Looking for Innovative Small-Cap Biotech Companies: George
Source: George S. Mack of
The Life Sciences Report
High-quality science underlies successful drug development
companies, even those that turn one company's discarded junk into
biotech treasure. That's an example of one compelling investment
strategy being employed by Senior Analyst and Managing Director
George Zavoico of MLV & Co. In this exclusive interview with
The Life Sciences Report,
Zavoico lays out a number of solid ideas predicated on good
science that growth seekers can leverage for real gains.
The Life Sciences Report:
George, do you have a theme or areas of specific interest you
could tell us about?
I have a Ph.D. in physiology and I've worked for a number of
pharmaceutical and biotechnology companies, including
Bristol-Myers Squibb Co. (BMY:NYSE), Alexion Pharmaceuticals Inc.
(ALXN:NASDAQ) and T Cell Sciences, which is now Celldex
Therapeutics Inc. (CLDX:NASDAQ). In addition to physiology, my
interest and experience lies in pathology and biochemistry and
particularly in signal transduction pathways-how messages signal
from the outside to the inside of the cell. That segues into
diseases that depend on signaling transduction for their
pathogenesis, and they include cancer, autoimmune disease and
inflammation. I follow companies that discover and develop drugs
for these indications and for treating cardiovascular diseases.
I'm also interested in molecular diagnostics. Medicine is moving
beyond just diagnosis and prognosis to predicting how individual
patients will respond to drugs and how their disease will
progress. That, in a nutshell, is my theme.
Is there a key focus?
Oncology is one of my key focuses. There are more oncology
companies out there than practically any other type of
disease-focused company, so it's easy to pick oncology
companies-or at least to screen them to find some that I like.
The autoimmune/inflammation space is less well populated by
companies, with the exception of companies developing vaccines. I
have gravitated toward vaccine companies to some extent,
including cancer vaccines, since new discoveries and technologies
are making it possible to produce effective vaccines for diseases
for which there are no currently available vaccines.
You have some companies under coverage that approach a billion
dollars in market cap, but you're basically in the small-cap
space. Your companies are small enough to give investors doubles
and potentially triples, yet large enough for mutual funds to
own. I'm wondering if this is a conscious part of your theme at
MLV, or did it just happen that way?
It is a conscious effort for me and for MLV in the healthcare
sector. I find that I can approach the science, the investigators
and the academic researchers developing innovative drugs mainly
through smaller-cap companies. The larger-cap companies tend to
be far more secretive about their early-stage development
projects and are less open to speaking with analysts about the
science. It is hard to get close to people involved in drug
discovery at a large pharmaceutical company. I find the
small-cap, micro-cap and even the private company space to have a
wealth of very interesting research. The most interesting have
the potential of changing the standard of care for some
George, we have had a lengthy period of about three-and-a-half
years where biotech has stagnated in the public markets, and
shares have not been reactive to any reports of progress in
pipelines. Does biotech have the wind to its back now?
Instead of saying biotech stocks have the wind to their backs I'd
say maybe they have a strong breeze to their backs.
Is the market ready to buy these stocks now?
I think it is. Many companies that have been well funded-or
funded enough-through this rough period have continued to make
progress and built up their fundamental values. Some have
started, and some have completed, important clinical trials. This
is despite the fact that their stock prices may have declined.
Once you get into proof of concept Phase 2b trials, and certainly
into Phase 3 trials, then you're looking at a much shorter time
horizon to potential commercialization, partnership or outright
acquisition by a larger pharmaceutical company, and you begin to
see investors adding value to those particular companies.
The U.S. Food and Drug Administration (FDA) is taking longer to
grant approvals. The more we learn, the more biologic complexity
we see. Is diligence taking longer because of increased
complexity, or is there something else going on, such as
: It could be a little bit of both. Yes, the biological
complexity is daunting. You're talking about diagnostics and
personalized medicine and being able to tailor drugs specifically
to certain diseases, especially polygenic (multiple gene
involvement) diseases. One example is Genomic Health Inc.
(GHDX:NASDAQ), whose product, called Oncotype Dx, is a multigene
assay to first determine the risk of a 10-year recurrence of
breast cancer and also whether chemotherapy will likely be
effective for some of those patients, or a waste of time.
The FDA is a government organization, so clearly there is
political influence there. It has become a large organization so
there is the issue of bureaucracy. I always think of the FDA as
being understaffed, overworked and underpaid, but FDA staffers
really try, and I think overall they do a very good job.
