DCGN :Look For Busy 1H:06
2006-01-10 05:55 (New York)
Piper Jaffray & Co.
(DCGN - $9.70)
Outperform Volatility: Medium
Look For Busy 1H:06
Edward A. Tenthoff, Sr Research 212 284-9403,
edward.a.tenthoff@pjc.com
William T. Ho, Research Analyst
212 284-9308, william.t.ho@pjc.com
KEY POINTS:
* We look for a busy 1H:06 for deCODE with several near-term milestones to
create value.
* Most important on this list is the start of Phase III trials of DG-031 for
the prevention of heart attack by 2Q:06. We believe the company will
negotiate an SPA with the FDA and that the trial will enroll ~2,750
patients worldwide. We estimate the trial will take approximately 2-1/
2 years with an interim analysis scheduled at 18 months
* We now believe it is less likely the company will partner this drug until
after completion of the Phase III trial in order to retain greater value
from this program.
* deCODE also intends to file an IND on a follow-on compound targeting the
LTA4 hydrolase pathway by year-end 2006.
* deCODE enrolled the final patient in the ongoing Phase II asthma trial in
early December and should lock the database by the end of February. We look
for data on this partnered program and a future plan to follow.
* deCODE has reformulated its proprietary DG-041 compound for PAD to increase
oral bioavailability. The new compound should advance into Phase II trials
in 1H:06.
* From this work, deCODE has identified a novel, orally available inhibitor
to the EP3 pathway for pain. DG-061 is a potentially first-in-class
compound that has equivalent efficacy to non-selective COX inhibitors,
without the gastrointestinal bleeding or cardiovascular side-effects. We
look for a potential IND filing in 4Q:06.
* All of this means deCODE could have 5 drugs in the clinic by year-end
including at least 1 Phase III trial in major diseases representing big
markets. deCODE has $171 million in cash to advance this pipeline.
From To Price: $9.70
Changes (Previous) (Current)
52 Week High: $10.67
Rating -- Outperform
52 Week Low: $5.09
Price Tgt -- $14.00
Price Target: $14.00
FY05E Rev (mil) -- $45.2
Proj Enterprise Value=$800M
FY06E Rev (mil) -- $36.0
Shares Out (mil): 53.7
FY05E EPS -- ($1.04)
Market Cap. (mil): $520.9
FY06E EPS -- ($1.27)
Avg Daily Vol (000): 355
Book Value/Share: $0.20
Cash Per Share: $3.18
Debt to Total Capital: 4%
Div (ann): $0.00
Est LT EPS Growth: NM
P/E to LT EPS Growth (FY06): NA
Est Next Rep Date: 02/14/2005
Fiscal Year End: Dec
INVESTMENT RECOMMENDATION:
We reiterate our Outperform rating on deCODE with a $14 price target. Our
target is based on a projected enterprise value of $800 million, based on 1
Phase III, 2 Phase II, and at least 1 Phase I program by year-end 2006. To
this, we add YE'06 net cash of -$65 million.
RISKS TO ACHIEVEMENT OF TARGET PRICE:
Risks associated with deCODE are common to all drug discovery companies,
including developmental, clinical, and regulatory. DG031 could fail in the
clinic. deCODE may fail to file INDs or enter into new collaborations,
thereby lowering revenues. deCODE may require additional capital or may face
litigation.
COMPANY DESCRIPTION:
deCODE is a population genetics company located in Iceland that is focused on
developing drugs and diagnostic products.
Expected Upcoming Events:
* Announce approval of Special Protocol Assessment with the FDA in the near
term
* Initiate Phase III trials of DG-031 for the prevention of heart attack by
2Q:06
* Complete partnered Phase II asthma trial in 1H:06
* Complete Phase I trial for DG-041 in PAD and initiate Phase II study in 1H:
06
* File IND for DG-051, a follow-on MI compound targeting LTA4H
* File IND for novel pain compound by year end
* Partner Roche to potentially file an IND for PDE4 program in stroke
DG-031 - Myocardial Infarction (Heart Attack)
deCODE identified a particular set of four SNPs in the ALOX5AP gene that
confer almost a 2x increased risk of heart attack and stroke. This gene
encodes 5-lipoxygenase activating protein (FLAP), which stimulates
leukotriene-B4 production thereby causing inflammation. There is a growing
abundance of literature linking inflammation markers such as leukotriene and
C-Reactive Protein (CRP) to cardiovascular disease independent of the risk
conferred by elevated levels of Low Density Lipoprotein (LDL) cholesterol.
