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•BTK 3,203.94 •NBI 2,966.25 October 23, 2014 | Issue No. 789 Since Last Issue: BTK: 5.2%; NBI: 5.4%; Model Portfolio: 9.8%; Trader’s Portfolio: 15.4 % This Issue: Despite Extreme Volatility, Staying the Course UPDATES: ALKS, CELG, ISIS, MDCO, NVAX, PCRX, PCYC, SGMO Biotech Sector Analysis SENTIMENT– The market took any and every reason to sell stocks in the beginning of October – the EU slowdown, US interest rates concerns, World Bank lowering global GDP forecasts, Urkaine/Russia, China, ISIS, technical violations and of course, Ebola. The bottom line may have been as simple as this – larger stocks, dominating the market in 2014, were due for a correction and smaller stocks appear to have bottomed in the meanwhile. As we mentioned a few times recently, fund managers get paid for performance on December 31. The market often gives us opportunities and this month was a classic example. Not to completely ignore the negative worldwide events, savvy investors with cash on the sidelines took advantage of attractive levels to add to or initiate positions during the recent market collapse. With the abatement of some of the above issues, all of a sudden the sentiment is not so bad if Chart A not positive once more (e.g., the spike and return of the VIX, see Chart A). Our last two Issues repeated the same message “Pick Your Spot” and there were plenty of them since then. Technically IBB At Highs Once More – Thanks to a bounce back in the smaller caps followed by another resurgence by the leaders (e.g., AMGN, CELG, REGN, GILD, see Chart B), the IBB touched its longterm support levels (i.e., the 200-day MA) and now is once more at the highs for the year (whew that was fast). It will be interesting to see if the momentum is maintained (e.g., will investors chase performance) or the trading range activity returns (e.g., one more pullback?). While the end of the year is still a bit away, the October damage was rather severe and may have signaled the bottom for the remainder of 2014. The sector does not seem to be in overbought territory, although short covering is likely to have played a role in the snapback as well. Chart B ©Piedmont Venture Group (2014). Address: P.O. Box 40460, Berkeley, CA 94706. Telephone: (510) 843-1857. Fax: (510) 843-0901. Website: http://www.bioinvest.com. Email: [email protected]. Published 24 times a year. Email subscription rates: 1 year - $399, 2 years - $678, 3 years - $898. You may cancel at any time for a prorated refund. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable but no representations or warranty, express or implied, is made as to the accuracy or completeness. In no way is any shall this newsletter be construed as an offer to sell or solicitation of an offer to buy any securities. The publisher and its associates, directors or employees may have positions in, and may from time to time make purchases or sales of, securities mentioned herein. We cannot guarantee and you should not assume that future recommendations will equal the performance of past recommendations or be profitable. www.bioinvest.com | 1 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course Leaders Keep Leading – BIIB announced a disappointing quarter and the first Tecfidera patient with PML, but it’s the only Big Bio that has not had good news of late. AMGN, with a pipeline resurgence, has been approached by activist fund Third Point, to split up the company. That comment sent the shares to new highs. CELG’s GED-301 hit the mark and investors were very pleased with its Q3:15 quarterly call. GILD received Harvoni approval (see below), ALXN beat and raised again, and REGN delivered further encouraging Eylea DME results. Hence, the new highs for the IBB. I/O Corner – PCYC’s Imbruvica Enters Red Hot Immune Oncology With BMY’s Optivo – PCYC/Janssen struck an IO collaboration with Bristol-Myers Squibb to test Imbruvica in combination with Optivo (nivolumab, anti-PD-1). The new IO combination will initially focus on diffuse large B-cell lymphoma (DLBCL), follicular lymphoma (FL) and chronic lymphocytic leukemia (CLL) with Janssen conducting the studies. Imbruviva has some very positive characteristics that would make it an ideal component of an IO combo as it is both safe and delivered orally for ease of use. Safety is always paramount in drug development and even more so when combining drugs. Imbruvica’s Truly Novel Mechanism of Action – Imbruvica's primary activity is against malignant B cells via BTK (Bruton's tyrosine kinase) inhibition. In addition, Imbruvica has potent off-target activity against ITK (interleukin-2 inducible kinase), which results in improved T cell immunity that, in theory, could enhance the response to a PD-1 inhibitor such as Opdivo. In a paper that appeared last year in the scientific journal, Blood, Imbruvica was shown to be the first clinically viable ITK inhibitor, with “clinically relevant and physiologically potent activity that could lead to broad therapeutic utility". It was shown that Imbruvica inhibits the differentiation and activation of T helper 2 (Th2) T cells and skews development in favor of Th1-based immune responses. The accompanying editorial stated that "this bias toward Th1 cells promotes a more effective antitumor immune response." In malignancies, the balance between Th1 and Th2 T cells is commonly disturbed and results in compromised ability of the immune system to eradicate the tumor. Therefore, in addition to a specific