Obesity/MASH Leads BioPharma With More Positive Data From VKTX and Zealand

The GLP-1 receptor agonists are transforming the treatment of Type 2 diabetes (T2D) and obesity, and the 11 approved GLP-1’s collectively achieved sales of $36.5 billion in 2023 making it the largest drug class in industry with growth potential in excess of $100 billion. VKTX shares soared this morning when the Company released excellent Phase 2 SubQ data for VK2735 (GLP-1/GIP) showing treated patients lost up to 14.7% of their body weight over 13 weeks, in a clean dose-dependent manner with high statistical significance (p<0.0001). The primary endpoint win is a 13.1 percentage point reduction in weight than the placebo group. In comparison, Eli Lilly’s Zepbound resulted in a 7-8% improvement over a placebo in the Phase 3 study (Surmount-1).  Lilly’s retatrutide – which targets all three Gs – led to 12-13% weight loss versus placebo, however with more side effects than the Viking compound, including cardiovascular risk. Investors were led to expect a bar of just 8% placebo-adjusted weight loss for ‘2735 – which has now moved into position as potential Best-in-Class drug.

Zealand Pharmaceuticals announced partner Boehringer Ingelheim’s GLP-1/glucagon survodutide improved metabolic dysfunction-associated steatohepatitis (MASH) versus placebo in a Phase II trial.  We remain skeptical regrdaing the third G, glucagon, as it appears to add cardio risk without adding much efficacy.

FEAR & GREED – STILL EXTREME

Extreme Greed rules the equity markets as AI enthusiasm ratchets higher following another blowout Q and guidance from Nvidia. For some perspective, the one day market cap gain for NVDA on the announcement of $277 billion is greater than the combined market capitalizations of Pfizer and Bristol Myers! The last week of February started with the S&P Select Biotech Index rallying for a fourth consecutive day to a new high for the year despite no new M&A and a tick up in interest rates. The move represented the 4th best day of the year and seemed technical in nature as the top end of the recent trading range is tested. The S&P 500 has now advanced for 15 of the last 17 weeks, which has only happened one other time in the last 50 years (1989).

TECHNICALS – XBI HIT OVERBOUGHT LEVELS DRIVEN BY FUNDAMENTALS

The XBI (98) had a whirlwind of volatile performance this week – mostly to the upside – with the index breaking above resistance on the stellar VKTX obesity data, plus CLDX’s CSU update at AAAAI. The biotechs were up on average 15% in February alone. At press time, the sector saw a big drop after the biggest 3-day jump in years coupled with an abundance of follow-on equity offerings. The index briefly touched 106 – it may have been a near term technical sell signal – and that is OK and actually healthy. With premium M&A, excellent clinical results, upcoming FDA approvals and a peaking of interest rates, biotech stocks are back. The volatility is somewhat scary after the huge movement in many stocks, but true biotech investors cannot be unhappy by the recent price action in the sector.

Of course, bankers rush companies to finance (and get the fat fees) and that often leads to a short-term pullback – due to not only dilution but also the fact the deals remove a lot of near term takeover speculations in respective stocks. Nonetheless, cash is often insatiable in this group and the worthy ones with real positive data are able to fund their top compounds and remain independent. With the Big Pharma/Big Drug stocks flush with mountains of cash, they are willing to pay up for novel assets to shore up their long-term pipelines to help offset upcoming patent expirations. Plus, the Street has until now been rewarding both target and acquirers’ stocks. There is no doubt a risk on market occurring (see Bitcoin) and biotechs are also a huge beneficiary of this type of environment. The GLP madness continues – and we expect a ton of more wannabes and copycats.

ACAD’s fourth quarter was dominated by Daybue’s sales of $87 million versus the consensus of $83.3 million. Although the company guided a quarter over quarter decrease in Q1 2024 ($76-82 million) based on the seasonal dynamics, we expect sales to continue to grow subsequently. In our view, given the strong interest from both Rett physicians and the patient community there should be a continued growth despite seasonal hiccups in the near term. Additionally, the patient adherence rate was found to be better than what LILAC data showed suggesting the positive benefits of dose titration and efforts to address diarrhea.  For Nuplazid, ACAD reported revenue of $143.9 million compared to the consensus of $139.1 million. For the full year 2024, Acadia guided net sales revenue for Daybue between $370-420 million and Nuplazid to $560-$590 million.

The unique mechanism of action (MOA) of pimavanserin has allowed ACAD to focus solely on negative symptoms in the Phase 3 design of ADVANCE-2. Given the landscape of schizophrenia drug development, pimavanserin has a unique position to be marketed solely for the negative symptom patients which might differentiate the drug concerning safety and efficacy.

