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Thursday, December 18, 2014

Epirus Biopharma: An Intriguing Global Biosimilar Play

By Jason Napodano, CFA & David Bautz, PhD.

Epirus Biopharmaceuticals (EPRS) is a biopharma company focused on developing, manufacturing, and commercializing biosimilar therapeutics in various jurisdictions worldwide. The company utilizes a tailored approach that takes into account the different regulatory, legal, and commercial barriers in each market.

The company's strategy is centered on launching biosimilar products in the developed markets (U.S., Europe), accessing growth in local production markets through strategic partnerships, and generating initial cash flows through the early launch of products in accessible emerging markets. In addition, Epirus is focused on selecting products that will have minimal competition in the marketplace while also building a pipeline of products with synergistic therapeutic applications.

We believe the stock is fairly-valued at $8 per share and that investors can establish a long-term position in Epirus today.

Monoclonal antibodies

Biological therapeutics, or biopharmaceuticals, have been a huge success for the biotechnology industry, both in terms of the number of patients that have been treated and the revenues generated from their sale. Examples of biopharmaceuticals include vaccines, gene therapies, tissues, and recombinant proteins. Monoclonal antibodies are a particular type of recombinant protein and comprise many of the top-selling therapeutics in the world. Humira® (adalimumab), Remicade® (infliximab), and Actemra® (tocilizumab) each generated revenues of $11.0, $8.4, and $1.1 billion, respectively, in 2013. According to EvaluatePharma, revenues generated from the sale of monoclonal antibodies totaled $61.8 billion in 2013 and grew at a compound annual growth rate of 14% from 2010 to 2013.

Monoclonal antibodies are large, complex proteins that have great structural complexity, including complex glycosylation (complex carbohydrate branches that are added by the cell during production) patterns that are critical for the function and activity of the molecule. They are composed of four polypeptide chains that are bound together by specific intra- and inter-chain covalent bonds. Their manufacture is further complicated by the fact they can only be produced in living mammalian cells, which introduces additional challenges in manufacturing and production on a commercial scale. Despite these challenges, monoclonal antibodies have proven to be robust medications in a number of different disease areas, including inflammatory diseases and multiple types of cancer.

The FDA approved the first monoclonal antibody in 1986. Since that time, over 30 additional monoclonal antibodies have been approved for a number of different indications. The patents for a number of highly successful monoclonal antibodies are set to expire over the next 10 years, thus representing a significant opportunity for biosimilars, or follow-on biologics, to enter the marketplace.



Biosimilars

Biosimilars are highly similar, though not exact, versions of approved biological drug products, which are referred to as reference products. As opposed to small molecule drugs, which consist of chemically identical active ingredients, biologics are vastly more complex and are comprised of a number of heterogeneous subspecies. Due to this, biosimilars require a different regulatory framework compared to generic versions of small molecule medications.

The European Medical Agency (EMA) first introduced a pathway to review and approve biologic equivalents based on commercially available biologics in 2006. Following the EMA's success, the Biologics Price Competition and Innovation Act (BPCIA) was passed in the U.S. in 2009, and the FDA adopted a similar approach to the EMA in regards to the commercialization of biosimilars. Other countries, including Japan, Canada, and Korea have gradually adopted similar regulatory pathways (Wang et al., 2012).

For approval, an application for a biosimilar product will typically reference existing information regarding the structure, safety, and efficacy of a previously approved reference product. Thus, the application emphasizes analytical characterization to demonstrate similarity between the proposed biosimilar and the reference product. In addition, a Phase 1 safety and Phase 3 efficacy study are also performed to support the approval of a biosimilar.

Biosimilars are categorized according to two categories: first generation, less complex biologics; and second generation, more complex biologics, the latter which includes monoclonal antibodies. Both categories of biosimilars are more complex and difficult to characterize, manufacture, and develop than small molecule generics.

The greater complexity in manufacturing biologics is in part due to the requirement to utilize living cells for their production. Small molecule drugs are derived through tightly controlled chemical reactions and generic forms of drugs are chemically identical to the original product. Due to the various molecular modifications that are introduced by cells onto protein products it is not possible to obtain a biosimilar product that is chemically identical to an original biologic. While biosimilars have the same amino acid sequence and shape of the reference product, various post-translational modifications (e.g., glycosylation patterns) are typically not identical, thus a rigorous analytical characterization must be performed to show that a biosimilar has at least a comparable glycosylation pattern along with other important molecular modifications.

Due to the aforementioned, biosimilars require significantly more clinical testing and regulatory review than small molecule generics. In addition to creating challenges for companies pursuing the development of biosimilars, the manufacturing, clinical, and regulatory complexity creates barriers to market entry. This in turn leads to the opportunity to sell biosimilars at relatively higher prices, and with better margins, than small molecule generics.

Biopharmaceuticals are produced through a technically complex series of steps that is summarized below:
  1. Isolate and identify the genetic code of the therapeutic protein.
  2. Insert the genetic code into a living cell (bacteria, yeast or cultured mammalian cell).
  3. Isolate specific cells that have integrated the genetic code of the therapeutic protein into their genome and produce large quantities of the target protein.
  4. Isolate the therapeutic protein from the cells and other nutrients through a series of purification processes.
  5. The isolated protein is then packaged into sterile vials for use by doctors and patients.
Companies that produce biosimilars must go through the same series of steps, from isolation of the genetic code for the particular protein of interest, to cell line selection, and final packaging of the drug product. Once the products are produced it is necessary for companies to fully characterize their molecules to show similarity to the reference biologic. Biosimilars must be shown to be comparable to their reference products in terms of structure, purity, safety, and efficacy.

However, as mentioned previously, the goal of biosimilar production is not to create an identical copy of a biopharmaceutical, and in fact this is not possible as even originator biologics are characterized by inherent structural and functional variability. Thus, biosimilars must fall within a range of values across important structural and functional parameters compared to those of the reference drug.