Certainly FDA has improved over the last several years despite
the fact that the approval process has become more complicated,
with NDAs (new drug applications) and BLAs (biologic license
applications) now being submitted in multiple volumes.
The application of cell technologies seems limitless. You have
some coverage here.
Right now I'm following one cell therapy company: Aastrom
Biosciences Inc. (ASTM:NASDAQ). I remember writing about cell
therapy 10-15 years ago, and there was a tremendous amount of
interest and hype, mainly in stem cells. At the time, the science
had not matured and we really didn't know how to go about it
properly. It took time to really understand how stem cells work,
what they do and how to grow them to a commercial scale. Aastrom
is one of the companies leading that field.
It's an autologous (using the patient's own cells or tissue)
mesenchymal stem cell technology being used for critical limb
). Can you judge efficacy from what you've seen?
Based on conversations with physician investigators, as well as
looking at the data from Aastrom's clinical trials, I believe
responses to their patient-specific Ixmyelocel-T (mixture of
autologous bone marrow-derived mesenchymal and monocytic stem and
progenitor cells, including certain types of activated
macrophages) treatment are clinically relevant and beneficial,
and they look better than with any other currently available
therapies. While some of the conversations were anecdotal, I
think the Phase 2 trial was positive and returned quite promising
results, which is why Aastrom is going into a large,
well-designed Phase 3 trial for CLI.
What are the other applications of this product?
It's also being developed for dilated cardiomyopathy. This is
heart failure following an ischemic heart attack (myocardial
infarction). Cells are injected directly into the ventricles of
the heart by catheter through a leg artery, and they are finding
improved heart function over a relatively short period of
With your background in biology, I know you like to evaluate
unusual technology with broad applications.
I like to look at the science and see if I can be convinced that
it could work. I like companies that are looking at targets that
might be more broadly effective and overlooked by others. The
best example of that right now is Threshold Pharmaceuticals Inc.
(THLD:NASDAQ). Their TH-302 is a hypoxia (oxygen
deficit)-activated prodrug (a molecule activated or metabolized
into its active form following administration). The activated
drug is bromo-isophosphoramide, which is structurally related to
cytotoxic nitrogen mustard drugs. Just about all tumors have
regions of hypoxia, where traditional chemotherapy is ineffective
because it can't diffuse into that region. But TH-302 is
activated in areas of tumor hypoxia. This is an example of a
potentially broadly applicable product.
The company was rewarded with very positive results from a
Phase 2b trial in pancreatic cancer, where patients were treated
with TH-302 in combination with gemcitabine. The idea here is to
use the gemcitabine to kill the cells that are in the normoxic
(normally oxygenated) region, and use the TH-302 to reach deep
into the tumor to kill the cells that are hypoxic. Results showed
a 63% improvement in progression-free survival in patients taking
the combination. Pancreatic cancer is exceedingly difficult to
treat, and I think there have been no drugs since gemcitabine
that have shown any comparable level of efficacy. Of course, the
final results are going to be about overall survival.
When will we hear about overall survival?
Those results are going to be reported toward the end of the
This stock is up 421% over the last 12 weeks. Is it still a
I believe so.
What positive news spiked Threshold's stock over the past three
There were two pieces of news. The first, in early February, was
an announcement that the company had struck a partnership
agreement with Merck KGaA (MKGAY:OTCPK) of Darmstadt, Germany.
The total value was over $500 million (
) upfront and in development and commercial milestones. Then
there was the data from the pancreatic cancer trial.
What else is attractive to you?
Peregrine Pharmaceuticals (PPHM:NASDAQ) has a lead compound,
bavituximab, a monoclonal antibody, targeting the phospholipid
phosphatidylserine (PS), which is normally not present on the
outside surface of the cell membrane. It's sequestered on the
inside or cytosolic surface. But in tumor cells and tumor
vasculature it flips over to the outside surface, and that
provides a very specific and selective target for antibodies that
can then flag the tumor cells for destruction by the immune
The market has not been receptive to Peregrine. It's been on a
steady decline over the past year, and is down 37% over the past
I view it as a buying opportunity. The company returned equivocal
results in a Phase 2 trial in a very difficult patient
population. However, there is strong evidence of efficacy in
earlier-stage trials. Peregrine has undergone a number of
changes. I think bavituximab may potentially be a broadly
effective drug, but of course that remains to be seen.
This is a very exciting idea.
Yes, it is. I also look at companies with novel protein kinase
inhibitors, and I look for some twist to the typical approach.
