Prosensa misses in DMD with read through for Sarepta, Sunshine Heart raises, Agenus pumps and raises, Repros reports positive data, Retrophin wants Transcept, Clovis up for sale rumors, SEC enforcement against biotech hedgies, FED cancels Septaper. Let's go over the stories we've been watching, commenting on and trading this week.
Prosensa (NASDAQ:RNA) and Sarepta Therapeutics (NASDAQ:SRPT)
On Friday, Prosensa dropped a complete bombshell when it disclosed that it's phase 3 trial of Drisapersen missed it's primary efficacy endpoint - by a huge margin. Here was our immediate reaction to the news as shared with our premium service beta testers that morning (before the RNA conference call):
Prosensa (NASDAQ:RNA) and Glaxo Smith Kline (NYSE:GSK) announced top-line results from the phase 3 trial of drisapresen for treatment of Duchenne Muscular Dystrophy (DMD).
In the phase 3 trial, Drisapresen failed to show a statistically significant improvement in the 6-minute walking test (6MWT) compared to placebo. The data were not even close to statistically significant (p = 0.415).
This has clear implications for Sarepta Therapeutics (NASDAQ:SRPT). Recall that SRPT's eteplirsen uses the same therapeutic approach of skipping exon 51 to induce production of dystrophin.
If Prosensa's therapy failed in a large double-blind clinical trial, the chances that SRPT would receive accelerated approval based on a single center trial with only 12 patients are near zero.
We do not expect that the Prosensa news will change the minds of either the bears or the bulls. Bulls will argue that Eteplirsen has a wider therapeutic index and therefore is able to be dosed higher and will show a statistically significant reduction in the 6MWT. Bears have all along said that n=12 is way too small of a trial to justify accelerated approval.
We believe that this trial failure tips the scale, for the moment, towards the bears. Our view is that SRPT is very unlikely to receive accelerated approval. The FDA is more likely to require the company to conduct a large, well-controlled phase 3 trial prior to considering approval of the drug.
Prosensa is trading down 62% in the pre-market. While SRPT briefly traded up but is now trading down.
As theStreet.com's Adam Feuerstein, a noted Sarepta Bull tweeted this morning:"Painful question to ponder but these drisa data raise real concern about validity of exon skipping in DMD.
$SRPT$RNA$GSK"
While availability of borrow for SRPT may be difficult, the fact that their chief competitor is now also publicly traded opens up new pair-trading opportunities for funds and investors looking to profit from the volatility in the DMD therapy space.
We have no position in SRPT, RNA or GSK.
Sunshine Heart (NYSE:SSH)
Sunshine heart raised $40 million this week though a secondary offering led by Piper Jaffray and Cowen and Company. The company issued 3.81 million shares at $10.50 each with an over allotment option of another 571.5K shares. A couple of weeks ago we participated in a conference call organized by our colleagues at PropThink.com with SSH CEO David Rosa. During that call, SSH indicated that the company is burning approximately $17 million per year. The CEO also indicated that the company had been fielding many requests from shareholders to raise additional cash now in light of the recent run the stock has experienced. David suggested that the company had considered raising including perhaps and ATM facility. When we got a chance to ask our question, we note Red Acre's preference for an outright secondary over an ATM facility (regular readers by now have heard us many times stating how we dislike At-The-Market financing facilities due to their lack of disclosure). We're glad to see that management listened to shareholder's suggestions both about raising some cash now, and about doing it via a secondary rather than and ATM facility.
SSH will be presenting data from it's open-label European OPTIONS-HF trial in late October, this data is limited to four patients. We have no view on whether or not the data being presented in late October will move the stock price much. When news of the SSH offering came out, there was some discussion on Twitter regarding the timing of the raise VS the upcoming data discussion in late October. After a quick check of our note from the conference call, our view is that the cash raise now is in line with what the company guided during the call and is, on balance, a net positive for the firm. SSH should now have approximately $54.4 million cash on hand. If the company's cash burn rate remain at current levels, SSH now has cash to last through Q3 2016. This positions the company well because the us-based COUNTER-HF trial will read out sometime in mid-2016 if the company's current enrollment estimates remain accurate.
