Halozyme: Drug Delivery Specialist With Multiple Near-Term Catalysts

Halozyme Therapeutics (HALO) (Q2 2013 conference call transcript, a source for many of the projected catalyst time frames outlined below) develops enzyme-based (hyaluronidase) products for a wide variety of conditions, which include diabetes, cancer, autoimmune disorders and cosmetic medicine (cellulite).

CLINICAL AND REGULATORY CATALYSTS:

Below is a summary of the Company's clinical development pipeline which includes collaborations with Roche (RHHBY.OB), Pfizer (PFE) and Baxter (BAX) in addition to an FDA approved product, HYLENEX (human recombinant formulation of hyaluronidase), which improves the absorption and dispersion of drugs injected under the skin (subcutaneously) (e.g. insulin) on a temporary basis (approximately 24 hours) with plans to increase sales through a recently initiated post-marketing study in Type 1 diabetes using insulin pumps.

1.) Herceptin-SC (trastuzumab) and MabThera-SC (rituximab) (novel subcutenous injected rHuPH20 formulations) are currently pending European Medicines Agency (EMA) decisions in the form of line extension applications for new formulations of approved anti-cancer drugs. In late June, partner Roche received a positive CHMP opinion for EU approval of Herceptin-SC with final EU approval expected approximately two months later by late August-early September.

Partner Roche filed a MabThera-SC line extension application in December 2012 with the next CHMP meeting scheduled for September 16-19 and a meeting update to follow on Friday 9/20/13. The May Pharmacovigilance Risk Assessment Committee (PRAC) meeting minutes posted in June (page 40-41) indicated that both line extension applications are acceptable with Herceptin-SC subsequently receiving a positive CHMP opinion in late June.

In addition, Roche has two ongoing Phase III clinical trials to evaluate patient preference and support pending European marketing efforts upon final approval for both Herceptin-SC (ClinicalTrials.gov ID NCT01810393) and MabThera-SC (ClinicalTrials.gov ID NCT01724021) compared to the standard, longer IV infusion delivery route for these products.

2.) HyQvia (novel subcutaneous injection formulation of immune globulin) received a Complete Response Letter (CRL) in August 2012 for a Biologics License Application (BLA) seeking approval as a novel formulation of immune globulin for subcutaneous injection due to elevated anti-rHuPH20 antibody titers and partner Baxter expects to submit additional data to the FDA by year-end 2013 to support potential FDA approval by mid-2014 to H2 2014 (Baxter Q2 2013 conference call transcript). In May, HyQvia received EU approval with the initial product launch ongoing.

3.) HTI-501 (recombinant human cathepsin L) (lysosomal proteinase) is currently being evaluated in a Phase II clinical trial and in late June HALO presented interim Phase II results from 12 of planned 34 evaluable patients in a fully enrolled Phase I/II clinical trial for the treatment of cellulite with the last patients dosed in July and final follow-up results through six-months post-treatment expected in early 2014.

4.) ClinicalTrials.gov ID NCT01839487 is the identifier for a Phase II clinical trial with results expected during Q3 2015 in a study evaluating PEGPH20 (PEGylated form of rHuPH20) in combination with nab-paclitaxel and gemcitabine for the first-line treatment of metastatic pancreatic cancer.

HALO will present more complete Phase IB data at the EU Cancer Congress on 9/30/13 following initial results presented at ASCO 2013 (42% overall response rate) and the Company is also developing a companion diagnostic with a planned start of a Phase II pancreatic cancer trial by Southwest Oncology Group by the end of Q3 2013.

5.) ClinicalTrials.gov ID NCT01848990 is the identifier for a fully enrolled Phase IV post-marketing clinical trial evaluating HYLENEX (rHuPH20 hyaluronidase human injection) in combination with rapid-acting analog insulin in Type I diabetics using insulin pumps with results expected in early 2014. HYLENEX is FDA approved to facilitate subcutaneous fluid administration for a variety of indications (e.g. hydration and to increase dispersion of other drugs as illustrated in the pipeline above).

6.) In December 2012, HALO announced an agreement with Pfizer to develop and commercialize biologic agents using Halozyme's Enhanze (hyaluronidase-based) drug delivery technology in up to six targets. Pfizer paid HALO an initial cash payment of $8 million for the initial two targets along with the right to add four more targets (additional fees apply) and the deal also includes potential regulatory and sales-based milestone payments of up to $507 million plus royalties.

