NSTITUTIONAL RESEARCH Healthcare & Biotechnology
UPDATE REPORT Dawson-James Member NASD/SIPC
Genaera Corporation (GENR)
March 6, 2006
Investment Highlights:
1) 24-Week Trial 209 Data Trends Positive as Expected: After adjusting for the fact that the 40mg patient's Study Eyes had far more advanced disease than the 20mg and placebo arms, we believe the data (as well as all previous clinical trials) demonstrate Evizon's efficacy will likely be superior to all Wet AMD drugs except Lucentis.
2) Wall Street Underestimates Market Demand for an I.V. Delivered Drug: We believe there will be two Wet AMD drugs in the market, one intravitreal injection (Lucentis) and one IV (Evizon). Outside the U.S., intravitreal injections are not commonplace and Lucentis affordability is problematic. IV-delivery works in a variety of settings even at the patient's home. IV also treats the Fellow Eye simultaneously versus a 2nd intravitreal injection.
3) Sales of Visudye Increase while Macugen Struggles: As proof that the market wants an IV-delivered drug, the clinically superior, but intravitreally-injected, Macugen struggled in the U.S. with sales of only $185M in 2005. Meanwhile, the inferior, but IV-delivered, Visudyne saw sales increase 8% to $484M during 2005.
4) Evizon should eventually supplant Visudyne: As all of Evizon's clinical trial results, both as a monotherapy and in combination with Visudyne, indicate that Evizon is significantly superior and does not require a laser. We believe Visudyne's sales of $484M will eventually be captured by Evizon.
5) Macugen acquired for $820M – Is Genaera Next? In November 2005, OSI Pharmaceuticals acquired Eyetech for $685M in cash and approximately $135M in stock. We believe Genaera will be a very attractive acquisition for the maker of Visudyne, QLT (Nasdaq:QLTI) having $466M in cash, QLT's marketing partner, Novartis (NYSE:NVS) or Alcon (NYSE:ACL) with $1B+ in cash being a few of the possiblilities.
Genaera Corporation (GENR) Evizon Best IV Drug – 160mg vs. Lucentis
SPECULATIVE BUY
6) Genaera Gets Agressive – Gunning for Lucentis: Although Evizon should enjoy market dominance in the IV- delivered drug space, Genaera recently announced Trial 212 which targets superiority (or non-inferiority) against Lucentis by increasing the dosages to 40mg, 80mg, 120mg and 160mg. Dosing will begin in Q2 and last 3-4 months and is expected to be completed during 2006. Since the trial is open label, results will be known in a timely manner. These results will be used in designing their Trial 302 Phase III.
Conclusion / Stock Valuation: We are reiterating our Speculative Buy recommendation and a 12-18 month price target of $5.00. Our price target of $5.00 is calculated on projected 2012 EPS of $0.69 with a 40x multiple discounted at 35% for risk yielding a valuation of $3.35. We then add a 50% acquisition premium resulting in a target of $5.00.
Investors should note that we believe this valuation will be realized late in our forecast period, being driven primarily from the clinical data results from the Phase II Trial 212 using dosages up to 160mg. These results are expected to decrease uncertainty and increase acquisition / partnership discussions.
The company has 3 products in Phase II – Evizon (squalamine) for wet AMD; squalamine for prostate, lung and ovarian cancer; and Lomucin for cystic fibrosis. The company looks to partner out its products in exchange for milestone payments, profit splits and/or sales royalties. IL-9, expected to begin Phase II this year, has already been partnered with MedImmune (Nasdaq:MEDI).
WET AMD DRUG SPACE
The following table illustrates the blend of various clinical trial results for the various drugs in this space. As can be seen, Evizon data indicates that, at the 40mg dose, it is superior to all drugs except Lucentis. Evizon will now begin clinical trials at dosages up to 160mg during 2006.
TIMELINE EVENT
Q2 2006 Begin Trial 212 Dosing
Q2 2006 Additional Interim Analysis Trial 209
Q3 2006 1-Year Data for Trial 209
Q3 2006 Amend SPA for Phase III Trial 301
Q4'06/Q1'07 Initiate new Phase III Trial 302
2006 MedImmune IL-9 Phase II Initiated
2007 Possible Acquisition / Partnership
SEGMENT VALUATION
Evizon Value $3.35 per share
(40x 2012 EPS discounted 35%)
Takeover Premium x 1.5
Target Price $5.00
Drug Letters Gained/Lost @ 1 Year Delivery
Lucentis +7 to +10 Intravitreal Injection
Evizon -5 Study Eye / +5 Fellow Eye * I.V.
Macugen -7 Intravitreal Injection
Retaane -7.5 Posterior Juxtascleral Injection
Visudyne -10 I.V.