We are interested in the SSH story but still have some work to do on the name. In the mean time we will be stalking an attractive entry point in the near future. For the time being however, we have no position in SSH.
Agenus (NASDAQ:AGEN)
Agenus issued a press release on Tuesday giving an update of their single-arm phase 2 trial of their prophage G-100 therapy for Glioblastoma MultiForme (GBM). Here is what we told our beta testers when we read the press release:
Agenus issued a press relase citing positive results from thier phase 2 trial of AGEN-100 in Glioblastoma Multi Forme (GBM) - brain tumors.
The company reports median progression free survival (PFS) of 17.8 months and median overall survival (OS) of 23.3 months. - So far so good.
The press release then goes on to compare these survival numbers with those from the gold-standard of GBM treatment, the Stupp et. al. paper in the New England Journal of Medicine from 2005. Here's the problem - this phase 2 trial was a single-arm study. Comparing it to Stupp et. al. is not possible.
The press release cites the 14.6 month OS for the Stupp trial - but ignores the fact that that trial enrolled sicker patients (some 15% or more had tumors that could not be operated upon). A more proper comparison would be to look at the subset of Stupp patients who had fully resected tumors - in this subset the OS is 18.8 months. AGEN's reported OS still shows an advantage - but not nearly as rosy as that reported in the press release. We don't quite understand why the company is trying to use misleading data to show a larger advantage - other than perhaps that their stock price recently crashed on the failure of partner Glaxo Smith Kline's (NYSE:GSK) Mage A3 breast cancer therapy.
Nevertheless, some speculative run in AGEN may ensue today - fueled by retail investors. We have no position in AGEN.
While AGEN did briefly spike up to $3.68 on Tuesday, it did not hold the gains as investors realized that the Stupp comparisons were overblown. Not surprisingly, AGEN used the spike in stock price to do a quick secondary offering of $6.5 million. The company sold shares at $3 with 30% warrant coverage with the warrants struck at $3.75. When company management issues "positive" news and then uses the ensuing spike in stock price to issue shares, this should be a huge red flag for longs.
Next Monday both AGEN and Immunocellular Therapeutics (NYSE:IMUC) will be participating in a conference call regarding GBM immunotherapies. We will have more to say about the subject of GBM trials and factors that lead to extended overall survival in our next weekly review.
We have no position in AGEN but we are long IMUC and have been accumulating lately, we'll go into details of why we're accumulating at these levels next week.
Clovis Oncology (NASDAQ:CLVS)
On Tuesday Bloomberg ran a story suggesting that CLVS has put itself up for sale. CLVS made a splash at ASCO this year with phase 1 results for a T790M EGFR in non-small cell lung cancer and a PRAP inhibitor in BRCA mutant ovarian, breast and pancreatic cancer. Based on these early results, the sell side issued lofty price targets and CLVS' stock price doubled overnight. As we noted back then, part of the reason for such a strong move in CLVS was the fact that the company has such a low float.
Our initial reaction when hearing this purported move by CLVS was that this story does not make sense. If the rumor is true, it signals to us that CLVS management is calling a top to the biotech market. Selling with only phase 1 data in oncology only makes sense if valuations are so high that people are willing to overpay for risky assets, OR if you know your pipeline is not really as good as everyone thinks it is.
Later in the week we talked to a source with knowledge of the matter who suggested that a fund needed to spruce up Q3 numbers and decided to float the CLVS acquisition rumor to cause a pop in the stock price. On the back of this rumor, Citi initiated coverage on CLVS with a buy recommendation and a $109 price target and suggested that CLVS could be worth up to $177 per share to a potential acquirer if some of their early stage programs pan out. Basing any part of a valuation on phase 1 assets is, in our view, a bit ridiculous. even if 3 of 4 patients demonstrate partial responses, this is a long way from a proven therapy that will get to market. This is not to say that a deal absolutely could not happen, but, we are generally skeptical.
(n.b. We didn't REALLY talk to a source suggesting that the CLVS story was a rumor floated by a fund - but see how easy that was?) The more likely scenario in our view is that the story run by Bloomberg may be based on faulty information. It's simple enough for an anonymous source "with knowledge of the matter" to suggest a buyout.
