The Life Sciences Report
as part of our
Source: George S. Mack of
The Life Sciences Report
The small biotech companies that have survived the last five
years have learned to be lean, mean and efficient with shareholder
capital. In this exclusive interview with
The Life Sciences Report
, Aegis Capital's Managing Director and Head of Equity Research
Raghuram "Ram" Selvaraju discusses companies that have mitigated
risk by giving new life and higher margins to products previously
relegated to the dustbin of commoditized generics. He also
highlights some very new and exciting developments in the realm of
stem cell technologies and monoclonal antibodies that engage
The Life Sciences Report:
You just returned from the 28th Annual European Conference on
Treatment and Research in Multiple Sclerosis in Lyon, France.
Putting aside the focus on multiple sclerosis, did you get any
perspective on biotech markets in general?
Right now, everyone is talking about the major cost-containment
pressures at work in the healthcare industry, and in Europe in
particular, where a lot of economies are in deep financial trouble.
Companies are concerned about the prospects of new drug launches.
Once new drugs get through the approval process, they then have to
go in front of reimbursement agencies in Europe. They are looking
for advantageous pricing, but nowadays companies have to be
prepared for a contentious battle, which was not historically the
case. That has put a damper on enthusiasm within the context of the
There are also concerns here in the U.S. about cost-containment
pressures because we have a fiscal cliff looming. If Congress can't
figure out how to put the country on a sustainable fiscal path, we
will see draconian, automatically imposed cuts across the board
within healthcare. These cutbacks will not only impact funding for
research and clinical development, but will also affect the ability
of the healthcare system to pay for drugs and other diagnostic and
The overarching concern globally is cost containment. That is
going to make things difficult for the biotech sector.
Ram, there's been a change in the regulatory environment in the
U.S. Would you address that?
The overall mood among healthcare-focused institutional investors,
whether hedge funds, mutual funds or venture capital firms, is
generally bullish, principally because of the recent demeanor of
the U.S. Food and Drug Administration (FDA). The FDA has approved a
large number of drugs that have either been on its docket for a
while or that people were not expecting the agency to approve in
such a timely manner. The overall positioning of the agency looks
very different from the way it was in the 2005?2006 era, when we
saw the Vioxx (rofecoxib) scandal and the subsequent approval and
then withdrawal of Tysabri (natalizumab). Tysabri eventually
returned to the market after patients and physicians alike argued
on its behalf, which illustrates how conservative the agency had
become. The FDA went from being a somewhat permissive agency to
extremely risk-averse. The new FDA attitude has been the principal
driver of bullishness in the biotech sector recently. These days,
when a drug is supposed to be approved?when it has demonstrated
strong safety and clinically meaningful efficacy in the disease
area that it is designed to treat?it has typically been
Do you think this loosened FDA stance will continue?
Yes?at least until there is another scandal. The new stance of the
FDA has been driven by voices in the Obama administration and in
Congress saying the agency has become too risk-averse. Complaints
by industry and patient advocacy groups have not gone unnoticed. We
need new drugs, especially for significant unmet medical needs.
You follow some micro-cap companies and do serious diligence on
them, which is rare. Are micro caps suitable for retail
I want to make it absolutely clear that I don't consider any
investment in biotech to be 100% suitable for the small retail
investor. The retail investor who chooses biotech should only
invest highly discretionary funds in the space. The older person
with only $50,000 in retirement savings shouldn't go anywhere near
the biotech sector, regardless of market cap.
Are there special risks associated with stocks in the micro-cap
We have been taught that drug development costs a lot of money, and
that it takes several hundred million dollars?at least?to get a
drug from concept through the clinic and into the market. The
problem with this approach is that investors become inured to the
fact that biotech companies are serially raising money, diluting
shareholders and carrying an accumulated deficit of several hundred
million dollars before getting a drug across the finish line and
within sniffing distance of sustainable profitability. Personally,
I think that is wrong and I have taken great pains to point out
that all drug development does not have to be prohibitively
Ram, is there a company that meets that criterion?
