Despite the recent surge in general and biotech indices I still believe we are in the beginning of a significant correction after a 10-year bull market. If a major correction occurs in 2019, I intend to use it and increase exposure to small cap biotechs as I still believe in their long term value proposition.

With respect to stock picking, the thriving biotech IPO market created a dichotomy. On the one hand, investors have a lot to choose from as the IPO class of 2017-18 includes so many high quality biotech companies. On the other, valuations for many companies (especially the ones without clinical validation) appear to be overblown, driven by hype rather than data.

The most extreme example is Moderna (MRNA), which went public with a valuation of $7.5B without a single program that has a clear route to the market. Many other companies IPO’d with generous valuations (>$500M) without clinical data, sometimes without a drug in the clinic. These include Rubius (RUBY), Arvinas (ARVN), Editas (EDIT), CRISPR (CRSP), Intellia (NTLA), Jounce (JNCE), Denali (DNLI), Homology (FIXX), Wave (WVE) and Scholar Rock (SRRK).

Looking at recent IPO filings, not a lot has changed. Synthorx (THOR) whose lead IL-2 variant is not yet in the clinic, is worth $431M. The same goes for high profile imminent IPOs: Harpoon (Lead program in P1 with limited data and no efficacy signal to date), TCR2 (lead program about to enter P1) and Alector (2 programs in P1, no data in patients).

These high profile companies have excellent fundamentals and could eventually generate huge returns in the long run but given the industry’s high attrition rate in translating preclinical data to humans, I find their stocks outrageously expensive. I therefore prefer to wait for clinical data before buying any of these stocks even if it means a higher price because, judging by the history of our field, most of them will encounter setbacks and failures.

Another group of stocks on my watchlist are advanced stage companies with clinically validated assets and in some cases regulatory approvals that are traded at a reasonable EV. These include: Xenon (XENE), Insmed (INSM), Chiasma (CHMA), Stemline (STML) and Esperion (ESPR).

Regardless of market performance, 2019 will have a flood of clinical data. Here are some segments worth tracking.

ANTIBODY-DRUG CONJUGATES (ADCs)

ADCs were the big hope of the antibody industry 5-7 years ago but so far did not live up to expectations. Originally, ADCs were supposed to combine the best of both worlds: chemo-like efficacy with antibody-like safety. In reality, ADCs behaved less like antibodies and more like chemotherapy with the main hurdle being off-target toxicity which limited the dose patients can be given. There are obviously additional issues specific for each program but a narrow therapeutic window has been the primary hurdle with many ADC programs to date. There were cases in which ADCs demonstrated a favorable clinical profile (HER2, CD30) but these are the exceptions.

Despite the challenges, 2019 could be a turning point for ADCs thanks to new technologies and a couple of “old school” programs that were able to generate compelling data.

Immunomedics’ (IMMU) Trop2 program (sacituzumab govitecan) has already been submitted for approval in triple-negative breast cancer. This program is very interesting because it relies on an old, less potent chemotherapy agent (like 1st generation ADCs which failed) but somehow Immunomedics found the right recipe with this program. Of note, this ADC is given frequently (weekly) at high doses (10 mg/kg), a regimen which is not feasible with 2nd generation ADCs from Immunogen (IMGN) or Seattle Genetics (SGEN). Efficacy to date has been encouraging (32% response rate, 6.7 months duration of response) and may be sufficient for accelerated approval.

Seattle Genetics’ (SGEN) anti-Nectin4 program (enfortumab vedotin) is currently in a pivotal P2 for bladder cancer. This ADC utilizes the same payload the company used in Adcetris (MMAE) which so far hasn’t been very successful in solid tumors for the reasons outlined above. With enfortumab vedotin, Seattle Genetics and its partner Astellas may have found the right target and indication to produce good efficacy even at a low dose (1.25 mg/kg). This agent still has serious side effects including fatalities that may be treatment related. The ongoing P2 is a single arm study in PD1-resistant patients with results expected in Q1 2019

While many biopharmas de-prioritized ADCs (including Astellas recently), there are still a lot of smaller companies working on novel ADC technologies.

