Infectious Disease Technologies Could Open Investment
Opportunities in 2012: Stephen Dunn
Source: George S. Mack of
The Life Sciences Report
(2/16/12)
http://www.thelifesciencesreport.com/cs/new/print/na/12559?x-t=pre.view
Investors have avoided infectious disease companies like the
plague, but LifeTech Capital President and Senior Managing
Director of Research Stephen Dunn doesn't agree, and he has
staked out some ideas in this space that could make you
financially better off. In this exclusive interview with
The Life Sciences Report,
Dunn explains the rationale and delivers the names of
bug-fighting companies that use the newest technologies to
overcome old barriers to success.
The Life Sciences Report:
Why is there such a disproportionate amount of effort and
resources targeting oncology versus infectious disease?
Stephen Dunn:
Most people don't realize that globally more people die from
infectious diseases than from cancer. We currently think of
cancer as a terminal disease of the developed world while we
believe infectious diseases are a third-world problem and are
treatable if only they had proper access to medical care. The
fact of the matter is that increasing human population density
combined with cheaper global travel between poor and developed
regions has magnified the risk of infectious disease outbreaks in
the developed world. Even now, our community and healthcare
facilities are seeing all sorts of new strains of infections. In
addition, human encroachment with wildlife and increasing
contamination in the water and food chain have caused a number of
deaths and triggered multiple food recalls.
Infectious diseases require a significant expenditure of drug
developer time and money. As a result, oncology drug development
appears more attractive. The development and regulatory hurdles
are usually much lower for oncology drug development since most
cancers affect fewer than 200,000 people a year, qualifying them
as orphan drugs requiring just a single Phase 3 trial with a
shorter review period.
Today, approximately 60% of new biotechnology companies are
focused on oncology and they attract almost 70% of the venture
capital and public market capital for biotech. However, the U.S.
National Institutes of Health (NIH) is expected to fund $15
billion (
B
) for infectious diseases, excluding HIV, during 2012 versus only
$8B for cancer. While Wall Street has been somewhat ambivalent,
the U.S. government clearly sees the growing threat and is
funding significant research for infectious diseases. We expect
investor sentiment to grow during 2012 as we are beginning to see
more and more pathogens that are resistant to current vaccines
and antibiotics.
TLSR:
What about profitability? How do you make money in the infectious
disease space when most, even viral diseases nowadays, are not
chronic diseases once they are treated? Even hepatitis C (HCV) is
curable.
SD:
Profitability is certainly an issue for those routine vaccines
such as the seasonal influenza shot that you can get at the
drugstore for $30 or the normal childhood vaccination regimens.
But investors know there are multibillion-dollar markets as we've
seen with the prophylactic vaccines for the human papilloma virus
(HPV). The increasing threat from emerging infectious diseases,
some with significantly higher transmissibility and mortality,
can drive the economics closer to the oncology space. For
example, the headlines over the past few years have brought
increasing investor awareness to the MRSA (methicillin-resistant
Staphylococcus aureus
) threat in the healthcare and community settings. Savvy
investors are also aware that MRSA is mutating into even more
lethal strains.
There are over 300 infectious diseases with only 15% of them
having an effective prophylactic therapy. However, since it is
usually not financially practical to develop prophylactics, most
of the industry and investors have turned to post-infection
therapeutic treatments. For example, we have seen both medical
and financial success in HIV and in HCV therapies to the point
where they could be considered chronic conditions. But these
infections require human blood-to-blood transmission, which is
relatively difficult.
We believe the best investments will be in the emerging
infectious disease space where the transmission vector is faster
along with rapidly mutating pathogens that develop drug
resistance. For example, Tuberculosis is spread via coughing and
sneezing and is so easy to catch that it is believed 30% of the
global population carries the latent form. It also has a 50%
mortality rate if it becomes active and is left untreated. Due to
the prevalence of this infection, Tuberculosis has now mutated
from drug-resistant to multi-drug resistant to extremely
drug-resistant strains. I expect this resistance pattern to be
seen across a number of infectious diseases in the future and the
financial opportunities are increasing along with them.