IntelGenx Corp. (IGX:TSX.V) is a company in my coverage universe
that has an accumulated deficit of only $17.5 million ($17.5M), a
market cap of less than $36M and an enterprise value of about $30M.
But the company has managed to get FDA approval for a drug without
help from an external party, whether a partner or otherwise. The
drug is Forfivo (bupropion), a higher-dose, extended-release
version of Wellbutrin for major depressive disorder; it is being
launched by IntelGenx's sales partner Edgemont Pharmaceuticals
IntelGenx has proven a drug can be taken through development and
to the market successfully without spending a massive amount of
money. This drug may represent only a niche opportunity, and I'm
not suggesting that it is a blockbuster. But the company has
succeeded where much larger companies have failed to get anything
approved. There are many illustrations of the hypothesis that drug
development can be done in a cost-effective, capital-efficient way.
Telling investors that all drug development is expensive is
disingenuous and wrong.
Aside from capital efficiency, what else do you look for using this
type of investment thesis?
I look for management teams with substantial ownership stakes in
their own companies. I don't like it when CEOs pay themselves
massive salaries and don't own a single share of stock?that's a
disaster waiting to happen. IntelGenx was founded by its president
and CEO, Horst Zerbe, who still owns 23% of the company. He founded
IntelGenx as a formulation expertise-focused company, and now it
has three core platform technologies that enhance drug delivery,
enable development of novel formulations and improve the dosing
convenience of existing drugs. Notice I said
This company is not engaged in pie-in-the-sky,
drug development on a novel, invalidated target. It is improving
existing agents that have indisputable safety and efficacy
The company has a plethora of clinical-stage candidates, all of
which are amenable to approval via the FDA's 505(b)(2) regulatory
pathway, which is a hybrid of the abbreviated new drug application,
used by generics companies, and the new drug application (NDA),
used by branded pharmaceutical companies. The 505(b)(2) route has
distinct advantages because companies get the same exclusivities
development via NDA, but have the added advantage of working in a
domain wherein chances of approval are much higher.
In my opinion, IntelGenx's model represents not only a
cost-effective approach to drug development but a risk-mitigated
approach as well. Saying you are going to dilute him/her to the
smallest extent possible is a responsible message to take to the
shareholder. Horst Zerbe can say that because he is a shareholder
in his own company.
In addition to IntelGenx's Forfivo, the company has a pipeline of
products for insomnia, migraine, erectile dysfunction and
neuropathic pain management, among others. Is your $3 target price
driven solely by Forfivo, or do you have these other products
factored into your model?
I attempt to ascribe a risk-mitigated net present value to all
components of a company's clinical-stage pipeline. My valuation
methodology takes account of IntelGenx's other drug candidates, but
I ascribe a $1/share amount to the company's lead product
candidate, Forfivo, by itself.
Is there another example you would like to talk about?
Following in the capital-efficiency vein, Israel-based BioLineRx
Ltd. (BLRX:NASDAQ) (BLRX:NASDAQ) is an interesting company. It has
a good pedigree; the company was co-founded by Teva Pharmaceutical
Industries Ltd. (TEVA:NASDAQ) and has been an incubator project.
BioLineRx has done some cost-effective, cost-contained,
capital-efficient drug development. Since its inception roughly
nine years ago, it has raised about $120M. It has burned through
about $90M or so while building a pipeline of seven clinical-stage
candidates and more than 20 preclinical candidates, all of which
are optimized. The company trades at an enterprise value of less
than $30M, but its pipeline is commensurate with that of a company
10 or 15 times its size.
Are you applying the concept that some micro-cap stocks are not
necessarily the great risk that consensus opinion seems to indicate
with regard to BioLineRx?
