HIT ‘EM WHERE THEY AIN’T

October 1, 2013

At the MTSL, we use BUY LIMITS that suggest discipline with our recommendations of not just what stock to buy, but at what price (i.e., at or below our BUY LIMIT).  In 2013, we have raised BUY LIMITS for ALKS, BMRN, CELG and PCYC based upon significant improvements in specific fundamentals that, in our view, raise the potential value of each company. While we are proud of the MTSL Portfolio performance YTD, most our Recommended Stocks currently trade above their respective BUY LIMITs. Unlike most Wall Street analysts, we find no need to continue to raise limits/target prices just because a stock has done what we expect it to. Our initial recommendations are based on the stocks not yet discounting what we believe are improving and/or undervalued fundamentals. For example, PCRX shares recently touched our TARGET PRICE. While EXPAREL has strong momentum, PCRX is a BUY under 20 with a TARGET PRICE of 30, and we are not raising out target price. We constantly assess our BUY LIMITs and TARGET PRICEs.

Last Issue (MTSL #749), we discussed strategies of Buy The Class or Best In Class, and concluded that the Hot New Classes (MTSL #748) will lead to blockbuster drugs but that many of the stocks have already discounted clinical and commercial success. A few MTSL stocks, however, remain under-owned and undervalued. CNDO, for example, has had a solid performance year-to-date, but only four funds own more than half the shares outstanding (see below). Should the TSO worms perform well in clinical trials, the current valuation is surely too low.

Novavax F Protein RSV Vaccine

One company that has not outperformed in 2013 is Novavax.  It’s technology and/or R&D pipeline are not associated with the Hot New Classes, and there have been no clinical and/or corporate catalysts since last Fall. With a flattish stock price in a bull biotech market, Wall Street analysts often focus on winners. Based upon our analysis and upcoming events, we believe NVAX constitutes an ideal “Hit ‘Em Where They Ain’t” candidate.

Novavax is widely known as a vaccine company based on its proprietary recombinant virus-like particle (VLP) technology, with two flu vaccines (seasonal and pandemic) under development.  At a valuation of $240 million, we believe that NVAX is undervalued based on the flu opportunity alone.  However, what makes NVAX an even more compelling investment opportunity is their “under the radar” RSV vaccine program –  poised to deliver important Phase II data in late-March/early-April.  Positive data would serve as a significant catalyst for multiple reasons.  First, the RSV vaccine market opportunity is sizable, and there are currently none on the market.  No competitors are in Phase II development.  Positive Phase II RSV data is not currently factored in NVAX consensus valuations. Favorable RSV data would also serve as proof-of-concept that NVAX has a platform for vaccine development that is capable of generating multiple vaccine shots on goal, reducing risk and increasing takeout potential.

The Target:  Respiratory syncyntial virus (RSV) is an enveloped virus with two major glycoprotein’s on it surface, the attachment (G) protein, with its significant strain-to-strain sequence variation, and the fusion (F) protein, which is highly conserved and important for viral entry into cells and target-cell fusion.  In addition to being highly conserved, the F glycoprotein is a known protective antigen and a target for neutralizing antibodies and is considered the most important antigen target for including in a RSV vaccine. Unlike other difficult vaccine targets like HIV, HSV, and HCV, there is a known immune correlate of RSV protection, which is the neutralizing antibody – MedImmune’s Synagis – to the F glycoprotein.  This is the target of the NVAX RSV vaccine. We believe that the F glycoprotein provides the foundation on which to build the first safe and efficacious RSV vaccine.

NVAX Phase II RSV Vaccine Development:  A Phase II trial in non-pregnant women was initiated in early October 2012. The trial design is a randomized, blinded, placebo-controlled study designed to evaluate the safety and immunogenicity of 2 dose-levels (60mg and 90mg) of the RSV vaccine development candidate, with and without alum as an adjuvant. The trial enrolled 330 non-pregnant women of childbearing age.  Each group received either one or two intramuscular injections at each dose-level of vaccine or placebo. Safety and immunogenicity will be evaluated over a 6-month period.  The primary endpoint of the trial is immunogenicity defined as antibody titers at Day 182 with an interim analysis at Day 56. (ClinicalTrials.gov).

