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SmithOnStocks Research Approach is Changing

I am altering the way I do research and then publish articles on SmithOnStocks. My prior approach was to try to identify small, biopharma companies that are not well covered by Wall Street analysts and as a result might be (usually were) inefficiently priced. I then tried to do intensive research coverage with the objective of having superior insight relative to the Street. I continue to believe that this is an approach that can lead to some significant investment opportunities. Of course, this is within the acknowledged framework that there will always be a large number of mistakes when dealing with biopharma sticks owing to the limited predictability of outcomes in clinical trials.

Over the course of the last year, I have come to the conclusion that this approach has a meaningful shortcoming. The biopharma world is seeing the emergence of several paradigm changing technologies and an explosion of companies striving to commercialize them. To capitalize on this requires casting a wide net. My previous approach only allowed me to intensely focus on 10 to 15 companies. Over the last year and particularly during the corona virus shutdown, as I expanded my research reach, I came across company after company with exciting potential. I was persuaded that to lock in on and intensively research a small number of companies is tantamount to not seeing the forest for the trees. In this case, the trees being the broad sweep of innovative approaches.

There may well be 30, 50 or even more emerging biotechnology companies whose stocks have home run potential. There is no way to intensively research each company as has been my prior approach. For me to come up with a comprehensive overview and broadening company coverage requires the necessary tradeoff that I won’t be able to dig as deep into a company’s fundamentals. I will be taking more of an overview approach with less intensive microeconomic scrutiny for companies that I write about. I will also be writing on some companies that are much larger than those I covered the past. This comes at the risk that I may not adequately understand some key issues that drive a stock. In a nutshell, I intend to publish shorter reports on more companies, but with less in-depth research.

We Are Seeing an Explosion of Scientific Progress in Biotechnology

The human body is a biological machine of staggering complexity that is based on eukaryotic cells (DNA is contained in the nucleus). Estimates for the number of cells in the human body range from 10 to 100 trillion arranged in some 220 or more cell types, e.g. skin, nerve, muscle, liver, heart and so on. These cells coordinate to to create and then operate the human body. The structure of cells and their functioning is dependent on incredibly complex interactions of the proteins they produce. Disease as we know it is most commonly caused by some process that causes a disruption in the production of one or more proteins. This could be too much or too little of a protein being produced or its being produced in a mutated form. This could be the result of mutated genes inherited from a parent(s); bacteria, virus or parasite high jacking or disrupting normal cell function; from environmental factors; during normal cell division; aging; and other factors.

Proteins control virtually everything about humans. The typing of this note starts with some impulse in my brain that results in a message being sent along my peripheral nerves that tell my fingers to move in a certain manner that results in typing these words. Your eyes see these letters on the page and through electrical signals transmitted through the eye into your brain cause an impulse in your brain (or not) which could lead to further action. So, it is with every voluntary thing we do such as talking, walking and every involuntary thing such as the heart beating and the lungs breathing. This is almost all based proteins; they are at the heart of life. The vast preponderance of approaches to drug development are based on blocking or enhancing one or more proteins involved in a disease state or replacing a protein that is not produced in sufficient quantities or at all.

When I first started covering the pharmaceutical industry in the 1970s, drug discovery was primitive by today’s standards. Millions of compounds would be screened in the hope that serendipitously one could be found that might lower blood pressure, calm an irregular heartbeat, lower cholesterol and so on. What researchers were searching for somewhat randomly, was some molecule that would address (seldom to solve) the problem of protein malfunction. This approach was largely aimed at treating symptoms of disease rather than the cause. Amazingly, this approach led to many effective drugs but they were usually non-selective and came with unexpected side effect burdens.

The world has changed dramatically and the era of non-targeted drug discovery is phasing out although still a meaningful factor in biopharma research. The knowledge of the human body and how proteins work and how to alter the effect of proteins to cure disease is progressing at a breathtaking pace and is leading to targeted approaches to drug development. Researchers often have an understanding of how disease occurs at the molecular level and can use new technologies to attack the disease process itself instead of symptoms. It is exciting that the pace of discovery is not linear but exponential.