Yes. We see a massive amount of value in BioLineRx, available at a
disproportionately low price. Not to mention that the company has
two drug candidates in phase 3 development, with results from both
pivotal programs due over the course of next year. The company does
not lack near- and mid-term value-driving catalysts. It's quite the
I am particularly impressed that BioLineRx has managed to
develop multiple drug candidates in different disease indications
simultaneously in an organized manner, without burning a lot of
money in the process. A case in point: The company recently
reported that it completed preclinical development for a hepatitis
C (HCV) candidate. That alone should be sufficient motivation for
investors to significantly bid up the price of the stock, because
HCV is a hot disease indication right now. We have seen a rash of
high-priced acquisitions, deals and partnerships in this domain,
and I expect that to continue. With HCV, companies can start
throwing off efficacy data almost as soon as they are in clinic or
start dosing patients?data that the market can take to the
Shares of BioLineRx are up 39% in the past four weeks, yet it only
has a $57M market cap.
Exactly. By the end of Q3/12, it is probably looking at $25?26M in
cash. We are talking about an under-$30M enterprise value, which
seems paltry in light of what is going on at this company.
Can you mention another company that you like?
Ampio Pharmaceuticals Inc (AMPE:NASDAQ) is also focused on the
505(b)(2) pathway. The company is interesting principally because
it looks at repurposing approved drugs for new disease indications.
This is a more sophisticated model than IntelGenx's, which is
focused on reformulation but not changing the purpose of the drug.
And as I said before, the 505(b)(2) application advantage is that
the route to market is significantly abbreviated, and the cost
associated with clinical development is significantly lower.
Could you address Neuralstem Inc. (CUR:NYSE.MKT)? You follow the
company and Aegis Capital recently participated in two equity
financings, in which nearly $10M was raised.
Sure. I visited Neuralstem's histology lab in San Diego in August
2010. I saw some very interesting animal data, which intrigued me
because I did stem cell experiments in models of neurodegenerative
disease when I worked in industry. It was devilishly difficult to
get any kind of meaningful result out of the model systems. The
stem cells that we injected went everywhere except where they were
supposed to. They did not provide any kind of regenerative effect
at all. We basically gave it up as a lost cause.
Yet this little company, Neuralstem, was demonstrating that
implantation of its neural stem cells into a rat's spinal cord
could generate axonal tracts?nerve fibers?along the entire length
of the spinal cord, from head to tail. Before implantation, the
spinal cords of these animals had been completely severed through a
crush operation. When the company showed me these results, I was
I thought this result deserved publication in a high-impact
scientific journal. Lo and behold, just about a month ago, the
research and results appeared in
the journal with the highest impact factor in the life sciences
space bar none. A
paper can represent 10 years of work.
The science underlying Neuralstem, in my opinion, is truly world
class. Even though the company, in my view, is very risky and
speculative, and is five to seven years away from entering the
market with a therapy, I believe it is a worthwhile investment
opportunity for the risk-tolerant biotech investor. The science is
of high quality.
The preclinical research makes me wonder why companies are not
doing clinical trials in acute stroke or acute spinal injury. Why
are we waiting, in human trials, until scar tissue forms and we
lose regenerative power before we try stem cell implants? Is
Neuralstem looking at acute indications that would correspond to
the rodent studies?
Neuralstem has tried to target the most difficult problems around.
It has done neural stem cell-based clinical trials in diseases like
amyotrophic lateral sclerosis (ALS), chronic ischemic stroke and so
on. Its rationale is that these are the most significant unmet
medical needs; these patients are beyond help. If the company can
demonstrate any improvement at all, it will have a clear path to
market, and can charge very high prices for its medications. The
downside, of course, is that the hurdle is very high, and there is
a high probability of failure. Another problem with doing acute
studies, as in the acute stroke setting, is the ticking clock. You
want to get therapy to the stroke patient within eight hours.
Many acute stroke patients recover on their own. But what about
severance of the spinal cord? Can you address that from an
Neuralstem could very easily focus on the treatment of acute spinal
cord injury. But another company that I cover, InVivo Therapeutics
Holdings Corp. (NVIV:OTCBB), is focusing on that space. InVivo's
is to inject a scaffold of an inert biomaterial into the spinal
cord, essentially preventing damage from spreading and preventing
the formation of scar tissue. Because scar tissue doesn't form, a
more permissive environment for regeneration is created, driven by
endogenous factors inside the spinal cord itself. InVivo is geared
more toward the acute therapy setting with regard to spinal cord
injury than Neuralstem is.