FINANCIAL STATS (Q2 2013 results press release):

- On August 12 & 14, director Kathryn Falberg purchased a total of 100,000 shares of HALO on the open market at an average price of $6.82 increasing her stake to 280,000 shares (SEC filing link) while CEO Gregory Frost exercised options into 20,000 shares of common stock which increased his large ownership stake to approximately 3.6 million shares (SEC filing link).

- On 8/14/13, Swiss BB Biotech reported a 5.1% ownership stake (5.75 million shares) in HALO (SEC filing link).

- HALO currently has a high percentage of insider and institutional investors which account for nearly 70% ownership of outstanding common stock and includes major holders such as Randal Kirk / Third Security (combined ownership stake of 23.3 million shares which equates to a 20.6% ownership stake) and Baker Brothers (6.5 million shares).

- Randal Kirk is a billionaire biotech entrepreneur who recently netted over $1 billion on the highly successful IPO for Intrexon (XON) (Forbes overview article) and he also serves on the Board of Directors for HALO.

- As of 6/30/13, HALO reported $76 million (M) in cash and equivalents with $11.4M in cash used to fund operations during Q2 2013.

- During 2Q13, HALO reported revenue of $14.5M vs. $7.8M in the year-ago period.

- As of 8/5/13, HALO reported approximately 113M shares of common stock outstanding with $29.7M in total debt as of 6/30/13 ($26.1M classified as long-term debt which reflects a term loan from Oxford Finance and Silicon Valley Bank with a maturity date of 12/1/16).

- HALO has provided guidance for potential to be cash flow positive in 2014 (PR link) based upon key partner product launches that include HyQvia, Herceptin-SC and MabThera-SC in Europe with adequate cash to fund operations into late 2014 based upon the current cash and burn rate with an expected decrease over time as additional revenue offsets R&D expenses for the Company's three wholly owned programs (HTI-501 for cellulite, Hylenex for use w/ insulin pumps and PEGPH20 for pancreatic cancer).

TRADE SUMMARY & OUTLOOK:

With final European approval for Herceptin-SC due any day now and a very likely (90%) positive CHMP opinion for MabThera-SC in the near-term; I expect shares of HALO to fill the gap-down in the chart if positive news comes in as expected in the coming weeks with the potential to reach low double digits during H2 2013 ($10-12 target) as additional catalysts approach and the Company continues narrowing the cash burn with a goal of becoming cash flow positive by next year.

I believe the decision by ViroPharma (VPHM) to discontinue development of Cinryze-SC will have no impact on other programs as discussed by HALO on the most recent quarterly conference call and the enzyme-related antibodies have never been linked to any side effects with no clinical impact observed to date for an issue that was known in summer 2012 and being addressed by Baxter as part of plans to resubmit a BLA for HyQvia which is already being marketed in Europe following approval earlier this year.

In addition, HALO spiked by approximately $2 earlier this year on both Phase 1b pancreatic cancer data for PEGPH20 and again in late June on the positive CHMP opinion for Herceptin-SC so there is potential for another $1-2 upside each for upcoming Phase 1b data being presented on 9/30 and an expected positive CHMP opinion for MabThera-SC.

Other recent bullish developments include a recent open market insider/director buy for nearly $700,000 and bullish trading in the September $7.50 and October/December $10 call options so in the short-term, I expect the positive uptrend in the six-month chart below to continue with an upper $7-lower $8 short-term swing / run-up target with key risks being potential for an overall market correction and unexpected bad news on any of the upcoming regulatory or clinical trial catalysts which would have the potential for downside risk that is similar to the upside targets outlined earlier.

(click to enlarge)

Disclosure: I am long HALO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Multiple myeloma: link to gene involved in aging

Featured Article
Academic Journal
Main Category: Genetics
Also Included In: Cancer / Oncology;  Blood / Hematology
Article Date: 19 Aug 2013 - 8:00 PDT Current ratings for:
Multiple myeloma: link to gene involved in aging

Researchers say that a gene responsible for helping to control the aging process by regulating a "cell's internal clock" may be linked to a type of blood cancer.

Scientists from The Institute of Cancer Research in the UK found a genetic variant called TERC among four new variants that they linked to multiple myeloma - a form of cancer that affects immune cells produced in the bone marrow for circulation in the blood. Their findings are published in the journal Nature Genetics.

The researchers say that this latest discovery takes the number of total genetic variants linked to myeloma to seven, and may help lead to the discovery of genetic causes of the disease.

Myeloma is a relatively uncommon cancer according to the American Cancer Society statistics, with a 1 in 149 risk of developing the disease in the US.

For the study, the research team analyzed the genetic make-up of 4,692 patients who had myeloma, and compared this with DNA of 10,990 people who did not have the blood cancer.