In preparation for my strategy shift on company coverage, I have written reports that give an overview of five broad technologies that will increasingly dominate biopharma research and development in coming decades. These are:

• Recombinant DNA
• Monoclonal antibodies
• Gene therapy
• RNA interference using short interfering RNA or antisense oligonucleotides, and
• Regenerative medicine based on stem cells

These are broad categories and each has sub-niches so that in the aggregate, there are countless innovative approaches within each of these five technologies. I have already put together reports that I will publish in coming days that attempt to provide an understandable overview of each written from my layman’s perspective. My objective is to give you a broad understanding of how these technologies can be harnessed to treat human disease. After this, I will follow with reports on companies that appear to be the most likely to take advantage of these technologies to emerge as commercial successes and then somewhat later grapple with the problem of evaluating which are most attractive as investments. The following sections of this note give a preview of those reports.

Today, recombinant DNA and monoclonal antibody technology are cornerstones of the research programs of all major biopharma companies and products based on monoclonal antibodies are the key driver of worldwide revenues. Their enabling scientific discoveries were made in the 1970s, over four decades ago. The first meaningful product based on recombinant DNA was the human insulin product Humulin. It was introduced in 1982. The first blockbuster monoclonal antibody product, Rituxan, was introduced in 1997. It is my judgment that the new technologies of RNA interference, gene therapy and stem cell therapy are at about the point in commercial development as were monoclonal antibodies in 1997, some three decades. If so, these technologies increasingly will drive the biopharma industry over the three or so decades and emerging companies that can catch and ride this wave will become the Amgens, Biogens and Genentechs of tomorrow. I hope to identify some of them.

Recombinant DNA Technology

Recombinant DNA technology allows scientists to insert human genes into the DNA of bacteria, mammalian of even insect cells and then have those cells express (manufacture) the human protein coded for by that gene. This breakthrough that allowed for the large scale production of proteins. The first scientific paper describing the successful use of recombinant DNA to produce proteins was published in 1972. Amgen, Biogen and Genentech then were founded in the 1970s to commercialize this technology. The first product produced by this technology to be approved by the FDA was human insulin (Humulin) in 1982. This drug was developed by Genentech and licensed to Eli Lilly. It was the first blockbuster drug arising from this technology. The next blockbuster was Amgen’s Epogen which was approved by the FDA in 1989. There were a few lesser products approved in between.

The number of diseases caused by the body not being able to produce enough or any of a protein is limited so there aren’t that many blockbuster drugs directly attributable to recombinant DNA. However, the enhanced ability that it gave scientists to create and then study the effects of a protein had far reaching, momentous consequences for research. As important was that it could be used for the production of monoclonal antibodies on a commercial scale that was of huge commercial importance and which I will touch on shortly.

The business model of biotechnology companies was alien and strange to the investment community in the 1980s and 1990s. Wall Street struggled with the prospect of investing in companies that would spend several years developing drugs and during that time would have no sales and would burn through huge amounts of cash. The prevailing concern from investors was how to value biotechnology stocks or even to bother considering an investment. The ultimate success of Genentech, Amgen and Biogen changed all that but not without stumbles and setbacks. As the years progressed, investors finally accepted that that this was a valid business model that could deliver extraordinary returns. Entrepreneurs and venture capitalists were encouraged to reach for the stars and dare to tackle commercialization of new scientific discoveries. This spirit has caused an explosion of scientific research that has led to today’s biotechnology industry with its thousands of individual companies. The taproot for this was recombinant DNA technology.

Monoclonal Antibodies

Awareness of the role of antibodies in fighting disease goes back well over a century. In fact, the famous German immunologist Paul Ehrlich, coined the term antibody in 1891. By 1960, five different classes of human antibodies had been defined. Their exquisite ability to specifically target molecular targets led to much thought about how to use them as silver bullets to specifically target a disease causing protein. The issue was how to manufacture a single antibody in amounts large enough to be used to treat a disease. The problem was solved in the 1970s when a hybrid cell (hybridoma) was formed by fusing an antibody-producing B-cell with an immortal tumor cell in a mouse. That cell could then be cultured and expanded to continuously produce a specific or monoclonal antibody.