Epirus' Pipeline of Biosimilars

Epirus currently has three biosimilar products at different stages of preclinical and clinical development. The lead product is BOW015, a biosimilar version of Remicade® (infliximab), a monoclonal antibody that is marketed by Johnson & Johnson, Merck Schering, and Mitsubishi Tanabe for the treatment of inflammatory diseases including rheumatoid arthritis (RA), Crohn's Disease, ankylosing spondylitis, psoriatic arthritis, and psoriasis (see full prescribing label). The other pipeline products, BOW050, a biosimilar version of Humira® (adalimumab), and BOW070, a biosimilar version of Actemra® (tocilizumab), are in preclinical development. BOW015 has received marketing and manufacturing approval in India for the treatment of rheumatoid arthritis.



…Remicade®…

Remicade® is a chimeric IgG1 monoclonal antibody that is targeted against TNF-α. Remicade® works by binding to and neutralizing the activity of TNF-α, thereby preventing TNF-α from docking with its receptor and initiating an inflammatory response. The drug has been approved by the U.S. Food and Drug Administration (FDA) (see approval history here) for the treatment of rheumatoid arthritis, psoriasis, ankylosing spondylitis, Crohn's disease, and ulcerative colitis.

The typical dosing regimen for Remicade® is 3 mg/kg body weight for treating RA and 5 mg/kg for treating all other indications. The drug is given at 0, 2, and 6 weeks, and then every 6-8 weeks after that. Remicade® is administered by intravenous infusion and must be dosed at a clinic or a hospital. One of the most common reasons for discontinuation of Remicade® treatment is for infusion-related reactions, such as dyspnea, flushing, headache, and rash. In Phase 3 clinical trials, approximately 18% of Remicade®-treated patients experienced an infusion reaction compared to 5% of placebo-treated patients. Approximately 3% of Remicade®-treated patients discontinued use due to infusion reactions.

Other side effects reported in Remicade® clinical trials include upper respiratory tract infection, headache, and gastrointestinal ailments (stomach pain/nausea). Serious side effects have been reported with the use of TNF-α blocking therapies, including an increased risk for lymphoma, hepatosplenic T-cell lymphoma, melanoma, hepatotoxicity, and hematologic abnormalities. For this reason, almost all TNF-α blocking therapies carry bolded boxed ("Black Box") warnings of the potential for serious adverse effects, including death.

Clinical efficacy of Remicade® in treating RA was shown in two multicenter, randomized, double-blind, pivotal trials: ATTRACT (Study RA I) and ASPIRE (Study RA II). In both trials, a greater percentage of patients reached a major clinical response (ACR20/ACR50/ACR70) than placebo-treated patients, as shown in the following table.



…BOW015…

Epirus has performed an extensive amount of bioanalytical and physicochemical comparisons between BOW015 and Remicade®. This includes data from both a Phase 1 clinical trial performed in the United Kingdom and a Phase 3 double blind comparator study conducted in India. The manufacturing processes for BOW015 were designed to ensure that the final BOW015 drug product is biocomparable to Remicade®. To support this, a full data package demonstrating biosimilarity between BOW015 and Remicade® has been produced and includes the physicochemical, biochemical, and biological properties of the two products.

Critical Quality Attributes (CQAs) are the physical, chemical, biological, and microbiological properties or characteristics that need to be within a certain range to show comparability between a biosimilar and a reference product. The CQAs for infliximab are known based on the mechanism of action, clinical experience, impact/risk assessment of production processes and the assessed ranges of specific attribute data generated by analysis of multiple lots of product. The CQAs are supported by Annex I of the Summary of Product Characteristics of the Remicade® European Public Assessment Report. Epirus has completed a full side-by-side characterization of BOW015 and Remicade®, including all CQAs for infliximab, which includes all known attributes that have the potential to impact safety, potency, and efficacy.

The assays utilized to assess biosimilarity include the following:

  • Physicochemical: These are assays that measure the physical and chemical structure of the molecule and include primary sequencing of the antibody and glycoprofiling.
  • In vitro biochemical: These assays measure the interaction of the molecule with other molecules. For infliximab, the assay measures the binding between the drug product and tumor necrosis factor alpha (TNF-α).
  • In vitro biological: These assays measure the interaction of the drug product with biological media (e.g., cellular or animal test systems).

Epirus has completed the assessment of CQAs and demonstrated comparability between BOW015 and Remicade®. Minor differences between the two products have been noted; however, they are all in non-critical quality attributes and have not demonstrated an adverse effect on the biology or efficacy of BOW015 in either in vitro or human clinical studies.

…Phase 1 Study…

A Phase 1 bioequivalence study was conducted in the United Kingdom in 2012 with the primary objective of the study being a comparison of the pharmacokinetics of Remicade® and BOW015 administered by intravenous infusion. The secondary objectives of the study were to assess the safety and tolerability as well as the immunogenicity of BOW015 compared to Remicade®. The drugs were considered to be similar if at various time points the concentrations of the drugs were within the specified statistical parameters of 80-125%. The study design and criteria for success were based on standard bioequivalence requirements.

The study enrolled 84 healthy volunteers who were randomized 1:1 to receive either BOW015 or Remicade® via intravenous infusion at a dose of 5 mg/kg with a 12-week follow up period. The study was powered to detect bioequivalence at 90% confidence interval of BOW015 to Remicade®. Of the 84 subjects enrolled, 43 evaluable subjects received BOW015 and 41 subjects received Remicade®.

The following graph shows the serum concentration of both BOW015 and Remicade® after a single intravenous infusion of drug product. The pre-defined pharmacokinetic values for the maximum serum concentration as well as the pattern of elimination were similar between the two drugs. In addition, no differences were seen in immunogenicity test results between the two treatment groups nor were there any differences in safety or tolerability between the two groups.



…Phase 3 Study…

Epirus conducted a randomized, double-blind, active comparator Phase 3 clinical trial in India to test the efficacy and safety of BOW015 in patients with severe, active rheumatoid arthritis on stable doses of methotrexate. The study subjects were randomized 2:1 to receive either BOW015 (n = 126) or Remicade® (n = 63) during the first 16 weeks of the study. The primary endpoint of the study was equivalence of both arms on the standardized American College of Rheumatology 20% improvement (ACR20) scoring system. This is a composite scoring system that includes objective laboratory measures as well as physician and patient assessments of well-being. Secondary endpoints were ACR50 and ACR70 scores as well as various components of the ACR20 scoring system.