We have no position in CLVS.
Retrophin (OTC:RTRX)
Retrophin issued a press release on Wednesday indicating that it had proposed to acquire all outstanding shares of Transcept Pharmaceuticals (NASDAQ:TSPT) for $4 per share. Interestingly, RTRX's offer is NOT dependent on a financing contingency. This means that they have probably already lined up financing to make a transaction happen. Let's try to understand whether or not the $4 per share valuation makes sense.
What is Transcept worth
Given that Transcept has 18.76 million shares outstanding plus another 3.85 million shares issuable due to warrants. Retrophin's proposal represents a transaction price of approximately $90.56 million. TSPT's only product, Intermezzo, is approved for treating early awakening due to insomnia. It is a reformulated version of the same active drug as Ambien, at a lower dose and with a time-release formulation.
For the 6 months ended June 30th, TSPT had royalty revenue of $963,000 but paid Purdue advertising expenses of $6.6 million. The company had $77.6 million of cash on hand as of June 30. Since the company burns about $4 million per quarter, current cash on hand should be about $73.6 million. or $3.26 per fully diluted share. If one excludes shares issuable due to warrants (a practice we do not recommend at Red Acre), TSPT actually has $3.92 per share in cash.
In addition to cash on hand, TSPT has net operating loss carry-forwards (NOLs) of $73.4 million. While it's hard to determine the exact value of NOLs since they partially depend upon the tax situation of the potential acquirer, $3.25 per share of NOLs should be worth more than 75 cents per share. For an acquirer who has taxable income, the NOLs protect income from taxation. Depending upon the corporate tax rate of the buyer, the NOLs could be worth over $1.14 per (fully diluted) share in tax savings.
This analysis suggests that the $4 per share offer is a low-ball opening bid. Even though TSPT has only 1 product, and one that will potentially face generic competition in the not too distant future, the NOLs plus cash on hand are worth more than $4 per share without counting any value for potential future Intermezzo revenues.
Why Retrophin is really pursing Transcept
Let's try to understand why Retrophin's is pursuing Transcept. Here is how the company describes itself on its website:
Retrophin is a biopharmaceutical company focused on the discovery and development of drugs for the treatment of catastrophic diseases that are debilitating and often life-threatening, and for which there are currently limited patient options.
Clearly, a drug for the treatment of insomnia related nighttime awakening is NOT a good fit with this strategy. TSPT had another pipeline candidate, T-2061 which the company discontinued development on after it failed to meet primary endpoints in a phase 2 trial. While RTRX has been known to re-purpose drug candidates that failed originally in other indications, we do not believe that this is the case with their interest in TSPT. Our view is that RTRX has absolutely no interest in commercializing intermezzo or in developing TO-2061 for other indications. The real prize for RTRX is the instant up-listing to NASDAQ that a merger with TSPT would provide.
Recall that RTRX, founded by former hedge fund manager Martin Shkreli, originally went public through a reverse merger transaction with shell company Dessert Gateway. While reverse mergers are a cheap and fast way of going public, the problem with going public this way is that the shell company usually has low volumes of daily trading and is usually not listed on a major stock market exchange. Up-listing to a major exchange like NASDAQ is made difficult by the fact that there are average daily volume requirements in order to up-list. One way to solve this problem is to merge with a company already listed on NASDAQ and have the NASDAQ listed entity be the surviving go-forward company. In our view, this is the real reason RTRX is pursuing TSPT,. The fact that RTRX made their (so far failed) bid to acquire TSPT public serves to raise the public profile of the relatively obscure firm.
Shareholder Dissatisfaction at Transcept
Transcept's management and board have so-far demurred to RTRX's advances and adopted a poison-pill plan. However, some of the company's largest shareholders oppose the rights plan and would rather see the company explore strategic options. Specifically, Roumell Asset Management, TSPT's largest shareholder at 12.2% has gone on record saying:
In light of Retrophin, Inc.’s offer to purchase the company on September 18, 2013, it is incumbent upon the Board to hire an investment banker to solicit additional interest. It is the fiduciary duty of this Board to begin this process immediately. We believe the Retrophin offer of $4 per share is woefully inadequate, as it is basically a return of the company’s cash with little or no value ascribed to Intermezzo. To be clear, we no longer, at current prices, believe the company should buy back stock, but rather begin a fair and open auction process for a sale of the entire company.
