Ebola's Silver Lining: MLV & Co.'s George Zavoico

The Life Sciences Report: We are in one of those high news flow periods, this time precipitated by Ebola virus disease and the fear surrounding it. Media are consumed with that topic right now. One important aspect of these crisis periods, as we saw with HIV/AIDS 30 years ago, is that they are disruptive. How do you see this current made-for-media crisis playing out?

George Zavoico: The crisis is made for media because of how horrible Ebola disease is, and how transmissible it is under certain circumstances. The extent of the epidemic in West Africa is unprecedented for Ebola, and the video and pictures that have come out of the region are extraordinarily frightening.

Since the disease made its appearance in the U.S., the media and politicians got involved because Ebola could not be contained in a Texas hospital, where a couple of healthcare workers who were handling the seminal patient, Eric Duncan, became infected. Although it's easily transmissible under some circumstances, Ebola is not airborne, like the flu or a cold. Once it becomes evident that folks aren't going to be easily infected under normal conditions, I expect people will begin to calm down.

TLSR: Clearly our attention has been diverted from some other pressing needs. What needs attention right now?

GZ: What's not garnering attention, despite affecting far more people, are the chikungunya and dengue virus epidemics in Puerto Rico, which are trickling into some of the southern states of the U.S., Florida in particular. These epidemics are not getting as much attention because they aren't as bad in terms of what happens to patients when they get sick. Also, the fatality rate is much lower. But these viruses are going to affect many more people. While there's not much media attention, the U.S. government, the U.S. Food and Drug Administration (FDA) and the U.S. Centers for Disease Control (CDC) are monitoring the viruses very closely. Hopefully, these mosquito-transmissible diseases will be effectively contained.

TLSR: U.S. National Institutes of Health (NIH) head Francis Collins said recently, and I'm paraphrasing, that we would have had an immunization for Ebola if NIH funding had not been static over the last decade. Do you believe this current Ebola scare has focused the minds in Congress? Do you believe this will trigger renewed funding from Congress?

GZ: That's a complex question. Has it focused the minds in Congress? Yes, but not necessarily on more research funding. The Congress has focused on why the CDC appears to have messed up. Congress will probably go for a short-term solution and look for scapegoats, rather than look for new funding. If it turns out there are just a few cases in the U.S., it's unlikely this outbreak will have a big impact. I don't see the crisis having an impact that could result in greater than a 5–15% increase in research funding, given the current environment in Congress. Members are focused on cutting funding, not adding funding.

Having said that, however, some funding could come from the Biomedical Advanced Research and Development Authority (BARDA) and the U.S. Department of Defense (DOD). Their jobs are to protect against this sort of thing. BARDA and DOD have pandemic flu programs underway. DOD is involved because servicemen and women are stationed overseas. BARDA and DOD may redirect, or perhaps add additional funding for Ebola or other infectious disease research. The Bill & Melinda Gates Foundation will probably become more involved in Ebola, because it is devastating the developing world.

TLSR: I think we're seeing a willingness among regulators to allow expanded access to Ebola virus disease treatments, formerly known as compassionate use exemptions. Could this spill over into non-Ebola indications? Will regulators allow use of highly experimental, even preclinical, therapies in critical areas?

GZ: Yes, a trend is developing in that direction. We're seeing more investigational device exemption (IDE) applications in compassionate use, some in blood-borne pathogens. Exemptions are influenced by patient advocacy and other advocacy groups as well, and it depends on the indication, obviously. The ALS (amyotrophic lateral sclerosis/Lou Gehrig's disease) Association has basically volunteered its ALS patients to be guinea pigs; these patients are willing to take the risk because it's a fatal disease. People diagnosed with ALS typically die within one or two years, and are not willing to wait to enroll in a properly planned, long-term clinical trial. They want the experimental drugs sooner.

TLSR: Do you believe that Ebola-related stocks are overbought at this point, considering how early stage the development is in virtually all of these companies?

GZ: There certainly has been a surge in some of the stocks involved in Ebola. I don't think very many companies are going to make a lot of money off Ebola. If an Ebola vaccine is developed, I don't think there will be a nationwide Ebola vaccination program.