Both BOW015 and Remicade® were administered at a dose of 3 mg/kg given as an intravenous infusion at week 0, followed with similar doses at weeks 2, 6, and 14. Subjects were assessed at week 16 and responders were able to enter an open-label phase. In the open-label phase, subjects continued to receive BOW015 at a dose of 3 mg/kg given as an intravenous infusion at weeks 22, 30, 38, and 46 and were followed up at weeks 54 and 58. Non-responders at week 16 entered a follow-up phase for immunogenicity, PK, and safety for an additional 3 months.

The 16-week data shows that 89.8% of BOW015 treated patients achieved ACR20 compared to an 86.4% ACR20 response rate in those patients treated with Remicade®. The outcome met the pre-specified statistical endpoint and was within the 15% equivalence margin at a 95% confidence interval. There were no differences in safety, immunogenicity, or the secondary endpoints between the two treatment groups. The ACR20 response rates for weeks 0-16 are shown below, showing a high degree of similarity in response to BOW015 compared to Remicade®.



During the open-label portion of the study, those who had received Remicade® during the initial 16-week portion of the trial were switched to BOW015. Importantly, 58-week data shows that the durability of the response was seen with BOW015 alone and after switching from Remicade®. BOW015 was safe and well-tolerated through 58 weeks both when dosed alone or after switching from Remicade®, and there was consistent immunogenicity in patients dosed with only BOW015 compared to those switched from Remicade® to BOW015. We think these strong results will be instrumental in helping Epirus and its partners gain market share as BOW015 is commercialized.



SCALE™ Manufacturing Platform

Up until now, the manufacture of biologics (including monoclonal antibodies) has involved an enormous investment in facilities that required large, expensive stainless steel pieces of equipment that could only be utilized for one product at a time before needing to be thoroughly cleaned, retested, and revalidated. This has resulted in a significant amount of time where the facility was not producing product.

However, there is a new trend in the use of single-use technologies for the manufacture of biologics. There are a number of advantages to single-use technologies including:
Lower capital costs, as there is no need for a specialized manufacturing facility.
Lower utility costs due to reduced sterilization procedures.
All parts utilized in the manufacturing process are single-use only, thus there is no risk for cross-contamination and no need to shut down the facility for cleaning and re-validation.
Ability to scale the amount of product produced based on demand.

Epirus' SCALE™ manufacturing platform utilizes single-use bioreactors as a means of manufacturing biologic products in local production markets in the most affordable means possible, while still keeping compliance with Good Laboratory Practice (GLP) and current Good Manufacturing Process (cGMP) requirements. A SCALE™ facility can be constructed for approximately $20 million to $40 million and is capable of producing up to 150 kg of product per year. In addition, multiple products can be produced in a SCALE™ facility simultaneously. In addition, when demand begins to exceed the output capabilities of a single bioreactor additional equipment can be installed to expand production capabilities.

Importantly, SCALE™ offers a flexible manufacturing solution for the company's partners in emerging markets. All aspects of biosimilar manufacturing can be conducted inside a "POD," a single modular manufacturing unit. Placed inside a warehouse, a POD needs only air, water, and power to be fully functional. The PODs are designed to be compliant with GLP and cGMP requirements with staffing at SCALE™ manufacturing sites kept to a minimum. The PODs and the single use biomanufacturing control systems are internet-enabled allowing for full-time monitoring of systems from anywhere in the world. SCALE™ also includes integrated and comprehensive quality systems, documentation management, training, and supply chain. The entire process is further enabled to allow technology transfer to partners in target countries.

Commercialization Strategy

Epirus has designated three potential markets for selling its products:

  • Developed Markets: In Europe and the U.S. there will need to be additional clinical work performed and a separate regulatory approval referencing an already approved product package.
  • Local Production Markets: These markets require local production of product, thus it is necessary to partner with established companies in each country that are familiar with the regulatory and commercial landscape. These countries include Brazil and China. While China requires clinical trials to be conducted in the local population, it is unclear whether Brazil will accept the Indian regulatory package for approval of BOW015.
  • Accessible Markets: BOW015 has received manufacturing and marketing approval in India and there are a number of countries that will accept the Indian regulatory package. These countries are located in northern Africa, southeastern Asia, and Central and South America (not including Brazil). In addition to accepting the Indian regulatory package, these countries do not require local production of product, thus Epirus can use BOW015 produced in India to greatly leverage initial market penetration and scale.

…Opportunity in Developed Markets…

Europe has had biosimilar regulatory guidelines in place since 2004 and there have been approximately 20 biosimilar products approved for sale in Europe. Epirus very recently completed a meeting with European regulators to discuss the design of a Phase 3 trial. There were three important outcomes to that meeting: 1) the molecular characterization performed thus far for BOW015 was deemed sufficient; 2) some additional technical work will likely be sufficient in regards to the BOW015 cell line; 3) A 30 week study will be considered sufficient to support a regulatory filing. In addition, the Phase 3 trial that will be conducted in Europe will be sufficient to support a regulatory filing in the U.S., and Epirus has already begun to receive interest from potential partners for selling BOW015 in the U.S.

The successful Phase 3 trial conducted in India significantly decreases the risk associated with the European Phase 3 trial, and we do not believe there will be any unforeseen issues that would result in a delay or inability to gain approval in Europe. We expect a regulatory filing in 2017 and launch of BOW015 in 2018.

…Opportunity in local production markets…

The two local production markets that Epirus plans to target first are Brazil and China. The Brazilian Ministry of Health initiated the Productive Development Policy (PDP) to establish a formalized pathway to access the public healthcare market, as the Brazilian government directly purchases a significant portion of all biopharmaceutical products. In order to gain full access to the public markets, a company must fully transfer the product and manufacturing technology to a Brazilian partner company. Epirus is currently in the process of selecting the optimal Brazilian partners.