The production of monoclonal antibodies based on hybridomas was based on research by César Milstein and Georges Köhler in 1975 for which they later shared the Nobel Prize for Medicine and Physiology. Building on this technique scientists could engineer monoclonal antibodies to target disease causing proteins and block their unwanted action. The first monoclonal antibody approved by the FDA in 1986 was OKT-3 for preventing kidney transplant rejection. It had a severe limitation as it was a murine antibody (contained mouse proteins) that triggered immune responses which severely limited its use. In 1988, Greg Winter pioneered techniques to humanize monoclonal antibodies that led to an explosion of drug development.

The first company to develop a medically and commercially important monoclonal antibody was Idec Pharmaceuticals. It was formed in 1985 to advance Rituxan (rituximab) for treating indolent non-Hodgkin’s lymphoma. Genentech entered into a collaboration with IDEC in 1995 to help develop and commercialize Rituxan in the US. It was approved by the FDA in 1997 and was the first blockbuster drug that was a monoclonal antibody. Genentech then stole the march on the biotechnology industry in developing monoclonal antibodies by gaining FDA approval for Herceptin in 1998 and Avastin in 2002, which also became blockbusters. Idec was acquired by Biogen in 2003

Big pharma was initially very slow to embrace recombinant DNA technology and this was also the case for monoclonal antibodies as development and commercialization was led by Genentech and a number of small companies through the decade of the 1990s and much of the 2000s. This attitude began to change in the 2000 decade so that by now every large pharma company and a plethora of small companies are aggressively involved with monoclonal antibodies. There are over 110 FDA approved monoclonal antibodies and more than 550 clinical trials are underway. The global monoclonal antibodies market was about $150 billion in 2019 and is projected to grow at 12% per annum to $315 billion 2022. For perspective, the worldwide pharmaceutical market was $1.3 trillion in 2019 and is growing at about 4% per annum. Monoclonal antibodies are the primary driver of worldwide sales for biopharma. Whereas, big pharma looked at this as a small niche technology in the early decades, it is now considered as a (the) key driver of the industry’s future.

RNA Interference

The mechanism of action of almost all currently used medicines like small molecule drugs and monoclonal antibodies is to target and block the action of  disease causing proteins after they have been produced. Over the last two decades two important technologies have emerged that block or reduce the action of messenger RNA (mRNA) so that protein production is blocked upstream of conventional drugs and monoclonal antibodies, i.e. before the protein is produced. Messenger RNA (mRNA) is a single-stranded RNA molecule that corresponds to the genetic sequence of a gene and is read by the ribosome in the process of producing a protein. To use an analogy, this approach is akin to stopping a flood by turning off the faucet as compared with small molecules and monoclonal antibodies  that mop up the floor. This is called RNA interference and holds the promise of being a major advance.

There are two somewhat comparable technologies that do this and which have advanced on a parallel track. One is based on using on a naturally occurring mechanism used by all human cells in which a molecule called short interfering RNA (siRNA) regulates mRNA (like a feedback loop). Synthetic molecules can be developed that are similar to siRNA that then use existing cellular mechanisms to alter or stop the production of a protein(s). The second technology that can achieve the same result is based on synthetic oligonucleotides that use complementary nucleotide base paring to bind to mRNA and inactivate it; this is called antisense. Both approaches have been shown to be extremely effective.

There are numerous companies involved in siRNA and antisense technology. Alnylam was the pioneer and unquestioned leader in the development of siRNA and Ionis holds the same position in antisense. I liken them to Genentech, Amgen and Biogen in recombinant DNA technology. Both have dominant positions with incredibly huge drug pipelines. Both should ride a tsunami wave of drug development resulting from siRNA and antisense technologies. I believe that these technologies represent a major paradigm shift that I expect over time (measured in decades) will replace many of the small molecule and monoclonal antibody approaches used in the current therapeutic armamentarium.

The first instance of RNA silencing in animals was documented in 1996 when an experiment showed that introducing certain RNA molecules in C. elegans (a worm) resulted in reduced production of a certain protein. In 1998, Fire and Mello discovered that the mechanism in the body that was responsible for this silencing and later received the Nobel Prize in Physiology or Medicine for this discovery. Alnylam was founded by scientists in 2002 as the first company to attempt commercialize this technology. In July 2013, Alnylam demonstrated that its lead drug patisiran could reduce production of the protein transthyretin and potentially treat the rare disease, hereditary ATTR amyloidosis. In 2018, Onpattro (patisiran) became the first siRNA therapeutic approved by the FDA. Alnylam also developed the only other siRNA drug so far approved by the FDA; Givlaari (givosan) was approved in November 2019 for the treatment of acute hepatic porphyria.