Inflammation in Heart Attacks
In the January 6, 2005, edition of the New England Journal of Medicine, two
articles, one by Nissen et al. and one by Ridker et al., demonstrate that
statin therapy can reduce inflammation and the rate of cardiovascular events
independently of LDL cholesterol concentrations in the plasma. These studies
demonstrate that CRP concentrations are significantly correlated with
progression of artheroscloerosis, which can lead to heart attack.
Specifically, Ridker et al. conclude that, "Patients who have low CRP levels
after statin therapy have better clinical outcomes than those with higher CRP
levels, regardless of the resultant level of LDL cholesterol." CRP itself is
an inflammatory protein that is produced in the liver as a result of
interleukin-6 stimulation. IL-6 is part of an inflammatory cascade that can
be activated by immune cells found within artherosclerotic plaques.
Current hypothesis is that vessel damage, high concentrations of lipids and
oxidative stress, can lead to the formation of artherosclerotic plaques
within a coronary artery. Inflammatory cytokines and chemokines produced by
the plaque can activate the cascade, causing inflammation and additional
oxidative stress, making the plaque vulnerable to rupture. Subsequent rupture
of the artherosclerotic plaque triggers thrombosis (clotting) leading to
vessel occlusion (blockage) and heart attack.
DG-031
In November 2003, deCODE in-licensed a FLAP inhibitor from Bayer, now called
DG-031. The goal of FLAP inhibition is to stabilize plaque, thus preventing
rupture and heart attack. DG-031 works by binding to the FLAP protein and
acting as a competitive inhibitor of the 5-lipoxygenase receptors. This
prevents the translocation of 5-lipoxygenase from the cytosol to the cell
membrane and reducing inflammation.
The drug has been administered to more than 1,000 patients by Bayer in Phase
I and Phase II asthma trials and appears to be safe and well tolerated. As
part of the license agreement, Bayer transferred the IND to deCODE. Important
to note, the issued composition of matter and manufacturing process patents
on DG-031 expire in 2009 and 2012 respectively. deCODE filed new patents on
the specific test and treatment use of this compound for novel indications,
which could potentially extend patent protection through 2022. In the worst
case scenario, upon potential approval in 2009, deCODE will have 5 year new
chemical entity (NCE) marketing exclusivity as allowed under the Federal
food, Drug and Cosmetic Act.
As a result of the purchase from Bayer, deCODE was able to leapfrog directly
into Phase IIa trials in myocardial infarction. The Phase IIa study sought to
demonstrate that the increased risk of heart attacks caused by the genetic
defect could be reduced through the inhibition of FLAP.
Phase IIa Trial Design
In 2005, deCODE completed a Phase IIa trial in which 191 Icelandic patients
with a history of heart attacks were enrolled in a double-blind, variable-
dose, placebo-controlled cross-over study. The cross-over design allows
investigators to examine placebo effects and any carry-over effects from
treatment phase to placebo. 87% of those enrolled carried an at risk genetic
variant of FLAP and 172 patients completed all visits. 161 (85%) of the
patients were also on statin therapy during the trial. The patients were
randomized and dosed three times daily with total concentrations of 250mg,
500mg or 750mg/day of either placebo or DG-031 for four weeks. Following
dosing and a two week washout period, the drug and placebo groups were
switched and dosed for another four weeks (the cross-over). All patients were
evaluated for biomarkers at weeks 4 and 7.
Following completion of the original study, an open-label randomized follow-
on study was completed in 75 patients. In this study, 3 groups of 25 patients
each received a regimen of DG-031 for 8 days (there was no placebo) to
examine the PK and PD relationship between DG-031, leukotriene B4, and
myeloperoxidase. These cohorts were broken into 25 who received 375mg/day of
DG-031, 25 receiving 750mg/day based on 375 mg BID, and 25 receiving 750mg/
day based on 250mg 3x per day.
Phase IIa Trial Results
As expected, the results of the trial demonstrate DG-031 to be safe and well
tolerated with no serious adverse events including liver toxicity. The
primary endpoints demonstrated that DG-031 had a significant and dose-
dependent effect:
1. 26% reduction in leukotriene B4 production by activated neutrophils in the
750mg/day cohort (95% CI, p=0.003)
2. 12% reduction in myeloperoxidase in whole blood in the 750 mg/day cohort
(95% CI, p=0.02)
3. 3% reduction in sICAM-I in the 750mg/day cohort (95% CI, p=0.03)
Importantly, the data demonstrated that patients in the pooled 500mg and
750mg/day cohorts of DG-031 also had a reduction in CRP by 16% (95% CI,
p=0.07) at the end of 2 weeks. Although this is not statistically
significant, a carry-over effect was seen. These reductions appear to be
persistent and improve to a statistically significant 25% reduction in CRP at
week 6 or visit # 5 (95% CI, p=0.02).