Epirus is planning to meet with Brazilian regulators to discuss whether the regulatory filing from India will be sufficient to gain approval in Brazil or if additional studies will be required. If the outcome of the meeting is positive, Epirus is likely to sign a partnership agreement soon thereafter and could be in a position to have BOW015 on the market by 2016.

The Chinese government encourages local production of biopharmaceuticals and requires that clinical testing be performed in the local population before a compound can be approved. Due to this we do not forecast BOW015 being approved for sale in China until after 2018.

On September 25, 2014, Epirus announced they had signed a royalty-bearing, multiple-product collaboration agreement with Livzon Mabpharm Inc., a Chinese biotechnology company focused on the development, manufacture, and sale of antibody-based drugs. Livzon was a major investor in Epirus' $36 million private financing round in April 2014, prior to Epirus becoming a public company. Under terms of the agreement, Epirus and Livzon will develop, manufacture, and commercialize up to five biosimilar products, with the first product being BOW015. Epirus will transfer the SCALE™ manufacturing platform to Livzon, with Livzon then being responsible for any additional development work necessary for approval of BOW015 in China.

…Opportunity in accessible markets…

The Phase 3 study referenced above was conducted in India and based upon the interim 16-week analysis Epirus was granted marketing and commercialization approval for BOW015 for the treatment of RA in India. In January 2014, Epirus entered into a license agreement with Ranbaxy, whereby Ranbaxy agreed to distribute and sell BOW015 in India under the marketing authorization granted in March 2014 as well as in other countries in Asia and North Africa. Epirus' manufacturing partner, Reliance Life Sciences, Ltd. (RLS), holds the marketing authorization in India. Under the terms of agreement with Ranbaxy, Epirus is responsible for supplying BOW015 to Ranbaxy, through RLS, for sale in India. On December 2, 2014, Epirus announced the launch of Infimab™ (BOW015) in India, which was earlier than the originally anticipated launch during the first quarter of 2015.

Ranbaxy paid Epirus an up-front payment of $0.5 million, with additional payments required based upon the achievement of certain regulatory and commercialization milestones of up to $1 million in aggregate. In addition, milestone payments of up to $10 million are required upon the achievement of certain pre-specified levels of aggregate gross sales of BOW015, with Ranbaxy paying Epirus a net royalty in the mid-teens. The agreement is in place for 20 years.

Epirus' pipeline

In addition to BOW015, Epirus is also in the preclinical development stage with BOW070, a biosimilar version of tocilizumab (Actemra®), and BOW050, a biosimilar version of adalimumab (Humira®). In addition, Epirus has Z944, an oral T-type calcium channel modulator that was acquired through the merger with Zalicus.

  • Tocilizumab (Actemra®): This is a humanized monoclonal antibody that acts as an immunosuppressive drug by binding to interleukin-6 (IL-6). It is approved for the treatment of rheumatoid arthritis and systemic juvenile idiopathic rheumatoid arthritis. Global revenues for Actemra® totaled $1.1 billion in 2013 at Roche. The EU and US patents for Actemra® expire in 2019, and Epirus is planning to initiate preclinical studies in 2016.
  • Adalimumab (Humira®): This is a fully human IgG1 monoclonal antibody that binds to TNF-α. Like Remicade®, adalimumab was first approved for the treatment of rheumatoid arthritis, and has since been approved for the treatment of additional inflammatory conditions such as psoriatic arthritis, Crohn's disease, ulcerative colitis, and ankylosing spondylitis. The EU patent for Humira® expires in 2018, and Epirus is planning to initiate preclinical studies in 2016.
  • Z944: This is a novel, oral, T-type calcium channel modulator that is being developed for the treatment of pain. The molecule has demonstrated efficacy in multiple preclinical pain models and in a Phase 1b experimental model of pain. Epirus gained this compound through the merger with Zalicus, Inc. Epirus management has stated that the drug does not fit with the new company's business model of developing biosimilars. As such, we are modeling for a disposition of this asset.

Valuation and Recommendation

Epirus is focused on delivering biosimilar therapeutics to various markets around the world by successfully navigating the different regulatory, legal, and commercial barriers that exist in each of those regions. The company has divided the various markets into the following categories:
Developed Markets: In established markets, such as Europe and the U.S., there will need to be additional clinical work performed and a separate regulatory approval referencing an already approved product package.

Local Production Markets: These markets require local production of product, thus it is necessary to partner with established companies in each country that are familiar with the regulatory and commercial landscape. These countries include Brazil and China. While China requires clinical trials to be conducted in the local population, it is unclear whether Brazil will accept the Indian regulatory package for approval of BOW015.

Accessible Markets: BOW015 has received manufacturing and marketing approval in India and there are a number of countries that will accept the Indian regulatory package. These countries are located in northern Africa, southeastern Asia, and Central and South America (not including Brazil). In addition to accepting the Indian regulatory package, these countries do not require local production of product, thus Epirus can use BOW015 produced in India to greatly leverage initial market penetration and scale.



…Epirus products face less competition than other biosimilars…


One of the strategies that Epirus is focused on has to do with selecting products that will have minimal competition in the marketplace while also building a pipeline of products with synergistic therapeutic applications. This is exemplified by the company focusing on developing biosimilar versions of Remicade®, Humira®, and Actemra®. As the following two charts show, biosimilar versions of Remicade®, Humira®, and Actemra® will have fewer competitors (<5 for Remicade® and Actemra® biosimilars; approximately 10 for Humira® biosimilars) than other products (>20 for Herceptin®, Enbrel®, and Rituxan® biosimilars).


While some may argue that developing multiple products for the same indication is unwise as it may result in one product taking market share from another, we do not feel this will be the case for Epirus. The main reason for this has to do with the nature of biological therapeutics, particularly in the case of treating rheumatoid arthritis. A 2006 survey reported that 94% of rheumatologists surveyed reported that they had switched an RA patient from one TNF inhibitor to another due to inadequate response or side effects (Kamal et al., 2006). Since approximately 30% of RA patients do not respond to initial therapy, there is a large contingent of patients that will need to try multiple treatment options before identifying one that works for them. Thus, by offering a range of therapeutic options for RA the company is more likely to retain those patients who have already tried biosimilar therapy, thus helping to maintain overall market share.