But I think a lot of companies will use Ebola research to engender goodwill, and also to validate technology. For example, malaria is not particularly prevalent in the U.S., or in any First World territory. Europe doesn't have it. Australia doesn't have it. But GlaxoSmithKline (GSK:NYSE) is pouring tens of millions of dollars into a malaria vaccine, called RTS,S, for Africa. I don't think the company will get more than cost, plus a little bit more, out of it. The World Health Organization (WHO) and individual nations will be the customers, not pharmaceutical companies. It is goodwill and, in Glaxo's case, it could prove that a certain adjuvant, called QS-21 Stimulon and developed by Agenus Inc. (AGEN:NASDAQ), works. The same applies to Cerus Corp. (CERS:NASDAQ), which could potentially validate its INTERCEPT platform to deactivate pathogens in blood components.

I would also like to mention Novavax Inc.'s (NVAX:NASDAQ) remarkable recent accomplishment with its vaccine development platform. Just about six weeks after the nucleic acid sequencing of the 2014 strain of the Ebola virus responsible for the current epidemic in West Africa, Novavax generated a nanoparticle vaccine candidate against the virus's glycoprotein (GP), and tested it in mice, where the vaccine induced the generation of high titers of antibodies against Ebola. Notably, this is the first vaccine produced against the current, epidemic 2014 West African Ebola GP sequence. Novavax has guided to commencing a first-in-human Phase I safety trial of its Ebola vaccine before year-end. Just think, from nucleic acid sequence to human trials in less than four months!

TLSR: You mentioned BARDA. Is BARDA able to move funds around and switch emphasis?

GZ: Yes, the agency can do that. There is a certain amount of funding available to BARDA, and its awards are usually done in stages, so that when investigators reach milestones, they get the next stage of funding. If you get first-stage funding, there's no guarantee that you'll be funded beyond that. BARDA money could shift if companies don't achieve agreed-upon objectives. That money then could become available for another award.

In special situations, BARDA could also go to Congress and say, look, we have to ask for money because this disease, Ebola or some other, is worse than we thought. Hopefully, that will never be the case, but the agency can ask for more funding.

In the context of Ebola, we have to wait and see how BARDA reacts, because it is a very careful and methodical organization. It often takes time to make a decision. BARDA could be waiting to see how the epidemic in West Africa develops, and whether the virus moves overseas more easily than it already has. Meanwhile, I'm sure the agency is keeping a close eye on developments.

TLSR: You mentioned chikungunya and dengue. You also mentioned Cerus Corp., which has a connection to these diseases. Could you address this company?

GZ: Cerus has a blood pathogen inactivation technology. Just about any pathogen with DNA or RNA that is in donated blood or any of its components—the platelet concentrate, plasma and packed red cells—is inactivated if treated using Cerus' INTERCEPT system. A proprietary compound is added to the components, which is activated with ultraviolet light. The compound crosslinks any nucleic acids of pathogens in the components, so that any virus or bacteria—pretty much anything with DNA or RNA—is inactivated. When the nucleic acids are crosslinked, the pathogens can't replicate or divide.

Cerus' blood pathogen inactivation system basically circumvents the need to test blood for chikungunya and dengue, for which, by the way, screening assays don't exist. You treat the blood using the INTERCEPT system, and you know that anything with DNA or RNA is not going to replicate. This system has shown its utility already in a number of epidemics, including the chikungunya epidemic on a small French island in the Indian Ocean, and the company is already selling these systems in more than 20 countries. All the platelets produced in Iceland, Belgium and Switzerland are treated this way. The haemovigilance data show that it's effective. It's a matter of time before it's implemented more widely.

TLSR: George, what about approval in the U.S.? Where does that stand?

GZ: In the U.S., Cerus has submitted premarket approval (PMA) applications for the INTERCEPT plasma and platelet systems, and the FDA is reviewing those. We expect a decision by mid-year 2015. With implementation and installation, we expect revenue in this North America/U.S. market to eventually tip Cerus over into profitability. Our understanding of the protection that the system provides against emerging infectious diseases like chikungunya and dengue is that transmission through the blood supply will be prevented.

