line results of the Phase 2 triplet oral therapy study (1002-038);
• Complete patient enrollment of the three ongoing global pivotal Phase 3 LDL-C lowering efficacy studies (Studies 2, 3 and 4);
• Brian A. Ference to publish results from the Mendelian randomization studies that genetically validate ACL inhibition in a top-tier medical journal.

FPRX Prepares For ASCO and to File Three INDs

FPRX will present updated gastric cancer clinical trial data from the FPA144 program at the ASCO 2017 Annual Meeting.  Abstract Number and Title: #4067, “Updated antitumor activity and safety of FPA144, an ADCC-enhanced, FGFR2b isoform-specific monoclonal antibody, in patients with FGFR2b+ gastric cancer”
Poster Session: Gastrointestinal (Noncolorectal) Cancer
Session Date and Time: Saturday, June 3, 2017, 8 – 11:30 a.m.
Location: Hall A, Poster Board Number: 59

FPRX plans to seek FDA regulatory guidance on a registrational path for FPA144 in combination with chemotherapy as a front-line gastric cancer therapy. Preclinical data suggest that the combination of FPA144 with standard-of-care chemotherapy is additive.  The company plans to initiate a combination trial of FPA144 with chemotherapy to advance into front-line therapy.  The company also plans to launch a Phase I safety trial for FPA144 in patients with gastric cancer in Japan, where the observed incidence of gastric cancer is higher in Asian populations than in other populations.  FPRX recently received clinical trial notification (CTN) approval from the Pharmaceuticals and Medical Devices Agency (PMDA) in Japan and plans to initiate a Phase 1 monotherapy clinical trial in Japan in the third quarter of 2017.

FPRX will also present initial clinical data from the cabiralizumab PVNS trial at the American Society of Clinical Oncology (ASCO) 2017 Annual Meeting.  Abstract Number and Title: #11078, “A phase I/II dose escalation and expansion study of cabiralizumab (cabira; FPA008), an anti-CSF1R antibody, in tenosynovial giant cell tumor (TGCT, diffuse pigmented villonodular synovitis D-PVNS)”
Poster Session: Sarcoma
Session Date and Time: Sunday, June 4, 2017, 8 – 11:30 a.m.
Location: Hall A, Poster Board Number: 401

INCY – Reported Q1:17 Highlighted By Strong Jakafi Beat, ASCO Up Next -d

INCY recently held their Q4 earnings call where they reported strong Jakafi U.S. sales of $251 million, substantially above the consensus estimate of $235 million.  The company reiterated FY17 Jakafi U.S. revenue guidance of $1,020-$1,070 which is just slightly below consensus for the year, however, we believe INCY is likely to raise guidance later in the year as they get a better feel for the Jakafi sales trajectory.

IONS – IONS/BIIB Blow Away Spinraza Estimates

IONS and their partner BIIB vastly exceeded the Spinraza estimates when they reported revenues of $47 million versus the Consensus forecast of $16 million.  While this excellent number reflects a contribution of $10 million of U.S. inventory build, the drug’s run rate still beat the numbers. BIIB has done a very good job of hitting the ground running in the U.S.  Commentary from Biogen management suggested the majority of U.S. sales resulted from new patient starts – with the transfer of clinical trial/Expanded Access Program (EAP) patients (100 patients) to commercial therapy providing a small contribution. BIIB, who is in charge of sales efforts, noted that it is too early to determine the kinetics of new patient starts on Spinraza going forward. As of April 21st, 88 treatment sites across 36 states have administered the drug and 203 sites have submitted start forms. This is encouraging given management/Cure SMA foundation previously highlighted infusion-related capacity constraints at some sites which still need training, in addition to gaining further reimbursement, as one of the two major rate-limiting steps for the launch. Some larger/leading centers have dosed as many as 10 patients – although the majority of sites have dosed only one or two.

Reimbursement continues to improve.

As of April 21, 165 plans (100 commercial and 65 Medicaid) provide Spinraza coverage. Approximately 75% of lives covered by commercial plans have a formal coverage policy – with 50% of those now providing broad access (all SMA types). Of the 35 states covered by 65 Medicaid plans, 20 states have a formal policy in place, and about 50% of lives covered by these plans have broad access to SPINRAZA. BIIB management  also observed Q1:17 reimbursement from 45 Medicaid plans that do not yet have a formal policy in place. The majority of patients whom have received Spinraza are Type1 SMA. However, many Type 2/3 patients were able to secure access through an appeals process/medical necessity request. Lastly, 25% of drug was provided through the free program for patients whom could not afford it, or were denied insurance reimbursement.