Roumell goes on to suggest that there is a high degree of likelihood that TSPT can get back the rights to Intermezzo from Purdue and that the $18 million revenue stream from the drug would be worth more than $4 per share to the right buyer.
Roumell is dissatisfied with current management and they suggest that several other early investors in the company are as well - to wit:
Further, Glenn Oclassen, President and CEO, has maintained over the past several months that shareholders are supportive of management. However, since our filing we have been contacted by many shareholders who not only support our position, but have also indicated their deep dissatisfaction with this management team. Moreover, the Board should take note that one of its longest tenured shareholders and original backers, New Leaf Venture Partners, has lost faith in this management team. We believe other early investors have also lost faith in Mr. Oclassen’s leadership and the direction he has been trying to steer the company.
Lastly, we believe the company’s NOL protection plan is a blatant attempt to maintain the status quo. However, we do not have sufficient information to underscore our belief. Thus, we request that the company make public an IRS Section 382 analysis to allow shareholders to confirm the company’s stated objective.
Roumell is not the only firm dissatisfied with TSPT management. SC Fundamental Value Fund L.P. and various entities associated with it are also on record expressing dissatisfaction with TSPT's management. According to filings by SC, they believe TSPT could be worth up to $6 per share.
Now that Retrophin has gone public with it's bid to potentially acquire TSPT, we may be in for more back and forth between the acquirer and the target. You are not having flashbacks to Vivus (NASDAQ:VVUS) from May through June, but the TSPT story is another one where the company's largest shareholder is unhappy and the current management is tone deaf.
Conclusion
Based on our initial analysis it does not seem like $4 per share is a price that would seal the deal but we have no view on whether or not RTRX will ultimately succeed in acquiring TSPT. In any event, whether or not RTRX is successful in acquiring TSPT, by going public with it's bid, Retrophin has moved closer to it's own goal. The increased publicity due to the potential deal, especially one that raises controversy by pitting management against some of the firm's largest shareholders, can only help raise the public profile, and by extension the interest in RTRX. This should serve to create a bump up in the daily trading volume of RTRX regardless of whether or not the TSPT deal goes through.
We have no position in RTRX or TSPT
Repros Therapeutics (NASDAQ:RPRX)
On Tuesday Repros reported top-line data from two phase 3 studies of their oral hypogonadism therapy, Androxal. Study Z-302 was the second phase 3 trial of Androxal while study Z-300 was a long-term safety trial. We were not expecting data from these studies until November, so this data readout seems a bit early to us. Here is what we wrote to our premium service beta testers on Tuesday morning beofre the conference call:
Last night after the market close, Repros reported positive top-line results from their second phase 3 trial of Androxal, their treatment for male secondary hypogonadism (low testosterone levels).
There was some twitter chatter last night about whether or not RPRX actually met one of the endpoints. At issue is the sprem count safety endpoint. The company said:
"The trial was to meet a non-inferiority delta comparing drug to placebo for drops of sperm concentrations greater than or equal to 50% comparing an average of two baseline assessments compared to two assessments after 12 weeks of treatment of 20%. The Company believes that the endpoint has been met and confirmed in the second study. Study ZA-301 recorded a lower confidence bound of -0.194 (final ITT, 1 of 38 placebo, 16 of 113 drug) and study ZA-302 had a lower confidence bound of -0.183 and -0.196 with or without the aforementioned site (preliminary ITT 2 of 47 placebo, 20 of 134 drug with aforementioned site, 2 of 40 placebo and 18 of 113 drug without site). There were no observed anomalies in study conduct in the second study."
In other words, to be non-inferior, the percentage of men whose sperm count dropped 50% needed to be no more than 20% greater than placebo. This was part of RPRX's special protocol assessment with the FDA. The numerical imbalances in sperm count drops are a point of concern; however as long as the company is reporting the data accurately, it appears as if the endpoint was met.