Interestingly, the results of the study appear to demonstrate that while DG-
031 was able to reduce several biomarkers for inflammation related to cardiac
disease; it also caused an increase in plasma Lp-PLA2 and serum LDL
concentrations. The significance of these observations will have to be
determined through larger Phase III studies that examine the effect of DG-031
on actual clinical outcomes.
In the follow on study, a statistically significant 23% (95% CI, p=0.01)
overall reduction of CRP levels was seen in the entire 75 patient population.
However, between the cohorts, the results were not statistically significant
and a non-linear response was observed. After 8 days, CRP levels declined 28%
(95% CI, p=0.02) in the 375mg/day cohort, by 38% (95% CI, p=0.02) in the
250mg, 3x daily group and no reduction was seen in the 375mg BID cohort.
Importantly, this reduction in CRP was achieved in addition to any reductions
or benefit caused by the use of statins.
Future Steps in the Clinical Development of DG-031
On April 21, 2005 deCODE presented this full Phase IIa data set to the FDA.
The agency had 28 days to respond with any questions/requests, after which
the company will have an additional 28 days to respond. We understand that
the FDA recommended that deCODE apply for a Special Protocol Assessment
(SPA). In 4Q:05, deCODE submitted an SPA application to the FDA who we
understand requested changes to the protocol to push to higher doses due to
the safety profile of DG-031.
In November 2005, deCODE published a paper, entitled "A variant of the gene
encoding leukotriene A4 hydrolase confers ethnicity-specific risk of
myocardial infarction" in the online version of the journal Nature Genetics.
The study analyzed the HapK variant in more than 3,000 individuals at the
Cleveland Clinic in Ohio, Emory University in Atlanta, and the University of
Pennsylvania in Philadelphia. The study identified that in subjects self-
identified as African American, HapK was carried by 6% of controls and 20% of
patients, representing a more than 250% increase in risk of heart attack.
Accordingly, deCODE plans to enrich the patient population of the DG-031
Phase III trial with additional African American subjects that are at
increased risk of heart attack.
Although the Phase IIa trial demonstrated that DG-031 was able to reduce
known and validated biomarkers associated with increased risk of myocardial
infarction, surrogate markers are not approvable endpoints. We expect the
primary endpoint of the Phase III trial to determine whether the drug's
effect on biomarkers will translate into positive clinical outcomes. Thus,
the endpoints will be a reduction in cardiac events, i.e. the number of heart
attacks or strokes, in the DG-031 arm versus control. Given the current
understanding of the role of inflammation in heart attacks and observations
seen in the Phase IIa trial, we do believe DG-031 acts on a promising pathway
to reduce the risk of coronary events.
Specifically, enrollment criteria will prioritize elderly (more than 65
years), acute coronary syndrome (ACS) patients who have already experienced
their first MI. The rate of recurrence in ACS patients is ~15% within the
first year while the rate of occurrence is only 1-2% in normal populations.
In addition, deCODE intends to enrich the population with patients who have
blood serum CRP concentrations greater than 2mg/L. The trial will also
include a subset of patients that have the "high-risk" haplotype. By
enriching the trial, deCODE expects to see more acute coronary events in a
shorter time period and thereby be able to enroll significantly fewer
patients at a lower total cost. Although this enrichment process would
increase the statistical power and potentially the probability of success for
DG-031, we believe deCODE must still be careful in how it proceeds with the
Phase III trial. Potentially, the enrichment could limit the ultimate label
of DG-031 as was seen with NitroMed's approval of BiDil.
The Phase III trial will be a multi-center, multi-national outcome trial to
examine the ability of DG-031 to reduce the incidence of ACS/MI and stroke.
The may enroll ~2,750 patients worldwide. We expect the trial will take
approximately 2-1/2 years with an interim analysis scheduled at 18 months.
The number of patients enrolled will take into account the FDA's safety
requirements for approval.
Incidentally, deCODE is also seeking to use elevated CRP concentrations as
criteria for use of DG-031. This falls within the company's proposed claims
for a "Test & Treat" patent filed February 23, 2003, which states:
A method of prophylaxis therapy for myocardial infarction comprising:
* Selecting a subject susceptible to MI; and administering (DG-031)
* Wherein the selecting step comprises measuring CRP and selecting a
susceptible subject having elevated CRP as being susceptible to MI
* Wherein (DG-031) is administered in an amount effective to reduce the
elevated serum level of CRP
deCODE believes that should this patent application be approved, it could
potentially extend the patent protection period on DG-031 through 2022. We
believe that this patent application is likely a stretch, but the methods
will enrich the trial and help power the trial to gain approval. The FLAP
haplotype could also be developed into a diagnostic test similar to that of
Herceptin and the HER2/Neu test. This could also potentially help deCODE
maintain intellectual property rights to the use of DG-031 for heart attacks.