MDCO – Carbavance Data Presented At ECCMID – FDA Approval Due Q3

Though given no attention in the MDCO story, Carbavance is an increasingly valuable asset that is going to be approved by the FDA by the third quarter. Updated data were recently presented at the ECCMID conference (April 22-25 in Vienna). At ECCMID, MDCO had 9 presentations mostly on carbavance (meropenem-vaborbactam) which is currently under NDA review for the treatment of complicated urinary tract infections (cUTIs). A PDUFA date is likely in Q3:17.

Active against deadly drug resistant strains

Carbapenem demonstrated robust in vitro activity against clinical isolates of the most common carbapenem-resistant Enterobacteriaceae (CRE), Klebsiella pneumonia carbapanemase (KPC), a group of emerging highly drug-resistant Gram-negative bacilli causing infections with significant morbidity and mortality. Specifically, exposures using PK data from the Phase I trial indicated that carbavance demonstrated bactericidal activity against 6 of the most difficult KPC-producing CRE with porin mutations containing strains with MICs of < 8 μg/mL while exposures from the TANGO Phase III study were bactericidal against the set strains up to 16 μg/mL. Carbavance showed excellent in vitro activity against KPC-producing Enterobacteriaceae from Europe, with 97.0% inhibited at < 2 mg/mL. Among the 496 KPC-producing OXA-48, MBL-negative, Enterobacteriaceae from Europe, the modal meropenem MIC dropped from >32 to <0.03 mg/mL in the presence of vaborbactam and the MIC90 dropped from >32 to 1 mg/L, validating the effectiveness when meropenem and vaborbactam are combined. Carbavance’s bactericidal activity against KPC-producing strains presents an important feature of the drug and should lead to greater adoption once approved in a market place that is currently lacking agents against these deadly strains.

Breaking News (5/4)

MDCO – Inclisiran FDA Path Clear After End of Phase II Meeting – Lower Risk, Value Enhanced

The Medicines Company announced that the primary endpoint of the Phase III registrational trial will be LDL-C levels. This is a major positive for MDCO – significantly reduces the risk and increases the value of Inclisiran. The Company will execute two trials – a 3,000 patient Phase III study for FDA approval (avg. LDL at enrollment of 90 mg/dL) and a ~14,000 patients CVOT study (avg. LDL level at enrollment of 125-135) to support the drug’s ability to lower CV outcomes. As a reminder, in addition to MDCO’s substantial knowledge and experience in performing large-scale CV studies, the Company learned a lot more about how to design the ideal study after the AMGN FOURIER study. This cannot be taken lightly as experts uniformly agree that AMGN would have had much stronger outcomes with Repatha in FOURIER had they designed a better study like the one MDCO just announced.

Cost Way Lower.

The Phase III LDL trial is going to begin mid-year/H2, the cost is expected to be around $60-70 million for MDCO, which ended Q1:17 with ~$435 million in cash. MDCO already has identified centers and has also begun screening patients (e.g., the PFE Phase III ASPIRE clinical program in high-risk patients is out there and likely ready to go). There has been speculation that without a strategic partner, MDCO would need to raise additional capital. On the call, management stated that no new capital would be raised in 2017. As another reminder, MDCO may be shopping the infectious disease division, one that could raise up to $1 billion with the upcoming approval of Carbavance and a fully integrated infrastructure plus approved and novel early compounds. While the second 14,000-patient CVOT study will be more expensive, cash on hand and available resources will be sufficient to go it alone. Even though we believe they won’t need to.

PCRX – Q1 Results: EXPAREL Steady As She Goes

In Q1, EXPAREL net product sales were $68 million compared with $64 million in Q1:16 and $71 million in Q4:16. The March guidance for full year 2017 net Exparel sales of $290 million-$310 million remains intact. These results reflect the continued success of EXPAREL as an opioid sparing solution for post-surgical pain. Gross margins are forecast to stay in the 70% range this year, but rise to 85% once the U.K. manufacturing facilities are operational in 2018. Overall a steady quarter of progress with a busy event calendar ahead.

PCRX’s three pillar growth strategy includes – driving education and awareness with patients, healthcare providers and payers about the need for opioid-sparing solutions; generating level one clinical data; and third, forming strategic collaborations with partners. While still early since inception, the Company’s JNJ orthopedic partnership is moving along well, and Exparel’s Orange Book patent was extended to 2021. Another sound partnership has been formed with BoneSmart.org, the largest active online orthopedic community in the world with more than 2.8 million site visits in 2016 alone. BoneSmart serves as an important website for patients planning or considering knee and hip replacement procedures and Pacira is working with them to address the use of opioids and the alternatives to opioids for orthopedic surgery.