Commercialization Opportunity

Our valuation is focused on BOW015 as it has already been launched in India and one more Phase 3 study needs to be completed along with an additional PK/PD study to run in parallel with the Phase 3 study before the drug can be approved in developed markets.

…Size of market in accessible markets…

There were approximately $26 million in Remicade® sales in the accessible markets in 2012. Remicade® is sold in 100 mg vials, and we estimate that a vial in these markets cost $600 (AWP) with each patient receiving an average of 2.5 vials per treatment for a total of 8 treatments per year. This equates to $12,000 per patient per year, and allows us to back-calculate an estimated 2,200 Remicade® patients in this market.

Epirus' strategy in the accessible markets is predicated on market expansion. As an example, Reditux®, a non-comparable biologic version of rituximab, was launched in India in 2007. Following the launch, and a subsequent 40% drop in price, the market expanded 6-fold, with Reditux® taking 34% of the expanded market.


We believe that BOW015 will initially be sold at a 30% discount to the $600 AWP price for branded Remicade®, and as more competitors enter the market this price will fall to approximately 50% of the AWP branded price. The number of patients should rise quite significantly as the price of treatment falls and access to treatment improves, thus we forecast the number of treated patients to rise to approximately 10,000 by 2019. Epirus is poised to gain a large share of the market in these countries, and we forecast they will attain 30% peak market share. We estimate a 16% royalty rate and with peak sales of approximately $34 million, this equates to approximately $5.5 million in royalty income. We apply a 13% discount rate to the future cash flows, giving BOW015 in the accessible markets a net present value of $13 million.

…Size of market in Brazil and China…

Remicade® sales totaled approximately $360 million in the local production markets in 2012, which includes Brazil, China, Russia, Turkey, and Saudi Arabia. We estimate that sales in Brazil and China were each responsible for 30% of those revenues. We estimate a vial in these markets cost $600 AWP with each patient receiving an average of 2.8 vials per treatment for a total of 8 treatments per year. This equates to $13,440 per patient per year, and gives an estimated 8,100 Remicade® patients in both Brazil and China.

We believe that BOW015 will initially be sold at a 30% discount to the approximately $600 AWP branded price in both countries, and as more competitors enter the market this price will fall to approximately 50% of the branded price. We estimate the number of potential patients will double by 2019 to approximately 16,000 in each country. As there will be more competition in these markets, we estimate that Epirus will have peak market share of 20% in Brazil and 15% in China. The agreement Epirus signed with Livzon calls for a royalty in the "high single digits" that we are estimating to be 8%. Epirus has yet to sign a partnership agreement in Brazil, thus we using a 12% royalty rate, a value half-way between the two signed deals (16% with Ranbaxy and 8% with Livzon). We apply a 13% discount rate to the future cash flows, and utilizing the aforementioned variables we arrive at a net present value for BOW015 in Brazil of $10 million and in China of $4 million.

…Size of market in Europe…

Europe is clearly the best opportunity for Epirus, but unfortunately the competition in Europe is quite fierce, with Epirus most likely to be the third or fourth Remicade® biosimilar to market. Total sales of Remicade® were $2 billion in 2012. A vial of Remicade® costs anywhere from $750-$1200 AWP, depending on the country, thus for our model we have assumed a cost of $1,000 per vial. We estimate that each patient requires on average 2.8 vials for each treatment, with 8 treatments per year. Thus, a patient is currently charged $22,400 per year for Remicade treatment®. This equates to approximately 90,000 patients currently being treated with Remicade®.

By the time BOW015 makes it to market in Europe, which we estimate will happen in 2018, we estimate infliximab biosimilars will be selling at a 40% discount to the current branded price, with the price eventually settling at approximately a 65% discount to the current AWP price. The patient population will not grow more than 2-3% per year, and with the intense competition we forecast Epirus to achieve a maximum market share of 13%.

Epirus has indicated a mixed sales approach, where the company will utilize a direct sales force for the countries of Belgium, Luxembourg, Netherlands, Switzerland, Norway, Finland, and Sweden and sign a partnership deal for the rest of Europe. We estimate that Epirus could garner 15% of BOW015 sales in Europe through the company's sales force, with a partner responsible for the other 85% of BOW015 European sales. The company has yet to sign a partnership deal so for now we are estimating a 15% royalty on partner revenues. We apply a 13% discount rate to future cash flows, and based on the preceding assumptions we arrive at a net present value for BOW015 in Europe of $72 million.

…Size of market in U.S….

While the U.S. market is likely to be the largest overall for biosimilar products, it may not be the largest opportunity for Epirus as there is going to be immense competition from a host of larger pharmaceutical companies. One difference between the U.S. and Europe is that Remicade® does not go off patent in the U.S. until 2018 (compared to 2015 in Europe), the same year that BOW015 is expected to launch. Sales of Remicade® in the U.S. were approximately $4 billion in 2013. A vial of Remicade® costs approximately $1500 AWP. We estimate that each patient requires on average 2.8 vials for each treatment, with 8 treatments per year. Thus, a patient is currently charged $33,600 per year for Remicade treatment®. This equates to approximately 120,000 patients currently being treated with Remicade®.

When BOW015 enters the market in the U.S., which we estimate will happen in 2018, we estimate infliximab biosimilars will be selling at a 50% discount to the current branded price, with the price eventually settling at approximately a 67% discount to the current AWP price. The patient population will not grow more than 2-3% per year, and with the intense competition we forecast Epirus to achieve a maximum market share of 10%.

Epirus has already indicated interest from potential partners for bringing BOW015 to market in the U.S. With no deal signed yet, we are estimating a 15% royalty rate on partner revenues. We apply a 13% discount rate to future cash flows, and based on the preceding assumptions we arrive at a net present value for BOW015 in the U.S. of $23 million.

Sum-of-parts valuation

In addition to BOW015, our sum-of-parts valuation takes into account the following additional assets: BOW050, BOW070, Z944, and available cash minus long term debt. Our calculations give us a net present value for the company of $140 million, and when divided by the fully diluted share count of 17.4 million shares gives us a current value of approximately $8.00 per share.