Rocktavian sales are off to a really slow start and the product was administered to just two patients (one German, one American) in 4Q, generating $2.7 million in net revenue. The numbers so far imply net revenue per patient of $0.8 million and $1.9 million in Germany and the US, respectively. Sales in Italy may soon commence following recent reimbursement approval. Analysts estimates have also come down substantially and predict BMRN will be lucky to generate even $40 million in revenue in 2024 for the Hem A gene therapy. Maybe doctors are waiting for the SGMO/Pfizer product which should be approved by year end and in our view is a superior gene therapy.

On a more positive note, Voxzogo’s strong trajectory continued through 4Q following October’s FDA label expansion to younger patients.

On further inspection of the Phase II 12-week CSU data, barzolvolimab’s wide therapeutic window continues to support its Best-In-Class compound profile. The urticaria market is extremely underestimated and we expect barzo forecasts will rise significantly from here. BUY

Unprecedented Efficacy…

Details of the successful, 208-patient 12-week study study of barzo in CSU were presented in an oral Late-Breaker trial on Saturday at the AAAAI meeting. The drug’s novel advantageous mechanism of action is evident by the consistent, superior human clinical data delivered last November and shown again this weekend. In a highly severe patient group barzo showed a rapid onset of action (~2 weeks); durable, total disease control of CSU (but now in all forms of urticaria) – UAS7=0 was observed in 51% of patients in the 150mg Q4W and in 37.5% of patients in the 300 mg Q8W groups compared to 6.4% in the placebo group); and a more than acceptable safety profile.  Moreover, the CLDX drug works just as good in Xolair (omalizumab) refractory, experienced and naive patients. Moreover, as in previous studies the responses with barzo deepen over time. Even though the data below is exceptional at just 12 weeks in and of itself, though not necessary to maintain its Best-in-Class profile, by 52 weeks the efficacy could possibly get even better.

…Supported By A Clean Safety Profile

One of the major investor (and bears/shorts) concerns coming into the meeting was the potential for neutropenia to be a limiting factor in barzo’s A/E profile. We have seen the efficacy presented above last November, but other than CLDX saying the safety was clean, until this weekend we had not yet seen the details. Of the 153 patients on Barzo in this study, just 2 patients discontinued due to neutropenia (Grade 3), with only 1 of those being confirmed by lab tests. However, Dr. Mauer quickly and effectively pointed out that one patient had pre-existing propensity for thrombocytopenia (not neutropenia) and the both of the patients briefly dropped below the pre-specified 1000 neutrophil count and had begun their recovery back above the threshold (one did it before and the other after the cutoff date). In other words, less than 1% of treated patients showed any sign of severe neutropenia and that resolves entirely over time and with drug discontinuation. According to both Drs. Maurer and Kaplan – barzo is a safe drug – and a much safer alternative than is currently being used to treat urticaria (e.g., steroids, cyclosporine, Xolair, the BTK inhibitors under development). In addition, in previous studies with the REGN/SNY blockbuster Dupixent, the rate of neutropenia in atopic dermatitis studies was over 4%. Both KOLs at the meeting easily dismissed neutropenia as a problem with barzo and reminded investors that every patient is pre-tested for these counts before beginning treatment anyway. In addition, Genentech’s Xolair – the only approved drug in the U.S for urticaria – carries a black box warning for anaphylaxis. Although there is always some risk in larger and longer term studies, at this stage of development the Barzo side effect profile looks very clean, easily refuting the bear/short call going into the meeting.

ESPR recently reported revenue of $32.3 million for the three months ended December 31, 2023, and $116.3 million for the full year ended December 31, 2023, compared to $18.8 million and $75.5 million for the comparable periods in 2022.  U.S. net product revenue was $20.8 million for the three months ended December 31, 2023, and $78.3 million for the full year ended December 31, 2023, compared to $15.0 million and $55.9 million for the comparable periods in 2022, driven by retail prescription growth of 44% and 30%. Collaboration revenue was $11.5 million for the three months ended December 31, 2023, and $38.0 million for the full year ended December 31, 2023, compared to $3.9 million and $19.6 million for the comparable periods in 2022, driven by increased royalty revenue and tablet shipments to international partners.

We are recommending Skye Bioscience (SKYE) as our next investment opportunity in metabolic disease; obesity and NASH/MASH.  Skye is developing a peripherally-restricted CB1 antibody — nimacimab — to treat obesity by restoring leptin sensitivity and increasing fat metabolism while avoiding the CB1 induced THC/buzz. We believe this mechanism of action (MOA) is validated by Novo Nordisk’s recent acquisition of privately-held Inversago for $1.075 billion. SKYE plans to shortly initiate a Phase II study of nimacimab +/- semaglutide in obese patients in mid-2024 with preliminary data due in 1Q2025. We believe the company’s unique approach of developing a selective large molecule antibody with muscle-sparing weight loss and no THC/buzz side effects has significant potential. The key is that large molecules like antibodies are denied entry into the brain by the blood brain barrier (BBB), while CB1/THC small molecules easily access the brain and lead to significant impairment. In our view, the nimacimab Phase II obesity trial has potential to serve as proof of concept and positive data would be a huge catalyst for the stock.  We are recommending SKYE as a BUY under 24 with a TARGET PRICE of 40. 