SGMO – Receives Positive FDA Designations for Three Drug Candidates, ASGCT Up Next

SGMO has received three new positive designations from the FDA for their portfolio of drug development candidates.  The first was a Rare Pediatric Disease (RPD) designation for SB-913 in vivo genome editing treatment for Mucopolysaccharidosis Type II (MPS II). RPD provides incentives to develop drugs for the treatment of rare diseases primarily affecting children ages 18 years or younger. In addition, a sponsor who receives a new drug approval for a rare pediatric disease may be eligible to receive a priority review voucher for a subsequent marketing application for a different product. The voucher may be sold or transferred.  SB-913 has already received Orphan Drug designation from the FDA. FDA has cleared an Investigational New Drug Application (IND) for this program, and a Phase 1/2 clinical trial evaluating SB-913 in adults with MPS II is open and screening subjects for enrollment. The last PRV was sold for $150 million and have gone for as much as $350 million.

The second piece of good regulatory news is the receipt of Orphan Drug Designation for SB-525 cDNA gene therapy for Hemophilia A. Orphan Drug designations are granted to drugs and biologics intended to treat rare diseases with a patient population less than 200,000 in the U.S. The designation provides incentives to advance development and commercialization of rare disease drugs.  FDA has cleared an IND for this program, and a Phase 1/2 clinical trial evaluating SB-525 in adults with Hemophilia A is expected to be opened and to begin screening subjects for enrollment later this quarter.

– Reports Q4 Financials and CD33-CAR-T Ready to Start Phase I

recently reported their Q1:17 financials and held a conference call.  During the call, the company said that are assessing several paths for the pivotal GBM trial, including a single-arm study of Ad-RTS-hIL-12 + veledimex compared to historical controls. With a commercialization path now becoming clearer, is evaluating partnership opportunities for Ad-RTS-hIL-12 + veledimex to treat glioblastoma (GBM) patients that have run out of therapeutic options.  The company is also currently in discussions with the anti- PD-1 companies for a partnership to develop a combo treatment in GBM.  In our view, the two discussions could be dovetailing as a deal could easily be struck that included both mono and combo therapies now that the regulatory path is becoming clearer for mono therapy.  will be presenting updated results from its Phase I, multicenter, dose-escalation study of Ad-RTS-hIL-12 + veledimex in patients with recurrent or progressive glioblastoma at the 2017 American Society of Clinical Oncology (ASCO) Annual Meeting on June 5, 2017.  The Company also expects to initiate Phase 1 studies of Ad-RTS-hIL-12 + veledimex in pediatric brain cancer, as well as in combination with an anti-PD-1 checkpoint inhibitor in adult GBM, as planned, in the first half of 2017.

Anticipated and Achieved 2017 Milestones

• Intra-tumoral IL-12 RheoSwitch^® programs:
  –  Updated clinical data from Phase 1 of Ad-RTS-hIL-12 + veledimex for recurrent GBM to be presented at ASCO
  –  Initiate pivotal clinical trial for recurrent GBM
  –  Initiate combination study of Ad-RTS-hIL-12 + veledimex with iCPI (anti-PD-1) for recurrent GBM during the first half
  –  Initiate Phase 1 study in the treatment of brain tumors in children during the first half
• CAR+ T programs:
  –  Continue CD19-specific CAR+ T second-generation clinical study, enrolling patients under shortened manufacturing
  –  Advance CD19 third-generation mbIL15 towards a Phase 1 clinical study evaluating point-of-care
  –  Initiate a CD33-specific CAR+ T clinical study in adults and children for relapsed or refractory acute myeloid leukemia
  –  Advance CAR+ T-cell preclinical studies for at least one hematological malignancy under a shortened manufacturing process towards point-of-care

THE MODEL PORTFOLIO*

*The Model Portfolio is designed to reflect specific recommendations. We began the Model Portfolio on 12/23/83 with $100,000. On 4/13/84, we became fully invested. All profits are reinvested. Stocks recommended since then may be equally attractive, but may not be in the Model Portfolio. Transactions and positions are valued at closing prices. No dividends are created, and a 1% commission is charged. We don’t use margin. Interest income is credited only on large cash balances.

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