Oppenheimer Analyst Rohit Vanjani's 2015 Pipeline: Pot, Pain, and Babies

Print 28 January 2015
Streetwise Reports

The Life Sciences Report: At Oppenheimer, you are an expert in products related to epilepsy, fertility and opiate intolerance/pain control. What do these biotech spaces have in common?

Rohit Vanjani: Not a lot, frankly. There is a mix of influences on the structure of my coverage list. I have a personal preference for picking firms in certain therapeutic areas, especially pain alleviation and generics. The firm's institutional preferences are reflected through banking deals. The bankers do secondary offerings or initial public offerings (IPOs) for companies that we cover. Our analysts are roped into that process when we have an underlying interest in a company. Conversely, an analyst can reject covering a company that does not make sense to him or her.

For example, Marinus Pharmaceuticals, Inc. (MRNS:NASDAQ) was a banking-related name. It made sense for me to learn about its epilepsy product because I cover specialty pharmaceuticals and generics. Marinus has a product in development that I believe in. The product, ganaxolone, may offer a new mechanism of action with a low side-effect profile. I conservatively model its sales starting in 2020.

TLSR: What is the backstory on ganaxolone?

RV: Ganaxolone treats refractory epilepsy. Roughly 60 percent of the patients taking epileptic drugs are treating epilepsy with either a single antiepileptic drug or polypharmacy. The rest are refractory, in that typical antiepileptic drugs do not work for them. Doctors are always looking for new therapies in epilepsy to treat the refractory patient population. Marinus' ganaxolone is a naturally occurring product that is slightly modified in the lab. It has a low side-effect profile that could be useful for treating the refractory patient population.

Marinus is also developing ganaxolone in various orphan indications, including Fragile X syndrome, a genetic condition that causes intellectual disability, and PCDH19 female pediatric epilepsy, also a genetic disorder. I do not give credit for these orphan indications in my model, but the products could provide upside to the valuation if they pan out.

TLSR: Marinus has recently reported a net loss. Is the company fairly valued?

RV: I don't believe Marinus is fairly valued. It is hard for investors to get excited about revenues when they are further out. Marinus has upcoming catalysts, however. In mid-2015, data will arrive for PCDH19 and Fragile X. By the end of 2015, there will be additional data for ganaxolone in the firm's larger target market of epilepsy. I believe Marinus will likely report a loss for the next couple of years, as the company invests in its pipeline, and that is as it should be. In 2019–2020, the onset of sales will translate into profitability further down the road.

TLSR: Are institutions investing in Marinus?

RV: Marinus' initial public offering, a couple of months back, was mostly supported by institutions. Institutional long-term investors can wait three to five years for returns while retail folks tend to have shorter horizons.

TLSR: What else is going on in the epilepsy space?

RV: SAGE Therapeutics Inc. (SAGE:NASDAQ) did very well in its IPO. SAGE has an allopregnanolone compound as well, with an orphan drug indication. Marinus has another form of the allopregnanolone compound, an oral formulation that is slightly modified to make it less reactive and longer acting. SAGE's allopregnanolone compound has a different indication called super-refractory status epilepticus. SAGE's product is an injectable. However, because SAGE's IPO has done so well, Marinus is now dusting off its injectable product, looking to find a niche.

TLSR: Is SAGE Therapeutics' stock doing well in the current market?

RV: SAGE IPO'd a few weeks ahead of Marinus. It was targeting $60 million ($60M). It went to $90M on the IPO. The IPO price was $18/share. It is now trading at $43/share, so it has done really well.

TLSR: What else can you tell us about SAGE's prospects in the orphan drug market?

RV: Orphan indications like SAGE's allopregnanolone are often treated differently by the markets. There are a number of studies on expenses for orphan drugs. Some studies show that sales of drugs designated orphans by regulators in the U.S., Europe or Japan will grow at an annual rate of 11% per year through 2020, compared to only about 4% for drugs treating larger populations. The industry has rushed to develop orphan drugs in recent years, because they have cost incentives to put orphans through clinical trials. There can be a 50% tax credit on research and development (R&D). These are not inexpensive projects, but there are considerable cost incentives in play. Plus, the patent holder gets seven years of exclusivity, which can allow for premium pricing.

