Expert Financial Analysis and Reporting

Investment Thesis

I wrote a major report on Chimerix on March 13, 2014. I had been working on the report for some time and it was my intention to recommend the stock. The stock came public on April 12, 2013 at a price of $14 and surged to $19 by the end of that day. The stock was around $19 to $20 at the time I was writing my report. However, excitement about the use of its lead drug for the compassionate use treatment in a seven year old boy for a life threatening adenoviral infection drove the stock to $27 just as I finished my report.

I think that this stock has home run potential and I usually don’t put overly much emphasis on price, but the surge to $27 just seemed too much and I started coverage with a neutral and the hope that I could find a more attractive entry point. I believe that we are now at that entry point. The sharp correction in small biotechnology stocks has led to a decline in the stock trading range to the $17 to $20 trading range. The announcement of a follow on offering of about $103 to $120 million that just closed has caused a further decline in the price to $14.22 per share. This is a price at which I feel much more comfortable and excited in recommending the stock.

Price Target Thinking: In my major report, I projected that brincidofovir could reach sales of $800 million by 2021 for prevention of cytomegalovirus infections (CMV) in hematopoietic stem cell transplants and based on this, my stock price target for that time frame was $62 to $82. This did not include sales projections for other potential indications. There is a great deal of upside potential if brincidofovir is successful in the phase 3 SUPPRESS trial that is now underway in CMV prevention in hematopoietic stem cell transplant patients. There is additional upside if it is successful in phase 3 trials in adenoviral treatment and CMV prevention in solid organ transplant patients that will be underway in 2015.

The Company had 26.7 million fully diluted shares outstanding at the end of 1Q, 2014 and this offering will add 7.3 million shares and potentially another 1.1 million if the Green shoe is exercised. The total number of fully diluted shares is about 35.1 million shares and at a price of $14.22 the market capitalization is $500 million. This valuation reflects awareness of the promise of the technology but not exhilaration.

Solid Financial Position: The additional $103 to $118 million (if the Green shoe is exercised) that was just raised will be added to the $100 million that was on the balance sheet at the end of the 1Q, 2014 for a total of around $200 to $220 million. This is a powerful balance sheet that will allow the Company to expand its clinical trial program dramatically.

Financing Allows Significant Expansion of Clinical Trial Program: When I wrote my report in March, the clinical trial program was focused on the use of brincidofovir in for the prevention of cytomegalovirus infections in recent hematopoietic stem cell recipients. This was felt to be an indication that could get brincidofovir to the market quickly and early. The FDA granted an accelerated approval for the drug which indicates that it could file for regulatory approval on the basis of one trial with the understanding that this would be followed by a phase 3 trial in another anti-viral indication which would support full approval.

The recent adenovirus development has led to a change in the clinical trial plans. The Company was leaning toward doing a cytomegalovirus prevention trial in solid organ transplants. It now is planning to launch a phase 3 trial in adenovirus infections that will begin late this year. There is an urgent unmet need for a treatment for disseminated adenoviral infections. Even though adenovirus is the cause of the common cold and is fended off by the immune system, in immuno-compromised patients in which the virus becomes widely disseminated the mortality rate is 40% to 80% and there are no approved drugs.

The furor over the use of brincidofovir for compassionate use in adenovirus has prompted the FDA work with Chimerix on a phase 3 trial design and a much quicker route to obtaining phase 3 results than had been previously envisioned. This trial should start before the end of the year as should a phase 3 trial in cytomegalovirus prevention in solid organ transplants. It is this accelerated clinical trial program that is the reason for the just announced equity offering.

Further Comments: I am not going to go back over the basics of the Company which I covered in my March 20 report and I would encourage readers to read that report to put this note in better context. However, I will do a brief review of brincidofovir and the company.

I also want subscribers to understand that research in the anti-viral area is relatively new to me. I have done work in HIV and HCV but because those areas were so well covered by Wall Street, I thought that my time could be better spent elsewhere. I look forward to getting more in-depth knowledge of the anti-viral apace and I trust that subscribers will contribute to this effort.

What is Brincidofovir?

Chimerix’s lead drug is brincidofovir. It was derived from the Company’s proprietary lipid technology that improves the efficacy and safety of approved and marketed anti-viral agents. This is achieved by delivering more of the drug to cells and leaving less in the blood stream where it can lead to side effect issues. While this sounds like a drug delivery mechanism, the technology results in a new molecular entity that has composition of matter patent protection which in the case of brincidofovir lasts until 2025 and potentially through 2034. Brincidofovir is an improvement on Gilead’s (GILD) Vistide (cidofovir).