While our preferred path forward would include a partnership, we now believe
it is less likely the company will partner this program until after
completion of the Phase III trial in order to retain greater value from this
program. We view the addition of Dr. Dan Hartman as SVP of Product
Development as already having an impact on the company's ability to design
and conduct late stage clinical trials. That being said, we do believe deCODE
would benefit from a partnership by: 1) validating the drug; 2) bringing in
cash and lowering the burn rate; 3) adding CV and drug development expertise;
4) sharing the risk of the program; and 5) eventually providing needed
distribution capabilities. Myocardial infarction is the leading cause of
death worldwide. In the U.S. alone, there are an estimated 1.1 million acute
coronary events each year, with 40% recurrent events.
With ~$171 million in cash, we do believe deCODE has sufficient resources to
fund the trial, which could cost upward of $75 million, however may have to
raise additional capital at some point in the future. Importantly, if deCODE
conducts the Phase III, the company could command even more attractive
economics from a marketing partner.
DG-051 - LTA4 Hydrolase. deCODE's work in myocardial infarction also
identified a second gene within the leukotriene pathway that confers an
increased risk of heart attacks. The leukotriene-A4 hydrolase enzyme confers
risk of MI that is similar to LDL cholesterol in addition to the risk
previously associated with FLAP. deCODE has identified a follow-on compound
to DG-031 named DG-051. In preclinical studies, DG-051 has demonstrated
potent inhibition of LTB4 production in a once-daily oral formulation and we
look for the company to file an IND in 1H:06.
ASTHMA
Based on the success of the DG-031 program, deCODE announced a clinical
development partnership for the treatment of asthma last December. deCODE's
genetic work uncovered a gene that encodes MAP3K9 (Mitogen-Activating Protein
Kinase Kinase Kinase), a kinase that plays a key role in asthma. The
undisclosed partner is developing a drug that targets MAP3K9 for a different
indication and has already demonstrated the safety of the compound in 800
patients for up to two years.
This compound is an inhibitor of MAP3K9 that is a part of a subfamily of the
ras/raf/MEK/erk pathway, a complex signal transduction pathway responsible
for signaling gene transcription. The pathway involves a cascade of kinase
proteins involved in a wide variety of functions from immune response to the
regulation of cell proliferation, survival, migration and differentiation.
Multiple studies have demonstrated that the activation of the RAS or RAF
pathway can lead to a cascade reaction of downstream transcription factors
including the NF-kB, c-Myc, and JNK. When activated, JNK translocates into
the nucleus to target the C-Jun, ATF and ELK transcription factors. These
transcription factors are clearly an important family of genes that have
recently been validated by new cancer and immune system therapies. deCODE's
MAPK inhibitor seeks to block the C-Jun kinase pathway and cytokine
production without affecting humoral or cell-mediated immune responses.
In its preclinical studies, deCODE determined that MAP3K9 haplotypes are
significantly correlated with asthma as determined by FEV1% (p=0.02), MCh
PC20 (p=0.03), use of inhaled Glucocorticoid steroids (GC) (p=0.02), need for
GC drugs (p<0.05) and rate of ER visits and hospitalizations (p<0.05).
Further, it was found that 40% of all Icelandic asthma patients are carriers
of at-risk haplotypes in MAP3K9 and these results have been reproducible in
Denmark and the UK. MAP3K9 genes can be found expressed in epithelium,
endothelium, airway smooth muscle and other inflammatory cells.
In May 2005, deCODE began a proof-of-concept, randomized, double-blind Phase
II trial in 160 asthma patients with the at-risk variants. Patients will
receive either placebo or one of three doses (the dose have not been
disclosed but are x, 2.5x, 5x mg) BID of the MAPK inhibiting drug in addition
to standard of care treatment for 8 weeks, with a 2 week follow up. Inclusion
criteria for the Phase II trial include being between the ages of 18 years to
75 years, a carrier of the MAP3K9 haplotype, a physician diagnosis and lung
measurements demonstrating persistent mild, moderate or severe asthma,
regular use of glucocorticoid drugs and FEV >12% or >45% of predicted value
at baseline among others criteria.
