Expert Financial Analysis and Reporting

Company Overview

The US Department of Health and Human Services estimates that there are about 1 million Americans addicted to cocaine and another 300,000 addicted to methamphetamine. This compares to about 1.9 million Americans addicted to opioid analgesics. The largest selling drug for opioid addiction is Suboxone, which has current US sales of about $1.2 billion. Assuming pricing comparable to Suboxone, the addressable US market for the cocaine and methamphetamine addiction is about $1.8 billion

There are no drugs approved for helping cocaine and methamphetamine addicts break their habit. Consequently, this is a significant unmet medical need and a large potential market opportunity for drug developers. Catalyst Pharmaceutical Partners (CPRX) is in a late stage phase IIb clinical trial with its lead drug, CPP-109 that is a potential registration trial. Earlier studies have suggested that it can help cocaine addicts achieve abstinence. Topline results are expected in 4Q, 2012 and success in this trial would be a major catalyst for the stock. Other drugs in phase II trials for this indication are Teva’s (TEVA) narcolepsy drug modafinil and a cocaine vaccine from Xenova Group. There may be other drugs in development as I have not yet done a thorough competitive analysis.

I had my first opportunity to meet with management in January at a biotechnology conference in San Francisco and to discuss the company’s technology platform, which is based on a novel class of drugs called GABA aminotransferase inhibitors. As will be discussed later in this report, this mechanism of action is believed to block or reduce the pleasure reward that cocaine users seek. Catalyst has two drugs of this class in clinical development, CPP-109 (generic name is vigabatrin) and CPP-115. Vigabatrin is the active pharmaceutical ingredient in the drug Sabril which was approved in Europe in 1992 for treating adult epilepsy and in the US in 2008 for treating infantile spasms, a severe form of epilepsy in infants.

Catalyst is developing vigabatrin/CPP-109 for a currently unapproved indication of treating cocaine addiction and will then try to extend this to methamphetamine addiction. The second drug in development CPP-115 is a next generation GABA aminotransferase inhibitor that has the same mechanism of action as CPP-109, but which based on pre-clinical studies holds the promise of being significantly more effective and safer. CPP-115 was invented by Dr. Richard Silverman of Northwestern who is also the inventor of Pfizer’s Lyrica, a CNS Drug that achieved worldwide sales of $3.5 billion for the 12 month period ended September 2011.

CPP-115 will be developed for cocaine addiction like CPP-109 but it will also be developed for complex partial epileptic seizures and infantile spasms for which Sabril (vigabatrin) is now approved and potentially other addiction and CNS indications. The strategy is to build a cocaine addiction franchise with CPP-109 and then replace its position in that market with CPP-115. Importantly, the other indications being pursued could allow CPP-115 to address a much larger commercial opportunity.

If successfully developed, CPP-109 would be combined with behavioral counseling. Clinical studies in Mexico conducted over the last decade have been encouraging and a well-designed phase II trial showed that after nine weeks of drug use, 28% of cocaine users given CPP-109 in combination with behavioral therapy became abstinent versus just 8% given behavioral therapy alone. Earlier open label studies showed even better abstinence levels of 40% to 50% for treated patients at the end of 9 to 10 weeks of treatment.

Disappointingly, a US phase II trial of similar design to the one in Mexico reported in 2009 that it failed to meet its primary endpoint. After careful review Catalyst and the trial investigators concluded that this was due to faulty trial design rather than lack of effectiveness of CPP-109. It was decided to continue clinical development and launch a new trial which is now underway and for which topline results could be available in 4Q, 2012. This is an important binary event for the company and a trial failure would be a severe setback, but not quite a matter of life and death. If the trial were to fail, the fallback position would likely be to refocus all of the company’s resources on developing CPP-115 for the orphan drug indication of infantile spasms, which could provide a fast path to approval.