Placebo -11 to -14
VEGF Trap Phase I trial ongoing Intravitreal Injection
* 24-week data
We believe QLT's Visudyne is at risk of market dominance from Evizon for the IV-delivered space and, with $466M in cash, is a potential acquirer of Genaera.
I.V. Drug Delivery versus Intravitreal Injection
We believe that there are significant barriers to adoption of intravitreal injections over IV-delivered drugs such as Evizon. According to the World Health Organization (WHO), AMD accounts for 8.7% of all cases of blindness worldwide. While the U.S. and Western Europe have a blindness prevalence of less than 0.3%, Eastern Europe, Asia and South America have a prevalence of 0.5% and India and Africa have a prevalence of 1% or greater. However, the WHO does not consider AMD a priority for their VISION 2020 initiative "primarily because there are no known easily-administered treatments nor prevention".
The level of skill required for intravitreal injections is much higher than administering a simple IV. Outside the United States and a limited number of specialists in Europe, intravitreal injections are not practical. However, an IV-delivered drug is simple and applicable to a variety of settings and could theoretically be performed by a nurse at the patient's home. In addition, IV administration also allows treatment of the Fellow Eye at the same time as opposed to two separate intravitreal injections.
INTRAVITREAL INJECTION
Even in the United States, intravitreal injections are not as widely performed as believed. As an example, sales of intravitreally-injected Macugen struggled with sales of only $185M in 2005 while sales of IV-delivered Visudye actually increased 8% to $484M despite the fact that Macugen is clinically superior to Visudyne.
We believe that Evizon should eventually supplant Visudyne in the IV-delivered drug space as all of Evizon's clinical trial results, both as a monotherapy and in combination with Visudyne, indicate that Evizon is significantly superior while not require the laser that Visudyne does.
Phase II Trial 209 Results (Evizon versus Placebo)
On March 1st, Genaera announced 24-week results for their Phase II Trial 209 for Evizon in 40mg and 20mg versus a placebo. The trial population had an average age of 75, 50% had active occult disease with 60% fellow eye disease. There were 108 patients total with 91 patients not receiving any other therapies while 17 received Visudyne.
However, it appears the high-dose 40mg arm was not randomized well. At enrollment, the 40mg patient's study eyes had significantly more advanced disease with 60% larger areas of choroidal neovascularization (CNV) and 40% greater fluorescein leakage than in the control arm. We believe the advanced disease at patient enrollment in the 40mg arm adversely impacted the results and therefore, we
feel that the results for the patient's less advanced fellow eye is a more appropriate measure for the 40mg arm:
Results in Patients receiving EVIZON Only
Arm # of
Patients Study EyeLetters # of Patients Fellow Eye Letters
40mg 35 -5 23 +5
20mg 41 -5 26 +2
Placebo 15 -10 9 -3
As can be seen in the table above, the Study Eyes did not have a dose response. This is the only time we have seen this in any of the trials, indicating that the advanced disease in the 40mg arm did indeed affect the results. If we use the earlier disease state of the Fellow Eyes, we see the dose response that we have seen in previous trials.
Overall results in patients who did not receive Visudyne show a clearer trend towards improvement:
EVIZON Trial 209 24-Week Data
Patients receiving EVIZON Only 40mg 20mg Placebo
# of Patients 35 41 15
Gain 15+ Letters 6% 5% 0%
Stable ± 15 Letters 77% 73% 60% Study Eye
Total Stable & Improved 83% 78% 60%
# of Patients 23 26
Fellow Eye
Gain 15+ Letters 13% 8% 0%
This trend was also seen in patients who had received Visudyne:
EVIZON Trial 209 24-Week Data
Patients also receiving Visudyne 40mg 20mg Placebo
# of Patients 42 45 21
Gain 15+ Letters 5% 4% 0%
Stable ± 15 Letters 79% 69% 71% Study Eye
Total Stable & Improved 84% 73% 71%
# of Patients 27 28
Fellow Eye
Gain 15+ Letters 11% 7% 0%
Phase II Trial 208 Results (Evizon combination with Visudyne)
In October 2005, Genaera presented data from their Phase II Trial 208 at American Academy of Opthamology meeting.
Trial 208 6-Months Letters
Evizon 40mg
with Visudyne +0.4
Visudyne Alone -5.0
Lucentis with
Visudyne (FOCUS) +4.0
We believe the results definitively show that Evizon is superior to Visudyne when combine with the Trial 207 results. We also believe the planned Trial 212 with Evizon dosages up to 160mg could meet or exceed Lucentis/Avastin performance.
