Investing in Cancer Research Is Worth the Risk: Echo He

Source: George S. Mack of The Life Sciences Report (5/23/13)

If investigators could find a way to make breast cancer survivors truly cancer free, and if a diagnosis of pancreatic cancer were less dire, investors could reap windfalls while patients and their families rejoice. In this interview with The Life Sciences Report, Maxim Group Senior Equity Analyst Echo He brings two important names to the table and explains why she believes the potential upside is worth the risk.
The Life Sciences Report: Dr. He, you are a senior equity analyst covering biotech in the U.S. and China. Which companies in the space are you excited about?

Echo He: Galena Biopharma Inc. (GALE:NASDAQ). is a $216 million ($216M) market-cap company and is trading at less than $3/share. The company’s lead drug candidate, NeuVax (nelipepimut-S or E75), a cancer vaccine, is already in a phase 3 trial. It does not have a pharmaceutical company partner. I want to talk about the drug, but I also want to address why the stock is trading at a relatively low level.

After patients are diagnosed with breast cancer, they go through standard-of-care therapy—surgical resection and then radiation and chemotherapy. Then laboratories confirm they are cancer free. Between that time and the time of breast cancer recurrence, quite a large portion of patients don’t receive any treatment at all. NeuVax is designed to work in the period after standard therapies and before the cancer recurs. The vaccine is designed to prevent the cancer from coming back, or to extend the cancer-free survival period as long as possible.

The company is currently enrolling a 700-patient phase 3 trial called PRESENT, and may finish enrollment by the end of this year. The trial will take a long time because the primary endpoint is three-year cancer-free survival. If Galena enrolls the last patient by the end of 2013, it would record the last patient data at the end of 2016. We could see a potential regulatory approval of NeuVax sometime in 2017. For investors this is a far-away time horizon.

Another challenge for Galena is that cancer vaccines have not generated a lot of commercial success so far. There are a couple of approved vaccines but, generally speaking, investors have not seen a whole lot of success—not like they have with antibodies. Regardless, we think NeuVax has a good chance of showing positive results.

TLSR: There is also an investigator-sponsored phase 2 trial with 300 patients in progress. It combines NeuVax with Herceptin (trastuzumab; Genentech/Roche Holding AG [RHHBY:OTCQX]). Both trials are designed to prevent breast cancer recurrence. Both trials are designed for patients with low-level expression of HER2/neu, at HER2 1+ or 2+ levels. My question is, when these patients are in remission, are they still expressing any level of HER2, as they were during the active phase of their disease?

EH: Having active disease or being in remission does not change HER2 expression at all. The HER2 expression level is a risk factor. The higher the expression, the more likely the cancer will recur. Clinically, HER2 1+ or 2+ expression is considered to be low or intermediate HER2-expression. A HER2-overexpression patient is at the 3+ level. That’s a very high level, and the population at that level is being treated with Herceptin now.

TLSR: So patients still express even low levels of HER2 when they are in remission, correct?

EH: Yes. And so far, this population of patients does not have a treatment. That’s where Galena has a chance.

TLSR: You wrote a note back in March about Galena’s acquisition of a sublingual fentanyl product, a narcotic. You were so positive on this that you raised your target price 20%, from $5 to $6/share. I’m wondering what the value is. This analgesic is so different from the company’s scientific model. Is it a sell-through to get the company’s name and the representatives in the offices and clinics of medical and surgical oncologists?

EH: I agree with you; the drug is not strategically in line with what Galena is developing right now. The contribution of the fentanyl product, Abstral, is near-term cash flow. Also, the company can train a small sales force to get experience in the oncology field. According to the management, the prescribers of sublingual fentanyl, which controls the breakthrough pain of cancer patients, would be the same oncologists who would prescribe vaccines to breast cancer patients.

I boosted the target price by 20% because of the near-term cash flow Abstral brings to the company. My valuation is based on the cash flow discounted back, but the company’s fundamentals do not change. The valuation still primarily relies on the success of NeuVax.

