It feels like forever since I wrote a Biotech Stock Mailbag.
Neal R. emails, "Trump is killing biotech stocks. What will it take for these stocks to go higher again?"
It's no coincidence the last mini-rally in the Nasdaq Biotechnology Index peaked on Jan. 10, the day before President Trump held a press conference and accused drugmakers of "getting away with murder."
No one can predict what Trump and Congress will do about drug pricing. There's simply too much uncertainty in the early days of his administration to figure out if a real plan is being drawn up, and whether or not it will succeed. Uncertainty is a big wet blanket for health care stock sentiment.
Good news is being sold. Look at Sarepta Therapeutics (SRPT - Get Report) , which has basically given back all the gains made when management announced better-than-expected launch metrics for Exondys 51. It's reminiscent of the trading and volatility patterns seen last year across biotech. You had to be a trader more than an investor to make money in biotech stocks last year. 2017 could be more of the same.
I spoke to about a dozen health care investors immediately after the J.P. Morgan Healthcare Conference, asking them how, if at all, Trump was changing their investing strategy. Here's some of the responses I got back:
"Until the details of Trump's plans come out, I believe new money won't flow towards bio and pharma and multiples remain low by historic standards. From the hedge fund perspective, Trump tweets do serve to liven the party a bit and more volatility in biotech stocks isn't necessarily a bad thing for all of us."
"I expect continued volatility like we endured in 2016 but also see opportunities provided by corporate tax relief and repatriation of overseas cash. This could certainly help to fuel M&A. Valuations are quite reasonable as well among the large caps. I expect to trade more on tweet-induced dislocations but I'm still optimistic about fundamentals."
"We tend to stay fully or close to fully invested even when faced with what I expect to be very high volatility in the coming year. Putting in some of the more creative hedging strategies that we have researched over the past few years. Paying more attention to cash runways and long stretches with nothing happening, under the assumption that beta is not your friend near and mid term... I had dropped biotech to 50% of the fund in 2016 and do not see going higher in in the first half of 2017 unless some really extreme valuations come along."
"Shifting weight, even before the Trump win, to more novel, breakthrough drug-type companies has been a must ... Assuming the payor market is stable, nice continuity at the FDA (and not some nut bag), this would favor novel biotech companies. Our heads are down, we're cautious like anyone about what is going on out there, but find good companies, cheap, working on great drugs, and good things happen."
"I would like to try to do a better job of managing the volatility better (trading around positions, options hedges) but that is easier said than done."
"We're not really changing anything other than hedging longs slightly more aggressively with XBI/IBB. Companies with unique and innovative approaches to unmet needs continue to be the bread and butter of biotech, and patient demand/volume will drive revenue for successful therapies, not price."
"I would say Trump doesn't really change what we are doing at all. It just makes it more frustrating. If you take a long term view on largely development stage companies, long and short, it's hard to see how the current controversies on pricing, bidding, etc., etc., have a material impact on how we look at these companies."
I don't follow Depomed (DEPO close enough to comment, but Aurinia Pharmaceuticals (AUPH has an opportunity to ease investor concerns about the safety of its experimental lupus nephritis drug voclosporin when a 48-week update from the phase II study is announced later this quarter (likely in the middle of February).
Lupus nephritis is a chronic disease (and a form of lupus) in which a person's own immune system attacks their kidneys, causing inflammation that progressively destroys kidney function. There are no drugs approved today specifically to treat lupus nephritis, so doctors use a combination of immunosuppressive drugs and steroids with mixed results.
As a reminder, Aurinia shares sold off hard last August when the 24-week results from the voclosporin study were announced. The primary endpoint of the study was met with 33% of low-dose voclosporin patients achieving complete remission compared to 19% of placebo patients, with statistical significance. Key secondary efficacy endpoints were also met in vocolosporin's favor. [There was a high dose of voclosporin in the study but it was less effective.]
Investors freaked out over an imbalance in patient deaths in the phase II study. Ten patients in the low-dose voclosporin died compared to one patient in the placebo arm and two patients in the high-dose voclosporin arm.
You can understand why investors were concerned.
Since August, Aurinia has dug into the study's safety data and believes strongly that voclosporin did not cause the patient deaths. Their argument, explained to me by Aurinia Vice President of Clinical Affairs Rob Huizinga in San Francisco during the J.P. Morgan Healthcare Conference, makes sense.
If voclosporin was contributing to the deaths, the rate of overall adverse events in the study, including deaths, would be higher. They were not. The overall adverse-event rate and the mortality rate in Aurinia's study were consistent with safety results from other lupus nephritis studies.