Wednesday, December 17, 2014

Auspex Pharma Hits A Homerun In Phase 3 Huntington's Chorea Trial

By Jason Napodano, CFA

On December 16, 2014, Auspex Pharmaceuticals, Inc. (ASPX) announced positive top-line efficacy and safety results from its Phase 3 registration program evaluating SD-809 for the treatment of chorea associated with Huntington’s disease (HD). The two Phase 3 trials, First-HD and Arc-HD, studied SD-809, a deuterium-containing analog of tetrabenazine, head-to-head vs. placebo for the treatment of chorea with HD and in transitioning patients on stable doses of tetrabenazine to SD-809, respectively. Results from both trials look outstanding.

We initiated coverage of Auspex Pharma in November 2014 with a $36 price target. As a result of the positive data, we have adjusted both sales and probability of approval inputs in our financial valuation model. We are raising our price target to $60 per share. Below we provide a brief background on SD-809, review the Phase 3 data, and then conclude with how this impacts our forecasts for sales of the drug and the valuation of Auspex Pharmaceuticals.

Brief Background On Tetrabenazine & SD-809


Auspex is developing SD-809, a deuterium substituted version of the established neurological drug tetrabenazine as a treatment for Huntington’s disease and other movement disorders. We believe tetrabenazine has a number of important shortcomings that are potentially addressed by Auspex’ SD-809.

Huntington’s disease (HD), tardive dyskinesia (TD), and Tourette syndrome (TS) are all disorders of excessive, uncontrollable movement associated with excess dopaminergic activity in the brain. Tetrabenazine provides symptomatic relief of movement disorders by inhibiting VMAT2, a transporter that packages dopamine and other neurotransmitters into vesicles for release into the synapse. This reduces synaptic dopamine levels, thus relieving overstimulation of dopamine receptors and reducing symptoms of HD, TD, and TS. Tetrabenazine was approved in the United States for the treatment of chorea (uncontrollable movements) associated with Huntington’s disease in 2008 and is sold as Xenazine® by Lundbeck.

Xenazine® has been designated an Orphan Drug in the U.S. given the narrow label for treatment of chorea only associated with HD and the small U.S. HD population of approximately 20,000 to 30,000 individuals (source: HDSA.org). The Xenazine® label does not include other movement disorders associated with HD such as dystonia or bradykinesia. U.S. sales in 2013 were $253 million, an increase of 20% over 2012. Orphan Drug exclusivity in the United States expires in August 2015, and there are no unexpired patents. In most Ex-U.S. markets, it is available as a generic, or sold at modest prices due to drug price controls. Outside the U.S., the drug is approved in many foreign markets for HD, TD, or for the broadly defined indication of organic movement disorders.

The annual cost of Xenazine® treatment in the U.S. can be estimated as $75,000 based on an average daily dose of ~40 mg (note the stable dose for the 36 patients enrolled in Arc-HD was 41 mg). Using $75,000 as the annual cost and Lundbeck's 2013 sales figures of $253 million, we estimate just shy of 4,000 patients in the U.S (about 15% of the U.S. HD population) are currently being treated with the drug – a surprisingly small number. We believe Xenazine® penetration is low due to the significant side effects and poor tolerability of the drug.

For example, in spite of its demonstrated efficacy in the treatment of movement disorders, tetrabenazine has numerous shortcomings. It has a relatively short half-life, must be administered three or more times daily, and has a poor side effect profile, which includes somnolence, insomnia, parkinsonism, severe depression, fatigue, anxiety, and irritability. The FDA label for tetrabenazine carries a "Black Box" warning for depression and suicide risk. Suicide risk is already greatly elevated in patients with Huntington's disease and schizophrenia, and this is exacerbated by treatment with tetrabenazine. Its pharmacologically active intermediates are metabolically inactivated by CYP2D6, a liver enzyme with activity that varies widely between individuals. Thus, the efficacy and side effects induced by any given dose varies widely across individuals, and dose-titration and pharmacogenomics testing are required to ensure safe use.

Below is a graph from the U.S. FDA showing the side effect profile of Xenazine®.


Auspex's platform technology uses deuterium, a stable, non-radioactive, non-toxic, and naturally occurring isotope of hydrogen to design improved variations of existing drugs. Deuterium has a natural abundance of about 1%, and is present in about one in every 50 water molecules on Earth. It has the same size and shape as a hydrogen atom, and differs only in forming very slightly stronger chemical bonds. The removal of a hydrogen atom attached to a carbon atom is the first and rate-limiting step in the metabolism of many drugs. If the hydrogen that is removed in the first step of the metabolic process is replaced by deuterium, the metabolic process is slowed by a factor of up to 8-fold because the C-D bond, which is stronger than a C-H bond, is harder to break (source: Auspex Pharma). Below is a cartoon showing the differences between tetrabenazine and SD-809.


Auspex Phase 3 Data – Outstanding Results!

Auspex examined SD-809 in a 90 subject Phase 3 clinical trial called First-HD comparing the drug to placebo (1:1 randomization) for the treatment of chorea symptoms of Huntington’s disease, a condition for which the FDA has granted SD-809 Orphan Drug designation. The primary efficacy endpoint for the study was the change from baseline to maintenance therapy in the Total Maximal Chorea (TMC) score of the Unified Huntington's Disease Rating Scale (UHDRS). SD-809 met the pre-specified primary efficacy endpoint. Patients taking SD-809 achieved a meaningful improvement of 2.5 points on the TMC score from baseline to maintenance therapy compared to placebo (p < 0.0001). Additional results from First-HD are as follows (source: Auspex Pharma):


The results look very similar on an efficacy standpoint to the Lundbeck Phase 3 trial with Xenazine®, which showed around a 3 point decline in TMC at week 12 compared to placebo (source: FDA). However, Auspex noted on their conference call that endpoints in Total Motor Score, which includes other movement disorders such as dystonia and bradykinesia, also met statistical significance. We note these added benefits are not listed on the Xenazine® label. At this point, we are unsure on just how much this increases the market opportunity for SD-809 beyond the current Xenazine® population. Additionally, there were four pre-specified key secondary endpoints that were tested on a hierarchical basis: treatment success based on patient global impression of change (PGIC) and clinical global impression of change (CGIC), quality of life and balance. Other pre-specified motor endpoints were also analyzed. 


