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VERTEX: A HIGH-TECH ASSAULT. XOMA: WHY INVESTORS ENTHUSIASM?

Prohost Biotech - Thursday, July 05, 2012

This article is not about Vertex (VRTX)but we could not refrain from expressing our anger about the high-tech slaughter of VRTX on Thursday June 28, 2012. What happens in such situations benefits only those who bet against excellent biotech stocks, who know, in fact, that if the prices continue to rally, they can still do whatever it takes to bring them down at the appropriate moment in time. Vertex’s statement was straightforward, pointing to the successful outcome of its small mid-stage clinical trial cocktail of drugs in improving cystic fibrosis (CF) patients’ lung function after eight weeks of treatment. Patients were treated with increasing doses of VX-809 for four weeks, and continued to take the drug for four more weeks together with either Kalydeco or a placebo. The candidates who were on both drugs had better lung function and less debilitating CF complications. We ask analysts who claimed that investors were skeptical about the cocktail’s efficacy: Do you have better, or even equal, outcomes from any investigational or marketed CF drugs that compare to the results of Vertex’ drug combination?

Vertex is a great firm that has a tremendous capability in bringing breakthrough treatments that serve unmet needs. Its HCV treatment has been the game changer in treating this debilitating chronic viral liver infection, and its cystic fibrosis therapeutics work at the root-cause of the disease, which no other product anywhere has come close to achieving. We took advantage of the dip in the stock price to accumulate the stock at 18% discount.   

 XOMA

We believe small biotech firms having solid scientific and technological fundamentals, and whose incompetent managements have stabbed them and their shareholders in the back, can still make a comeback. This is especially true in cases where bad managers are sent packing. Many small biotech firms have lost their values at the hands of irresponsible managers. In such tragic situations, the shareholders are not the only victims. The wasted technological capabilities, the brilliant scientists and life sciences, including, of course, the medical establishment, also fall. A typical example is Xoma (XOMA) whose science and technology helped other firms develop and market breakthrough blockbuster drugs, yet its past management had terribly failed to increase its own firm’s value. They let it fly away on the winds of incompetence. Xoma’s scientists were ready and willing to create breakthrough drugs and make the firm one of the most successful biotechs. However, they were unable to carry out their missions in a cash-dry company. These scientists are now free to execute their big projects and they are obviously doing a great job in that respect.       

When we learned about the change in Xoma’s management, we felt that the odds of a comeback for the devastated firm are better than anytime before. Transmitting this feeling to others at the time seemed a mission impossible. There were so many angry investors out there who looked as if ready to come down hard on anybody who dared to just mention Xoma’s name. We decided to wait and see. We took advantage of any promising news coming from Xoma to write about it, but stopped short of offering any positive anticipation.    

All of the above, though, has become history. Recently, Xoma and its partner “Les Laboratoires Servier” announced that it has opened enrollment in two clinical trials of its monoclonal antibody drug Gevokizumab targeting IL-1 beta for inflammatory diseases. The first trial is a global Phase 3 study investigating gevokizumab’s efficacy in reducing the complications of non-infectious uveitis (NIU) involving the intermediate and/or posterior segment of the eye. The second trial is a Phase 2 study to evaluate the potential for Gevokizumab in decreasing the pain and structural abnormalities while improving the physical function in patients with erosive osteoarthritis of the hand

Why the enthusiasm to this news?

In our January article we wrote about Xoma’s CEO John Varian delineation of the firm’s plans and strategy towards increasing Gevokizumab’s value and, consequently, the firm’s value. The plan stands on evidence supporting the role IL-1 β plays across a broad range of inflammatory diseases. The plan comprised the following:

- The initiation of global Gevokizumab Phase 3 program in the second quarter for non-infectious uveitis, including Behçet's uveitis.

-The completion of Phase 2 proof-of-concept trial of the same drug in moderate to severe acne, and pinpointing additional indications that would expand the commercial opportunities for the drug; and  

- The completion of proof-of-concept Phase 2 program, which aims at evaluating Gevokizumab’s therapeutic potential in various inflammatory diseases where IL-1β is involved.

We cited investors’ expected catalysts in 2012 as follows:

- Advancing Gevokizumab into Phase III trials in 2012 for Behçet's uveitis;

- Good news from other Gevokizumab Phase trials;

Other secondary catalysts we cited in our previous article are:

- Moving any of the preclinical programs into clinical trials.

- More licensing agreements, especially if accompanied by upfront payments;

- Adding more customers for services and licensing of technologies and;

- Exceeding the market’s expectation in Aceon sales.

Having said that. It became obvious that the source of investors' enthusiasm following the recent news is based on the fact that the firm has, indeed, realized two of its major promises, in addition to other major achievements.  In addition, Gevokizumab has successfully passed proof-of-concept Phase 2 trial in patients with Behçet's uveitis. All seven patients in the trial displayed rapid reduction in intraocular inflammation and improvement in visual acuity and other ophthalmic measures after one treatment with the drug. These results are viewed as very encouraging in view of the fact that the strong immunosuppressive drugs cyclosporine and/or azathioprine were discontinued prior to Gevokizumab trial. More good news was that patients with recurring uveitis had no problem responding to Gevokizumab. Also good news was that patients who received treatments for one year or longer reported no drug-related adverse events.  