TLSR: Are there any other firms in the epilepsy market that you follow?

RV: There are a number of developers working in the cannabidiol space. The background story on cannabidiol is that Cannabis has a number of different active cannabinoids. THC, delta-9-tetrahydrocannabinol, is known colloquially as marijuana, and is likely the best known cannabinoid. But cannabidiol, another cannabinoid in Cannabis, is thought to have more therapeutic applications than THC. People are looking at cannabidiol for various therapeutic areas—for epilepsy, for glioma, for arthritis. It is an exciting, new therapeutic paradigm.

Insys Therapeutics, Inc. (INSY:NASDAQ) has a cannabidiol program. GW Pharmaceuticals Plc (GWPH:NASDAQ), which has done really well, also has a cannabidiol program. A private company called Zynerba Pharmaceuticals Inc. has a transdermal gel and patch cannabidiol program.

TLSR: Do these firms manufacture their own cannabinoids, or do they take them from the plants?

RV: GW's is plant-based. Insys' is synthetic; it manufactures cannabidiol in a facility in Texas.

TLSR: Is there a difference between synthetic and horticultural cannabidiol?

RV: Most people say no, that the active constituents are the same for both. But the idea is that by going synthetic, a factory may generate greater yield. Manufacturing margin could be wider with a synthetic because extracting cannabidiol from a whole plant can be more cumbersome, but this still is a bit of a wait-and-see.

TLSR: Cannabinoids can address epileptic symptoms?

RV: Animal models have shown some effectiveness in epilepsy, and that is where the cannabinoid excitement was born. But all of the cannabidiol programs are in very early stages. There is not a ton of data out there to say whether cannabinoids will actually work as theorized in humans.

TLSR: Who do you like in the infertility space?

RV: It might be worthwhile to take a step back and look at the history of infertility treatment to grasp the present situation. In vitro fertilization (IVF) was introduced in the late 1970s by a scientist named Robert Edwards out of the U.K., and his gynecologist colleague, Patrick Steptoe. They are largely credited with pioneering the process of IVF. The two had the innovative but controversial idea that they could help couples with infertility problems by harvesting eggs directly from the ovaries and returning them to the womb once they had been externally fertilized. The technique worked, and has become the standard of care today, but there likely haven't been many paradigm-breaking developments in the fertility field since then.

"Some studies show that sales of drugs designated orphans by regulators in the U.S., Europe or Japan will grow at an annual rate of 11% per year through 2020."

I am not discounting the innovations that have occurred, such as preimplantation genetic diagnosis, which involves subjecting early-stage embryo cells to genetic analysis, and intracytoplasmic sperm injection (ICSI), where a single sperm is injected directly into the egg. That process greatly assisted male infertility. Those improvements emerged in the 1990s. But they may not have been on the order of the leap we saw in the late 1970s with the introduction of IVF.

There are now three companies working in the fertility field. Each company targets a different step in the IVF pathway, all with the goal of improving pregnancy rates. OvaScience (OVAS:NASDAQ) works to improve the quality of the ova, or eggs, used in IVF for fertilization. Auxogyn Inc., a private company, aims to select the most viable egg after fertilization. Another private company, Nora Therapeutics, strives to improve the embryonic environment or the womb space once the egg is implanted.

TLSR: What is the nature of OvaScience's technical advance?

RV: Think of mitochondria as the battery packs of a cell. Studies have shown that adding donor mitochondria to eggs can improve fertility rates by adding energy. But each mitochondrion has its own chromosome. Therefore, donor mitochondria adds a foreign DNA source to the egg. A lot of regulatory bodies have an issue with that.

OvaScience has discovered that the outer cortex of a woman's ovary contains egg precursor cells, which are basically arrested eggs. Each of these eggs has mitochondria. Using laparoscopy or biopsy, OvaScience can extract precursor cells, withdraw mitochondria, and inject the mitochondria into the egg along with the sperm, using the ICSI process. This avoids injecting foreign DNA because it uses the woman's own egg precursor cells. There has not been a lot of data from OvaScience's AUGMENT process yet. But based on the prior studies using donor mitochondria, OvaScience' technique makes sense in theory.

TLSR: What time frame are we looking at to find out whether or not AUGMENT really works?