Trial 207 Letters
40 mg +2.7
20 mg -1.8
10 mg -4.8
Phase III Trials 301 and 302
Genaera management plans to amend the SPA for Trial 301 based on the Phase II Trial 209 results. The SPA allows for modification. Management stated that enrollment has been slow as off-label use of Avastin is being administered to patients that would normally enroll in a formal clinical trial. Genaera stated that the FDA has not indicated that the current placebo control arm would require a change to Macugen or presumably Lucentis in the future.
Trial 302 is on hold until the results of the Phase II Trial 212 are known. Based on the dose-ranging study of 40mg, 80mg, 120mg and 160mg treatment arms, Trial 302 may be a superiority trial against Macugen or Lucentis.
PRODUCT REVENUE PROJECTIONS
Evizon for Wet AMD – Could Be #1 in Less Severe Patient Populations
Disease Description
Age-related macular degeneration (AMD) is the most common cause of vision loss in people over the age of 65, a rapidly growing demographics group. In its more advanced stages, AMD will cause patients to have a very noticeable decrease in their ability to see "sharply", or use focused vision, which is the type of vision required for reading or watching television. For about 90 out of every 100 patients with AMD, this loss of vision is a very gradual process. Patients who show this gradual vision decrease have what is often called the "dry" form of AMD. However, for the remaining 10% of patients who are
diagnosed with the "wet" form of AMD, there can be a very rapid and dramatic loss of vision. The causes of AMD are three-fold: a proliferation of blood vessels, leaks in the blood vessels and edema in the eye. VEGF is instrumental in causing blood vessel proliferation and also has a role in leakage. The main risk factor is aging with other factors including tobacco, genetic tendencies, the degree of pigmentation (with light coloured eyes being at higher risk), arterial hypertension, the ultraviolet rays, and consumption of a non-balanced diet. Current Treatment There are only 2 treatments for wet AMD currently on the market. Visudyne, from QLT Inc. and Novartis, uses an IV to deliver a photosensitizer to target rapidly growing blood vessel cells. The photosensitizer is activated by laser light, causing destruction of target cells. Visudyne helps slow vision deterioration. Visudyne may be used as frequently as once every 3 months. However, in practice, the average usage is about 3 times over 2 years, after which the disease tends to burn itself out. Macugen, from OSI Pharmaceuticals (acquired Eyetech in November 2005) and Pfizer, is a chemically synthesized aptamer that binds to VEGF which in turn prevents it from binding to the receptor which causes blood vessel growth. Macugen binds only to the isoform 165 of VEGF. Isoform 165 is believed to be the major contributor to blood vessel growth for wet AMD. Macugen helps slow vision deterioration and must be injected directly into the eye once every 6 weeks. The drug has been shown to help mitigate vision deterioration for a full 2 years.
Evizon Use
Genaera's Evizon is an IV drug that does not require a laser, administered once weekly for four weeks followed by once monthly treatments. Evizon works within blood vessel cells. It binds to calmodulin, a protein that is triggered by VEGF to cause cell proliferation. Basically it prevents VEGF signaling within the cell.
Future Competitors
Genentech's Lucentis is the most significant competitor that should be on the market by Evizon's launch. Rather than just slowing vision loss, like Visudyne and Macugen, Genentech data shows an average gain in the number of letters. However, we note that Lucentis is a once a month eye injection.
While Avastin has had several investigator-sponsored trials in wet AMD, Genentech is not pursuing development of the drug for this indication. We suspect the bleeding and hypertension side effects are the reason as well as the much lower profit versus Lucentis.
Alcon's Retaane received an approvable letter from the FDA in late May 2005, despite the second pivotal failing to show non-inferiority to Visudyne. In the successful pivotal trial, the average loss of letters was 7.5, similar to Visudyne and Macugen. The company filed for an indication in all wet AMD but as of March 2006, the Alcon has not released details of discussions with the FDA. However, Alcon withdrew their European application in March 2006.
Regeneron has VEGF Trap in Phase I for wet AMD. However, Sanofi recently returned rights to the product to Regeneron, so we have discounted the likelihood of success for this product.
Genvec has AdPEDF in Phase IB. We have discounted this product due to its gene therapy nature and its early development stage.
OTHER PIPELINE PRODUCTS
Squalamine for Lung, Ovarian & Prostate Cancer
Squalamine is the generic name for Evizon and is a synthesized version of a protein found in the liver of the dogfish shark.. As a VEGF inhibitor, the drug also has potential in cancer, and the company is in Phase II in lung, ovarian and prostate cancer.