Chimerix was founded on a lipid technology that allowed the company to create new molecular entities from existing drugs that are FDA approved. By adding a lipid tail to existing, previously approved drugs, efficacy can be enhanced and side effects reduced. The resultant drugs are absorbed in the small intestine and transported throughout the body as a phospholipid. They cross target cell membranes by means of facilitated and passive diffusion and have a long intracellular half-life. Within the cell, they are cleaved into the parent compound.  This technology increases potency by getting more drug into the cell where it exerts its therapeutic effect with less remaining in the blood stream where it can cause unintended side effects.

The first drug that was synthesized was brincidofovir which was based on the approved anti-viral drug cidofovir that is marketed by Gilead (GILD) as Vistide. Cidofovir is given as an IV infusion while brincidofovir can be given as a pill or liquid on a twice a week basis. Within the cell it is converted to cidofovir. This results in a 50 to 100 fold improvement in efficacy as compared to the same amount of cidofovir given by IV infusion. It also improves the side effect profile. Cidofovir is so nephrotoxic that the black box warning says as few as one or two doses can lead to nephrotoxicity and/or death. In Phase 2 trials brincidofovir produced evidence that it may be protective of the kidney possibly because it inhibits another dsDNA virus that causes kidney complications.

Brincidofovir was originally synthesized and evaluated as an oral treatment for smallpox for biodefense initiatives, but it also showed potency in animal models and in vitro models against all strains of the five families of double-stranded DNA herpes viruses. For many drugs, in vitro and animal models are not necessarily predictive of outcomes in humans. However, they are much more predictive for anti-bacterial and anti-viral drugs. If they can kill pathogens in a Petrie dish they can also kill them in humans providing that an effective concentration of drug can be delivered to the site of infections. Chimerix’ CEO Michelle Berry nicely summarizes this by saying that they took a very effective anti-viral and made it into a very effective anti-viral drug. (Italics added for emphasis).

Many people are infected with not just one but multiple dsDNA viruses. This broad spectrum of activity of brincidofovir allows for positioning for multiple viruses and multiple conditions. Pre-clinically, it has demonstrated broad activity against all families of dsDNA viruses including herpes viruses (e.g., CMV, herpes simplex virus, varicella zoster, and Epstein-Barr virus), adenoviruses (over 50 subspecies), polyomaviruses (e.g., BKV and JCV), papillomaviruses, and poxviruses (vaccinia, monkeypox, and smallpox). CMV, AdV, and BKV are the three dsDNA viruses responsible for the majority of viral infections that are of concern for human illnesses.

Diseases Addressed by Brincidofovir.

Cytomegalovirus (CMV) is a dsDNA virus that is prevalent in over 65% of Americans. Most people are not aware that they have ever been infected because the effects are so mild. However, once infected the virus is not cleared by the body and remains latent; this is true of all dsDNA viruses. In people with normal immune systems this is of little import, but in those with compromised immune systems resulting from disease or drugs that cause immune suppression (such as those used in HCT or solid organ transplants to prevent graft rejection), CMV can re-emerge with devastating, life threatening consequences.

The first indication being pursued with brincidofovir is for the prevention of cytomegalovirus infections in HCT. In bone marrow transplantation, patients are given very high doses of chemotherapy or radiation therapy, which destroys cancer cells in the bone marrow. Unfortunately, it also destroys all the normal cells developing in the bone marrow, including the critical stem cells. After the treatment, healthy stem cells are reintroduced, or transplanted, which reestablish the blood cell production process in the bone marrow.

Brincidofovir has a potentially much greater role to play in the treatment of dsDNA viral infections. The next area of emphasis is in the treatment of adenovirus infections. This virus is the cause of the common cold, but if the infection becomes disseminated in immuno-compromised transplant patients, the mortality rate has been estimated at 40% to 80%.

One of the intriguing outcomes observed in the phase 2 trials was that there was less kidney damage with it than with placebo. This is noteworthy because most anti-viral drugs aimed at dsDNA viruses are toxic to the kidney. The hypothesis is that brincidofovir is effective against the BK virus, a dsDNA virus that is known to infect kidneys and is a major issue in kidney transplant rejections. This suggests that brincidofovir has a major role to play in kidney and other solid organ transplants.