Antisense technology sprang from efforts in the 1970s to understand the mechanism of mRNA. Ionis was founded in 1989 by Stanley Crooke, previously head of research at GlaxoSmithKline, to commercialize antisense technology. Ionis’ first marketed drug was Vitravene (fomivirsen) for the treatment of cytomegalovirus (CMV) retinitis in HIV patients. It was approved by the FDA 1998 as the first antisense drug approval. As other medicines brought HIV under control, CMV ceased to be meaningful problem and the drug was withdrawn from the market. Ionis’s second drug was mipomersen, which was partnered with Genzyme for the treatment of homozygous familial hypercholesterolemia. it was approved by the FDA in 2013, but the European Medicines Agency rejected it in in 2012 and again in 2013. The drug has never reached meaningful levels of sales.

In December 2016, Ionis finally developed a medically meaningful and commercial blockbuster product with Spinraza (nusinersen). This drug was discovered in a collaboration Cold Spring Harbor Laboratory and the initial clinical development work was done by Ionis. The company then partnered with Biogen in 2012 on further clinical development and Biogen was given exclusive marketing rights. Ionis has since gained approval for two other antisense drugs. Tegsedi (inotersen) was approved by the FDA in October 2018 for the treatment of the polyneuropathy of hereditary transthyretin-mediated amyloidosis. Waylivra (volanesorsen) was approved in May 2019 by the EU for the treatment of familial chyromicronemia syndrome. However, the FDA elected not to approve it following an advisory committee meeting in August 2018.

The road to development for both siRNA and antisense drugs are quite similar from one protein target to the next. This means that once a protein is elucidated as causing a disease, it is relatively straightforward to rapidly develop a drug to block the mRNA. As a result, the pipelines of both Alnylam and Ionis are exploding with new drug candidates. And just to reiterate what I said earlier, I think that drugs based on RNA interference promise to be a major advance with potential to supersede small molecules and monoclonal drugs in many disease states over coming decades.

Gene Therapy

Drugs based on small molecules, recombinant DNA, monoclonal antibodies and RNA interference treat disease by altering the effects or blocking production of proteins produced by genes. Gene therapy is a new and very promising technology that achieves the same end result in a quite different way. Many diseases are driven by mutations in genes that result in abnormal or production of a protein or altering its structure in a way that causes disease.

Genes are made up of DNA nucleotide base sequences that are the blueprints that tell the body how to build proteins. A small alteration in the DNA nucleotide base sequence of a gene can significantly alter the structure of the protein it codes for so that it does not function properly and can cause a disease. These mutations can be caused by inheritance of flawed genes from parents, errors that occur in normal cell replication or external influences such as an infection, exposure to a toxin and other factors. Gene therapy is the purposeful introduction, removal or alteration of a gene in order to reduce or increase production of disease causing proteins or produce new, modified proteins.

A major promise of gene therapy is that instead of providing proteins or other therapies externally with pills or injections that may need to be dosed over a lifetime, gene therapy offers the possibility of dosing a patient once to achieve a long‑term, durable benefit. Once the therapeutic gene is transferred to a patient’s cells, the cells may be able to continue to produce the therapeutic protein for years or, potentially, the rest of the patient’s life. Hemophilia is an example. Gene therapy has the potential to transform the way patients are treated by addressing the underlying genetic defect.

Gene therapy delivers and inserts genetic material into the DNA in the nucleus of cells. The most common technique is to use  a virus as a carrier or vector to deliver the genetic material. Viruses are used because their very existence is based on penetrating a cell and getting the genome of that cell to incorporate its genetic material and express proteins that it needs to survive and spread. Through genetic engineering, the infection causing components of a virus is removed so that when it enters the nucleus of the cell to deliver its genetic payload, it does not make the patient sick.