One of the reasons the stock went down so much is that the Spanish company, Grifols S.A. (GRFS:NASDAQ), stopped distributing the system in Spain and Portugal. The inventory of that distributor sold off and wasn't restocked. Cerus is distributing in Spain on its own now. The recently reported Q3/14 numbers are beginning to rebound, with a healthy quarter-over-quarter increase of $1.8 million ($1.8M) in product revenue to $10.4M. We think that as revenue recovers, and as new markets and revenue opportunities open up in new territories, as we expect, so will interest in the stock. These will be catalysts for the stock.

Also, Ebola is still not considered a huge market. There have only been a handful of patients in the U.S. In Africa, the system would be a cost-plus product, if that. It will probably take some time to train people to implement the system, although Cerus is experienced in rapid installation of its products, and we expect it would also do a good job in Africa.

One important thing for investors to remember is that the FDA approved the compassionate use IDE in Puerto Rico for chikungunya and dengue. That IDE approval tells me that the FDA has high confidence in the technology. In my mind, it's prescient of an approval next year.

TLSR: Does the company have something like "fast-track status" for a device approval in the U.S.?

GZ: Originally, the FDA asked Cerus to do a second Phase 3 study in platelets, but then the agency said the first trial was fine, and that the company could also use the international data. The company submitted the INTERCEPT platelet PMA without having to do an additional Phase 3 trial. It's not really "fast tracked," but Cerus doesn't have to do another trial. For the INTERCEPT plasma application, Cerus pushed back the guidance for approval so it could work through some questions raised by the FDA before the agency continued its review of that PMA.

TLSR: Could we go to another company?

GZ: I think Omeros Corp. (OMER:NASDAQ) is on the cusp of an inflection point. At the end of May, the company's Omidria (phenylephrine + ketorolac) irrigation solution for intraocular lens replacement surgery was approved. It's a combination product of a pupil-dilating (mydriatic) agent and an anti-inflammatory. It reduces postoperative pain after intraocular lens surgery. It should be easily adoptable because the pupil-dilating property makes surgery more efficient, improves patient outcomes and reduces the frequency of complications, with minimal change to what the physician already does.

Omidria should have a big effect on this very large market. One of the important issues for investors is that Omeros is likely to be marketing Omidria itself, which is prudent since the company can focus on centers that do a lot of these procedures. It won't need a huge sales force. However, Omeros has never sold anything before, so there is a little pushback on that. On the other hand, the benefit is that Omeros collects all the revenue, and doesn't have to share the profit.

TLSR: Will there be any special reimbursement for Omidria?

GZ: It's a new, FDA-approved product that provides additional benefit to patients, and recently Omeros got a very favorable decision from the Centers for Medicare and Medicaid Services (CMS) on reimbursement. The company requested, and received, pass-through reimbursement status, effective Jan. 1, 2015, which means that Omidria's cost will not be bundled with the reimbursement for an intraocular replacement surgery procedure. Omeros is guiding to a launch early next year, just as the pass-through status becomes effective. By the way, this was a catalyst for the stock, stimulating an uptick from around $11.60/share to more than $17/share. We'll be watching the quarterly sales revenue numbers to better gauge market penetration. Omeros has stated that it expects to charge a wholesale price for a single use vial at $400-$500.

TLSR: You wrote a research note on Oct. 22 referring to Omeros' schizophrenia and Huntington's disease candidate, OMS824, a phosphodiesterase 10 (PDE10) inhibitor. The company said the Phase 2 Huntington's trial is being delayed due to a higher than anticipated drug concentration in the blood of rat models. Either of these indications is going to be difficult. Is the company's business model to let Omidria revenue fund development of OMS824 from here on?

GZ: If Omidria revenue doesn't fund everything, hopefully it will fund a substantial fraction. We see a pretty healthy revenue stream coming from Omidria.

TLSR: What about the orthopedic/arthroscopy indication with OMS103HP? The idea here is to irrigate during arthroscopic knee surgery to reduce postoperative pain, similar to Omidria's mechanism and benefit for eye-surgery patients. Where is this program?