Brincidofovir is being studied under collaboration with the Biomedical Advanced Research and Development Authority (BARDA) that sponsors drug development for counter-terrorism measures. Chimerix received a contract in February of 2011 and another more recently in which BARDA gave grants to study brincidofovir as a medical countermeasure against the dsDNA virus, smallpox. In vitro studies have shown that brincidofovir can inhibit the variola virus, the dsDNA virus that causes smallpox. Efficacy has been demonstrated against variola in cultured cells, and brincidofovir has shown activity against related viruses in animal models of smallpox including ectromelia in mice, rabbit pox, and monkeypox.

Potential Timing of Regulatory Approval

The basis for my enthusiasm for the company’s fundamentals is prospects for its lead drug brincidofovir in its initial indication for the prevention of cytomegalovirus infections in patients who have just undergone hematopoietic cell transplants (HCT). Topline phase 3 data from the SUPPRESS trial should be available in mid-2015 and I believe that the probability for success is high. I believe that this single trial could be sufficient for approval and if so, brincidofovir could be introduced in the US in 2016.

The endpoint of the SUPPRESS trial is clear cut; the FDA unquestionably has accepted reduction in viral load as an endpoint for drugs used to treat antiviral infections such hepatitis C and HIV. The phase 3 SUPPRESS trial mirrors the design of a phase 2 trial that produced strong positive results in which the prevention of cytomegalovirus infections was determined through the measurement of viral load. This leads me to believe that SUPPRESS will be successful and lead to approval in early 2016.

The phase 3 trial in adenoviral infections could start late this year and topline data could be available in 2016. Commercialization could begin in 2017. There could be a similar timeline for use in cytomegalovirus prevention in solid organ transplants.

Not a Lot of Competition for Brincidofovir

Some areas of biotechnology have a bewildering number of companies competing to develop new drugs. In oncology, all the large companies and perhaps hundreds of smaller companies have cancer drug development programs.

Until dramatic advancements in molecular biology showed pathways to attack viruses, there was not much interest in the anti-viral drug development as compared to other drug development venues. This has been changing rapidly as science has allowed new approaches and there has been fervent and productive research in treating HIV and hepatitis C, led primarily by small companies. For dsDNA viruses, there has been little productive research for over 20 years and Chimerix finds itself in a leadership position in this area.

There are three competitive drug development efforts that I am aware of. ViroPharma’s (recently acquired by Shire) maribavir failed in a phase 3 trial for prevention of cytomegalovirus. It is pursuing approval for treating infections after they have occurred. I think that most physicians and patients would prefer to prevent an infection rather than treating it after it has occurred. I don’t see much potential for this drug.

Vical (VICL) in partnership with Astellas (ALPMY) is conducting a phase 3 trial with a vaccine to prevent cytomegalovirus, this vaccine is ASPO113 (formerly TransVax). Vaccines usually need a strong immune response to be effective. The Vical product is being administered before an organ transplant when the patient has a normal immune system and also in post-transplant when the patient is immuno-compromised. This creates uncertainty about the efficacy of the product. The biggest problem that ASPO113 faces is that the FDA is requiring that the endpoint should be overall survival. This is a very hard endpoint to achieve as cytomegalovirus infections may account for about 8% of deaths in HCT and it may be difficult to sort out the mortality benefit. In the words of one key opinion leader, “with an endpoint of overall survival they are screwed.”

In October of 2012, Merck acquired marketing rights to letermovir with terms that included an upfront payment of 110 million Euros; this was a drug developed by AiCuris which is a spin-off from Bayer. This drug has a different mechanism of action in that prevents viral budding as opposed to the nucleotide mechanism of brincidofovir. It is only effective against cytomegalovirus infections and this presents an issue as many patients are infected with other double stranded DNA viruses such as adenovirus.

Partnering and Commercialization Opportunities

A positive investment aspect of Chimerix is that it has not yet partnered brincidofovir. It has the financial resources to wait until it has phase 3 data and this increases the value of the Company to shareholders.  If the Chimerix board elects to sell the company after phase 3, the lack of partnering entanglements will greatly enhance the value of the Company.

Chimerix has the open the option of marketing brincidofovir in the US. If a biotechnology company is able to achieve such vertical integration, the value to shareholders is greatly enhanced. Chimerix has the opportunity to market brincidofovir in the US for its initial indication. The medical centers involved in organ transplant are small and can be reached with a sales infrastructure (reps, medical liaisons, etc.) of less than 50 people.