The trial will seek to determine improvement in lung function and reduction
in airway inflammation. deCODE will measure spriometry tests, nitric oxide
exhalation concentrations, bronchial provocation tests and biomarkers in the
sputum to determine activity. The last patient in this trial was dosed in
December 2005 and we look for deCODE to provide more information on the
partner and drug this quarter. We expect to learn more about the partner and
future development path at that point. This is the second program that deCODE
is redirecting safe drugs to target new indications. We believe the new
asthma partnership will expand deCODE's clinical pipeline, validate the
company's pharmacogenomics "repurposing" approach, and bring in additional
money. In April, deCODE did file a patent on the use of this target in
asthma.
Peripheral Arterial Disease (PAD)
DG-041. Using information from its population genetics studies, deCODE found
that the two most common haplotypes (15% and 7% of patients respectively)
that confer a relative risk of more than 7 times for Peripheral Artery
Disease! PAD is a serious disorder involving atherosclerotic plaques within
the arteries of the legs affecting 1-in-5 elderly patients over the age of
70. PAD can lead to tissue damage, ulceration, gangrene and in 2-10% of
patients even the amputation of limbs. deCODE's Pharmaceutical unit
discovered a lead series, selected a development candidate, DG-041 and filed
an IND in 3 years.
In January 2005, deCODE filed its first proprietary IND for DG-041 to treat
PAD. DG-041 is an orally available anti-platelet drug that selectively
targets the EP3 receptor for prostaglandin E2 (PGE2). The EP3 receptor is
expressed in smooth muscle cells, found in atherosclerotic plaques and its
binding by PGE2 results in increased platelet aggregation promoting the
formation of plaques. In preclinical studies, deCODE demonstrated that DG-041
is a potent antagonist of the EP3 receptor for PGE2 resulting in the
inhibition of human platelet aggregation induced in vitro by PGE2.
In March, deCODE initiated a Phase I clinical trial for DG-041. The trial is
an ascending-dose, single-blind, placebo controlled, randomized trial to
evaluate the safety, tolerability, pharmacokinetics and pharmacodynamic
profiles of DG-041 in 54 healthy volunteers. The trial was completed in Fall
2005 and initial data in 18 patients demonstrate DG-041 to be well tolerated
and PK analysis resulted in dose proportionate plasma concentrations. It
appeared that in the higher 100mg and 200mg cohorts, DG-041 was able to
completely inhibit platelet aggregation through the EP3 receptor.
Unfortunately, the Phase I trials demonstrated a high level of variability in
oral bioavailability leading deCODE to reformulate the compound. This
required the completion of new Phase I studies. The new formulation appears
well-tolerated with no severe adverse events and now demonstrates improved
PK/PD properties with a 4x improvement in absorption. deCODE now looks to
initiate a Phase II trial at the 200mg BID dose starting in 2Q:06.
PAIN
DG-061. deCODE has identified a novel, orally available inhibitor to the EP3
pathway. DG-061 is a potentially first-in-class compound that has equivalent
efficacy to non-selective COX inhibitors, without the gastrointestinal
bleeding or cardiovascular side-effects. We look for deCODE to continue to
conduct pre-IND studies through 3Q:06 with a potential IND filing slated for
the fourth quarter.
STROKE w/ ROCHE
PDE4. deCODE identified an association between Phosphodiesterase 4D (PDE4D)
and increased risk of stroke. Specifically, increased PDE4D activity
decreases cAMP in vascular smooth muscle cells thereby promoting plaque
build-up. deCODE's Pharmaceutical unit completed high-throughput screening
and identified three active compounds that increase intracellular cAMP.
deCODE is now conducting parallel medicinal chemistry and structural biology
efforts.
In November 2004, deCODE and Roche launched a three-year collaboration to co-
develop PDE4 inhibitors for vascular disease including stroke. We believe
Roche may file an IND on this program in early 2006. We hope to the Phase I
trial complete and Phase II study initiated by year-end 2006.
VALUATION
We reiterate our Outperform rating on deCODE genetics with a $14 price
target. We look for deCODE to create value by advancing and partnering its
clinical pipeline. We arrive at our price target based on a projected
enterprise value of $800 million, based on 1 Phase III, 2 Phase II, and at
least 1 Phase I program by year-end 2006. To this, we add year-end 2006 net
cash of -$65 million.
deCODE retains a strong cash position of $171 million, sufficient to fund
operations for the next few years. deCODE is more levered than some companies
in the discovery space with long-term debt of $193 million, including
convertible debt of $150 million due in 2011.
Important Research Disclosures
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Analyst Certification - Edward ... |
