By George Crist :
Contrafect is a biotechnology firm addressing deadly infections with a paradigm shift in anti-infectives that utilize a recombinant biologic derived from viruses that attack bacteria
Bacteriophage are to bacteria what viruses are to humans. Since their discovery in 1917, bacterial viruses known as bacteriophage have fascinated with their genetic varieties, simplicity and physical structure . Similar to mammalian viruses, bacteriophage employ a minimalist design to accomplish their goals of infection and replication. Throughout the 20th century, as basic scientific understanding of phage mechanics grew, so also grew an interest in utilizing the tools evolved by bacteriophage to control bacterial populations to prevent infections. Fast forward to 2018, there are several phage products that are utiltized in a number of commercial settings to control bacterial growth, especially in food service and medical settings as surface coatings to discourage the growth of bacteria. Utilizing a phage-derived product as a drug in humans, however, has been elusive goal.
Contrafect is a publicly traded biotechnology company that is navigating the FDA review process to potentially bring the first phage-derived product to market as a biological medical product.
Innovation in antibiotic development summarized: New verses of the same old song
Antibiotics have been in the medical arsenal since the discovery of Penicillin in 1928. In the 9 decades since, many additional antibiotics have been developed to address growing medical needs around the management of bacterial infections. However, most traditional antibiotics share the common feature of stopping or slowing bacterial replication through interactions with the peptidoglycan cell wall or interfering with the cellular machinery that replicates and translates genetic information. Moreover, the vast majority of new antibiotics are simply variations of existing classes of antibiotics. Bacterial resistance to antibiotics is one of the biggest challenges facing modern healthcare. Antibiotics that combat bacterial resistance frequently target enzymes known as Beta Lactamases, which hydrolyse (or inactivate) antibiotics in the penicillin, cephalosporin, monobactam and carbapenem families. While the cycle of innovation continues, albeit at a slow pace, additional antibiotics will be brought to market, and inevitably, new mechanisms of resistance will evolve.
Of note, innovation in antibiotic development has slowed due to the lengthy development pathway and the reality that a new antibiotic in the marketplace will swim against the current of readily available generics that blunt revenues of new drugs. Quoting Dr. Suzanne Hill in a WHO report from 2017, "Pharmaceutical companies and researchers must urgently focus on new antibiotics against certain types of extremely serious infections that can kill patients in a matter of days because we have no line of defence," Nevertheless, the cost of bringing a new antibiotic to market is high while the reward is often a slow adoption rate. Part of this reluctance to utilize new antibiotics is due the conservative strategy to reserve newer antibiotics as drugs of last resort in order to preserve their effectiveness. In June of 2018, FDA chief Scott Gottlieb made a pitch to change the reimbursement model for antimicrobials (including anti-fungals) to shift to a licensure model similar to the way software is acquired, "Developing new drugs is a costly endeavor. But the current reimbursement model, where drugs are reimbursed based on each episode of their use, presents incentives that run contrary to effective stewardship over new antibiotics that might be highly effective against very rare and dangerous pathogens".
Changes in the reimbursement model or other legislative incentives would be transformative for the valuations of companies bringing novel anti-infectives to market, but efforts to incentivize these companies with the 21st Century Cures Act, and the GAIN Act have so far fallen short. Take Achaogen (NASDAQ: AKAO ) as a recent example. Post approval for Zemdri, and faced with the sober reality that they now must commercialize their first product, the share price has fallen by approximately 70%. Their last successful capital raise was nearly one year pre-approval at $22.50 per share and now they languish at $4. One challenge in utilization is empirical in the manner in which new antibiotics are tested. These trials are often designed as "non-inferiority" trials, meaning so long as they are no worse than the control against which they are tested, they are deemed successful. The problem here is that post-approval, hospital formularies are left with the choice of cheap generics, or expensive newer drugs that are all "equal" in the eyes of the clinic. With costs on the rise in every which way, it's difficult to blame pharmacies for leaning towards less expensive options. And it's difficult to blame investors for tempering their enthusiasm for companies developing anti-infectives given the challenges.
Most known classes of antibiotics were discovered from the 1940's to the 1960's and as mentioned, most new antibiotics are variations and merely new members of existing classes. The need for a new treatment paradigm is evident in the growing mortality due to so-called "multi-drug resistant ("MDR") bacteria". In 2016, global mortality due to antibiotic resistant bacteria was close to 700,000 ( O'Neill report , Nathwani ). In particular, resistant Staph A infections kill approximately 3 in 10 who contract them. Compounding the issue, the costs attributed to resistant bacterial infections is nearly $20B, and many of these infections originate in a hospital setting. Specific to methicillin-resistant Staph Aureus (MRSA) infections, in 2009 , there were approximately 19,000 deaths in the U.S. with a cost of approximately $3-4B to the health care system.