In our view, antibody titer levels will be the most closely watched metric from this trial.  Based on the strong Phase I data (see below), there appears to be the potential for higher antibody titers at the higher 90mg dose.  As a reminder, vaccination of women of child-bearing age is the first step in developing a strategy for inoculation of pregnant mothers in hope of passing along antibodies to the newborn.  It is widely recognized that protection of newborns is a significant unmet medical need and an attractive commercial opportunity exceeding $500 million annually.

Following the results of the study, NVAX intends to choose the safest and most effective of the four doses currently being tested to move into a confirmatory Phase II trial.  The company plans to enroll 500 patients at the chosen dose and the data could be available as soon as next year as these are relatively short trials – a few weeks to enroll/dose with six months of follow-up.  Starting the confirmatory Phase II will be an important step for the RSV vaccine’s development, but we may not have to wait for this trial to conclude before NVAX signs a partnership.  If the upcoming data is positive, there could easily be enough information to commence partnership discussions.

Phase I data from a Validated Target:

The RSV vaccine Phase I data was presented last year at the 8th Annual International Respiratory Virus Symposium and the International Society for Respiratory Vaccines. NVAX’ RSV vaccine delivered a 19-fold increase in protection at the highest dose (60mg) compared to placebo. Importantly, the levels of neutralizing antibodies, which is the benchmark of a vaccine’s immunogenicity, were up to 10-fold higher with the NVAX F vaccine candidate than was identified as being protected with palivizumab (Synagis).   The data also demonstrated that the immune response to the RSV-F vaccine targeted the clinically validated Synagis binding site (F glycoprotein) where the virus enters the cell and infects it. The antibody levels induced by the vaccine appear to be well in excess of the levels of those shown to prevent hospitalizations in high-risk premature infants. In fact, the Phase I data showed a 10-fold better antibody response than Synagis. As a reminder, Synagis is the monoclonal antibody marketed by AstraZeneca/MedImmune, and is effective in the prevention of RSV and has recorded peak sales of over $1 billion (2010).

 

NVAX Stands Alone: The table below summarizes the currently RSV drug development landscape, dated from December 12.  NVAX F protein vaccine is the only RSV vaccine candidate in Phase II trials. AstraZeneca (owns MedImmune) released 2011 financial results including a R&D pipeline review. Interestingly, AZN’s MEDI-534 does not appear on the R&D table, therefore, we believe it is not being developed further. MEDI-557 and MEDI M2-2 vaccine also appears to have been moving slowly, beginning a small study in 2011 with data due in 2014 (ClinicalTrials.gov).

Phase I in the Elderly:   In 2012, Novavax initiated a Phase I RSV vaccine trial which is enrolling 220 healthy adults over age 60 at four locations in the U.S.  Patients in the Phase I trial will be divided among 5 dose cohorts – 1. low dose with alum; 2. low dose without alum; 3. high dose with or 4. without alum and 5. control. All patients will be inoculated with the RSV vaccine candidate on Day 0 and a trivalent influenza vaccine on Day 28. The primary endpoint is immunogenicity defined as defined as RSV antibody titers at Day 56 with final analysis at Day 364. HAI titers for the influenza vaccine will be also evaluated at Day 56 to assess general level of immune response in each patient. Additionally, there are pre-specified subgroup analyses for subjects aged 60-75 years, and over 75 years. Given that dosing in the elderly is an antibody booster strategy, we believe duration of antibody response will be a key metric for assessing the required frequency of use. Thus, while the initial 56-day data will be important, the one-year follow up data is just as important.  Data is expected near-term as well, in Q2:13. The elderly represent a large unmet medical need as discussed above and a very large additionally market opportunity.