ArQule Inc. (ARQL:NASDAQ) is an example. It has a c-Met inhibitor
that doesn't work at the catalytic site-the ATP-binding site-but
rather at the allosteric site, away from the active site. It
doesn't appear to hit off-target kinases, and that makes it
Another example I'm looking at is Curis Inc. (CRIS:NASDAQ),
which is developing a targeted kinase inhibitor in combination
with a histone deacetylase (HDAC) inhibitor in a single molecule
(CUDC-101). The movement in cancer is toward cocktails of drugs,
not single drugs, and if you can put everything on one molecule,
that seems to make sense. I'm optimistic about both of these
kinds of unusual targeting technologies.
Curis just had its lead compound, Erivedge (vismodegib), an
oral medication, approved in January for basal cell carcinoma.
It's partnered with Genentech (a unit of Roche Holding Ltd.
[RHHBY:OTCPK]), and this could be a $1-2 billion (
) drug. Curis should be able to sit back and collect royalties
while it develops its own pipeline.
Agenus Inc. (AGEN:NASDAQ CM) has an adjuvant, QS-21 (a type of
saponin) that is an important part of multiple GlaxoSmithKline
plc (GSK:NYSE) vaccines. Some data on this is getting ready to
come out. We expect more results from GSK's vaccine trials this
year, and that has driven Agenus' stock up since the beginning of
Agenus is indeed up, more than 60% over the past month.
We see more upside there.
What else are you talking to investors about?
Another interesting area is pain management, because there
haven't really been any new interesting pain medications in a
while. Neuronal signaling is dependent on ion channels through
cell membranes. There are as many ion channels as there are
kinases, if not more. I think we're going to find certain ion
channels in neurons (nerve cells) that, if targeted, are great
for dulling pain without going to the brain with opioids, which
are, of course, addictive. I think we're going to see some
interesting new drugs for the treatment of pain. Zalicus Inc.
(ZLCS:NASDAQ) is one of those companies that have promising
compounds in development.
So we're talking about nonopioid analgesia for oral delivery.
Yes, it's an orally available small molecule.
A non-addictive oral analgesic should have good uptake by
physicians who are managing pain. What else did you want to speak
Resverlogix (RVX:TSX.V) is developing drugs for cardiovascular
diseases, specifically plasma lipoprotein abnormalities. An
RVX-208 Phase 2b trial, called SUSTAIN, recently fully enrolled
high-risk patients for recurring cardiovascular events. We think
RVX-208 has demonstrated promising changes in plasma lipid
dynamics in patients with low high-density lipoprotein
cholesterol (HDL-C), a high-risk group of patients with heart
disease. If RVX-208 rebalances patients' plasma lipids, including
cholesterol, then this would set the stage for a pivotal trial,
especially if another RVX-208 Phase 2b trial also underway,
called ASSURE, demonstrates reduced plaque in carotid arteries.
We know that these plaques predispose patients to ischemic
strokes and other cardiovascular events. We expect results from
both trials in the second half of this year.
On another note, I'm also interested in finding drugs that
have been overlooked or discarded and that can be repurposed
through innovation. To that end I like Spectrum Pharmaceuticals
Inc. (SPPI:NASDAQ). This company has gone from almost nothing in
valuation 10 years ago to around $750M based on finding drugs
that were discarded or distressed for whatever reason. Spectrum
acquired these for a song, overcame the difficulties and is now a
profitable company. It has two marketed drugs and two more that
could be approved either later this year or in early 2013.
Companies that can effectively and economically repurpose drugs
have great potential. Spectrum is one of the best companies at
Spectrum is up 60% over the past six months.
Sales of one of its drugs, Fusilev (levoleucovorin) for
metastatic colorectal cancer and osteosarcoma, rocketed when
there was a recent acute shortage of generic leucovorin. The FDA
said if leucovorin is unavailable, then go ahead and use Fusilev.
The company certainly leveraged that to its benefit, but it also
provided patients with a drug without which they couldn't be
Spectrum also has Zevalin (ibritumomab tiuxetan, an anti-CD20
monoclonal antibody conjugated to a radioisotope) approved for
non-Hodgkin's lymphoma (NHL).
Zevalin was approved for another indication. It's a
radioimmunotherapy, and there were a number of issues with
delivering it. You had to order the radioisotope separately from
the antibody and combine the two, which was somewhat cumbersome.