TLSR: Adding this pain control drug was an interesting strategy. It hints that maybe the company wants to become an integrated biopharma, and to market NeuVax after it is approved in 2017.

EH: That’s a reasonable thought. So far the company does not have a big pharma partner. If Galena is able to keep all, or the majority of, the rights to NeuVax, that would provide the most upside to the stock. I would like to see that. But during the course of drug development, cost to the company would be high. Galena would have to dilute the shares of holders because it will need more capital without a partner. I would love to see Galena work toward becoming an oncology company and not a pain control company. Pain control is more competitive.

TLSR: In the company-sponsored phase 2 trial of NeuVax, which led up to the phase 3 PRESENT trial, was Galena able to discern anything about disease-free survival, or perhaps overall survival?

EH: The company did not separate cohorts between the HER2-overexpressing and HER2 low- or intermediate-expressing patients. Because it did not separate those two cohorts, the phase 2 trial did not reach statistical significance.

TLSR: Was the phase 2 trial controlled?

EH: It did have control patients. The trial was stratified by patients with lymph node invasion at diagnosis, node-positive and node-negative. In each of the patient cohorts, NeuVax was used to treat patients in the experimental arm, leaving a control arm untreated. But the company thinks node-positive patients have more aggressive cancer than node-negative ones. By doing a phase 3 trial among only node-positive patients, there will be more chance to detect a difference in a three-year period. The company reported on the phase 2 trial at 24 months, while it is scheduled to report on the phase 3 trial at 36 months. Galena is also still following up the phase 2 trial patients. It could be that NeuVax has had an effect among them, whether node-positive or node-negative.

But for node-negative patients, whose cancers may not be that aggressive, it may take longer time for a vaccine to show a statistically significant effect. The rationale behind the phase 3 PRESENT trial is to isolate those patients with breast cancers that are relatively more aggressive. This way the company can show the efficacy in a better way.

TLSR: We actually saw a strategy like that when trastuzumab (Herceptin) was being developed. It did not seem to be particularly effective in a general population of breast cancer patients, but when it was selected out for HER2-positive patients—those patients that were HER2 3+ or more—it did quite well.

EH: That’s actually why I am confident about NeuVax. The major rationale behind my thinking is that the company will likely deliver positive results in phase 3 among HER2 1+, 2+ and node-positive patients.

I said earlier that I wanted to address the stock’s valuation. In general a lot of people have doubts about the cancer vaccine market, and this is a major issue in Galena’s valuation. If some successful precedent is set, then the stock would have better exposure to investors. The company tends to be overlooked because investors don’t have anything comparable to follow, and they don’t know where to lay their confidence. I understand that. But from the scientific level, from the trial design, I think Galena has a good shot on this phase 3 trial.

TLSR: You have also written a recent note about data from the company’s phase 1 folate-binding protein-E39 (FBP) study, which may have some effect on shares.

EH: It may or may not. It’s a minor driver; it’s only in phase 1.

TLSR: Go ahead to your other name, please.

EH: Threshold Pharmaceuticals (THLD:NASDAQ) is trading at just over $5, and I have it Buy-rated with a $10 price target. The company has a $317M market valuation. Investor interest in Threshold arises from pancreatic cancer, a very difficult-to-treat disease—probably one of the most vicious cancers. At the time of diagnosis, 80% of patients are already at an advanced stage. Pancreatic cancer is very hard to detect. The location of the cancer is in a cavity behind the abdominal organs, so there is usually no early diagnosis with imaging or other screening. Although some drugs work on this cancer, there have been failures just in the past year. Threshold Pharmaceuticals faces an uphill battle in this difficult indication.

The company was able to show a statistically significant progression-free survival benefit in a phase 2 trial with TH-302 (a hypoxia-activated chemo prodrug). But the trial did not show an overall survival benefit, and that dented investors’ confidence in the company and its drug. Threshold’s phase 3 trial has a much cleaner design than the phase 2 study. Also, Threshold has partnered with German companyMerck KGaA (MKGAY:OTCPK), and just the fact that Merck decided to go with a phase 3 gives some support to the theory Threshold has a good shot at pancreatic cancer with TH-302.