I understand what you are saying about difficult indications. If a
therapy shows any efficacy in a truly unmet need, is the FDA likely
to approve it?
Yes. And Neuralstem believes that because its stem cells have been
engineered to regenerate the pieces of the neuronal circuitry that
are deficient in these neurodegenerative disorders, it can go after
chronic spinal cord injury and still hope to have success.
The company has a potential ace up its sleeve. Its small
molecule program focuses on disease indications that are less
chronic in nature and in which activity could be observed in a much
shorter period of time. Its lead small molecule candidate, NSI-189,
is being developed for treatment of major depressive disorder. We
could see efficacy data early next year. In the future, we could
see the molecule being applied to enhancement of cognitive function
in healthy people.
Are there synergies between the small molecule development program
and the stem cell platform?
There are. The small molecules would not have been discovered
without the company's expertise in the neural stem cell domain. It
uses its neural stem cells as a screening platform from which to
identify proprietary small molecules with neurological
The company is interrogating the stem cells with the small
Yes. That is how Neuralstem's discovery effort on the small
molecule side works. The company envisions utilizing the small
molecule and the neural stem cell solution in the same patient, at
the same time, to create a synergistic interaction between the two.
It hopes to stimulate endogenous regeneration?neuronal sprouting?in
areas like the hippocampus (the area of the brain that governs
learning and memory) by applying the small molecule systemically
and, at the same time, injecting a neural stem cell into the brain.
This could selectively give rise to dopaminergic neurons, which are
deficient in people with Parkinson's disease. Both therapeutic
agents could be applied together to the same patient.
Are Neuralstem's cell lines genetically modified or hormonally
No. Based on the area of the brain they came from, they
preferentially differentiate into the various kinds of neurons. The
company has one stem cell line that preferentially gives rise to
dopaminergic neurons. It has another stem cell line that
preferentially gives rise to cholinergic neurons, which would be
used in Alzheimer's disease. And it has one cell line being used in
an ALS study (and that was the focus of the
paper), which gives rise to GABAergic neurons (secreting
?-aminobutyric acid), which would have a role in mediating recovery
from spinal cord injury and could have a role in reconstituting
motor neuron circuitry (deficient in ALS).
You also follow Lpath Inc. (LPTND:OTCBB), a company developing new
monoclonal antibodies engaging new targets.
Lpath recently instituted a 1-for-7 reverse stock split, which has
taken the company to the NASDAQ from the Bulletin Board. This
company has also undertaken a capital-efficient approach to drug
I like Lpath for three reasons. First, it is a monoclonal
antibody company. When I initiated coverage on Lpath, a section in
my report was entitled "Everyone Loves an Antibody Company," which
is absolutely true. Monoclonal antibodies are high-value products.
If you look over the course of the past 15 or so years, there have
been more acquisition transactions involving monoclonal antibody
platform companies than there have been of any other technology
type or drug class in the entire biotech industry. The most recent
example was the acquisition of Micromet Inc. by Amgen Inc.
(AMGN:NASDAQ). Micromet didn't have any approved products, and it
had one candidate on the cusp of entering phase 3, but Amgen paid
$1.1 billion ($1.1B) for it.
Second, I like Lpath because its monoclonal antibody-focused
platform technology is unique. It is the only company in the world
that has figured out how to make monoclonal antibodies against a
particular class of molecules?not proteins, as is the normal case,
but molecules known as bioactive lipids, which are very important
inflammatory mediators. They also regulate the fibrotic process.