A total of 90 patients (45 in each group) were enrolled for evaluation over 13 weeks: patients were titrated weekly to an optimal dose up to week eight; were on maintenance therapy for four weeks, and; were taken off study medication in the final week of the study. Dose of SD-809 at week 12 was approximately 40 mg. A total of 87 patients completed the study; one patient in the SD-809 group and two in the placebo group discontinued.

As important as the efficacy data for SD-809 are the safety and tolerability data. In fact, we believe the data below are what will separate SD-809 from Xenazine® / generic tetrabenazine once approved. In general, SD-809 was well tolerated; there was no difference in the rate of dose reduction between SD-809 and placebo (6.7% in each group). Results from First-HD show a favorable safety and tolerability profile of SD-809; following are the number of patients reporting adverse events by system organ class:


We believe these safety and tolerability results are outstanding. Below we highlight some of the key differentiators seen between SD-809 in Auspex Phase 3 trial vs. Xenazine® (tetrabenazine) in the Lundbeck Phase 3 trial. Note the meaningful reduction in things like somnolence, sedation, fatigue, insomnia, anxiety, depression, and akathisia.


In parallel to the First-HD study, Auspex completed the four-week “switch” study called Arc-HD in which maintenance of chorea control was assessed after switching patients overnight from tetrabenazine to SD-809 (at approximately half the dose of tetrabenazine). All available data through eight weeks following the switch were included in the analysis. Dose adjustments were permitted after week one. The mean total chorea score decreased by approximately one point from baseline on the TMC score (week one = -0.8 ± 0.4 / week four = -0.8 ± 0.5). In addition, there were 21 patients for whom data were available at week eight; these data demonstrated an improvement of 1.9 (± 0.8) points on the TMC score. Data for the remaining 15 patients will be available at a future date. The Arc-HD study has an ongoing long-term safety component as well. Results from Arc-HD, presented below in graphical form, are outstanding.


The results from First-HD and Arc-HD show SD-809 to be a superior drug to Xenazine®. We believe the efficacy is comparable in reducing chorea associated with HD and that SD-809 offers additional benefits of reducing other motor function disorders associated with the disease such as dystonia and bradykinesia. Safety and tolerability data show a marked reduction in key adverse events that currently limit Xenazine® uptake like sedation and depression, and results from Arc-HD prove that patients can be switched from Xenazine® to SD-809 with no loss of chorea control. Week eight data from Arc-HD suggests additive control with SD-809 over Xenazine®, likely due to the ability to increase the dose to higher levels thanks to the added tolerability.

Implications For Auspex

These are obviously fantastic results (note the stock is up 101% as of writing this report). We had previously believed that Auspex would be able to capture 15% of the HD market once SD-809 was approved. This assumed taking 50% of the Xenazine® market share (7.5% of the market) and bringing in another 7.5% new patients. However, based on the results of First-HD and Arc-HD, we now believe that Auspex will take nearly all the market away from Lundbeck’s Xenazine®, as well as bring in a new 25% of the population. As a result, we are increasing our sales assumptions from SD-809 in HD from our previous estimate of $250 million (similar to the current Xenazine® market) to $550 million.

We also see increased likelihood of success in the ongoing Phase 3 Arm-TD and Aim-TD clinical trials studying SD-809 in Tardive Dyskinesia (TD); and the potential to expand SD-809 use in Tourette syndrome, currently in a Phase 1b study. The graphs below show the efficacy response rates to tetrabenazine in HD, TD, and tics (representative of Tourette syndrome) as found in a retrospective analysis of patients with movement disorders followed over an average of 2.3 years (Kenney et al, 2007). A total of 98 patients had HD, 149 had TD, and 93 had tics (including TS). Approximately 80% of patients with each type of movement disorder achieved a moderate-to- marked reduction in symptoms when evaluated on a 5 point rating scale.


Data from the Phase 3 Arm-TD and Aim-TD studies are expected to report around the middle of 2015 and in 2016. Phase 1b data in Tourette syndrome are also expected around the middle of 2015. Auspex management anticipates filing the U.S. FDA for SD-809 in HD by the middle of 2015. We remind investors that Auspex will seek approval for SD-809 via the 505(2) pathway.

Valuation & Recommendation

As noted above, we are dramatically increased our sales assumptions for SD-809. We previously believed the drug would do sales in HD around $250 million. We now believe eclipsing $500 million is achievable. We have also increased our sales assumptions in both TD and Tourette syndrome. At peak, we believe SD-809 could be a $2 billion drug, albeit we place a slightly higher discount rate on the sales in TD and Tourette syndrome based simply on stage of development.

We assume a limited impact from generic tetrabenazine, believing that the SD-809 data is superior enough to the clinical profile of tetrabenazine that the majority of patients will switch to the new drug. Our only concern at this standpoint is pending competition from Neurocrine Bio’s (NBIX) Phase 3 drug, valbenazine. Neurocrine is pursuing indications in TD and Tourette with valbenazine, a purified active metabolite prodrug of the (+)-alpha isomer of tetrabenazine. Nevertheless, we believe the market is large enough, particularly in TD with an estimated 500,000 patients in the U.S., where both Auspex and Neurocrine can see meaningful success with their respective drugs.

We have conducted a discounted cash flow analysis inputting our sales assumptions for SD-809 along with the following additional assumptions: 12% CoGS, R&D and G&A expenses that bottom out at 7% and 10% of gross revenues, respectively, 32% effective tax rate beginning in 2017, 22% discount rate. Based on our assumptions, we calculate a fair value for Auspex Pharmaceuticals of approximately $1.9 billion, or $60 per share. We continue to rate the shares 'Buy'.