Initially, companies focused on highly-potent payloads, which looked great in mice but backfired in humans due to increased toxicity (see SGN33A as a recent example). Today, companies are focused on improving the therapeutic window by minimizing exposure in normal tissues, which is perceived as the main barrier.

It remains to be seen whether these new technologies improve ADCs’ therapeutic window but there is reason to believe some features can be optimized to overcome general toxicity. Personally, I am optimistic about Zymeworks (ZYME) and its ADC platform, which appears to rationally and meticulously address the major technical issues with ADCs. The company’s lead ADC, ZW49, combines the company’s ADC technologies including a bispecific binding region (to enhance cell penetration) as well as an optimized conjugation method (to improve exposure in the blood while minimizing exposure in non-target tissues). ZW49 is expected to start P1 imminently and should have P1 data towards YE2019.

CRISPR AND PROTAC

2019 should have the first ever clinical data for two potentially disruptive technologies: CRISPR (clustered regularly interspaced short palindromic repeats) and PROTAC (proteolysis targeting chimera).

Editas (EDIT) and CRISPR Therapeutics (CRSP) both have active clinical programs that are expected to generate data in 2019. Editas is evaluating EDIT-101 in LCA10, a rare genetic retinal disease which is not amenable to standard gene therapy with AAV due to the size of the mutated gene. CRISPR Therapeutics is developing CTX001, an ex vivo treatment for Beta Thalassemia and Sickle Cell Disease, putting it in direct competition with Bluebird Bio (BLUE).

PROTACs are a novel class of molecules that selectively degrade proteins by harnessing the body’s natural protein disposal system. This could enable targeting proteins deemed undruggable with conventional methods. In principle, the concept is similar to siRNA but with a small molecule, making it more feasible in tissues outside the liver. Arvinas (ARVN) is expected to start P1 for ARV-110 (targeting androgen receptor for prostate cancer) in Q1 2019 and could have initial results by year-end 2019.

While both approaches are not validated in humans, any clinical proof of concept with any of the programs above will be huge news, potentially opening a new era in medicine.

IMMUNO-ONCOLOGY

The year has been particularly tough for IO pure-plays who went from the industry’s darlings in 2015-2016 to the most beaten down group on the stock market. This is easily illustrated by pure play IO stocks like Jounce (JNCE), Surface (SURF), FivePrime (FPRX) and Corvus (CRVS), all of which are currently trading close to their cash levels. Arcus (RCUS) is an exception with an enterprise value of ~180M.

There will likely be a lot of PD1 combo data in 2019 but so far nothing looks promising. Nektar’s (NKTR) PEGylated IL2 will have readouts from multiple studies but data will be hard to interpret without a control arm.

At ASH 2018, CD3 engagers demonstrated good efficacy in liquid tumors. Three CD20-targeting programs from Roche (mosunetzumab and CD20-TCB) and Regeneron (REGN) demonstrating good efficacy (including durable CRs) in NHL. Side effect profile appears manageable but toxicity is still an issue. Importantly, all agents were given once every 2-3 weeks, in contrast to first generation CD3 engagers (BiTE) that are given via continuous infusion over months.

Amgen presented preliminary results for its CD3xBCMA BiTE in multiple myeloma, demonstrating responses in 7/10 patients. While preliminary, this type of activity may make bispecific BCMA antibodies (especially constructs with half-life extensions) a real threat to BCMA CARs. GENE THERAPY

2018 was not an easy year for gene therapy, a sector for which I still have high hopes. With a few exceptions, news flow has been negative to neutral dominated by development setbacks and early uninterpretable data. Muscle diseases provided a preliminary silver lining while ophthalmic and liver targeted programs failed to impress.

Early positive readouts in muscle diseases

Audentes (BOLD) and Sarepta (SRPT) presented positive data in XLMTM and DMD, respectively. Audentes’ AT132 data continue to look promising with significant improvements in functional and respiratory endpoints that cannot be explained by spontaneous improvement. As patients are treated early in life and their muscle tissue grows significantly, duration remains a key concern (in two patients there were mild score reductions at the last time points but it’s too early to tell whether this is a real trend or not). The company expects to present updated results in 2019 and intends to file for approval if results continue to look good.

