Reap Biotech Profits from Overlooked Spaces: Alan Carr
Source: George S. Mack, The Life Sciences Report (6/7/12)
Within the investment community, the story goes that new antibiotics can't generate big profits and central nervous system (CNS) drugs are too difficult to develop. Investors worry they could be throwing good money after bad. Senior Biotechnology Analyst Alan Carr of Needham & Company refutes these tales and believes that product differentiation provides the formula for success. In this exclusive interview with The Life Sciences Report, Carr shares his deep industry knowledge and renders his very best ideas in the CNS, antibiotic, antiviral and metabolic spaces.
The Life Sciences Report: Alan, what is your current theme?
Alan Carr: I focus on the broad umbrella of CNS, metabolic and infectious disease, but several specific and timely themes interest me, including rare disease, weight loss, antibiotics and hepatitis C (HCV).
TLSR: Can we talk about the antibiotic theme first?
AC: Yes. I spend a significant amount of time on that space.
TLSR: What would be the sweet spot in terms of growth potential for investors?
AC: Resistance to antibiotics is a continuing problem and represents an unmet need. For a number of years big pharma stepped away from developing antibiotics because it thought the problem had been solved. In addition, the market was not attractive because of the challenges faced trying to build a blockbuster out of a drug used on an acute rather than chronic basis. We moved into a situation in which relatively few antibiotics were under development. Resistance to antibiotics became more and more problematic. As a result there currently is a lot of interest in the issue of resistance, and a lot of research and development (R&D) is under way.
TLSR: Given that antibiotics are generally used on a short-term basis, where are the new products coming from?
AC: Much of this work is ongoing at small biotech companies, but big pharma is becoming interested again. A few big pharma companies kept their R&D programs and others have restarted theirs. There is some interest in acquiring compounds in phase 2 or phase 3 trials from biotechs. Biotechs have stepped up to address the problem. A number of private and a few public biotechs are devoted to R&D in antibiotics. Some plan to bring drugs all the way through development and launch them with their own sales forces. Others are looking to find a collaborator to commercialize their products.
TLSR: Is the idea to target hospitals? Is that the business model?
AC: As big pharma moved away from antibiotics over the last 10-15 years, the resulting vacuum provided a great opportunity for smaller biotechs because the commercial opportunity was the right size. Resistance is probably the biggest concern in hospital infections, and that market in many cases can be addressed by smaller biotechs with small sales forces.
TLSR: Some physicians, especially younger ones, avoid using new antibiotics for fear of making them obsolete through resistance. Do you see that as a risk for developers?
AC: The infectious disease specialist likes to hold new drugs in reserve, at first, for fear of emergence of resistance. That is a continuing challenge for new antibiotics, and something that companies need to think about when they launch new drugs. It took a while for Cubicin (daptomycin) to ramp up, but in the long haul it has done very nicely. Cubist Pharmaceuticals Inc. (CBST:NASDAQ) has shown that a biotech company with its own sales force can do the job.
In the case of Dificid (fidaxomicin) from Optimer Pharmaceuticals Inc. (OPTR:NASDAQ), the company not only talks to the infectious disease specialist who may be hesitant to use a new drug, but talks to other specialists in the hospital too. According to Optimer, the other specialists seem much more flexible and interested in using the drug. They don't have the same biases that infectious disease specialists have. The outcome for Optimer has been pretty impressive, and Dificid's launch has gone very well. The company used this innovative approach in teaming up with Cubist, but it has been very creative in touching as many physicians in the hospital as possible, including oncologists and especially gastrointestinal (GI) doctors.
TLSR: What are the regulatory risks in antibiotic drug development?
AC: It's been a challenge. The U.S. Food and Drug Administration (FDA) changed requirements while a number of Phase 3 programs were under way. Over the last couple of years the FDA has been working with the National Institutes of Health and industry to come up with new guidelines. While these new guidelines are not ideal, they have allowed a number of companies to restart or start phase 3 programs for several antibiotics. There are still a couple of indications where the FDA is leaning toward fairly onerous requirements, particularly with regard to hospital pneumonia.
TLSR: Where is the growth market in antibiotics?