inhibition and down-regulation of BCR that directly inhibits the proliferation and survival of the malignant B cell, Imbruvica's inhibition of ITK leads to a “dramatic” change in the tumor microenvironment. This promotes a Th1 response that helps immune regulation that inhibits malignant cell growth. Importantly, the activity of Imbruvica beyond BTK inhibition, which to date has been viewed as a potential liability, could extend its utility to solid tumors as part of an immuno-oncology (IO) combo paradigm. PCYC will most likely form additional future solid tumor collaborations with other I/O players. BMS formed another I/O joint venture, this time with Novartis, to test Opdivo in combination with three NVS experimental cancer drugs. One study will evaluate Opdivo with Zykadia, which was approved by the FDA in April as a treatment for late-stage nonsmall cell lung cancer. The second study will test Opdivo with two investigational drugs, INC280 and EGF816. INC280 is INCY’s C-met inhibitor that is partnered with Novartis. NVS is also developing Chimeric Antigen Receptor T-cell, or CAR-T, immunotherapies, which involves engineering a patient's own T-cells to identify proteins on cancer cells. The company also acquired CoStim Pharmaceuticals earlier this year as they play catch up in the red hot IO space. Regulatory – FDA Rolling Along – Gilead has won FDA approval to begin selling Harvoni (a.k.a, the son of Solvaldi), the first pill that cures most hepatitis C (HCV) patients without requiring other medicines. Its near $100,000 cost will likely further inflame the national debate between drug companies and health insurers over spiraling prices. Harvoni combines Sovaldi with another agent into a single pill that needs to be taken just once a day to cure most > www.bioinvest.com | 2 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course patients. The cost is $94,500 for most patients, who will be treated for 12 weeks. An FDA panel voted unanimously to approve Novartis’ secukinumab for moderate-to-severe plaque psoriasis. The agency’s Dermatologic and Ophthalmic Drugs Advisory Committee voted 7-0 in favor of secukinumab, a selective interleukin-17A inhibitor, based on 10 Phase II/III clinical trials that included nearly 4,000 patients. The new drug could be very competitive as it has shown superiority to AMGN’s Enbrel, an anti-TNF drug, which represents the current standard of care. BMS announced that they were withdrawing their US application for asunaprevir and daclatasvir, eight months after the HCV combination received 'Breakthrough Therapy Designation’ from the FDA. The decision due to the “rapidly evolving” HCV treatment landscape in the US, which means that GILD, ABBV and JNJ will have one less competitor in the extremely lucrative U.S. HCV market. The U.K.’s National Institute for Health and Care Excellence (NICE) published draft guidance that recommended Novartis’ Gleevec for up to three years in patients who have had a gastrointestinal stromal tumor (GIST) and are at high risk of recurrence. The U.K.’s NICE has also decided that Dendreon’s Provenge is too expensive to be used as a treatment for prostate cancer. InterMune/Roche and Boehringer both were granted FDA approval for their fibrosis drugs. The two treatments were designated "Breakthrough" and are designed to treat the often-fatal idiopathic pulmonary fibrosis (IPF), a lung-scarring disease that inhibits oxygen absorption and hampers pulmonary function. InterMune/Roche's drug, perfenidone, will be branded Esbriet, the same as it does in Europe, while Boehringer's nintedanib will be called Ofev. Until now, there were no FDA-approved treatments for IPF, which kills about 40,000 people a year. AMGN has filed for an early FDA approval for its leukemia drug candidate blinatumomab based on promising Phase II data. The compound is an antibody developed through Amgen's bispecific T cell engager (BiTE) system, which they acquired in 2012 when they bought Micromet. Amgen has moved quickly with blinatumomab, which is also in development as a treatment for CLL, B-cell lymphoma and other blood cancers. Pfizer’s potential breast-cancer treatment, palbociclib, was granted Priority Review by the FDA, potentially speeding the approval process by up to four months. The FDA designated an adult stem cell treatment from BrainStorm Cell Therapeutics as a fast-track product for treating amyotrophic lateral sclerosis, or ALS. Daily Ebola News Affects Markets, Some Bios – Ebola headlines were the icing on the market’s decline (once the virus arrived in the U.S.), and its abatement (for now) has led to the market’s rebound (once all quarantined people were released without a new infection being reported). NLNK started a Phase I trial of an experimental Ebola vaccine at Walter Reed. GSK has also provided an update on their Ebola vaccine saying that initial Phase I data will be available by year end which would allow them to begin testing the vaccine in healthcare workers going to Africa as soon as early next year. JNJ announced that it would deliver 250,000 doses by May of a novel Ebola vaccine developed with Denmark’s Bavarian Nordic. Other biotech-related Ebola stocks and their wild rides include TKMR, BRCX, CERS and CHRX. Although Ebola will continue to make noise until a bonafide treatment and/or vaccine exists, the most urgent virus causing hospitalization in infants/adults remains the flu/RSV (hence, our NVAX recommendation). More Partnerships – In the midst of all of their