TLSR:
Just addressing viral and bacterial disease for a moment, how can
we keep pace with drug resistance? It takes 10-15 years to
develop an antibiotic or antiviral. Then, the developer of an
antibiotic could be asked by the FDA to hold the antibiotic back
as second- or third-line use to delay resistance. How is a
developer incentivized to expend the resources for such a
project?
SD:
During the relatively short history of antibiotics, we typically
see resistance develop in humans within four or five years and
turn into a significant problem within 10 years. This is a result
of the multiple pathways for resistance to form. For example,
research just published in the
New England Journal of Medicine
on gonorrhea, which became resistant to sulfanilamide in the
1940s, penicillin and tetracycline in the 1980s and
fluoroquinolone by 2007, is now showing resistance to
third-generation cephalosporin. Unfortunately, this
antibiotic-resistance issue also means that drug developers are
not incentivized to develop new antibiotics. The risk/reward for
developing an antibiotic, even if it is successful, is
unfavorable as the drug might be held in reserve by prescribing
physicians to reduce developing resistance. This makes it a risky
area for investors.
TLSR:
Relatively few new antibiotics have come along recently. Is there
a play here for investors?
SD:
One of the few recent success stories was Optimer Pharmaceuticals
Inc. (OPTR:NASDAQ) where DIFICID (fidaxomicin) was shown to have
a longer clinical response over the antibiotic vancomycin in
Clostridium difficile
-associated diarrhea and was approved by the FDA last year.
However, even today, there is still a lingering risk that
vancomycin will be prescribed first by some physicians who will
keep DIFICID in reserve despite its effectiveness. The bottom
line is that antibiotic development is not an attractive space to
most drug developers, nor is it to most investors.
TLSR:
Steve, what about alternatives to antibiotics? Can you escape the
lock-and-key mechanism to bypass resistance?
SD:
Development of alternatives to antibiotics is very attractive to
investors. However, there are relatively few publicly-traded
companies specializing in this field. One of them, NovaBay
Pharmaceuticals Inc. (NBY:NYSE.A) is developing a new drug class
called Aganocides that mimic the human body's way of killing
pathogens. When white blood cells, called neutrophils, encounter
foreign bacteria, they surround it and generate an oxidative
burst process, which destroys it. The oxidative burst creates
hypochlorous acid molecules, which are highly reactive and kill
bacteria. Aganocides are stable versions of this chemistry, which
does not cause resistance in pathogens. We know resistance is
unlikely, otherwise human neutrophils would have been rendered
useless a long time ago.
Also in the antibiotic alternative space is a private company
worth keeping your eye on called AvidBiotics Corporation
(private). It uses antibacterial proteins, specifically
re-engineered defensive proteins called bacteriocins, which are
employed in nature by
Pseudomonas aeruginosa
to kill other strains of bacteria by piercing their cell
envelopes. This could represent a new class of highly targeted,
narrow spectrum antibacterial agents.
TLSR:
Since antibiotics on only work on bacterial targets, what about
the viral target space?
SD:
Traditional vaccine technology consists of an antigen that
teaches the immune system to recognize a specific virus. It can
be combined with an adjuvant (an assist molecule) that can boost
the immune response making it more effective. In fact adjuvants
have been called "immunology's dirty little secret" and may be
more important than the antigen (a protein that challenges the
immune system to create antibodies) itself in eliciting an
effective clinical immune response.
TLSR:
I'll bet you have a play on adjuvants.
SD:
A company that is currently under the radar in this area is
Stellar Biotechnologies Inc. (KLH:TSX.V) which is the world
leader in keyhole limpet hemocyanin (KLH) production for use as
an adjuvant and protein carrier. KLH is produced by
Megathura crenulata
(great keyhole limpet, a marine animal), and it is such a large
and complex molecule that it cannot be synthesized. This
represents a high barrier to competitive entry especially for
production of cGMP (current good manufacturing practices)-grade
KLH, for which Stellar is partnered with Sigma-Aldrich
Corporation (SIAL:NASDAQ). Currently KLH is being used as either
an adjuvant or protein carrier in over 30 active human clinical
trials in various indications. It is important to note that KLH
is considered so important to medical research that Stellar
receives government funding to ensure that it can maintain a
sustainable supply and even develop a KLH-based immunogenicity
assay.
TLSR:
What about other technologies such as DNA vaccines?