AC: It has been in MRSA (methicillin-resistant Staphylococcus aureus) and other gram-positive infections over the last 10-15 years because that is where the need was. [Editor's note: Gram-positive bacteria turn red or pink in response to the gram stain test; gram-negative bacteria do not change color. Reactivity enables physicians to determine the correct antibiotic for treatment.] We've had a few drugs launch in that area and several more are in late-stage development. I expect several gram-positive drugs to reach the market soon. Much of the Staphylococcus aureus resistance issue may very well be adequately addressed in the near future. There hasn't been as much work done in drug discovery and development for gram-negative infections. This will be the next area of focus. We are seeing more and more resistance there, and physicians don't have the drugs they need. Gram-negatives may be on an upward trajectory now.
TLSR: Let's shift to the antiviral area. A lot of HCV drugs are in development. Do you think this market is getting too crowded to be a growth market from the investor's point of view?
AC: Only two direct antivirals have been approved for HCV so far: Incivek (telaprevir) from Vertex Pharmaceuticals Inc. (VRTX:NASDAQ) and Victrelis (boceprevir) from Merck & Co. Inc. (MRK:NYSE). Both have some serious limitations. They have helped quite a bit in that they have improved sustained virologic response rates substantially, but both have safety and tolerability issues. All-oral HCV regimens are expected to address these issues. Some of these are just starting to move into late-stage clinical development. There is a lot of investor interest in this space and we have seen some massive swings in market caps as news emerges.
TLSR: Alan, is CNS drug development an extremely tough area?
AC: It is.
TLSR: A couple of companies-Targacept Inc. (TRGT:NASDAQ) and Addex Therapeutics (ADXN:SIX; ADDXF:OTCBB)-have had some issues. Targacept announced a failed phase 3 program in depression last November, and last September Addex had rights to a drug revert back to its partner Merck after a four-year collaboration. Why is it so tough?
AC: The challenge lies in developing reliable preclinical models for CNS diseases. In some indications, such as in Alzheimer's, we do not have a great understanding of what is behind the disease. Phase 3 trials in Alzheimer's tend to be exploratory rather than confirmatory. But companies are willing to take the risk in these very large phase 3 trials because of the enormous potential market value.
TLSR: What are the needs in CNS?
AC: There are unmet needs in depression, schizophrenia and Alzheimer's, but the phase 2 trials aren't as reliable as we would like them to be. There is a high failure rate going from phase 2 to phase 3 studies. That is the challenge.
TLSR: You can't demonstrate proof of concept (confirmation of drug action in phase 2) in Alzheimer's, can you?
AC: In some cases you can do proof of concept for a CNS drug in phase 2, but it is much more helpful to have the very large patient numbers of a phase 3 trial. In the case of Targacept, with its drug TC-5214 for depression, there was a strong signal in phase 2 that was not confirmed in phase 3. You need a very large sample to show whether or not there is an effect and that can be a challenge in phase 2. That's why there is so much risk.
TLSR: You have Targacept rated Hold. You just mentioned its failed trial with TC-5214, which was partnered with AstraZeneca Plc (AZN:NYSE). The company has two other programs partnered with AstraZeneca. Could failure of an advanced-stage product like this change or hurt that relationship?
AC: The two companies have had a long relationship, and have agreements around several different programs. The other collaborations are ongoing, and AstraZeneca is evaluating them on a program-by-program basis. While Targacept does have a nicotinic receptor platform, the failure of any particular drug doesn't necessarily mean that another drug is going to fail. They each stand separately, and AstraZeneca appears to recognize that.
TLSR: Targacept's next product is AZD3480, in phase 2b for Alzheimer's.
AC: Correct. The Alzheimer's program is in partnership with AstraZeneca. The company also has unpartnered programs in attention-deficit hyperactivity disorder (ADHD) and schizophrenia. I'm most interested in the schizophrenia program. Some encouraging data has emerged from a phase 2 proof-of-concept trial, and that coincides with some encouraging data from EnVivo Pharmaceuticals (private), which also has a nicotinic-receptor compound with indications of efficacy in schizophrenia. I am interested in seeing how that plays out. We will be learning something next year.
TLSR: Could you address Addex?
AC: I don't cover the company, but we saw some encouraging data from its metabotropic glutamate receptor 5 inhibitor, dipraglurant, in levodopa-induced dyskinesia in Parkinson's disease. The company is looking to partner that. There are some indications of activity and it is worth pursuing. Addex also has two products, one for schizophrenia and one for anxiety partnered with Janssen Pharmaceuticals (a unit of Johnson & Johnson [JNJ:NYSE]).