They are master regulators in many ways. These molecules have been
very difficult to target. Most strategies targeting bioactive
lipids involve interfering with the receptors of those lipids, but
that is very inefficient because multiple receptors are targeted by
the same bioactive lipid. I like Lpath because its technology
platform is clearly differentiated and focuses on a class of
molecules with massive potential in terms of specific targeting in
Lastly, I like Lpath because of its lead indication, which is
wet age-related macular degeneration (
). The target is sphingosine 1 phosphate (S1P). I love
ophthalmology as a disease indication because the eye is a surface
organ, and it can be targeted with topical medications like eye
drops, as well as with microimplants and intravitreal injections.
As soon as systemic exposure is taken out of the equation, the risk
profile of a drug drops by 20?30%, and the FDA loves that. There is
no need to worry about cardiotoxicity or renal toxicity or liver
toxicity, all of which are typical concerns with any standard pill.
Ophthalmology is also a great indication because visual acuity is a
simple endpoint to measure in a clinical study. It is evaluated
with an eye chart. The third thing that makes ophthalmology an easy
indication is that clinical trials can be done over short periods
of time. A drug's efficacy can be measured within three or four
weeks. If it's not doing anything by then, it's never going to do
In the ophthalmology domain, we have seen a rash of
acquisitions. ISTA Pharmaceuticals Inc. (ISTA:NASDAQ) was acquired
by Bausch & Lomb Inc. (private) this past summer and Inspire
Pharmaceuticals Inc. (ISPH:NASDAQ) by Merck & Co. Inc.
(MRK:NYSE). The big kahuna, Novartis AG (NVS:NYSE), got Alcon
Laboratories for $12.9B. Big pharma has a major jones for
ophthalmology, and Pfizer Inc. (PFE:NYSE) is partnered with Lpath
in its AMD program, which is now in phase 2 and will report results
by the summer of 2013. If data are positive, it could pave the way
for Lpath to be acquired by Pfizer. I don't see any reason why
Pfizer would hold back at that point.
It's amazing how many indications, including systemic disease,
could be affected by targeting S1P.
I agree. Sphingosine I phosphate is also a target in multiple
sclerosis, and in cancer. Lpath has demonstrated the impact of
targeting sphingosine I phosphate with its monoclonal antibody in
cancer already. There is a lot of potential in Lpath's technology
platform, which the market is discounting.
Does Pfizer have any ownership in Lpath?
Pfizer does not have any equity investment in Lpath.
You do not follow VentriPoint Inc. (VPT:TSX.V), but can you talk
about the company?
We have been in touch with VentriPoint for a while now because we
think its technology platform is very interesting. It has developed
an intelligent way of imaging the heart, taking a page out of the
playbook of Pixar Animation Studios, which has made films like
Are you familiar with what Pixar does?
The company animates a figure, and then its software fills the
Exactly. The technology is called Piecewise Smooth Subdivision
Pixar generates animations with smooth surfaces by approximating
an area in which a smooth surface should appear (like a floor of a
room) with a coarse mesh made up of many tiny polygonal elements.
By using more and more polygons, the mesh gets smoother and
smoother until eventually it creates the appearance of a smooth
surface, to the point where the human eye cannot detect anything
With PSSS, VentriPoint is enabling clinicians to use ultrasound
scans, done with relatively inexpensive equipment and composed of a
limited amount of information, to sketch accurate 3-D renditions of
right ventricular malformations. This highly proprietary modeling
approach is very powerful and can be applied to very serious
conditions, like tetralogy of Fallot, which gives rise to what were
called "blue babies." It detects other conditions as well, such as
pulmonary arterial hypertension, which afflicts adults mostly and
is life-threatening. There are multiple applications for this
The great advantage of the system goes to cost containment.
There are money savings because it allows clinicians to do the same
kind of imaging with ultrasound that they would otherwise have to
get with a CAT scan or MRI, which are erratic and difficult to use.
Very expensive MRI or tomography machines are freed up for more
lucrative things, such as, for example, brain imaging. My view is
that this technology is fundamentally underrated and misunderstood
by the market.
To be clear, normal ultrasound imaging systems can use the
software. Is that right?
That is correct. Basically, this system is plug-and-play. Buy the
software from VentriPoint, and you are pretty much ready to go.