It was up against Rituxan (rituximab; from Genentech) a hugely
successful drug. But Zevalin, I think, has a number of
advantages-including cost and efficacy-over Rituxan, and it just
remains to be seen how well Spectrum will be able to educate
physicians and convert some of them. If Zevalin can take a
10%-market share, or even less, of a multibillion dollar market,
it's still going to be a windfall for a company of this size. I
think that's certainly doable.
What's your favorite stock, George?
My favorite stock? I put them into two buckets. For example,
there are companies that are underappreciated and have potential
for short-term gains. Peregrine Pharmaceuticals falls into that
bucket. There are also two other related companies, Keryx
Pharmaceuticals (KERX:NASDAQ) and AEterna Zentaris Inc.
(AEZS:NASDAQ). Keryx is like Spectrum in a way. It licenses drugs
relatively inexpensively and completes their development. It has
a drug called KRX-0401 (perifosine) in Phase 3 for colorectal
cancer and multiple myeloma right now, and that will read out in
the next month or two, hopefully. Perifosine was licensed from
AEterna Zentaris, which is an unusual company in that its
research is in Germany, but its corporate headquarters are in
Québec City, and its clinical development group is in New Jersey.
AEterna Zentaris has a robust drug discovery program in Germany
for a variety of indications, mostly cancers, that is very
impressive. I think AEterna Zentaris has tremendous potential.
Novavax (NVAX: NASDAQ) is another company that falls into this
category. It's a vaccine company, and has a robust clinical
development plan developed in collaboration with the Biomedical
Advanced Research and Development Authority (BARDA). I think it
will be rising steadily as it executes on trials and delivers
results. For the short term I see these companies as being
somewhat more risky, but also likely to provide short-term
In the second bucket are companies that I think have
tremendous potential for steady, increasing value accretion. I
put Threshold and Spectrum in this category. Curis is also in
this bucket. It can sit back and collect royalties on Erivedge
from Genentech while it develops its own pipeline.
I've enjoyed speaking with you very much.
George B. Zavoico, Ph.D., has more than six years of
experience as a life sciences analyst writing research on
publicly traded equities. He has most recently worked at Westport
Capital Markets and Cantor Fitzgerald in their research
departments, and has received
The Financial Times
/Starmine Award two years in a row for being among the
top-ranked earnings estimators in the biotechnology Sector. His
principal focus is on biotechnology, biopharmaceutical, specialty
pharmaceutical and molecular diagnostics companies engaged in
discovering, developing and marketing drugs and value-added
diagnostics for the diagnosis and treatment of cancer,
cardiovascular and inflammatory/immune diseases and disorders.
Prior to working as an analyst, Dr. Zavoico established his own
consulting company, serving the biotech and pharmaceutical
industries by providing competitive intelligence and marketing
research, due diligence services and guidance in regulatory
affairs. He also wrote extensively on healthcare and the biotech
and pharmaceutical industries for periodicals targeting the
general public and industry executives. Dr. Zavoico began his
career as a senior research scientist at Bristol-Myers Squibb
Co., moving on to management positions at Alexion
Pharmaceuticals, Inc. and T Cell Sciences, Inc. (now Celldex
Therapeutics, Inc.). He has a bachelor's degree in biology from
St. Lawrence University and a Ph.D. in physiology from the
University of Virginia.
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
The Life Sciences Report:
Resverlogix Corp. Streetwise Reports does not accept stock in
exchange for services.
3) George Zavoico: 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.
The Life Sciences Report
is Copyright © 2012 by Streetwise Reports LLC. All rights are
reserved. Streetwise Reports LLC hereby grants an unrestricted
license to use or disseminate this copyrighted material (i) only
in whole (and always including this disclaimer), but (ii) never
The Life Sciences Report does not render general or specific
investment advice and does not endorse or recommend the business,
products, services or securities of any industry or company
mentioned in this report.
From time to time, Streetwise Reports LLC and its
directors, officers, employees or members of their families, as
well as persons interviewed for articles on the site, may have a
long or short position in securities mentioned and may make
purchases and/or sales of those securities in the open market or
Streetwise Reports LLC does not guarantee the accuracy or
thoroughness of the information reported.
Streetwise Reports LLC receives a fee from companies that are
listed on the home page in the In This Issue section. Their
sponsor pages may be considered advertising for the purposes of
18 U.S.C. 1734.
Participating companies provide the logos used in The Life
Sciences Report. These logos are trademarks and are the property
of the individual companies.
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 981-8204
Fax: (707) 981-8998