RV: OvaScience has launched abroad in four regions—the United Arab Emirates, Turkey, the U.K., and Canada. It will also launch in Japan. OvaScience has a patient registry program, but we are not likely to see patient data until the end of 2015 or early 2016. The company is going to launch commercially and hope it works out as planned.

TLSR: Does OvaScience have pricing advantages in play?

RV: After OvaScience's recent investor day, its stock ticked up significantly. Pricing was three to five times higher than perhaps what the Street had been anticipating. IVF is priced differently in different regions. In the U.S., the cost can be roughly $15,000 ($15K) per cycle or procedure for clients using their own eggs, and $25K for procedures using a donor egg, but can vary from region to region. The idea was to price AUGMENT between $15–25K in the U.S., the cost of one cycle.

However, the technique was not allowed to launch in the U.S. because of the U.S. Food and Drug Administration (FDA). The FDA did not halt the OvaScience studies, but it did require a discussion about the state of the trials. OvaScience has pivoted its marketing strategy and launched in regions where the regulatory agencies are more lax—where IVF products can be sold without running patient trials, and sometimes where IVF is done at lower prices. However, when OvaScience announced that AUGMENT would be sold within the range of the U.S. price no matter the region, it effectively set a global price. That news has significantly bolstered the value of its shares.

TLSR: OvaScience can market its IVF product in these regions without having gone through the clinical trials that would be necessary in the U.S.?

"People are looking at cannabidiol for various therapeutic areas; it is an exciting, new therapeutic paradigm."

RV: In the U.S. there is a low bar and a high bar on what is called the 361 HCT/P pathway. The FDA can allow a developer to go through the low bar, which is a practice-of-medicine standard by which, if a product sort of works and catches on, it is effectively approved. The high bar is used for greater-risk new drugs, biologics and medical devices. IVF was originally introduced without rigorous patient trials, using an adoption technique. OvaScience thought that it could apply this same methodology. It was targeting 40–80 test cycles in the U.S. before launching. The FDA, however, sent the company a letter in September 2013, in effect stopping the tests. So instead, OvaScience launched abroad in areas where regulatory agencies are more conducive to the practice-of-medicine standard rather than running clinical trials.

TLSR: What kind of clinical trials do you have for IVF? It seems a little extreme to have to have people give birth in a study.

RV: Exactly. That is why there are no clinical trials for IVF. Because AUGMENT was enhancing IVF, OvaScience thought it could run the product through the low bar. By launching abroad, however, it can gather procedural data over a number of years, and then come back into the U.S. without having to run clinical trials. Or so the theory goes.

TLSR: Why did the FDA step in?

RV: For safety. If something goes wrong, it does not want to be accused of having allowed the methodology without running any clinical trials.

TLSR: Let's talk about the pain control space. Who do you like there?

RV: Insys Therapeutics, which has the cannabidiol program in the pipeline, is growing very quickly in its various markets. Its alternate formulation product, Subsys (fentanyl sublingual spray), launched in March 2012, has already reached the 40% range of market share for breakthrough cancer pain products. Management is aiming for peak penetration at roughly 50% within one to two years. The company expects continued prescription and revenue growth for Subsys in Q4/14. It believes that Subsys can continue to achieve revenue growth in the next two years.

TLSR: How does Insys' product work better than similar products?

RV: The main differentiator for Subsys is its formulation—a sublingual spray—and its fast onset of action. The comparator products, Actiq (fentanyl citrate oral transmucosal lozenge/Teva Pharmaceutical Industries Ltd. (TEVA:NASDAQ) and Fentora (fentanyl buccal tablet; Teva), are an oral lollipop and a buccal tablet, respectively. With Actiq, you have to actively swab the product, and with Fentora, the product must dissolve. They can be tough to take. They also have a 15-minute onset-of-action time compared to Subsys' 5 minutes. The difference likely has to do with the sublingual nature of Subsys. The sublingual surface has a shorter distance to blood vessels than does the blood mucosa region, the lining of the cheeks and the back of the lips, where Actiq and Fentora are placed. Because Subsys covers a mucosal surface with its spray stream geometry, the result is predicted to be better absorption with faster time to relief of pain.