CF-301/Exebacase: A novel MRSA weapon
Contrafect is developing CF-301, named Exebacase, a recombinant lysin that was genetically derived from bacteriophage in order to combat MRSA. If approved, CF-301 would become the first of a new generation of bacteria-fighting weapons. CF-301 is beyond a new class of antibiotic, rather it is a "biologic", meaning it is a functional enzyme. All currently existing antibiotics are molecules with molecular masses of a few hundred g/mol (or Da, short for Daltons), whereas Exebacase is approximately 26 kDa because it is constructed of a chain of amino acids. This also means that it can only be infused in an IV rather than taken as a pill. Our stomachs would digest Exebacase just like any other protein.
The genius in the design of Exebacase is that it was designed by mother nature. The gene that encodes Exebacase was identified from bacteriophage, and is used by phage to rupture the bacterial cell wall in order to release new phages to go on and infect new bacteria. Recombinant genetics have enabled Contrafect to insert the gene encoding Exebacase into plasmids that can then produce just the lysin protein. Contrafect currently outsources the production and manufacturing of Exebacase to FujiFilm Diosynth. When employed as a therapeutic, Exebacase functions in the same way as it does in its native environment, except instead of rupturing a bacterium from the inside out, it is working from the outside in.
One of the truly differentiating qualities of Exebacase is that it is the first truly bactericidal therapeutic to be tested in humans. In the presence of a bacterial culture, Exebacase literally "pops" bacteria. You can see it in action as Contrafect published a fascinating video of Exebacase working in culture on YouTube . Such is the "bacteria-popping power" of Exebacase that there was concern of a "lysis storm" in vivo similar to what it seen with tumor lysis syndrome with certain modern chemo's. Fortunately, this phenomenon was not observed in their Phase 1 study. The rapid nature of its bactericidal activity could be of great value in patients with serious life-threatening infections. It could also be used in combination with conventional antibiotics to amplify the effect. Another valuable feature of Exebacase is that it is able to eliminate biofilms.
Biofilms can be thought of as a colony of bacteria held together by a matrix of extracellular polymeric substances ("EPS"). Biofilms amplify the problems associated with pathogenic bacteria and can compound antibiotic resistance in a medical setting both inside of a patient, and also in materials that interface with patients such as catheters. The ability of Exebacase to fight infection within the biofilm microenvironment and eliminate biofilms is potentially a game changer in the antimicrobial space.
Exebacase is also differentiated in its ability to potentially avoid the development of bacterial resistance. To understand this it is helpful to visualize how traditional antibiotics work, which is to inhibit the viability of a bacterium as it reproduces. Antibiotic resistance is a numbers game in that if enough bacteria try to reproduce in the presence of an antibiotic (think billions and billions), eventually one bacteria will possess a mutation or genetic modification that evades the drug. So in this sense, traditional antibiotics could almost be thought of as "defensive" in nature. Exebacase, rather, is an "offensive" drug in that it targets and kills living bacteria in the first generation, rather than attempting to prevent the production of the second generation. In MRSA cultured in the presence of Exebacase for 26 days, resistance did not occur as it did for traditional antibiotics like daptomycin and vancomycin. Additionally, when cultured in the presence of Exebacase, the development of resistance to daptomycin and vancomycin was a fraction of what it was in the absence of Exebacase. To summarize, not only does Exebacase appear to not develop appreciable resistance, it possesses the ability to reduce the development of resistance to other co-administered antibiotics.
Unlike all recently developed antibiotic agents, Exebacase is currently being tested in a "superiority" trial. This trial, a Phase 2, is being tested in 115 patients randomized 3:2 to Exebacase + Standard of Care vs. Placebo + Standard of Care. The enrollment for this trial was recently completed and results are expected in 4Q2018. The primary end point will be the clinical response at Day 14 with additional secondary end points to evaluate safety, pharmacokinetics, and other clinical data. Based on the pre-clinical data as well as the data from their Phase 1 trial in healthy patients, I expect that the company will demonstrate that Exebacase potentiates the standard of care and will be superior in terms of patient outcome. Superiority here is the key word, because if it can demonstrate superiority it will enjoy a rate of adoption far higher than peers who are approved on the basis of non-inferiority.