Tuesday, December 16, 2014

FDA Allows InVivo Therapeutics To Expedite Enrollment For Spinal Injury Device

By Jason Napodano, CFA

On December 16, 2014, InVivo Therapeutics (NVIV) released some very positive news with respect to the company's going pilot study (NCT02138110) testing InVivo's Neural-Spina Scaffolding ("NSS") for the treatment of complete traumatic spinal cord injury. It's primarily a safety study, with investigators and the FDA looks for signs that the NSS does no additional harm to a completely paralyzed patient post a traumatic spinal cord injury.

The primary endpoint is incidence of all Adverse Device Effects ("ADEs") of any kind / seriousness six months post surgery. The trial was originally designed with several safety "check ups" as individual patients were enrolled and treated. The trial also had a pretty strict enrollment criteria when initiated. For example, the original protocol called for a total of five patients between 18 and 55 year old with traumatic spinal cord injury along the thoracic region on the spine (T3-T11). Patients had to have an ASIA-A complete impairment confirmed by neurosurgeon occurring within past 10 days prior to surgery.

Following the surgery, patients were followed closely for three months; and only after three months with no safety issues or ADEs would the FDA allow the second patient to be enrolled. This process was expected to take place for all five subjects - meaning enrollment could have taken as long as 15 months from first to last patient, with 21 months to initial top-line data. The secondary endpoint of the study, which include AIS score changes from baseline, occurred at three months, six months, and 12 months post surgery.

The news this morning dramatically speeds up the potential enrollment of the study. Under the new plan, barring significant safety issues, InVivo will submit two months of safety data to the FDA for the first subject enrolled in October instead of three months. This means open enrollment for the second subject should commence in mid-January. Upon enrollment of the second subject, InVivo will submit to the FDA one month of safety data for that subject together with the previous subject’s data. Then, concurrent enrollment for the remaining three subjects will then begin (about two months after the second subject is enrolled). There will be no additional mandatory holds between enrollment of the final three subjects. This news take the enrollment period from 15 months noted above to potentially as low as 6 months!

And this isn't the first good news InVivo received since the start of the trial. On October 29, 2014, InVivo announced that the FDA had approved various changes to the protocol expanding the number of allowable clinical sites from six to 20, along with broadening the eligibility criteria. The new eligibility criteria changes include:

- The upper end of the age range has been increased from 55 to 65
- The spinal cord injury level has been expanded from T3-T11 to T3-T12/L1
- The enrollment window has been extended from 10 to 21 days post injury
- The Body Mass Index upper limit has been increased from 35 to 39

Why Is The FDA Doing This?

On November 7, 2014, we wrote an article providing a brief update on InVivo Therapeutics. In the article, we noted that the first patient was enrolled in the company's pilot study of its NSS device for the treatment of complete traumatic spinal cord injury on October 15, 2014. The subject, who we now know to be 25 year old Jordan Fallis of Arizona, was the first human to receive InVivo's NSS device at the Barrow Neurological Institute at St. Joseph’s Hospital and Medical Center in Phoenix, AZ.

November 11, 2014, Barrow press released news of the surgery, creating a bit of a media frenzy over the next few days. We think Barrow waited 27 days to press release news of the surgery (and Jordan's name) in order to be confident no serious ADEs occurred during the first month. We think this is a very good sign of things to come. Back in October, Dr. Nicholas Theodore, Chief of Spinal Surgery, Barrow Neurosurgical Institute and Medical Director of the Neurological Trauma Program performed the surgery and commented that the procedure went smoothly and the patient was doing well following surgery.

We are now over two months since the first surgery and to date there has been no major safety issues or serious ADEs reported. In fact, there is anecdotal evidence of efficacy through media interviews and a comment from Mr. Fallis himself stating, "I've already started getting feeling back lower..." If Jordan is stating that he is getting some feeling back at one month, we are very excited to see his progress over the next year. Those interested in following Jordan's recovery and donating to help pay for his medical costs can visit a "Go Fund Me" page set up by Sandy Fallis.

Regardless, we think today's news is very positive for InVivo because it shows the company has a good working relationship with the FDA, there have been no issues to date that would impede development of NSS, and credibility is improving for management. The FDA is an enigma at times, but it seems clear to us that with InVivo and the NSS, the FDA is keeping a close eye on the study and doing all reasonable things to facilitate advancement of the device.

Reasons To Be Bullish

We remind investors that InVivo received a Humanitarian Use Device (HUD) designation for the NSS in April 2013. Management believes the NSS- is a potential $500 million product in acute spinal cord injury. We concur. Enrollment criteria in the IDE trial is strict, even with the expanded inclusion criteria. However, we believe if the NSS works, then neurosurgeons will use the device in almost all non-penetrating spinal cord injuries, regardless of things like ASIA impairment level and injury location. This brings the market up from roughly 1,600 patients per year to more like 6-8,000 patients per year. Of course, as of now we are excluding the nearly 300,000 American’s with injuries greater than 10 days old. In time, InVivo may expand the use of the NSS to these “chronic” patients, perhaps in combination with neural/spinal cord stem cells.

According to the NSCISC's February 2013 report "Spinal Cord Injury Facts and Figures at a Glance," (i) during the first year, average "cost of care" ranges from $340,787 to $1,044,197, depending on the severity of the injury, (ii) the net present value to maintain a quadriplegic injured at age 25 for life is $4,633,137, and (iii) the NPV to maintain a paraplegic injured at age 25 for life is $2,265,584. Because these costs place a tremendous financial burden on families, insurance providers, and government agencies, and because of the HUD designation, we believe a cost of $100,000 is fair (and actually quite conservative).

As for commercialization, according to industry statistics, nearly 80% of all spinal cord injuries are treated at 75 Level 1 trauma centers around the U.S. We believe the company can effectively target these 75 centers with 10 to 20 direct representatives. InVivo’s scaffolding is designed to complement the current standard of care for an acute spinal cord injury, not replace it. The sales forced, armed with pivotal human efficacy data and promoting the product under that type of marketing message, should have enormous success.

We are being aggressive here because the scaffolding is designed to be complementary to standard-of-care or new treatment options that might incorporate the use of neural stem cells. We expect next-generations variations of the scaffolding will be designed to specifically incorporate advancing regenerative medicine technologies. As such, $500 million seems easily doable – assuming the NSS works.