The scientists say that in a previous study they conducted, three genetic variants were discovered in DNA, which was found to increase the risk of myeloma.

The new batch of variants in this most recent study were discovered by combining these samples with other samples collected by researchers in Germany. The researchers add that this produced more data and more statistical accuracy.

From this, the genetic variant TERC was discovered. It works, the scientists explain, by regulating the length of telomere "caps" (protective caps) on the ends of DNA. Over time, these caps erode in healthy cells, causing tissues to age.

But the researchers say that some cancer cells appear to be ignoring the aging trigger and continue to divide. They add that if the link between TERC and myeloma is confirmed, this could lead to new treatments of the blood cancer.

Richard Houlston, professor of molecular and population genetics at The Institute of Cancer Research (ICR), explains: "Our study has taken an important step forward in understanding the genetics of myeloma, and suggested an intriguing potential link with a gene that acts as a cell's internal timer."

Prof. Houlston adds:

"We know cancer often seems to ignore the usual controls over aging and cell death, and it will be fascinating to explore whether in blood cancers, that is a result of a direct genetic link.

Eventually, understanding the complex genetics of blood cancers should allow us to assess a person's risk or identify new avenues for treatment."

Professor Chris Bunce, research director at Leukemia & Lymphoma Research, says this research offers more evidence that the risk of myeloma can be inherited.

"By showing how these specific genes influence the cancer's development, this research could potentially lead to the development of targeted myeloma drugs in the future," adds Prof. Bunce.

"In addition we know that a common condition called MGUS predisposes to the development of myeloma. The identification of additional genetic risk factors in these patients could revolutionize their future management and prospects."

Written by Honor Whiteman

Reference: 'Common variation at 3q26.2, 6p21.33, 17p11.2 and 22q13.1 influences multiple myeloma risk,' Daniel Chubb, Niels Weinhold, Peter Broderick. Letter to Nature Genetics published online 18 August 2013 (doi:10.1038/ng.2733).
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Spectranetics Has Multiple Attractive Opportunities, But Will They Execute?

I've had a love/hate relationship with Spectranetics (SPNC) for more than 15 years now. I've always loved the potential of the company's laser ablation products in markets like pacemaker/ICD lead removal and peripheral atherectomy, but I've hated the company's pattern of inconsistent execution and the inability to ever "get over the hump" and establish a true growth trajectory.

I expressed similar reservations about a year and half ago, and it turns out that my timing was precisely wrong, as the shares (along with the med-tech sector) began an impressive run that has seen better than 130% appreciation and several positive sell-side initiations. Curiously, my financial model has proven to be accurate in terms of revenue evolution and my estimates for margins and cash flow have proven too bullish. What has changed is investor sentiment and optimism around the company's ability to penetrate the lead removal and atherectomy markets.

Spectranetics is now valued as a med-tech growth stock, and if management can continue to deliver double-digit revenue growth it is not unreasonable to think that the shares will reach the low-to-mid $20s over the next 6 to 9 months (approximately a 20% return). Unfortunately, that potential is tempered by the realities of a challenging market and improving alternatives.

Hitting The Mark In Q2

Spectranetics didn't report a blockbuster second quarter, but it was good enough to maintain credibility that this is an emerging med-tech growth story.

Revenue rose 13%, with lead management revenue growth of 11% and vascular intervention growth of 9% (constant currency) supplemented with 34% growth in the "Laser System, Service & Other" category. While there are still many relevant companies left to report, these growth rates appear well ahead of overall cardiac rhythm management (CRM) and vascular intervention procedure growth rates for the quarter. It's also worth noting that revenue from U.S. peripheral vascular intervention rose 19% for the quarter.

Margins are still mixed. While the gross margin did improve a bit (up 30bp yoy), last year's operating income reversed to a loss as the company's R&D spending outstripped growth, due in part to the ongoing EXCITE U.S. clinical trial.

Lead Removal - If Not Now, When?

One of the frustrating issues with Spectranetics has been that the company has always addressed attractive-looking markets, but market adoption has never gone to plan. The company's lead removal business is a case in point.

While the leads used to connect a pacemaker or ICD to the heart can usually be left alone, occasionally they fail or become infected and ought to be removed. The problem is that doctors just don't do this as often as they should, even though the prognosis for these patients is poor. Even with a mortality rate in excess of 30%, infected leads are removed roughly 40% of the time. While it's true that mortality rates are still elevated even when leads are removed (probably because the infection has already established itself at that point), there is a solid and reproducible benefit to patient survival.

