Expert Financial Analysis and Reporting

Company Description

Chimerix is focused on the development and commercialization of antiviral drugs. Its lead product brincidofovir is a phospholipid derivative of Gilead’s existing anti-viral agent cidofovir. The differentiating feature is a much improved side effect profile that will allow much greater use of brincidofovir for treating infections caused by double stranded viruses, notably cytomegalovirus, adenovirus, smallpox and BK virus. The much enhanced safety profile may also allow the drug to be used for prophylaxis in both hematopoietic stem cell transplants and some sold organ transplants. The toxicity of cidofovir greatly limits its use for treating infections and prevents its use for prophylaxis.

The strongest clinical data for brincidofovir is a phase 2 study for prophylaxis of cytomegalovirus reactivation in hematopoietic stem cell transplant patients. The phase 3 SUPPRESS trial is designed to replicate these results and result in a regulatory filing. SUPPRESS began in September 2013, and results from the trial are expected in early 2016. Chimerix also has a phase 3 trial called AdVise for the treatment of immunocompromised patients with an adenovirus infection. The Company will begin the SURPASS and SUSTAIN trials in kidney transplant patients in 2H, 2015.

Phase 3 results from both the AdVise and SUPPRESS trials are expected in early 2016. If positive, these datasets will be combined with pivotal animal data for brincidofovir's use against smallpox to form an NDA supporting brincidofovir's approval in all three indications. Management plans to submit an NDA and MAA for brincidofovir in 2016. I expect a commercial launch in 2017.

Perspective: History of Reports on Chimerix

I first met with Chimerix in January 2014 at the JP Morgan conference in San Francisco I liked the fundamentals very much as this company had many of the investment characteristics of Trius, which was one of my better recommendations. (Trius was recommended at $5.05 on May 30, 2012 and acquired by Cubist on July 31, 2015 at $13.50 plus a contingent value right). This led me to write an initial report that was published on March 13, 2014. However, the stock ran up while I was writing the report and I initiated coverage with a neutral rating at $25.48. The report was “Chimerix is A Company Focused on Infectious Viral Diseases that Has Investment Characteristics Similar to Trius (CMRX, Neutral, $25.48)”.

I was looking for the opportunity to upgrade and this came on May 21, 2014 when the stock sold off in a poor biotechnology market environment and in the process of doing an equity offering. I upgraded the stock to buy at a price of $14.22 in a report called “Chimerix: Moving to a Buy (CMRX, $14.22)”.

The stock did very well in the aftermath of the upgrade, but I this was unduly influenced by investor enthusiasm about the potential for the use of brincidofovir for treating Ebola virus. I was skeptical that this would amount to anything and on October 20, 2014 I wrote a report signaling my discomfort with buying the stock at the then current level of $31.31. I said that “The stock has some fluff in it due to the Ebola scare which has moved it ahead of where I would like to buy it aggressively.This report was Chimerix: A Review of Recent Analyst Day Presentations with a Focus on Adenovirus and Ebola (CMRX, $31.31, Buy/ Hold).

News Flow in 2015 Has Been Enormously Positive

I was right in being concerned about the enthusiasm of investors about the Ebola virus as the company subsequently dropped clinical development. However, the investor appetite for biotechnology stocks, particularly companies with very promising late stage products continued very strong from October 2014 to now and the stock has continued to soar to its recent price of $53. This was attributable to the strong market backdrop and extremely positive news flow in the first half of 2015.

• In January 2015 the Company announced the issuance of a composition of matter for brincidofovir that extends exclusivity to 2034. This will provide about 18 years of exclusivity following a projected launch in 2017 that will allow CMRX to take advantage of the broad anti-viral spectrum of the drug and potentially commercialize it for diseases caused by other double stranded viruses than cytomegalovirus and adenovirus.
• In February 2015, preliminary results were reported from the initial 85 subjects enrolled in our open label Phase 2 AdVise study. This showed that for patients who received brincidofovir for adenovirus infection, the mortality rate was less than 40%. This is an open label trial with no comparator, but results are very encouraging when viewed against historical data that suggests reported mortality rates of up to 80%.
• In April 2015, BARDA announced their intent to award a procurement contract to Chimerix that will include brincidofovir in the CDC’s Strategic National Stockpile as a medical countermeasure in the event of a smallpox bioterror event. The contract has a base value of $100 million over 60 months. BARDA stated that it anticipates announcing this award of the contract by the end of September 2015.
• In May 2015, Chimerix outlined the trial designs for the upcoming trials SUSTAIN and SURPASS in kidney transplant patients. A particular focus of these trials is to determine efficacy against BK virus that plays a major role in decline of renal function and kidney graft loss in kidney transplant patients. This is a great unmet medical need and a very significant commercial opportunity of the same magnitude as use in cytomegalovirus and adenovirus infections.
• In June 2015, the Company completed a $162 million offering and at the end of 2Q, 2015 that brought its cash balance to $404 million. The Company should have enough funds to launch brincidofovir for cytomegalovirus and adenovirus infections (expected in 2017) and to complete the important SURPASS and SUSTAIN trials.
• In July 2015, Chimerix announced that brincidofovir had met the primary endpoint of improved survival in its pivotal study of smallpox infections, the major step toward a potential FDA approval of brincidofovir as the first treatment for smallpox infection.
• In August 2015, CMRX announced the completion of enrollment of AdVise which puts the Company on track to report topline data from both SUPPRESS (cytomegalovirus infections) and AdVise (adenovirus infections) in early 2016.

Price Target Thinking

Chimerix is at the top of the list of companies that I follow based on probability of successful clinical development and commercial potential. I think the risk of failure is much less than most of the companies I follow. I think that the Company’s lead drug brincidofovir is an extremely promising, broad spectrum anti-viral drug for the treatment of severe infections caused by double stranded DNA viruses-cytomegalovirus, adenovirus, smallpox, BK virus and numerous others. The first important application will be in allogeneic stem cell transplant setting to prevent infections in the immunocompromised stem cell transplant recipients and also in other immunocompromised patients such as chemotherapy patients. I project that the drug will be approved in 2017 and my model projects $800 million of sales in 2021.

I believe that this could result in a market capitalization in 2020 of five to nine times projected one year forward revenues in 2021 which is $4.0 to $7.2 billion; this is $88 to $158 per share. I arrive at this multiple of sales by noting the current market capitalization to sales ratio of several successful biotech companies: Alexion (ALXN) sells at 12 times 2015 estimated revenues, BioMarin (BMRN) at 12, Gilead (GILD) at 6, Regeneron at 13 and United Therapeutics at 5.This $800 million sales estimate does not include projections for use against BK virus or potentially other viruses and does not include any sales from new products internally developed or acquired. Obviously, success in other viruses or acquisitions could significantly boost the price targets

I was wrong in becoming more cautious on the valuation in October 2014 as the positive announcements in 2015 drove the stock higher. However, one of the key aspects of my investment strategy is to not trade in and out of stocks on the basis of price. I focus on the long term events that will drive the stock and as long as the outlook remains essentially unchanged, I remain with the stock as the potential upside for most of the emerging biotech stocks that I follow can be several fold if they are successful. As in October, 2014, I am uncomfortable recommending aggressive new purchases, but I would not sell the stock on a price basis.

Upcoming Catalysts

■ Finalize BARDA procurement contract for brincidofovir in 3Q, 2015

■ Initiate the Phase 3 SUSTAIN and SURPASS trials in kidney transplant recipients during 2H, 2015

■ Data from the Phase III AdVise trial of brincidofovir in adenovirus and the Phase III SUPRESS trial in CMV in early 2016