Investors got excited with Sarepta’s DMD data which were limited (4 patients) but did show impressive micro-dystrophin expression and sharp reductions in CK (a marker for muscle damage). The effect was less dramatic on key functional scores but improvement was seen across the different endpoints, including NSAA, which will probably be the primary endpoint for the pivotal study. Still, these improvements are hard to interpret without a control arm as they can be unrelated to treatment. Similarly to the case in XLMTM, DMD patients are children so the question of dilution as patients grow and add muscle mass is a very pertinent one.

Solid Bio (SLDB) and Pfizer are also enrolling patients in their respective DMD programs, with initial data expected in 2019. Results will be inevitably compared to those of Sarepta but they will likely be hard to interpret via cross trial comparison.

Source : Citi, November 2018

Pompe disease is the next frontier in muscle diseases with multiple programs in development, including Spark’s (ONCE) SPK-3006 and Audentes’ AT982. Both programs are expected to enter the clinic in 2019 with Spark taking the lead following a recent setback with AT982, forcing Audents to explore a different vector.

Liver programs generated mixed data

For liver-targeting therapies, 2018 will go down as a disappointing year. While hemophilia B programs from Spark and UniQure (QURE) generated promising data, Spark’s Hem A program continued to face challenges, leaving Biomarin’s (BMRN) BMN270 in the lead.

So far, companies could not replicate the initial success with hemophilia in other liver diseases.

Ultragenyx’s (RARE) DTX301 for OTC demonstrated suboptimal efficacy with only two of six patients achieving a response (normalized ureagenesis at 24 weeks). There was no dose-response despite a 3-fold increase in the second cohort, which is concerning. In 2019, Ultragenyx will provide an update from the third cohort.

The company recently released preliminary results from a second liver-directed gene therapy for GSD1, reporting clinical improvements (time to hypoglycemia) in 2/3 patients in the first cohort. The trial will start enrolling the second cohort imminently with potential data later in 2019.

Audentes’ AT342 in Crigler-Najjar syndrome also encountered setbacks due to slow enrollment and a transient biomarker effect in the first patient. The study is evaluating a higher dose with data expected in 2019.

Retinal programs

The retinal gene therapy space started 2018 with high expectations following the approval of Spark’s Luxturna (Dec 2017), however, the year included mainly mixed or negative data readouts.

Nightstar (NITE) presented first data for its XLRP program which demonstrated some efficacy signals at the lower doses but adverse events at higher doses required intervention which made data hard to interpret.

AGTC’s (AGTC) XLRS program failed to demonstrate efficacy, leading Biogen to terminate its collaboration with the company. AGTC has three other programs in clinical development, data from which are expected during 2019. Expectations around the two Achromatopsia programs are low given setbacks observed to date. The XLRP program recently entered P1 and it will be interesting to see whether AGTC will also see the efficacy signals observed by Nighstar.

REGENXBIO (RGNX) reported an update from its AMD program, which is intended to replace chronic administration of anti-VEGF drugs. Although the company reported a dose-dependent expression of the protein in the eye, clinical outcomes were not as unequivocal with 3/6 patients requiring anti-VEGF rescue treatments.

MeiraGTx (MGNX) continued to enroll patients in three retinal programs (RPE65, Achromatopsia, XLRP), with data expected in 2019.

CNS

Investors should expect a lot of readouts for CNS gene therapy programs in 2019. Similar to the case in ophthalmic programs, the field has one major success story (Avexis) that spurred a lot of activity but so far no home run data have been reported. Companies are focusing on rare genetic diseases such as MPS and Batten (CLN) with a strong preference for AAV9 given its ability to penetrate the brain and efficiently transduce neurons.