The trial also includes a subset of patients with endocarditis. MRSA is a common cause of endocarditis and patients have poor outcomes because there are few options that can resolve it. Significant improvements in survival from the trial, or improvements in this particularly morbid subset of patients, could enable an expedited clinical pathway to approval through a Breakthrough Therapy Designation (BTD). I suspect the company will apply for BTD if the Phase 2 data look good, and if successful, BTD carries with it a number of benefits which are meant to streamline and expedite the approval of life-saving drugs for which a significant unmet medical need exists.
The company is also developing additional Lysins that target other categories of problem infections. They also have an early-stage program that will pursue an inhaled monoclonal antibody for Influenza. While these targets are interesting and could add value to the company, long term, for now all eyes are on the outcome of Exebacase in their Phase 2 trial. This read out will represent a binary catalyst for the company and if successful, should translate to a step-up in the valuation. An improvement in their valuation will translate into an acceleration of their other clinical candidates.
The company had approximately $37m in cash as of their latest (6/30/2018) 10-Q . This did not include $10.4M that was raised in a small offering on Aug 3, 2018 of 5,750,000 shares at $2.00 per share. With the recent raise, there are approximately 79.4M shares outstanding and if all outstanding warrants and options exercised, 118M shares fully diluted. Their previous raises were more substantial (July, 2017 $40M and July, 2016 $35M) and also included warrants. I feel that the recent raise being so small relative to the previous two was a tip of the cards from management in anticipation of a favorable outcome of the Phase 2 trial. If they do produce good data, they will need a more substantial raise to get far into their Phase 3 trial(s). They appear to be banking that they'll be able to raise on more favorable terms after the data release.
Competent and Experienced Leadership
Contrafect's management consists of some experienced players in the anti-infective landscape. Their CEO, Steven Gilman, was the CSO at Cubist until their acquisition by Merck. Cubist acquired both Trius and Optimer for their antibiotic products. Previously, he was at Millennium where he managed their Inflammation group, and at Pfizer where he was responsible for drug discovery of novel anti-infectives.
Near Term Outlook
After dipping down into the $1.50's after their most recent offering, Contrafect's recent price action has been on the upswing. This is likely due to buyers taking positions in anticipation of their Phase 2 data release. While the exact timing of the upcoming catalyst is uncertain, their guidance of 4Q2018 means that news could come any day.
Assigning an appropriate valuation for companies at this stage is tricky business. The current market cap of around $142M encapsulates the uncertainty of the Phase 2 data, but is lower than its intrinsic value once proof of efficacy is established. In terms of what Exebacase could look like as an eventual product, there are approximately 200,000 hospitalizations annually in the U.S. due to MRSA. Exebacase would likely only be used in a portion of the more serious cases. Pricing will be a little unique for Exebacase as well. Since it will be used mostly as a one-time therapy, the price of Exebacase will likely be higher. It is too early to speculate on revenues and the company has not guided on pricing, but when I look at different scenarios I envision an eventual revenue run rate of between $316M and $1B. The error bars will likely narrow over time. Contrafect's patent protection for Exebacase runs through 2033.
In the inverse scenario, if Contrafect fails to produce a meaningful treatment benefit for Exebacase in its Phase 2 trial, the share price will likely drop sub-$1. Their options at that point will be to run another trial or scrap Exebacase in order to shift priorities to another candidate in their pipeline. Another risk factor is that Exebacase produces a treatment effect, but also generates serious adverse events (SAE) that would call into question the safety of the therapy. Frequently with biologics, since they are larger foreign molecules, there is the possibility of neutralizing antibodies or antibodies that cause an immune response to combat the foreign molecule. While no immune response was observed in their Phase 1 trial, there were anti-drug antibodies to Exebacase observed in 9 of 13 subjects. While this type of thing is becoming less commonly observed with the modern iterations of monoclonal antibodies, it's important to remember that this is a recombinant viral protein, not a mAb.
- Contrafect represents a speculative investment opportunity with a near-term binary catalyst that could result in a rapid appreciation of its share price.
- Investments in small cap biotechnology companies are inherently risky, but Contrafect appears poised to demonstrate value for what could eventually be transformative in the anti-infective space.
- While much can be said for the market's apathy for companies developing anti-infectives lately, I'm banking that this novel and differentiated technology will buck this trend
See also Navigating The 'Rate Rant' on seekingalpha.com