Threshold is similar to Galena in that we have to wait a long time for data. Interim data is set for release in late 2014. For end results, the timeframe is sometime in 2015. That’s a long wait, and because of that the stock is not generating any excitement. It gets overlooked by a lot of investors.

TLSR: You said the drug did not show a statistically significant increase in overall survival in phase 2. What do you make of this?

EH: Actually, after the company reported that phase 2 did not meet the overall survival endpoint, I consulted with some practicing oncologists. When progression-free survival was achieved, patients in the control arm were allowed to cross over to the TH-302-treated group—the experimental arm—to receive whatever treatment the oncologist prescribed. That mixed up the design, complicating the analysis of overall survival rates; in fact, the crossover could have caused the statistical insignificance of overall survival.

Also, among those doctors I spoke with, quite a few stated that pancreatic cancer has particular varieties of cancer physiology, some of which may lead to long survival for some patients regardless of treatment. These outliers would distort the statistical results. Enlarging the sample size from around 200 in phase 2 to more than 600 in phase 3 could solve the outlier distortion issue.

TLSR: Phase 3 overall survival data in pancreatic cancer patients being treated with TH-302 are expected in mid-2015 or 2016. If in the meantime, if the Data and Safety Monitoring Board (DSMB) interim analyses say that the trial should continue, should we read something positive into that?

EH: The priority of the DSMB is to monitor the safety. If it says go ahead and continue, that does not mean that Threshold will eventually get positive results. The go-ahead only means there is no safety issue and the efficacy looks OK up to that point in time.

TLSR: What about potential competitors to TH-302 in pancreatic cancer?

EH: Although Celgene Corp.’s (CELG:NASDAQ) Abraxane (paclitaxel) has been approved for treatment of pancreatic cancer as of last October, TH-302 may still have a chance in the first-line treatment market if it is ultimately approved, depending on the overall safety and efficacy of the two drugs.

Other competitors have recently failed. We have several examples. Clovis Oncology (CLVS:NASDAQ)announced back in November that its CO-101 had failed. Amgen Inc. (AMGN:NASDAQ) failed a trial with AMG 479 (ganitumab) late last summer. Both were in combination with gemcitabine. Infinity Pharmaceuticals Inc. (INFI:NASDAQ) had a drug, IPI-926 (saridegib), also in combination with gemcitabine, which failed in the same setting.

These failures give TH-302 more chance to succeed in the market once it has achieved positive results. Also, with all these failures, some in earlier trial phases, I would say it is already encouraging that TH-302 was able to carry over to phase 3 trials.

TLSR: Echo, thank you.

EH: Sure. Thank you.

Prior to joining Maxim Group, Echo He was a director at Oppenheimer & Co. Inc., where she conducted equity analysis of small- to mid-cap U.S.-listed Chinese stocks. Previous to Oppenheimer & Co., Dr. He served as a vice president at CRT Capital Group LLC, where she conducted equity and credit analysis of Chinese small-cap, U.S.-based life science and distressed companies. Dr. He also served as a research scientist at the National Institutes of Health (NIH), where she conducted a part of the Human Genome Project aimed at interpreting diseases and their risks by genetic patterns. Dr. He received a medical doctorate from Beijing University, a doctorate in medical sciences from the University of Toledo and a master’s of business administration in finance and economics from the University of Chicago.

DISCLOSURE:

1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He 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:Galena Biopharma Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Echo He: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Maxim Group expects to receive or intends to seek compensation for investment banking services from Galena Biopharma, Inc. in the next three months. Maxim Group received compensation for investment banking services from Galena Biopharma Inc. in the past 12 months. Maxim Group is a market maker in Galena Biopharma Inc. Maxim Group expects to receive or intends to seek compensation for investment banking services from Threshold Pharmaceuticals Inc. in the next 3 months. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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