There are two kinds of gene therapy: in vivo (in the body) and ex vivo (outside the body). In the case of in vivo therapy, the drug is injected directly into the bloodstream, finds its way to targeted cells, penetrates the cell membrane and inserts its genes into the cell. In ex vivo therapy, cells are first removed from the body a viral vector is used to insert genes into the genome. The resultant cells are expanded exponentially in a culture and then returned to the patient. The approach chosen depends on the nature of the disease and the tissue in which the disease occurs.

After extensive research on animals throughout the 1980s. The first approved gene therapy clinical trial in the US started in 1990. This was the insertion of human DNA into the genome of a patient suffering from ADA-SCID (bubble boy disease). It is estimated that since then over 2,900 clinical trials have conducted, about half of which were/are phase 1 trials. The field suffered a major setback in 1991 when the teenager Jesse Geisinger was treated with gene therapy for a non-life threatening genetic disease and died from an immune response to the treatment. As a result, the FDA suspended several clinical trials pending the reevaluation of ethical and procedural practices and research was stalled for a decade.

The first commercial gene therapy, Gendicine, was approved in China in 2003 for the treatment of certain cancers. In 2011, Neovasculgen was registered in Russia for the treatment of peripheral artery disease, including critical limb ischemia. In 2012, UniQure’s Glybera was the first product approved in Europe for the treatement of the rare inherited disorder, lipoprotein lipase deficiency. None of these products were commercially successful and none were approved by the FDA. However, the FDA recently has approved commercially important gene therapy products:

• Novartis’s CAR-T drug Kymriah, was approved for certain hematological cancers in August 2017. It is an ex vivo treatment.
• Gilead’s CAR-T drug Yescarta was approved for certain hematological cancers in October 2017. It was obtained though through the acquisition of Kite Pharmaceuticals in October 2017. It is also ex vivo.
• Roche’s Luxturna (obtained via the Spark Therapeutics acquisition) was approved in May 2019 for the treatment of an inherited retinal disease caused by mutations in both copies of the RPE65 gene. It is an in vivo treatment.
• Novartis’s Zolgensma (obtained via its AveVix acquisition) was approved in March 2020 for the genetic disease, spinal muscular atrophy. It is an in vivo treatment.

In the early going, it looks like Kymriah, Yescarta and Zolgensma are on track to become blockbusters. Luxturna is off to a slow start. There are many other drugs in development by a number of companies, some of which are late stage clinical development or regulatory review. The most interesting is BioMarin’s valoctocogene roxaparvovec for the treatment of hemophilia A.  The FDA has designated it a breakthrough therapy; the PDUFA date is August 21, 2020.

Stem Cell Therapy

In  my opinion, an understanding of the role stem cells play in the human body and the application of that knowledge to develop drugs to treat disease and trauma has the potential to far surpass each of the technologies I have just discussed. However, I must caution that the complexity of the biological systems they orchestrate is so intricate and hard to decipher that this likely will occur over decades, not years. I regard it as a much greater technical challenge. However, this year could evidence the first FDA approval of a stem cell based therapy since the approval of hematopoietic stem cells to treat some cancers some 50 years ago.

Stem cells are different from what most of us think of when we reflect on cells. The cells we are familiar with are those in the skin, heart, lungs, muscles and other organs and tissues; these are called somatic cells. They have a specific function and when they divide, they produce two identical cells. Stem cells do not have a specific function and when they divide, they create one identical stem cell and one precursor cell. That precursor cell can then go on to ultimately become any number of somatic cells. In the case of the hematopoietic stem cell, the precursor cell can divide rapidly and ultimately differentiate into any of the red and white cells in the blood. A relatively few stem cells can give rise to millions and millions of somatic cells.

Scientists generally claasify stem cells as embryonic or adult. Every cell in the human body can trace its ancestry to embryonic stem cells that form in the blastocyst a few days after fertilization of a female egg by a male sperm. Each embryonic stem cell can give rise to any adult stem cell or somatic cell in the body. Adult stem cells are more limited in what they can do and are directly tied to a specific organ or tissue. For example, the hematopoietic adult stem cell only gives rise to blood cells and the epithelial adult stem cell only gives rise to skin and hair cells. Adult stem cells specific to organs or tissues are responsible for replacing cells that die and importantly addressing damage caused by disease or trauma.