SD:
Development of DNA vaccines is another promising technology.
These newer products in development can be considered
third-generation vaccines, and they are made up of a small,
circular piece of bacterial DNA called a plasmid, which is
genetically engineered to produce specific proteins, antigens,
for which there is a desired immune response. Once inside a cell,
it translates the pathogenic (disease-causing) DNA and converts
it into its respective proteins. Because the host cell recognizes
these proteins as foreign, they are processed and displayed on
the cell's surface. Consequently, the immune system is alerted,
which then triggers a range of immune responses.
TLSR:
What investing ideas do you have in the DNA vaccine space?
SD:
A company to watch in this space is Vical Incorporated
(VICL:NASDAQ), which has several DNA vaccine candidates in
clinical trials. Another company to keep your eye on is Inovio
Pharmaceuticals (Amex:INO), which uniquely combines DNA vaccines
with electroporation so that small controlled pulses of
electricity are able to temporarily increase the permeability of
the cell membrane and increase the DNA vaccine uptake. One of the
larger companies in the space is Dynavax Technologies Corporation
(DVAX:NASDAQ), which uses short DNA sequences to activate the
innate immune system, specifically targeting toll-like receptor 9
(TLR9), which is found on a specialized subset of immune cells to
teach and stimulate the immune system. Finally, Novavax, Inc.
(NVAX:NASDAQ) uses recombinant DNA (rDNA) technology to create
virus-like particles (VLPs), molecular structures very similar to
a virus, except that they are lacking the genetic material
necessary to replicate. Genes coded for specific pathogenic
antigens are integrated into the baculovirus, which then infects
a cell culture from which the recombinant viral proteins are
collected. When injected into the body, VLPs attach to cells and
trigger an immune response against the virus for which the VLP
was created.
TLSR:
What about biomarkers and diagnostics in the infectious disease
space? What are you looking at here?
SD:
Diagnostics is an area in this space that is often overlooked by
investors. A significant player in infectious disease diagnostics
is Cepheid (CPHD:NASDAQ) with its Xpert line of
in vitro
diagnostics for acquired and critical infectious diseases along
with its instruments and reagents. Another diagnostic company,
Quidel Corporation (QDEL:NASDAQ), has the QuickVue line of rapid
diagnostic tests along with its molecular diagnostics for nucleic
acid testing, for which the company expects to significantly
expand indications in the future. The infectious diseases space
is very large but very fragmented, and there are relatively few
publicly-traded companies, especially when one considers the huge
potential markets. We believe investors would do well to enter
the infectious disease space during 2012.
TLSR:
Thank you, Steve. I enjoyed this.
SD:
Thank you very much.
LifeTech Capital Senior Managing Director and President
Stephen Dunn was previously the managing director of Life
Sciences Research at Jesup & Lamont, as well as director of
research for Dawson James Securities and director of Life
Sciences at Cabot Adams venture capital group. He has held
management positions in Business Development, Finance and
Operations having worked in over 25 countries in North America,
Europe and the Far East with biomedical companies including
Beckman Coulter, Coulter, Cordis (Johnson & Johnson),
Telectronics (St. Jude Medical) as well as several smaller
companies. With over 25 years within the global biomedical
industry, Mr. Dunn has negotiated numerous intellectual property
licenses, product development agreements, venture funding,
M&A and joint ventures. Dunn is a five-star biotechnology
analyst on StarMine and has appeared in both the financial and
scientific media such as
The Wall Street Journal,
CNN,
Newsweek, Forbes,
Nightly Business Report,
Nature Biotechnology, The Scientist,
BioWorld and many other media outlets. He is also a frequent
speaker and panel member for many financial, medical and venture
capital events.
DISCLOSURE:
1) George 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:
None.
2) The following companies mentioned in the interview are
sponsors of
The Life Sciences Report:
Stellar Biotechnologies. Streetwise Reports does not accept stock
in exchange for services.
3) Stephen Dunn: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I
personally and/or my family am paid by the following companies
mentioned in this interview: None. I was not paid by Streetwise
for participating in this story. LifeTech Capital has received
investment banking compensation from NovaBay Pharmaceuticals in
the previous 12 months and Stellar Biotechnologies is currently
an advisory client of LifeTech Capital.
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