Why CB1 Has Potential in Metabolic Disease

SKYE’s nimacimab has a unique mechanism of action that selectively targets the endocannabinoid system (ECS) to treat obesity/metabolic disorders and glaucoma. The primary role of the ECS is to introduce, accumulate, and store energy in the body enabled by activity of cannabinoid type-1 receptor (CB1) in the brain and peripheral tissues. Recent work has uncovered that CB1 inhibition in the periphery can regulate leptin sensitivity, likely due to signaling effects on adipocytes. CB1 activation stimulates adipogenesis and lipogenesis, leading to impaired mitochondrial function, whereas genetic and pharmacological inhibition of CB1 increases mitochondrial biogenesis. Consequently, body weight loss induced by administration of CB1 antagonists is largely due to increased energy expenditure and activation of lipolysis and fatty acid oxidation. Lipolysis occurs in brown adipose tissue, which operates as a source of energy, as opposed to white adipose tissue, which serves as a stable longterm store of fat. It is currently hypothesized that the tone of CB1 activity determines the balance of white and brown fat, and as a result, metabolic rate.  The upcoming Phase II trial will assess body composition and may demonstrate that nimacimab spares muscle loss due to its fat “browning” mechanism.  In our view, Skye’s approach of developing a CB1 antibody with muscle-sparing weight loss and no psychiatric side effects has block buster potential.

Novo Nordisk’s Wegovy (semaglutide) and Eli Lilly’s Zepbound (tirzepatide) are revolutionizing weight management in obese patients with GLP-1s which were originally approved for Type 2 diabetes. Now these drugs are even showing cardiovascular benefit due to weight loss and should eventually show a long term mortality benefit from the improved CV profile. While Zepbound was only recently launched, Wegovy revenues were $4.7 billion in 2023, and the class is projected to grow to $20 billion by 2030! Despite unprecedented efficacy and commercial success, there remains room for improvement over currently weekly injectable GLP-1 and GIP agonists for the treatment of obesity. In most cases, GLP-1 monotherapy does not get patients to a healthy BMI, and there is the potential for even greater weight loss through combination therapy.  Preclinical evidence suggests that targeting both GLP-1 and CB1 mechanisms has an additive effect on weight loss, but also provides a restoration of insulin sensitivity that is not seen with GLP-1s alone.  GLP-1s are not the end all for obesity as real world observations estimate a 50% dropout.  Lastly, CB1 make make GLP-1s more tolerable as CB1/THC is known to have a beneficial effect on nausea.

VKTX shares soared this morning when the Company released excellent Phase 2 SubQ data for VK2735 showing treated patients lost up to 14.7% of their body weight over 13 weeks, in a clean dose-dependent manner with high statistical significance (p<0.0001). The primary endpoint win is a 13.1 percentage point reduction in weight than the placebo group. In comparison, Eli Lilly’s Zepbound resulted in a 7-8% improvement over a placebo in the Phase 3 study (Surmount-1). Lilly’s retatrutide – which targets all three Gs – led to 12-13% more weight loss versus placebo, however with more side effects than the Viking compound, including cardiovascular risk. Investors were led to expect a bar of just 8% placebo-adjusted weight loss for ‘2735 – which has now moved into position as a potential Best-in-Class drug. One apparent advantage of the Viking compound is the potency and durability – it may be administered once-a-month versus weekly or every other week for the current market leaders. In addition, another key catalyst to watch for by the end of Q1 is the oral version of ‘2735 with an expectation for a 1-3% placebo-adjusted weight loss. In our view, this Phase II SubQ data de-risks the upcoming Phase I data for ‘2735. Oral administration (i.e., a pill) is a huge advantage for the class – in particular as a long-term maintenance option – and we are raising our BUY to 100 (from 28) and our TARGET to 145 (from 45).

The Impressive Data:

Safety Looks Great

Regarding safety and tolerability, the data for ‘2735 continues to look generally clean with expected AEs (i.e., mostly GI disturbance) similar for the GLP class as a whole. Discontinuations appear balanced between the treatment and placebo groups, with 13% of patients on ‘2735 discontinuing the study compared to 14% of those on placebo. There appeared to be a slight dose effect in the ‘2735 group. 92% of drug related TEAEs were characterized as mild-moderate to severity, and the majority (95%) were GI-related including elevated nausea (43% vs 20% on pbo) and vomiting (18% vs. 0% on pbo). This common side effect was generally observed early in the course of treatment, in line with other incretins.