You can let your imagination soar with the thought of what an understanding of the functioning of adult stem cells and finding cell based drugs that duplicate their biological effects could lead to. Stem cells could be used to repair tissues and organs damaged by disease or trauma. It is entirely within the realm of possibility that they could reverse paralysis, regrow lost limbs and replace damaged cells in any organ or tissue with fully functioning ones. The potential applications are open ended as is made clear by looking at just a partial list of the diseases in which stem cell therapies currently are under investigation-graft versus host disease, heart failure, lower back pain, ischemic stroke, adult respiratory distress syndrome, ALS, chronic limb ischemia, spinal cord injury, kidney disease, Parkinson’s disease, Alzheimer’s disease, osteoporosis, traumatic brain injury, cerebral palsy, diabetes, blindness, liver failure, burns, cancer; genetic diseases and more.

However, let me now bring you back down to earth. Despite the allure of stem cell therapy, many, many research attempts have come up against seemingly insurmountable hurdles that have so far thwarted drug development efforts. As I previously alluded to the FDA has not approved any new stem cell treatments since hematopoietic stem cell transplants were approved over 50 years ago for treating certain type of blood cancers. Adult stem cells are rare and with the exception of hematopoietic stem cells are difficult to isolate and difficult to grow in culture. In the body where they are governed by complex biological interactions with other cells and are even more difficult to control. Trying to control embryonic stem cells is even more complex. I will go into more depth on these issues in an upcoming report that I have already written,

Scientists have been able to show some tantalizing findings in laboratory experiments, but have not been able to replicate these results in human beings. This appears to be changing. Over the last decade there has been an encouraging advance that may lead to a series of approvals of products based on using cells produced in the lineage of mesenchymal stem cells. Mesenchymal stem cells are adult stem cells traditionally found in the bone marrow and can also be isolated from other tissues including cord blood, peripheral blood, fallopian tube, and fetal liver and lung.

Remember that when a mesenchymal stem cell divides it produces a precursor cell that may go on to become a somatic cell but can also produce cells that help the body repair damaged tissue. Original research on mesenchymal stem cells hypothesized that if we could introduce them into the human body, they would hone in on damaged tissue, incorporate into that tissue and transform into new healthy somatic cells. This hypothesis on mechanism of action has now largely been disproved. It now appears that precursor cells can be cultured in the laboratory and expanded many fold before being returned to the body. They then migrate to damaged tissue where they lodge and release proteins that block inflammation and help tissue to regrow. Ultimately, they are degraded and leave the body comparable to drugs.

Stem cell therapy has been too controversial and uncertain to attract big biopharma players who prefer to focus their research spending on proven technologies like small molecules. Stem cell therapy has been the Rodney Dangerfield of drug development. As a result, a number of small companies that you may never have heard of are leaders in late stage clinical development. They are Mesoblast (an Australian company), Athersys, Pluristem, Brainstorm Cell Therapeutics and Caladrius.

Mesoblast may soon gain FDA approval for its lead drug Ryoncil (remestemcel) for pediatric graft versus host disease. In January 2020, the FDA designated Ryoncil as a breakthrough therapy. This is a designation for a drug that treats a serious or life-threatening condition and for which preliminary clinical evidence indicates that the drug may demonstrate substantial improvement on a clinically significant endpoint(s) over available therapies. It has a PDUFA date of September 30, 2020. Mesoblast also has products with the same mechanism of action in phase 3 development for advanced heart failure and chronic lower back pain. Athersys has a comparable mesenchymal precursor cell that it is developing called MultiStem that is advancing in a phase 3 trial in ischemic stroke. Very importantly, extensive clinical work has show that Ryoncil and MultiStem do not cause an immune reaction when they are derived from donor cells. They are allogenic, off the shelf products.

The mechanism of action of Ryoncil and MultiStem is similar and small phase 2 studies have indicated that they may reduce the severity of adult respiratory distress syndrome (ARDS). It is ARDS arising as a complication of Covid viral infections that usually leads to death in these patients. Mesoblast and Atherysys have initiated dosing in phase 2 studies to see if they may be able to reduce the severity of ARDS. We shall see where this goes.

 

 

 

 

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