CPP-115 is just entering phase I studies and its profile in humans has yet to be established, but based on pre-clinical studies it appears to be a much more elegant molecule than CPP-109. It is judged to be 200 times more potent and it also appears to be safer, particularly in regard to the most troublesome side effect of vigabatrin, which is that cumulative use over time can result in adverse effects on peripheral vision. However, this has not been an issue in the CPP-109 cocaine addiction trials because the cumulative dosage has been below the threshold level at which this side effect occurs. CPP-115 also has very strong patent protection as it is covered by a composition of matter patent that lasts until 2028 while CPP-109 is covered only by a method of use patent through 2018. Waxman Hatch provisions would likely extend protection for five years following its introduction, which might extend protection to 2019 or 2020.

The strong results in the Mexican studies with CPP-109 were highly encouraging but the unfavorable US trial results create uncertainty about the outcome of the critical phase IIb US trial now underway. However, besides the Mexican studies, there are reasons to believe that CPP-109 is an effective drug and could be successful in this trial. The National Institute on Drug Abuse (NIDA) believes that CPP-109 has such promise that it is funding most of the $10 million cost of the US trial. The Mexican phase II trial was published in in the American Journal of Psychiatry in 2009 which suggests that the addiction treating physician community takes the results of the Mexican trial very seriously. And finally, CPP-115 and CPP-109 have both been granted fast track status by the FDA for the treatment of cocaine dependency, a status that is accorded to promising drugs that address unmet medical needs and facilitates their development and regulatory review.

CPP-109 is not the ultimate answer to cocaine addiction. If the Mexican results are validated with the ongoing US trial, it would indicate that it can help 30% or more of cocaine addicts achieve abstinence when used in conjunction with behavioral modification. This compares to about 5% to 8% for behavioral modification alone. The potential for causing long term abstinence is not clear because studies to date have been limited to three to four months of treatment. However, in a market desperate for drug treatment options, it could be a very successful commercial product.

Investment View

Intuitively, I think that most investors would feel that if CPP-109 if approved for cocaine addiction that it will be a significant drug. It would be an early mover in a market with $1.8 billion of potential sales. It may or may not be first to market so that it could be in competition with other drugs. Still, in this large market, it would seem possible that it could carve out $200 to $400 million of sales before it loses patent protection in 2018, 2019 or 2020.

The product will probably have to be partnered which will reduce the economics to Catalyst as it might co-promote the drug and receive a royalty, but weighed against the diminutive $30 million market capitalization of Catalyst this seems to be a compelling opportunity. CPP-115, if successfully developed has the potential to enormously enhance the outlook for Catalyst with its much greater sales potential and long patent life, but until the drug confirms pre-clinical studies in phase II human studies, I am reluctant to place too much emphasis on this drug.

I am obviously interested in the investment scenario for Catalyst, but at this time I am not issuing an investment opinion. I have a rule that I don’t issue a recommendation after one meeting with a company. I intend to watch the situation develop and gather more in-depth information before deciding on an investment recommendation. People who have read my past reports will understand that this is my usual mode of operation.

I do want to emphasize to investors that while the reward for the stock may be high so is the risk. Failure in the phase IIb trial would be a severe setback for a company that lacks financial strength. I think that Catalyst ended 2011 with about $6.0 million of cash. The recent quarterly burn rate of $1.3 is expected to be somewhat lower going forward. The company has guided investors that it has sufficient cash to cover operations through mid-2013 without any new cash infusions. Successful results in the US phase II trial could produce a lucrative partnering deal that might bring in significant amounts of cash.

The key event for Catalyst in 2012 is the reporting of top line results of the US phase IIb trial in 4Q, 2012. Results of the phase I trial of CPP-115 may be released in 1Q, 2012 and will be interesting, but of much less importance to the stock. The company thinks that it the phase IIb results are consistent with those seen in Mexico that it can file an NDA in 2H, 2013 and possibly see approval in 3Q, 2014. To meet this timetable, the results will have to be very convincing. CPP-115 is perhaps three to four years behind in development although there might be a chance to get it to market quicker if it shows good results in treating infantile spasms.