TLSR: What other products does Insys have in the pipeline?

RV: Insys has an oral dronabinol product, which is a different formulation of Marinol (dronabinol; AbbVie Inc. (ABBV:NYSE)), for chemotherapy-induced nausea and vomiting (CINV). The Marinol capsule has a highly viscous active pharmaceutical ingredient with delayed absorption and high intrapatient variability—dose to dose it can behave very differently. Patients can get different results when they take the same dose at different times of the day. Insys' oral liquid formulation is supposed to improve on these shortcomings.

Oral dronabinol is the first pipeline product that the company will likely launch (other than Subsys). The other program that people are excited about is the cannabidiol program, which Insys is developing for a number of orphan drug indications, including Lennox-Gastaut and Dravet syndromes, two orphan pediatric epilepsy indications.

TLSR: Is Insys looking for acquisitions along the way?

RV: Insys' management team has indicated that it is looking at both product and company acquisitions. It has noted that any deal would consist of marketed products that fall under the supportive care umbrella. Insys has previously defined that therapeutic category as either pain products or nausea and vomiting products.

2015 may be more of a spend year, as Insys works on its cannabidiol, buprenorphine, and dronabinol programs. If that is the case, then investors will look to Subsys, and Subsys is fairly well valued in the share price, in my opinion. To get investors excited, Insys could look for a product acquisition in the CINV space.

TLSR: How is Insys stock doing?

RV: The stock has done really well, and I was Outperform for a long time, but am now Neutral rated. Insys has a valuable pipeline, but I want to see the company hit some of the road markers ahead before giving credit to that. The shares have done really well based on Subsys' growth, but I think the story now is more about the pipeline.

TLSR: Are there any other firms that you think we should be watching?

RV: IGI Laboratories Inc. (IG:NYSE.MKT) did something very similar to what ANI Pharmaceuticals (ANIP:NASDAQ) did, which I talked about in a previous interview withThe Life Sciences Report. IGI could be what ANI was 12 months ago. Both have taken significant price increases on products—ANI with esterified estrogens/methyltestosterone, and IGI with econazole nitrate—that were a large part of the story until now. However, last December, ANI did a deal that was somewhat transformative, in which it purchased 31 discounted products from Teva. Almost a year later, we're starting to see the benefits from that deal, as ANI returns those products to market, one of which was a drug shortage product for which ANI was able to take significant price.

With IGI, at the end of September, the company announced a product acquisition deal as well. The company acquired injectable products from AstraZeneca Plc (AZN:NYSE). Nine of the 17 injectables that it purchased from AstraZeneca are drug shortage products, so it is now a race for IGI to return those discontinued products to market, with the potential of significantly raising prices. That could be a big story in 2015 and 2016.

TLSR: How do you think 2015 is going to shape up for life sciences?

RV: Generics companies will likely have a pricing window for a year or two because of the problems with the Indian manufacturers, in my opinion. Orphan drug companies are going to continue to develop orphan drugs that have pricing behind them, that have market exclusivity, and that have R&D tax credits. However, there is likely going to be increasing pushback from the pharmacy benefit managers because they are in a more consolidated space. We have already started to see pushback from Express Scripts Inc. (ESRX:NASDAQ) and CVS Health Corp. (CVS:NYSE), which are flexing their muscles and taking drugs off of their formularies. That dynamic is going to continue in 2015.

TLSR: Thanks for your time, Rohit.

Rohit Vanjani is a director and senior analyst at Oppenheimer & Co., covering generics and specialty pharmaceuticals. Vanjani has been with the firm since 2011, initially working on the Healthcare Services Team (healthcare IT, PBMs, and labs). Prior to Oppenheimer, Vanjani worked at Jefferies, UBS and Leerink Swann, helping cover biotechnology, managed care and hospitals, and specialty pharmaceuticals. He has also worked as an assistant economist at the Federal Reserve Bank of New York, and as an economics associate at Stanford University, helping to conduct healthcare economic research. Prior to those roles, Vanjani worked as a laboratory associate researching enzyme active site residues and animal mitochondrial DNA. Vanjani holds bachelor's degrees in biochemistry and economics from the University of Michigan, and a master's degree from New York University's Stern School of Business.

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