The next paragraph in the press release tries to offer explanations for why the sperm counts are so different for men on the study drug. This kind of post-hoc press release scientific analysis is rarely well received by the professional investment community.
RPRX will host a conference call at 8 AM to discuss the trial results.
When RPRX released data from the first phase 3 study, the stock spiked from $9 to $16 and has been trading mostly up ever since. We do not find the same value in RPRX at these price levels that we did prior to the first study; therefore we are on the sidelines at the moment - We have no position in RPRX.
While the press release for the data used equivocal language regarding whether or not study Z-302 hit it's primary efficacy endpoint, during the conference call CEO Joseph Plodsky was 100% unequivocal saying in response to a question: "We hit the endpoint". This kind of unequivocal statement after the release of pivotal data is required in order for the market to have confidence in a company and the go forward plan. As we expressed a couple of weeks back, we felt that Biodel (NASDAQ:BIOD) failed to offer such an unequivocal statement regarding their go-forward plans for BIOD-123, and the market reacted accordingly.
The jump in RPRX price on Tuesday took us a bit by surprise, and the stock peaked and then faded throughout the day. The next day Brean Capital issued an upgrade for RPRX suggesting a target price of $40 based on Androxal's approval prospects. As we told our beta testers, we do not find quite the same value in RPRX at $28 that we did at $9. We remain on the sidelines here, but will continue to follow the RPRX story since the PDUFA decision will be another binary event for the stock.
SEC Enforcement Against Hedge Funds
This week the US Securities and Exchange Commission (SEC) announced that it had undertaken enforcement actions against 23 firms who had illegally shorted stocks in the restricted period ahead of secondary offerings. 22 of the firms settled with the SEC for fines of a paltry $14 million. For the large funds involved, these fines are completely meaningless and are not, in our view, a deterrent to stop this type of behavior. One of the firms who paid the highest fine was Deerfield Management Company (DF). Micro-cap biotech investors know the name Deerfield very well. DF is involved in some of the most onerous financing in biotech (see Mannkind [NASDAQ:MNKD] for a recent example). We are not surprised to learn that the shrewd investors (some would say loan sharks) over at DF were shorting stocks ahead of financings in which they participated. Anytime a biotech company cites DF investing in them or approving a further tranche of financing (ahem: MNKD) as a vote of confidence, remember this SEC enforcement action. DF does not invest to be buy and hold investors, they make their money going in to the deal, not because of value inflections later on. Retail investors often fail to see this reality for what it is.
There was some twitter discussion regarding whether or not this action had any real impact. On the one hand, some people felt that SOME fine was better than what had happened in the past - which was no enforcement whatsoever. Others felt that the $14 million was not enough to cause any kind of change in behavior. There was also some discussion regarding why this type of practice was bad for stocks. In essence, shorting ahead of financings is destructive to the company because it results is worse pricing for the deal.
While we do not believe that this action will effect a real change in the behavior of hedge funds, it's good to see the SEC taking at least some action. This type of action also serves to reinforce the retail investor perspective that hedge funds are out to get them by ignoring the law and working against their interests.
Federal Reserve Cancels Septaper
The Federal reserve's open market committee (FOMC) met this past week but decided NOT to taper it's bond purchases under the third round of quantitative easing (QE3). The market was largely expecting the FED to announce some degree of tapering (decreasing how many billions of dollars of bonds they buy every month). Our assessment was that the market was prepared for at least $10 billion in QE3 tapering. Instead, the FED cited weakening economic indicators and the possibility that congress may actually be dumb enough to let the government shutdown over funding the federal government and/or over the US debt ceiling. Because a stalemate in congress is a likely scenario, the FED sees increased risks to the economy and decided not to remove economic support at this time. While markets rallied hard on this news, the implications of the FED's decision are that there will be anxiety over tapering every month until it actually beings, AND that starting by the end of this month, the markets will begin to worry over the prospects for a government shutdown. Depending on how the drama in Washington DC plays out, this may be the event that triggers the market correction that so many investors have been expecting for quite a while.