So, why did so many patients in the low-dose voclosporin arm die? Because through a fluke in the study's randomization by geography, patients from less-developed Asian countries like Bangladesh, the Philippines Sri Lanka were placed into the low-dose voclosporin arm, Huizinga notes. These patients had more severe disease at baseline than other patients entered into the study and they also had poorer access to quality health care.
Seven of the 10 patients in the low-dose voclosporin arm who died came from Bangladesh, Aurinia discovered. They all died within 60 days of starting the study.
The most reassuring data point to rule out voclosporin's role in the patient deaths would be no more deaths. As of early January, when I met with Huizinga, there had been zero additional deaths in the phase II study. The company receives daily updates on adverse events, including mortality, from study monitors.
Aurinia continues to follow lupus nephritis patients in the study and will report 48-week data.
No additional patient deaths will be good news for voclosporin. Investors also want to see the rate of complete remission seen with the drug at 24 weeks extend out to 48 weeks.
Will a positive 48-week update from the voclosporin phase II study cause Aurinia's stock price to move higher? You'd think it would, for no other reason that safety concerns about the drug would be mostly put to rest. Is that enough to counteract the current Trump-averse, risk-off market for biotech?A phase III study has already been designed but won't start until the second quarter. There's a long wait for top-line results, which generally keeps investors on the sidelines. Aurinia raised $28 million in December, but that doesn't entirely satisfy the company's cash needs. Management has expressed a desire to raise additional money by partnering voclosporin in Europe instead of selling additional equity or raising debt.
Aurinia's current market cap is far below fair value if voclosporin's phase III study succeeds and the drug reaches the market. There's an opportunity here. The issue is time and having the patience to wait for the drug to advance.
Daniel M. writes, "While I enjoyed reading your story about Immunomedics (IMMU - Get Report) , one criticism I have is confusion over what happens if the company side wins the proxy fight. I've owned Immunomedics for some time but would it be bad if VenBio doesn't get what it wants? You didn't really address this issue in the story, but it seems important."
That's a perfectly valid criticism and it gives me a chance to clarify what I wrote this week about the ongoing proxy fight at Immunomedics.
I side with VenBio, but that doesn't mean Immunomedics goes into the crapper if the internal reform efforts led by newly appointed Chairman Jason Aryeh emerges with a majority of the shareholder vote. Aryeh is also trying to sell Immunomedics and unlock the value in the breast cancer drug IMMU-132. Aryeh is an experienced activist investor with a successful track record. There isn't a gaping difference in the end goals of either side in the proxy contest. They mostly disagree about how to get there.
Of the three drugs in the Cellceutix (CTIX pipeline, Kevetrin is the most likely to go nowhere.
Cellceutix has been talking up plans for a phase II study of Kevetrin in ovarian cancer since at least last February, almost one year ago. The study still hasn't started enrolling patients. There is not even a listing of the study design on ClinicalTrials.gov.
Last August, Cellceutix told investors the Kevetrin phase II study would start before the end of 2016. In December, the company backtracked, claiming work to create an oral version of Kevetrin was taking priority. The company still intended to conduct the phase II ovarian cancer study with an injected form of Kevetrin, but timing for the start was pulled.
Cellceutix Chief Medical Officer Arthur Bertolino didn't respond to an email with questions.
The only human data Cellceutix has on Kevetrin is a phase I study that showed administration of the drug was safe.
Kevetrin targets p53, a well-known tumor-suppressing protein in the human body. Normally functioning p53 causes malfunctioning cells to die before they can grow into cancerous tumors. When p53 is mutated, the cellular kill switch doesn't work and tumors grow.
More than half of all cancers are known to contain mutated p53, which makes it a juicy target for cancer research. Unfortunately, efforts to develop an anti-cancer drug that activates p53 have been largely unsuccessful.
Cellceutix makes a lot of claims about Kevetrin and its ability to kill cancer by activating p53, but the data collected to date don't support it. The program is just another excuse for Cellceutix to promote its stock to retail investors who don't know any better.
I've been covering biotech long enough to remember Introgen Therapeutics, which went bankrupt trying to develop a gene therapy targeting p53 in cancer. Introgen made a lot of unsubstantiated and misleading claims about its p53 drug, which came out of the research labs of MD Anderson Cancer Center. I mention that because Cellceutix likes to link Kevetrin with the Dana-Farber Cancer Center.I wrote about another Cellceutix pipeline drug, Prurisol, earlier this week.