TLSR: You cover Gilead Sciences Inc. (GILD:NASDAQ). It has been in the news with its HCV franchise. Can you comment on that?
AC: There is a lot of focus on Gilead's HCV program, especially on the drug it obtained through its Pharmasset acquisition. PSI-7977, now GS-7977, is expected to have an early and a big impact on HCV as part of an all-oral regimen.
TLSR: Gilead suffered a major disappointment with that product, which was previously proposed as a monotherapy. I believe the company has decided that it will be used as a combination therapy.
AC: Gilead has been investigating GS-7977 in combination with ribavirin. But it appears the drug would benefit from being combined with another drug in some HCV patient populations. Gilead is in the process of sorting out which combination is best. The company has a number of drugs in its pipeline, so it has options. I expect to learn more over the course of this year.
TLSR: Back on May 10 the advisory panel to the FDA recommended approval of Gilead's Truvada (emtricitabine/tenofovir disoproxil fumarate) for prevention of HIV infection. It is currently used as a therapy for HIV. This was very big news in the general media, as you're well aware. If the FDA approves Truvada for prevention, how big could this product be?
AC: I don't think it will have much impact. The drug is expensive, and there are other effective ways to prevent transmission.
TLSR: Can you mention another company that you like?
AC: I like Optimer. We talked about that company, and we discussed the company's strategy in marketing Dificid.
TLSR: You have a $19 price target on the company.
AC: Yes. It is important, when you're looking at biotech, to focus on companies with differentiated products. A challenge in the antibiotic space is that a number of trials are set to establish noninferiority to standard of care. But in Optimer's case, it was able to show that Dificid was superior to vancomycin in preventing recurrence of Clostridium difficile infection (CDI), which will make a difference in the long term.
TLSR: Optimer's collaboration with Cubist will end two years after its initiation. What is the relevance of that?
AC: The collaboration has benefited Optimer by ensuring a stronger launch, which often has a long-term beneficial impact for a drug. It is unlikely that the Cubist sales force would have much more incremental impact after that time period anyway. The deal has also benefited Cubist because its sales reps have another drug in the bag to bring to a new set of physicians. I forecast peak sales of Dificid of $300-500 million globally.
TLSR: Is there another company that you might mention?
AC: We talked about weight loss, which is another of my themes. I like Vivus Inc. (VVUS:NASDAQ). Its drug Qnexa (phentermine and topiramate) has been very effective in phase 3 trials. Very impressive weight loss was seen in those trials and I expect the drug will be approved by the FDA. The advisory panel voted 20-2 in favor of approval. The PDUFA (Prescription Drug User Fee Act) date was extended 90 days, to July 17, 2012, for FDA's review of Qnexa.
TLSR: You also follow Cempra Inc. (CEMP:NASDAQ). What do you like about this company?
AC: Cempra is an exciting antibiotic company because of two products in development, solithromycin (CEM-101) and Taksta (fusidic acid). Both are moving into phase 3 trials around the end of the year. Solithromycin treats community-acquired pneumonia, and looks to be pretty well differentiated in its class. It's a potent macrolide that covers MRSA and appears to have a clean safety profile. Fusidic acid, which doesn't get as much attention, is unique because the company plans to develop it for a chronic indication, which you don't see with antibiotics very often. It targets prosthetic joint infection, which is very tough and takes a long time to treat. The antibiotic needs to be administered for years in some cases. The commercial opportunity is different than for your typical antibiotic.
TLSR: Alan, I enjoyed speaking with you very much. Thank you.
AC: I enjoyed it. Thank you.
Alan Carr joined Needham & Company in 2006. From 2001 to 2006 he worked in Yale University's technology transfer group, the Office of Cooperative Research, where he out-licensed technologies and therapeutic product candidates developed in Yale labs and helped establish startup companies in the New Haven area. Prior to that he was with J. Bush & Co., a New Haven investment firm, where he covered companies in the research tool and healthcare space. He earned his undergraduate degree at Albion College and his doctorate in molecular biophysics and biochemistry from Yale University.
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1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Addex Therapeutics. Merck & Co. Inc. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Alan Carr: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.
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