CPP-109 and Cocaine Addiction

Cocaine’s addictive properties are due to its ability to increase levels of dopamine which is a neurotransmitter (chemical messenger in the brain). Increased levels dopamine can create a heightened sense of pleasure and well-being. CPP-109 reduces the dopamine rise after cocaine use and reduces the pleasure sensation or high that cocaine users are seeking. It does this through its effect on another neurotransmitter, gamma-aminobutyric acid (GABA) whose main role in the nervous system is to control neuronal excitation such as that caused by dopamine. CPP-109 inactivates the enzyme GABA aminotransferase that the brain uses to control and decrease levels of the protein GABA (don’t confuse the enzyme and the protein it modulates). By decreasing GABA aminotransferase (the enzyme), GABA (the protein) levels in the brain are increased and this in turn leads to a decrease in dopamine levels. This appears to be done without creating a new addiction to CPP-109 and without causing withdrawal symptoms; tolerance has not yet been shown to be an issue.

Early Proof of Concept Trials for CPP-109 for Treating Cocaine Addiction

Proof of concept trials for the use of CPP-109 in treating cocaine addiction came from two small open label studies performed in Mexico in 2003 and 2004. These trials were done in conjunction with weekly supportive psychotherapy in an outpatient setting. There were 20 cocaine dependent patients in the first study and in a 10 week study eight were abstinent for at least 4 successive weeks during the 10 week study. In a second study of 30 patients with methamphetamine and/or cocaine dependence, 16 were abstinent for at least 3 successive weeks over 9 weeks of treatment. The most common adverse effects were transient sleepiness and headache; no serious events occurred in either study.

Phase II Randomized Study in Mexico was Encouraging

Based on the two small studies, a larger phase II trial was conducted. The study subjects were parolees from a Mexico City prison who had a history of cocaine dependence. In the trial, 50 subjects were randomly assigned to CPP-109 and 53 to placebo. The trial lasted for 9 weeks after which patients were followed for another four weeks. The primary endpoint was full abstinence for the last 3 weeks of the trial. Cocaine use was determined by testing urine samples that were taken twice a week.

The CPP-109 daily dose of 3 grams was dissolved in 250 ml of orange juice according to a fixed titration and placebo patients were given identical bottles of juice. The patients were required to visit the treatment center twice a week to give urine and at that time were given their daily dose under observation. For the other five days of the week, they self-administered the drug. All patients received weekly behavior therapy focused on supporting abstinence.

Fourteen (28%) of the CPP-109 treated patients were abstinent for the final three weeks of the trial as compared to only 4 (8%) of the placebo patients. This primary endpoint of the study was successfully achieved with p<0.05. A secondary end point of partial abstinence (reduced cocaine consumption) was reached by 17 (34%) vigabatran patients and 5 (9%) of placebo patients for a p<0.01. Interestingly, 10 (20%) of vigabatran patients stated that they were also abstinent from alcohol at the end of the trial versus 1(2%) of the placebo group for which the p value was <0.01.

Through the four week follow-up period, 12 of the 14 vigabatran patients who reached the primary endpoint of the trial and 2 of the 4 placebo patients remained abstinent. In the vigabatran arm, 62% of patients completed the trial versus 44% in the placebo arm. However, there were no differences between the two groups in drug craving, depression or anxiety. Side effects for vigabatran and placebo were comparable.

The Phase II US Trial Disappointed

These favorable Mexican studies led to the initiation of a phase II trial in the US which was similar in design to the phase II Mexican trial. This trial failed to produce positive topline results. However, researchers generally felt that this disappointment was attributable to the trial design rather than lack of activity of the drug.

The US trial included 186 patients from 11 medical centers who were randomly assigned to 3 grams of vigabatran given in two daily doses or placebo. The trial ran for 12 weeks and patients received computerized behavioral therapy and counseling once a week. Urine specimens were collected three times a week to test for cocaine use. The primary endpoint was being abstinent in weeks 11 and 12 of the 12 week study. This was determined by patient self-reporting and also measuring levels of benzoylecgonine, the major metabolite of cocaine, in urine samples. Treatment adherence was evaluated through pill counts and patient self-reporting.