The PATH Collaboration: NVAX has collaborated with PATH (a global nonprofit health organization) to help fund their Phase II RSV vaccine trial.  PATH has provided approximately $2 million of non-dilutive initial funding to support the Phase II dose-ranging clinical trial on women of childbearing age. Following this initial study, PATH can elect to continue to partner with NVAX by providing additional financial support (50%) for the external clinical development through commercialization.  In return, PATH will have rights to distribute the RSV vaccine in the low resource countries while NVAX retains all global commercial rights.  Hence, PATH’s interest in the NVAX approach has afforded the company excellent non-dilutive financing terms to develop the RSV vaccine.

The Market Opportunity

Respiratory syncytial virus, RSV, is a serious respiratory disease and represents a significant unmet medical need in both infant and elderly populations.  In the U.S., it is the leading cause of pneumonia in infants under one year old and results in ~100,000 hospitalizations per year.  RSV is a leading cause of pneumonia in the elderly resulting in 14,000 deaths and 175,000 hospitalizations annually. Maternal immunization for RSV may address this major unmet need and would be aligned with evolving medical practices for influenza and pertussis vaccines, that are given to the mother and benefit the newborn via trans-placental transfer (a.k.a. vertical immunity) of maternal antibodies to the fetus in-utero.  RSV infections in adults represent re-infections and are generally mild-to-moderate in severity, except in persons with high-risk conditions including the elderly and adults with underlying chronic cardiac or pulmonary disease.  It is estimated that between 11,000-17,000 adults die of RSV infection annually in the U.S.  Hence, important life-saving and strong pharmacoeconomic benefits exist with an effective RSV vaccine.  The only treatment today for RSV is AZN/MedImmune’s Synagis, which costs roughly $10,000 per infant for protection from RSV. A vaccine would probably sell for a few hundred dollars – a fraction of Synagis – and still provide both enormous cost savings and profits to NVAX.  An RSV vaccine for the elderly would also provide huge cost savings by preventing death and hospitalizations. 

MEDI Jr?

Dr. Jim Young joined the NVAX Board of Directors in April 2010 and was appointed Chairman of the Board in April 2011. He has also become the company’s de facto recruiter.  Dr. Young was MedImmune’s (MEDI) President of Research and Development, where he was instrumental in the development of both FluMist and Synagis.  In his short tenure as NVAX Chairman, Jim has been instrumental in adding numerous key personal that used to work with him at MEDI.  There is an old saying in Silicon Valley that also applies to biotech, “the best assets have tennis shoes.”  Given that it is only five miles from MEDI to NVAX headquarters, some could have actually walked the whole way.  Key hires from MEDI include – Senior VP of Manufacturing and Process Development, Timothy J. Hahn, Ph.D.; VP of Process Development, Erica Shane, Ph.D.  In addition, most of the senior management at NVAX has significant experience at developing vaccines and shepherding them to market. In our view, having the key Synagis development leaders join Novavax bodes well for the success of the RSV vaccine.

Where They Ain’t – In our view, NVAX represents a strong example of a stock that is not part of the Hot New Classes and one that investors have yet to focus on.  As a result, we believe the risk/reward is quite favorable. And while the upcoming Phase II results will not be pivotal data nor be enough to lead to FDA approval, it may be enough to begin to awaken investors to NVAX. The Company ended 2012 with $50 million in cash, last year’s burn was $18 million, and the company’s two main programs are funded by the government (flu) and a non-profit organization (RSV). We also noticed the company filed a  mixed shelf of securities on March 14, possibly seeking to raise capital in light of positive news. Interestingly, while completing this report Chairman Jim Young purchased 100,000 shares at $2.03. In the current market bullish market environment, it is challenging to find a biotech stock that does not meaningfully discount clinical and commercial success.

 

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