Ram, could this be a point-of-care service in smaller clinics, and
perhaps in underserved developing world areas?places where you
would never find MRI equipment?
Yes. The advantage is that you can provide access to reliable
cardiac imaging in places that previously would never have been
able to accomplish that.
Was there one more company you wanted to mention?
The last company that I would highlight is Synergy Pharmaceuticals
Inc. (SGYP:NASDAQ). The company is in a single phase 3 trial with a
drug candidate very closely related to Ironwood Pharmaceuticals
Inc.'s (IRWD:NASDAQ) recently approved drug, linaclotide, which is
going to be launched in December under the trade name Linzess.
Linzess went through four phase 3 trials in chronic constipation
and irritable bowel syndrome, and met 66 primary and secondary
endpoints with statistical significance.
Linzess is based on an endogenous human hormone, but it is not
an exact replica of that hormone. Instead, it is a peptide that was
identified in a bacterial endotoxin that is known to perform some
of the same functions as the endogenous human hormone, which
stimulates fluid secretion into the intestine. Obviously, if there
is more fluid in the intestine, there is greater gastric motility,
and therefore issues associated with chronic constipation and
irritable bowel syndrome can potentially be resolved. Synergy has a
direct copy of the endogenous human hormone, plecanatide (formerly
SP-304). If the mechanism has been validated by Ironwood's drug,
and Ironwood's drug causes some diarrhea as a side effect because
the bacterial endotoxin overstimulates the receptor and
oversecretes fluid into the intestine, Synergy's drug candidate is
not only more risk-mitigated but also could demonstrate comparable
efficacy without the problem of diarrhea.
How much could Synergy Pharmaceuticals be worth?
Ironwood is worth roughly $1.4B, but it only owns about 40% of
Linzess, whereas Synergy owns 100% of plecanatide. Using Ironwood's
current market cap of about $3B as a proxy, we think Synergy's
$300M market valuation represents an unwarranted discrepancy.
Ram, I've enjoyed this. Thank you.
I've enjoyed it very much.
Raghuram "Ram" Selvaraju's professional career started at the
Geneva-based biotech firm Serono in 2000, where he discovered the
first novel protein candidate developed entirely within the
company. He subsequently became the youngest recipient of the
company's Inventorship Award for Exceptional Innovation and
Creativity. Selvaraju started in the securities industry with
Rodman & Renshaw as a biotechnology equity research analyst. He
was the top-ranked biotech analyst in the
Wall Street Journal's
"Best on the Street" survey (2006) and went on to become head
of healthcare equity research at Hapoalim Securities, the New
York-based broker/dealer subsidiary of Bank Hapoalim B. M.,
Israel's largest financial services group. While at Hapoalim,
Selvaraju was regularly featured in the
Wall Street Journal, Barron's, BioWorld Today,
and Reuters/AP. He was also a regular guest on the Bloomberg TV
program "Taking Stock," appeared with Bloomberg TV's on-air
correspondents Betty Liu and Gigi Stone and was a guest on CNBC's
"Street Signs with Herb Greenberg."
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1) George S. Mack of
The Life Sciences Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are sponsors
The Life Sciences Report:
Neuralstem Inc., Lpath Inc., VentriPoint Diagnostics Ltd. Merck
& Co. Inc. is not affiliated with Streetwise Reports.
Streetwise Reports does not accept stock in exchange for services.
Interviews are edited for clarity.
3) Ram Selvaraju: I personally and/or members of my immediate
household own shares of the following companies mentioned in this
interview: None. I personally and/or members of my immediate
household am paid by the following companies mentioned in this
interview: None. I was not paid by Streetwise Reports for
participating in this interview.
4) Aegis Capital Corp. has received compensation for investment
banking services from the following firms within the past 12
months: Ampio Pharmaceuticals, Neuralstem Inc., Synergy
Pharmaceuticals. Aegis may seek to obtain compensation for
investment banking services from any or all of the companies
mentioned over the course of the next three months. The firm does
not own 1% or more of the outstanding shares of any of the
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