This excellent news was hailed by Behçet's uveitis patients and their specialists, but not by investors. There were two reasons for investors’ lack of enthusiasm. First, the good news came at a time when Gevokizumab had failed in the diabetes trials. Second, the market for Behçet's uveitis is extremely small, which was the reason for the regulators granting Gevokizumab orphan status for this condition. Adding to these two reasons is, of course, investors’ skepticism about any good news Xoma would announce.  

What the market overlooked at the time was the importance of the news that interleukin-1β (IL-1β), which is Gevokizumab’s target, has shown involvement not only in causing Behçet's uveitis, but in other inflammatory diseases. The diseases include non-infectious uveitis (NIU), cardiovascular disease, acne vulgaris and other auto-inflammatory diseases. Gevokizumab binds strongly to IL-1β and has a unique allosteric modulating property, which bestowed the drug’s potential as a therapeutic for the above-mentioned diseases.

So, the enthusiasm about the initiation of a Gevokizumab Phase 3 program for non-infectious, non-anterior uveitis (NIU) and Phase 2 trials for erosive osteoarthritis of the hand is that the advanced trials cancels the notion that the drug would have a very small market, a major reason for investors’ skepticism. The Gevokizumab new programs increase the potential U.S. patient population from the estimated 7,500 in Behçet’s uveitis to an estimated 150,000 in NIU, in addition to the large market of erosive osteoarthritis of the hand. Add to these markets that of acne vulgaris and the expected programs for other autoimmune diseases, of course if the drug would be granted approval.  

Paul Rubin, M.D Xoma's Senior Vice President of Research and Development and Chief Medical Officer, stated,

     "As preclinical and clinical data have shown that IL-1β is an important contributor to the inflammation seen in uveitis, we believe Gevokizumab's ability to potently inhibit IL-1β signaling could be relevant in controlling this inflammation as well as the inflammation associated with other conditions. Because of this, we established a proof-of-concept program (POC) in November 2011 to lead us to additional indications for this antibody. Included in this program is the ongoing trial in moderate to severe acne vulgaris from which we anticipate top-line data by yearend. Today, we opened enrollment in the second POC indication, erosive osteoarthritis of the hand, which we believe will complete enrollment sometime around the end of 2012." 

     So, in case Gevokizumab is approved, the market will not be that of 7,500 patients only, but could be over 400,000 patients or more, depending on the drug’s success in various indications.

With regard to Xoma’s credibility, no one of all the frustrated investors from this firm’s history has demonstrated skepticism against the firm’s scientific credibility. On the contrary, investors’   frustration and anger were caused by the old management’s incompetence and its failure to take advantage of the strong science and technology and capitalize on them towards creating shareholders value. Xoma’s monoclonal antibody proprietary platform is recognized as one of the best in town. Its proprietary Bacterial Cell Expression (BCE) technology is a key breakthrough for the discovery and manufacturing of antibodies and other proteins. Its ADAPT™, ModulX and OptimX™ technologies enable multiple antibody discovery, development, and manufacturing. They are the engines behind monoclonal antibody discovery and optimization, biological pathways modulation, affinity, immunogenicity, stability, and manufacturability consecutively.  To read more about the platform click HERE 

Xoma’s technologies have contributed to the discovery and development of bestselling targeted monoclonal antibody therapeutics, include Lucentis® (ranibizumab injection) for wet age-related macular degeneration and Cimza® (certolizumab pegol) for rheumatoid arthritis and Crohn's disease. Sixty pharmaceutical and biotechnology companies have signed licenses to get to Xoma’s BCE technology and better than all the partnering agreements signed with Servier and Novartis on specific drugs.   

“Les Laboratoires Servier is doing its best to expand its relationship with Xoma on many fronts. It granted Xoma the U.S. representation right of its perindopril franchise comprised of the angiotensin converting enzyme (ACE) inhibitor Aceon (perindopril erbumine) and other candidates. The revenues to be generated from this offer might not be game changers, but they are, nevertheless, a plus, not a minus. More important is that this act might project the good relationship between the two partners. Servier is a serious, well-respected drug discoverer and developer. Its interest in Gevokizumab can be interpreted as a positive forecast about the drug’s clinical trials future outcome, and its expansion of the relationship with Xoma at the scientific level as well as the commercial level could be interpreted as a confidence in Xoma’s science, scientists and management. This is important towards the new management bring back the firm’s lost credibility.

So, Yes, we are optimistic and are declaring our optimism this time.

In addition to the above reasons for optimism, we feel good also about the terms of Xoma’s agreement with Servier on gevokizumab. For the first time in its history, Xoma holds the rights to launched a global Phase 3 program with its own created product to which it retains the commercial rights to the largest market in the world.

Also encouraging is knowing that Xoma’s clinical and regulatory teams are playing a major role in gevokizumab development. They are working side by side with Servier’s scientists to design the gevokizumab non-infectious uveitis trial, making sure the drug will meet the FDA and other regulatory agencies’ requirements in this indication.

Again, we say we are optimistic. We hope next time we find it more comfortable, putting the word “very” before the word optimistic.

We are long XOMA     

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