So why isn't this done more often? I can only speculate, but I wonder if the relatively rare incidence of lead infection (the literature runs from less than 1% to as high as 7%) and lead failure discourages doctors from learning the procedure or the hospital from acquiring the equipment. To that end, the well-publicized scandal surrounding St. Jude Medical's (STJ) faulty leads has only led to a modest positive inflection in growth.

Even so, there are credible arguments for ongoing growth in this market. Medtronic (MDT) was first to market with an MRI-safe pacemaker, and both Boston Scientific (BSX) and St. Jude look to follow. But while the new devices may be MRI-safe, the old leads are not and need to be removed. Likewise, should Boston Scientific's subcutaneous ICD and St. Jude's experimental leadless pacemaker succeed, lead removal could grow from the $60 million or so in annual revenue for Spectranetics and get closer to the $250 million to $300 million in theoretical market potential.

Cause For EXCITEment

Although Spectranetics is seeing adoption of its laser catheters in peripheral atherectomy grow, the opportunity has been there for a long time now and the company has seen mechanical atherectomy products from Covidien (COV) and Cardiovascular Systems (CSII) launch, accelerate past them, and leave them well behind in terms of market share.

The big "but" has been the in-stent restenosis application, and that is an increasingly significant opportunity for Spectranetics. Basically, here's the deal - as technologies (and clinical data) have improved, doctors have increasingly turned to stents to deal with blocked arteries in the leg. Covidien and Bard (BCR) remain leaders in this segment, but companies ranging from Boston Scientific to Medtronic to Abbott (ABT) and others have all targeted this badly-underserved market as a growth opportunity.

While these newer stents perform much, much better than older versions, in-stent restenosis (that is, a blockage within the stent) still remains a significant problem. This is an opportunity for Spectranetics to shine, as the early data on laser atherectomy for in-stent restenosis have not only been good, but better than the data from Covidien's mechanical atherectomy system.

To develop this opportunity, Spectranetics is following up the successful German PATENT study with the EXCITE study in the U.S., and the company hopes to have FDA approval to begin marketing this indication in 2014. Although I suspect there is already off-label usage for in-stent restenosis, I don't think it's significant, and this would open up a market that could be worth upwards of $700 million a year.

Opportunity Versus Reality

All told, I believe Spectranetics has (or will soon have) products and approvals to address markets worth as much as $1.5 billion a year. Compared to expected revenue of $155 million for 2013, that's a major growth potential if Spectranetics can increase adoption.

Alas, that "if" is the problem. I simply do not believe that Spectranetics is going to get all that much share in the "traditional" peripheral atherectomy market, even though reimbursement and the cost of the catheters make it economically attractive for out-patient practices. Likewise, I just don't see a catalyst for a big acceleration in lead removal - there are journal papers going back over 15 years advocating for the practice and it's still largely a niche procedure. That puts a lot of pressure on management to make the most of the peripheral in-stent restenosis potential, and my fear is that the launch of drug-eluting balloons in the coming years (in other words, no stents) could nip this opportunity in the bud.

Not surprisingly, my base case assumptions for Spectranetics are not favorable for the stock. But since I missed the big move over the last 18 months, let's consider a more optimistic/bullish case. Let's say that Spectranetics can get one-third of the theoretical lead removal market in 2019, as well as one-third of the in-stent restenosis market and about 20% of the peripheral atherectomy market. That works out to around $550 million in revenue in 2019 and a 10-year revenue growth rate of over 20%. Assuming that Spectranetics could generate industry standard free cash flow margins in the mid-teens that works out to a fair value of just under $24.

For better or worse, though, sell-side analysts and many (if not most) institutional investors don't evaluate growing med-tech stocks that way. Instead, they use revenue multiples. Allowing that Spectranetics is now a med-tech growth stock, it could fall into that valuation paradigm where 5x to 10x multiples come into play. Giving the stock the low end of that range (as it only barely qualifies on the basis of 10-12% expected growth), a $22 to $25 target seems reasonable (depending on whether you include net cash).

The Bottom Line

I'm sure it sounds like sour grapes to be still be skeptical after this big run in Spectranetics shares, but I just think the expectations are getting pretty heated for a company that has never managed to find the spark to accelerate from 10% growth to the 20% or higher that marks the real med-tech success stories.

Maybe this time is different, and maybe the EXCITE study will open the door to a major revenue opportunity. With the stock possibly still holding 15% to 30% upside, it could be one of the only bargains left in the growth segment of med-tech, but investors considering the shares need to appreciate that there are above-average risks and challenges with this idea.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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