GZ: I think the orthopedic product is on the back burner at this point. Right now, Omeros is focusing on getting Omidria launched and moving forward with OMS824 and OMS721. OMS721 is a proposed therapy for atypical hemolytic uremic syndrome (aHUS), a rare but life-threatening form of thrombotic microangiopathy (TMA). It's in Phase 2 development.

TLSR: Would data from OMS721 be market moving when results are released?

GZ: With positive results in Phase 2, Omeros will be able to decide which TMA indication to go after with OMS721, because there are several possibilities. One TMA, aHUS, is treated with Alexion Pharmaceuticals Inc.'s (ALXN:NASDAQ) antibody Soliris (eculizumab). It's a big drug for Alexion—$555M in Q3/14, so potentially over $2 billion for the year. For a company like Omeros, with a $580M market cap—about the same as the last quarter's Soliris sales revenue—having a drug in Phase 2 that may be as good as Soliris represents a market-moving opportunity with positive results. Even if it captures a small fraction of the Soliris market, if OMS721 proves safe and efficacious and is approved, you're still talking about a few hundred million dollars in revenue. Absolutely, it would be market moving.

TLSR: When might we see some data on OMS721?

GZ: Omeros initiated the Phase 2 trial this summer. It's a small, 29-patient open-label trial, so we could see interim results starting some time later next year, with final results by the end of 2015.

TLSR: What about near-term catalysts for Omeros? Is this now an Omidria revenue story?

GZ: It's transitioning into a revenue story, but not solely. I think that if either OMS824 or OMS721 prove effective, their potential revenue would be more than what is expected from Omidria. But if revenue is strong, Omidria should sustain the company for a while, or lessen the need to go back to the capital markets. In the best-case scenario, the revenue will support the company, but we have to see how the sales trends develop.

TLSR: My understanding is that Omeros could expect European Medicines Agency (EMA) approval of Omidria by the end of 2014. Would that be market-moving news?

GZ: I think it's worth an uptick. Again, it has to do with reimbursement. Some people may pay for Omidria out of pocket because they don't want to be in pain and they want to avoid adverse events with their eyes. That might be more of the case in Europe, where the solution will either be on the formulary or not. If it's not, it could cost the patient up to about $400, as part of an operation that costs a few thousand.

TLSR: The bottom line is that margins will be achieved in the U.S. Is that what you're saying?

GZ: In the shorter term, yes. The sales trends in the U.S. will predict what might happen in Europe as well.

TLSR: Could you go to another name, please?

GZ: Let's talk about Threshold Pharmaceuticals Inc. (THLD:NASDAQ), which is targeting hypoxia, a characteristic of many solid tumors and some blood cancers. The company has a couple of near-term milestones. At the Society for Neuro-Oncology in mid-November, Threshold plans to present some TH-302 (hypoxia-activated chemotherapeutic prodrug) data from a glioblastoma study. Then, in early December at the American Society of Hematology meeting, it is presenting further data on multiple myeloma. Threshold has two Phase 3 trials going on with TH-302 in sarcoma and pancreatic cancer, which should read out by the end of 2015 or early 2016. It also has a number of ongoing investigator-sponsored trials.

Back on Oct. 9, the company did something interesting: It licensed a hypoxia-activated epidermal growth factor receptor tyrosine-kinase inhibitor (EGFR-TKI), called hypoxin (formerly PR610), from the University of Auckland in New Zealand. Like TH-302, it's a prodrug that is hypoxia-activated. It's been shown to induce tumor cell death in erlotinib-resistant non-small cell lung cancer (NSCLC). It could be used in combination with another EGFR-TKI to get broader activity, with hypoxin penetrating deeper into tumors to kill tumor cells a targeted EGFR-TKI might not reach. In other words, the targeted agent would kill the tumor cells nearest the tumor blood vessels, while the hypoxia-activated prodrug would kill cells in more hypoxic regions, farther away from blood vessels. You could potentially get more efficient tumor killing, which could diminish the risk of mutations that make tumors more resistant. This could enable prolonged progression-free survival and perhaps even overall survival.

TLSR: I realize this molecule was just in-licensed, but what is its current status?