Squalamine for non-Small Cell Lung Cancer (NSCLC) In May 2002, Genaera released positive results on the first Phase II clinical trial in lung cancer --squalamine, combined with first line standard chemotherapy of carboplatin and paclitaxel, in patients with Stage IIIB or Stage IV advanced disease. Overall, 27% of patients experienced an objective response (defined as a 50% or greater reduction in tumor size). In comparison, an appropriate historical benchmark objective response rate for this group of patients treated with carboplatin and paclitaxel alone is 17%. The median survival time for all patients enrolled in the study was 10.0 months. In comparison, the historical benchmark objective median survival for this group of patients treated with carboplatin and paclitaxel alone was 8.1 months. The median time to progression was 4.4 months compared to the benchmark 3.1 months. On June 5, 2004, at the American Society of Clinical Oncology (ASCO), Genaera presented interim results from squalamine in its Phase IIB NSCLC clinical trial of 45 stage IIIB or stage IV advanced lung cancer patients who were to receive weekly dosing of squalamine, combined with weekly chemotherapy of carboplatin and paclitaxel. Overall, the combined drug regimen was well tolerated, with fewer
serious adverse events than in Genaera's prior Phase IIA NSCLC study. Forty-one patients were evaluable for efficacy. Objective responses occurred in 24% of the patients (10 of 41; 1 complete and 9 partial responses). In summary, the one year survival rate is 22%, with one durable complete response with squalamine combination therapy. By comparison, a Phase II trial of Avastin, another VEGF inhibitor, showed an overall response rate of 32% and one year survival of 47%, but had some bleeding associated with treatment – minor
mucocutaneous hemorrhage and major hemoptysis. Due to capital constraints, the squalamine study is on hold for 1-2 years.
Squalamine for Ovarian Cancer
In May 2002, Genaera released positive results on its Phase II clinical trial in recurrent advanced ovarian cancer evaluating squalamine in combination with carboplatin. In this study, 35% of evaluable patients (9 of 26) had an objective response to the study drug regimen of squalamine and carboplatin. The best response has included five complete responses, and four partial responses. During 2001, the U.S. Food and Drug Administration (FDA) granted squalamine Orphan Drug designation for the treatment of ovarian cancer. Orphan Drug designations are granted to applicants when the prevalence of the disease occurs in less than 200,000 patients in the United States and entitles applicants to certain exclusive marketing rights, tax credits and waivers on FDA user fees. Due to capital constraints this study is on hold for 1-2 years. Due to capital constraints this study is on hold for 1-2 years.
Squlamine for Prostate Cancer
In November 2002, Genaera announced that a $1.1 million award was granted by the United States Department of Defense for the first clinical trial of squalamine in the treatment of prostate cancer. The grant supports a Phase 2 clinical trial begun in 2003. The trial evaluates squalamine in conjunction with anti-androgen therapy in patients undergoing radical prostatectomy. Up to 132 patients will receive androgen ablation during the first two weeks. Half of the patients will receive weekly treatments of squalamine (100 mg/m2) for either 6 or 12 weeks prior to surgery. All patients will receive both squalamine and androgen ablation postoperatively. All patients will receive follow-up long term for evidence of tumor recurrence. The study is in the process of enrolling patients and awaits restarting of grant funds.
Avastin is just starting Phase III trials in hormone-refractory prostate cancer. The Genaera trial is being funded externally, and we have not modeled any revenue from this indication. Lomucin for Cystic Fibrosis
A 4 week Phase II study showed roughly stable FEV-1 for patients on Lomucin compared to 3% decreases for placebo. Due to the small size of the study, the difference was not statistically significant. However Genaera just announced receipt of approval from the Irish Medicines Board to begin a pivotal Phase II trial which will be funded by the Cystic Fibrosis Foundation through milestone-driven matching funds. We have not modeled any revenue from this product.
IL-9 for Asthma – Already Partnered
IL-9 is currently in Phase I trials for asthma and is expected to move into Phase II sometime this year. Genaera entered into an agreement with MedImmune in April 2001, whereby Genaera could receive up to $55 million in milestone payments and an estimated 10% royalty on sales. MedImmune is responsible for conducting all clinical trials.
RISKS
We believe a Speculative Buy position with Genaera Corporation involves the following risks:
• Clinical Trial and Regulatory Risks: Serious unwanted and unexpected side effects, lack of efficacy or insufficient clinical data may delay or preclude regulatory approval of some or all of Genaera's drug
candidates.
• Possible Need to Raise Additional Funds: We believe that Genaera will most likely be required to raise additional funds in the future should an adequate partnership or acquisition not occur in 2006/2007.
• Competition: Even if Genaera's drugs receive approval, market competition and physician adoption rates may be slower than anticipated. Genaera will rely to a large degree on the marketing effectiveness of future partners, which Genaera does not control.
• Sector Rotation: Genaera is a small specialty pharmaceuticals company often kept in a portfolio with similar companies. In such cases, a significant event for one company may have a material impact on the valuation of all similar companies regardless of their unique qualities.
DISCLOSURES
Initiated May 3, 2005 – BUY – Price Target $5.00
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