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Biotech Stock Mailbag: NeoStem, Gilead and the Importance of Big-Cap Biotech Earnings

NEW YORK (TheStreet) -- The Biotech Stock Mailbag arrives a day earlier due to tomorrow's market holiday. Tory G. writes:

I have read your bearish articles on NeoStem (NBS) so I'd like to know if the deal to buy a cancer drug makes any difference in your view of the company. Thanks for your help.

NeoStem is buying California Stem Cell for approximately $36 million in stock. CSC's primary asset is a dendritic cancer immunotherapy (vaccine) ready to move into a phase III study in melanoma.

Often times, buying something cheap is good. Not here. Neostem acquiring a late-stage cancer vaccine -- melapuldencel-T -- for next to nothing is bad. Promising, exciting cancer therapies moving into late-stage clinical trials are not sold for pennies. What Neostem actually bought -- but won't admit, of course -- is a junky, picked-over and unwanted cancer therapy. That's why the price tag was $36 million in stock.

Must Read: Anacor Pharma Remains Over-Valued on Development of Inferior Drugs

Buying CSC and melapuldencel-T allows NeoStem CEO Robin Smith to promote the company's stock with more buzzwords. She'll now talk about cancer immunotherapy and a pipeline that includes a phase III drug. Some investors will be fooled, the smart ones won't because they'll remember NeoStem's previous diversionary acquisition of a Chinese drug company. The China fiasco ended badly for NeoStem shareholders as will the CSC deal.

If you're interested in digging deeper into melapuldencel-T, you'll find more information using its older names -- ovapuldencel-t or DC-TC. (From here, I'll call it mela-T.) 

A phase II study of mela-T in melanoma was published in the Journal of Immunotherapy in October 2012. NeoStem summarized some very cherry-picked results from the study in this week's CSC deal press release:

In a Phase 2 randomized clinical trial of Melapuldencel-T (an irradiated autologous in vitro proliferating melanoma cell line loaded onto an autologous dendritic cell combined with granulocyte macrophage colony-stimulating factor {GM-CSF}), patients showed a significant improvement in two year overall survival from 31% in controls to 72% in treated patients (p=0.007) with advanced melanoma (recurrent Stage III and Stage IV). The toxicity profile was favorable with no grade IV and only one grade III (allergic reaction) event in the study.

You're better off reading the actual study paper because NeoStem leaves out important -- and troubling -- information. The manufacturing of Mela-T starts with a surgically removed sample of a patient's melanoma tumor. The tumor sample is placed in growth culture to expand the number of cancer cells. These cancer cells are then irradiated and loaded onto dendritic cells, which also harvested and processed from the same patient. Finally, these dendritic cells -- trained with antigens from the tumor -- are combined with an immune-system boosting agent and injected back into the patient.

You're right if you suspect making Mela-T isn't easy. Researchers in the study started with 188 melanoma samples, but only 78 adequate cell cultures were grown -- a 41.5% success rate. It took a median of 3.1 months to grow these cancer cells.

Of the 78 adequate cancer cell cultures obtained, only 42 melanoma patients were randomized into the study. Forty-two enrolled patients is a very small study. Twenty-four melanoma patients were injected with their own irradiated cancer cells alone. These patients served as the control arm of the study. The other 18 patients received mela-T (their irradiated cancer cells loaded onto their own dendritic cells.) It took another median of 3.6 months to get to this randomization point of the study.

Assuming all 42 patients could have been treated with mela-t, the manufacturing success rate in the phase II study was 22% and median manufacturing time was almost 7 months. Dismal. In fact, 20 patients died waiting for their mela-T to be manufactured.

The survival analysis in the study starts at the point of randomization. This is a very important point because it means the lengthy mela-T manufacturing process is excluded from the survival analysis. Therefore, the mela-T survival data reported from the phase II study by Neostem are artificially high. In the eventual phase III study, NeoStem can't vanish patients who die waiting for mela-T to be produced or subtract all the time it requires to make the experimental vaccine.

Now you better understand why NeoStem paid just $36 million for a phase III cancer vaccine.

Peter D. writes:

I've read elsewhere that positive biotech earnings reports might be the event that investors need to start buying again. Is that how you read the situation?

Given the heavy selling in March and the lousy investor sentiment, it's more important than ever for the big-cap biotech companies to deliver strong first-quarter earnings. Raising guidance for the rest of the year would be nice, too, although less likely given most companies provided initial 2014 guidance just three months ago.

If or when we do start to see a recovery rally in the biotech sector, I hope investors differentiate between quality stocks and the over-valued, high-risk garbage. Gilead Sciences (GILD - Get Report), Celgene (CELG - Get Report), Biogen Idec (BIIB - Get Report) and Amgen (AMGN) fit the former category. These stocks have been sold down along with everything else to the point where they trade at attractive forward P/Es. Valuations today bake in a lot of the concerns about drug pricing and long-term growth yet give little credit for pipelines or other upside.

Gilead and Amgen kick off biotech earnings season on Tuesday, with Celgene and Biogen Idec reporting later in the week. Gilead's first-quarter earnings and conference call is probably the most important given that biotech stocks started to tank in March as criticism over the price of the hepatitis C drug Sovaldi ramped up.

On a related note, Tomas L. asks:

What are your thoughts about Gilead Sciences and the Sovaldi pricing issue? Is there something the company should be doing? Will they lower the price under this pressure?

The Gilead Sovaldi controversy reminds me of the comedian Louis CK and his skit "Everything's Amazing and Nobody's Happy" in which he rips "spoiled idiots" jaded about modern conveniences and technology.

Let's step back for a moment and consider the changes to hepatitis C therapy. Five years ago, the best treatment doctors could prescribe to patients with hepatitis C consisted of weekly injections of interferon and twice-daily oral doses of a ribavirin. The interferon-ribavarin therapy lasted for a year, during which patients felt like crap. The drugs caused fatigue, flu-like symptoms and anemia. And after a year of feeling terrible, only four of 10 patients would be cured. Under the best scenarios, the cure rate was maybe 50%.

Today, a doctor can prescribe Sovaldi plus interferon and ribavirin for only 12 weeks (Or skip the interferon altogether.) Later this year, the same doctor will prescribe a single pill combining Sovaldi and another Gilead medicine for 8 or 12 weeks. For every 10 hepatitis C patients treated with these new, convenient, all-oral therapies, nine will be cured and without the debilitating side effects. A 90%-plus cure rate!

The improvement in hepatitis C therapy we're witnessing today is absolutely mind blowing, yet all we hear are complaints about Sovaldi's price tag and how the drug -- and others like it -- is going to bankrupt the healthcare system. Channeling Louis CK, these are the same people who bitch to flight attendants when the in-plane wifi is too slow.

Patient demand for Sovaldi -- and how best to manage it -- is the real issue, not the drug's price. It should surprise no one that doctors and their hepatitis C patients are clamoring for Sovaldi. The insurance companies and pharmacy benefit managers knew Solvaldi was coming, so why didn't they take any proactive steps to manage overwhelming patient demand? Why aren't insurance companies "managing care" like they're charged to do? Patients with advanced, progressive hepatitis C should be the first in line for Sovaldi. Hepatitis C patients who can wait without medical harm should be placed at the back of the treatment line.

Lowering the price of Sovaldi is not going to make it less attractive to patients. In fact, it may make the demand problem even worse.

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