GZ: Threshold is doing preclinical studies to see whether the theory I just described might play out. The company will announce later whether it's going to advance the asset into clinical trials. I would very much like to see Threshold advance the EGFR-TKI prodrug further, because it would be the logical next step in the company's platform and in introducing a new class of agents, targeted hypoxia-activated prodrugs.

TLSR: Why didn't the company issue a press release on the acquisition of hypoxin?

GZ: Because it's not definitive. If the company were confident it was going to move forward with this drug, it would have issued a press release. Because the drug could fail in preclinical testing, it could end up being a blip, and not have material impact. The terms of the acquisition weren't disclosed either.

TLSR: George, you have a $14.50/share target on Threshold Pharmaceuticals. The recent price was $2.79/share. Your target represents more than a quadruple. What events could move this stock to that level?

GZ: Any positive data in the pancreatic or the sarcoma studies could take shares to that target. Threshold also has a number of investigator-sponsored trials (ISTs) ongoing. More positive data from these studies will add confidence to a positive outcome in the pancreatic and sarcoma trials.

The pancreatic cancer trial involves adding TH-302 to gemcitabine. The standard of care is now Abraxane (paclitaxel protein-bound particles; Celgene Corp. [CELG:NASDAQ]) + gemcitabine. Threshold is beginning trials with a triplet—Abraxane, gemcitabine and TH-302. If approved and the trials show that the triplet doesn't increase adverse events, then we can see TH-302 added to the doublet in pancreatic cancer.

Soft tissue sarcoma is a tough nut to crack. Threshold has increased the size of its trial and pushed back the timing of the final results. There are a number of ways to interpret that. One is that the standard of care has changed and is improving, so historical progression-free survival and overall survival data aren't relevant anymore. Therefore, the original trial design may not be sufficient to show better efficacy and safety. Hopefully we will still be able to see a significant difference between the progression-free survival and the overall survival.

TLSR: Do investors give a lot of credence to the ISTs?

GZ: If those are positive, they give confidence. If they're negative, the stock could tank. If the ISTs are positive, then the company has to decide if it's going to commit resources to moving forward in a pivotal glioblastoma or multiple myeloma trial.

TLSR: Are we still looking for Phase 3 data in soft tissue sarcoma in summer of 2015?

GZ: It's likely to be H2/15 for the Phase 3 sarcoma trial, H1/16 for the pancreatic cancer Phase 3 trial.

TLSR: Could we look at another name, please?

GZ: The developing story about Peregrine Pharmaceuticals Inc. (PPHM:NASDAQ) is the emerging recognition that bavituximab, its lead compound, a monoclonal antibody, is indeed an immune checkpoint inhibitor.

As you know, tumor immuno-oncology and checkpoint inhibitors are the Holy Grail in cancer research right now. If you can get the immune system to recognize cancer and enable T cells to eliminate it, then you can get remarkable results, like we've seen with some of the antibodies targeting PD-1 (programmed cell death protein-1) and CTLA-4 (cytotoxic T-lymphocyte-associated protein 4). Bavituximab is upstream of those—at the very beginning of the cascade.

Peregrine is investigating combinations with some of the more established checkpoint inhibitors. As interesting as these targets—PD-1 and CLTA-4—have been, they are effective by themselves in up to 40% or so of patients, depending on the cancer. There are multiple pathways through which T cells are inhibited and stimulated to recognize a tumor. Some of these immunotherapy combinations could be toxic, and might even tip a patient over into an autoimmune disease, so researchers have to be very careful with the combinations they choose.

Bavituximab is in a Phase 3 trial in NSCLC. Hopefully that will play out positively for Peregrine and put the therapy on the map. Bavituximab has a bit of a checkered history, including problems in the Phase 2 trial, when the contract research organization (CRO) running the Phase 2 trial messed up. Certainly there are risks here, but investors are seeing a higher level of risk than is justified, because bavituximab, even correcting for the mishap with the CRO, has pretty good data in prolonging both progression-free and overall survival.

TLSR: On Oct. 15, Peregrine put out a press release saying it had peer-reviewed data to show that phosphatidylserine, the lipid being targeted by bavituximab, could be of value as a target in Ebola virus disease. Is the company looking for some BARDA funding or other federal money to move that along?