Abeona (ABEO) is one of the leaders with 2 programs in the clinic (MPSIII A and B, respectively), with two additional programs (CLN1, CLN3) expected to start P1 by mid-2019. In 2018, the company reported encouraging biomarker and imaging data for its MPS programs but so far could not demonstrate unequivocal neurocognitive effects. With no new data since May 2018, 2019 is going to be an important year for both programs. The MPSIIIA program will focus on younger patients hoping to see neurocognitive stabilization or improvement in 6-8 patients, which may be sufficient for approval.

Amicus (FOLD) recently became a dominant CNS GTx player via the acquisition of Celenex in September 2018. The company now has two clinical stage programs for Batten disease (CLN6 and CLN3) and multiple preclinical programs (CLN8, Niemann-Pick C). In its R&D day, Amicus presented encouraging anecdotal results for the first two patients, indicating disease stabilization.

REGENXBIO (RGNX) expects to have three CNS programs in the clinic by YE2019. RGX111 (MPSI) and RGX121 (MPSII) are actively recruiting patients with preliminary data expected in 2019. A third program for CLN2 is expected to enter the clinic in 2019.

Beyond rare diseases, there are multiple gene therapies for Parkinson’s disease, most of which are designed to increase dopamine levels in the brain and do not address the underlying cause of the disease. Voyager (VYGR), Axovant (AXON) and MeiraGTx (MGTX) have programs in the clinic.

Ex vivo gene therapy

In 2018 three ex-vivo gene therapy companies got listed. Rocket (RCKT), AVROBIO (AVRO) and Orchard Therapeutics (ORTX) joined Bluebird Bio (BLUE), which is still the leader in the space. The companies are using lentiviruses to transduce blood cell progenitors outside the body (ex vivo).

Bluebird, which became more of a CAR story following promising BCMA data in multiple myeloma, continued to advance LentiGlobin for Beta thalassemia and Sickle cell disease (SCD). Recent data at ASH demonstrated good efficacy with an optimized manufacturing process in SCD but a case of MDS in one patient raised concerns among investors despite the fact that the cancer cells did not contain LentiGlobin’s transgene. The company guides for a potential approval of LentiGlobin in 2019 in Beta thalassemia, initially in Europe.

Rocket presented data in Fanconi anemia which demonstrated some signs of efficacy but totality of clinical data were inconclusive. The company expects to start dosing patients with an optimized process in 2019. The company expects to advance three additional programs to the clinic, including one in vivo AAV-based program for Danon disease.

AVROBIO started 2018 with promising data for its Fabry program but a recent update was disappointing due to lack of persistence (see my take here). In 2019, the company will provide updated results in Fabry, including data from an improved manufacturing process that could improve persistence and expects to start P1 for two additional programs (Gaucher and cystinosis).

Orchard has already an EU approved product for ADA-SCID (a rare immunodeficiency syndrome), originally developed at GSK. The company has four other clinical stage programs including two immunodeficiency programs, one rare metabolic program and a program in Beta Thalassemia.

siRNA

Another important 2018 landmark was the first approval for a siRNA drug, Alnylam’s (ALNY) Onpattro for TTR amyloidosis. The road was admittedly longer and more expensive than originally anticipated (17 years from the first paper to describe siRNA in human cells, 16 years from the establishment of Alnylam and 14 years from its IPO), but at the end of the day it should be viewed as a major success story with a validated class that should generate a steady flow of new drugs going forward. The next step for the field would be validation of siRNA drugs using GalNAc delivery which carries a major overhang following revusiran’s P3 termination due to mortality imbalance.

At a market cap of $9B Alnylam is not a steal yet I would feel much comfortable owning it today vs. owning Moderna at $5.6B. mRNA drugs have an explosive potential and do not directly compete with siRNA drugs but if history is of any indication, mRNA could be years from realizing its potential. Alnylam has everything Moderna lacks: Clinical validation across multiple agents, genes and indications (so far limited to liver diseases); a clear translational route from in vitro through animals to humans and market assumptions that stand up to scrutiny.

Portfolio updates

I am selling Endocyte (ECYT) and Sunesis (SNSS), adding another position in Stemline (STML) and starting a new position in Chiasma (CHMA).

Portfolio holdings – Jan 13, 2019