Clinical Trial in Adenovirus; A New Development Since the March Report

The controversy on compassionate use of brincidofovir to treat a child with a disseminated adenoviral infection earlier this year has triggered a more rapid development plan for adenovirus infections. Since March, with the approval of the FDA Chimerix has been enrolling a pilot trial to provide access to compassionate use patients while finalizing the study design for a pivotal trial. Management had originally thought that the pilot trial would enroll about 20 patients but there is no set limit. All data on these patients will be provided to the FDA and investors should hear of the outcomes of this uncontrolled trial later this year.

There is ample evidence of the safety of brincidofovir from previous studies so that this should not be an issue. Over 100 pediatric patients have been treated including children less than two years of age. They also have data that shows that brincidofovir is well tolerated in highly immuno-compromised pediatric patients while demonstrating strong antiviral activity against adenovirus. This should give the FDA confidence that evidence of safety is sufficient to conduct a phase 3 trial.

The pilot portion of the trial will remain open until the final study design is decided. Data from the pilot portions will be submitted to the FDA along with the final study design of the phase 3 trial in 2H, 2014. However, the majority of the efficacy data that will be the basis of the final study design will come from phase 2 studies on treatment of adenovirus that were presented at the European Bone Marrow Transplant Meeting in 2013. These showed significant antiviral declines and the improved mortality rate short-term compared with historic data.

The design of the phase 3 will be somewhat different in that it will not have a control group. The current standard of care for disseminated adenovirus infection is mainly to decrease the level of immuno-suppressants. There is no drug approved for this indication although some centers use cidofovir IV off label; its use despite severe adverse effects indicates the gravity of these infections. Because, there is anywhere from a 40% to 80% mortality rate, it would be unethical to withhold brincidofovir from any patients enrolled in this trial.

The control for this study will be historic data for the past two years that shows the results from whatever standard of care was used. These historic data will come from the same centers that will participate in the phase 3. Chimerix is working with these centers to standardize adenovirus assessments across all of the sites.

The pivotal adenovirus studies will be for treatment of adenovirus unlike prevention as in case of the ongoing phase 3 prevention study in cytomegalovirus infections. There may be two patient groups in the trial that are given different durations of brincidofovir. There is some precedent for this. The end point of the study may be progression free survival, all-cause mortality or non-relapse mortality. There is not much data correlating the degree of viremia to severity of the disease and this is not an appropriate surrogate marker. However, if efficacy is similar in the two duration groups the degree of viral load could be a differentiating factor.

Clinical Trial in CMV Prevention in Solid Organ Transplant Patients

The original plan with brincidofovir was to gain accelerated approval with the CMV prevention trial and then full approval with a follow-up phase 3 trial in solid organ transplants. They had planned to get this trial up and running by the end of 2014. However, with the focus on adenovirus and the opportunity to initiate that trial in adenovirus, that trial has moved to the forefront. .

They continue in active discussions with the U.S. and European regulators regarding a cytomegalovirus prevention trial in solid organ transplant recipients with a focus on renal transplants. They expect to have a final study design by the end of 2014 and initiate a trial in 2015 somewhat after the adenovirus trial. Less than half of transplanted kidneys are still functioning ten years after transplant and a significant contributor to this failure rate is viral infections.

Chimerix will have to work with the regulatory agencies on the endpoint of the trial. If the endpoint were graft survival, this could be a very long trial. However, there might be a way to correlate graft survival or functionality with viral load that might not take as much time. Because adenovirus now is likely to be the confirmatory trial needed to gain full approval, the solid organ transplant trial might be designed to show a specific effect such as activity against the BK virus that is implicated in kidney transplant failures.

Other Indications/Advantages for Brincidofovir

One of the main advantages for brincidofovir is that broad spectrum of activity. In the phase 2 studies in the patient population that is the focus of SUPPRESS, the highest risk allogeneic transplant patients, they saw that many of the patients were infected with multiple double stranded DNA viral infections. Brincidofovir is not specifically acting on just one viral infection. Chimerix believes that it can prevent reactivation or prevent primary infection in patients who we know are susceptible to multiple infections simultaneously.

 

 

Tagged as brincidofovir, Chimerix, CMRX + Categorized as Company Reports