GZ: Peregrine has had an antiviral program for some time, but it has been dormant because the company has focused its resources on the cancer indications.

But you're right, virally infected cells express phosphatidylserine on their surfaces. When enveloped viruses like Ebola bud off the mammalian cells they infect, they carry some of that membrane with them. That means the phosphatidylserine remains on the surface of the virus. So bavituximab potentially could be effective in not only identifying infected cells, but also in identifying the virus. The Peregrine investigators have found that bavituximab by itself is not as effective as it would be in combination with antivirals, and we know from experience that the best results with antiviral therapy requires a cocktail of two or more drugs. If bavituximab can be used to enhance the efficacy of an existing cocktail, that would be an important finding for Peregrine.

TLSR: Did you have another name that you wanted to talk about today?

GZ: I wanted to mention two European names. One is Galapagos NV (GLPG:BSE), and the other is MorphoSys (MPSYF:OTCPK). They both have pretty high valuations as biotechs, and they're both worth watching because they have deep pipelines.

MorphoSys, in particular, has a proprietary antibody discovery and development platform with a lot of partnered compounds in a number of different indications. Altogether, MorphoSys has more than 90 distinct antibodies at various stages of development, with two of them in Phase 3 and licensed out: bimagrumab for certain musculoskeletal diseases to Novartis, and gantenerumab for Alzheimer's disease to Roche. Even if a fraction of its products play out favorably, we see MorphoSys becoming even more profitable than it is already. Apart from its many partnered antibody candidates, MorphoSys is now developing its own suite of three proprietary antibodies, now in Phase 2. Two of these are now partnered with large pharmaceutical companies.

Galapagos, in contrast, has a novel drug target and small molecule drug discovery platform, and it too has already established multiple partnerships with pharmaceutical companies. Five of its drug candidates are in Phase 1 or 2 trials. What we find interesting about Galapagos is its focus on the discovery of new drug targets, so that it can lead the field and potentially deliver first-in-class drugs for underserved indications.

Its leading drug candidate is GLPG0634, a very selective JAK1 (Janus kinase 1) inhibitor with continuous target inhibition in Phase 2 for rheumatoid arthritis and Crohn's disease. The rheumatoid arthritis trial showed an improvement in the ACR20 score in 83% of patients within four weeks of starting therapy. An interesting drug candidate still in preclinical studies is GLPG1837, which acts as a potentiator to enhance the efficacy of certain drugs that treat cystic fibrosis patients with certain mutations. Interestingly, MorphoSys and Galapagos recently established a collaboration to discover antibodies directed against some of the new drug targets Galapagos discovered.

We think that if the stock of either of these companies were traded in the U.S., their valuations would be substantially higher than they are in Europe. I think they both are notable and underappreciated.

TLSR: Did you have one more company to comment on?

GZ: I want to mention CytoSorbents Corp. (CTSO:OTCBB). It's a small company that developed a cartridge called CytoSorb, which contains beads that can filter a number of cytokines from patients who have sepsis, trauma and burns. These "cytokine storms" are the result of a systemic inflammatory response that occurs in very sick patients. CytoSorb is CE-marked in Europe, which is the equivalent of FDA device clearance in the U.S., and is being used in Europe.

The product requires no learning curve: Doctors just put the cartridge in a blood dialysis system or in a cardiopulmonary bypass circuit. That's it. I think it's in use in more than 30 countries now. There are also a number of ISTs with CytoSorb going on in Europe. The company's recent revenue growth is impressive. CytoSorbents plans to start a trial in cardiac surgery in the U.S. A small trial in Germany demonstrated that the use of CytoSorb with a heart-lung machine in high-risk cardiac surgery reduced blood levels of proinflammatory cytokines and inflammatory biomarkers in a three-day post-operative period. If CytoSorb gets approved in the U.S., we could see a big uptick in revenue and the value of the company.

What's impressive about CytoSorb are numerous case studies coming out of Europe where the use of the cartridge induces a rapid reversal of multiorgan failure in sepsis or traumatic shock, with full recovery of the patients. We see CytoSorb gaining traction in territories where a CE-Mark is sufficient to launch a product.

TLSR: We've covered a lot today. Thank you.