The study failed to meet its primary endpoint. There were 61 dropouts so that 125 patients completed 12 weeks of therapy for a dropout rate of about 33%, which is common for addiction trials. In a post hoc analysis which looked at urine samples, it was found that 48% of the 61 patients in the CPP-109 patients that stayed in the trial were not compliant with their medication. This lack of compliance had a profound negative influence on the trial outcome

Catalyst performed an analysis of the 32 patients who were compliant with their medication for the entire trial. Because of the small numbers of patients involved in the study, there was not enough statistical power to reach significance on the primary abstinence endpoint. However, there was also encouragement on a secondary endpoint as CPP-109 patients used consistently less cocaine as determined by measuring benzoylecgonine (the major metabolite of cocaine) levels; the p value was 0.006.

Catalyst believes that the US trial failed because the US patients were less motivated than the Mexican patients. Mexican patients were observed by their parole officers or health care personnel taking their medication for 2 of 7 days each week. The subjects in the Mexican study were also parolees from prison, and showing up at least once per week at the CPP-109 study treatment center was necessary to meet the requirements for parole. The American study consisted of patients who had been recruited by academic medical centers through radio and TV ads and who were paid for their participation. US patients were generally unobserved taking their medicine and were less motivated overall to take their medication.

Proof of Concept Trial in Methamphetamine Addiction

A proof of concept trial in methamphetamine users enrolled 29 patients on CPP-109 and 28 on placebo. There was a 2.5 times higher rate of abstinence in the last two weeks (weeks 11 and 12) of the study in the CPP-109 group versus placebo. This was not statistically significant due to the small number of patients enrolled, but it was encouraging.

The Next Step, New US Trial in Process

In February of 2010, Catalyst began a new phase IIb study of CPP-109 in which 200 patients will be enrolled. This time the trial is only enrolling truly motivated patients who have a strong incentive to quit, e.g. keeping their family together and/or retaining their job. Patients will receive no payment for participating in the trial. The endpoint of the study is abstinence at 8-9 weeks with patients then being followed through 24 weeks in total. The company believes that topline data will be available in 2H, 2012 and if the trial is positive an NDA could be filed in 2H, 2013 with possible approval in 3Q, 2014.

More on CPP-115

Pre-clinical work in rats with CPP 115 has been very encouraging. PET imaging scans have shown that in rats given cocaine, the dopamine levels are increased 550% with placebo, 325% with CPP-109 and 250% with CPP-115. Remember that less dopamine leads to less cocaine induced pleasure. Other types of rat studies have also indicated that rats received less cocaine dependent pleasure reward when using this drug.

The pre-clinical profile of the product indicates that the drug is not metabolized which reduces the potential for interactions with other drugs. This is important for epilepsy patients who are often on multiple therapies. It also appears to have little off targeting binding which should reduce the side effect potential. No cardiovascular or respiratory effects were observed. One of the most important findings was that in rat models it appears to have much less effect on vision acuity than CPP-109.

Sabril (vigabatran or CPP-109) was approved in 2009 in the US to treat infantile spasms, a very severe form of epilepsy that affects infants. The incidence in the US is about 2000 children per year and the prevalence is about 4,000. The prevalence is also about 4,000 in Europe. The US market size is about $100 million divided between Questcor’s Acthar Gel at about $60 million and Sabril at $40 million. CPP-115 in pre-clinical studies has shown significant advantages over Sabril. It suppresses seizures at doses 100 times lower than Sabril, has longer time of control over seizures and doesn’t appear to cause severe sedation. It could be a significant advance for treating this dangerous disease and could provide a quick path to approval.

In Europe, Sabril is indicated for and widely used for treating complex partial epileptic seizures. These are epilepsy patients who generally lose consciousness during their seizures and are unable to recall that they have had a seizure. There are about 1.5 million such epilepsy patients in the US who are treated and about 30% are refractory to therapy. Based on the experience of Sabril, CPP-115 may be effective as monotherapy in refractory patients and as add on therapy for many of the effectively treated patients. This could be a very large market opportunity.