Ebola catalysts, NewLink made headlines once again when they inked an attractive partnership with Genentech/Roche for the development of NLG919, an IDO pathway inhibitor. NLNK will receive an upfront payment of $150 million and may receive in excess of $1 billion in milestone payments plus escalating double-digit royalties. The company has www.bioinvest.com | 3 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course discovered novel tryptophan-2,3-dioxygenase (TDO) specific inhibitors that are potential anti-cancer compounds which could function individually or in combination with IDO inhibition and were included in this deal. As a reminder, MTSL Recommendation INCY is the faraway leader in the IDO race. M&A – ABBV/SHPG Break-Up & More Deals – With the collapse of the AbbVie/Shire merger, SHPG walks away with a $1.6 billion break-up fee. As a result, small/mid-cap biotechs have emerged as targets for Shire to spend its newfound money on. Speculation targets include CBST, NPSP, BMRN, DVAX and SGMO. In the meantime, more deals are being struck. Actavis is buying Durata (DRTX), a specialty drug maker – for $675 million plus more on sales milestones – which is expected to strengthen its business that focuses on infectious diseases. In our view, this bodes well for MTSL Recommendation MDCO (see below). Endo is buying Auxilum, boosting its offer to $2.6 billion. The Auxilium acquisition is the latest of several deals for Endo, which pulled off a tax-cutting inversion earlier this year with its purchase of Paladin Labs. Data – Good and Bad Remind Us It’s A Stock Picker’s Market – ALNY’s stock rose sharply after the Company released positive Phase II data for patisiran, for the treatment of transthyretin-mediated amyloidosis (ATTR) in patients with familial amyloidotic polyneuropathy, a rare genetic defect that affects roughly 10,000 people. MTSL Rec ISIS is also developing a drug candidate for this indication that is currently in Phase III. Regulus’ stock doubled when it announced positive Phase I data for HCV. In 14 patients with hepatitis C, a single injection of RG-101 yielded an average viral load reduction of 4.1 log at 29 days. While very early data, a four log reduction from a single injection could compete with the new HCV combo pills. Regulus was formed by a joint venture between ALNY and MTSL Recommendation ISIS. SNSS stock was crushed after vosaroxin missed Phase III trial endpoints for acute myeloid leukemia. The stock plunged ~70% on the news that the compound failed to significantly improve survival rates compared to a placebo. Alcobra is attempting to tout the benefits of a failed Phase II trial for its ADHD treatment, MDX. Wall Street clearly understood the data, sending the shares down nearly >50% on the clinical trial. GW Pharmaceuticals' potential treatment for ulcerative colitis missed its primary endpoint in a Phase II trial and was not well-tolerated, a setback for the U.K. drugmaker and its pipeline of cannabinoid treatments. IPO – Forward Goes Backward – One of the more widely anticipated debuts, Danish drug developer Forward Pharma (FWP) priced its IPO at $21 which was above the initial range. Unfortunately, timing was poor and the deal quickly traded down to ~$16. Forward's lead treatment is FP187, a compound in Phase III trials for MS that uses a proprietary formulation of dimethyl fumarate (DMF), the same active ingredient in Biogen's Tecfidera. Forward will likely face Biogen in court as an IP battle is about to be waged. At the time of publication, the stock has recovered although still sits below the IPO price. The Netherlands' Forbion Capital Partners has raised $120 million with plans to stake a new generation of biotech companies. Forbion expects to raise up to $250 million in this third fund of theirs, enough to support 12 to 15 investments in therapeutics, devices and diagnostics. Among the group's recent exits are Santaris Pharma, sold to Roche for $450 million; Bluebird, which pulled off a $116 million IPO last year; and BioVex, which Amgen acquired for up to $1 billion. Focus On MTSL News Now and Future – This Issue will focus on the plethora of news flow in our Universe, keeping subscribers well informed and ahead of the curve. With the recent sharp pullback most of the companies continue to trade below our > www.bioinvest.com | 4 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course BUY LIMITS. Although we believe they are still undervalued, the majority of our companies have bounced off their recent lows by 10-20%. In our view, however, the market has given us a tremendous opportunity in MDCO and SGMO shares at current levels. Except for CELG and SGMO, the remainder of our universe will be reporting Q3:14 earnings and holding conference calls between now and the next Issue. CLINICAL TRIALS WATCH – Relevant New Studies or Changes Posted on ClinicalTrials.gov for our MTSL Portfolio and/or Related Companies since last Issue: ABBV – Study Evaluating ABT-199 in Subjects With Relapsed or Refractory Non-hodgkin Lymphoma or Multiple Myeloma ALKS – A Drug-Drug Interaction Study of ALKS 5461 in Healthy Volunteers CELG – Pharmacokinetic and Safety Study of Nab®Paclitaxel (ABI-007) Plus Gemcitabine in Subjects With Advanced Pancreatic Cancer Who Have Cholestatic Hyperbilirubenemia CELG – Efficacy and Safety of Intramuscular PDA002 in Subjects Who Have Diabetic Foot Ulcer With Peripheral Arterial Disease CELG – The Efficacy and Safety of Nab-paclitaxel in Pretreated Patients With Extensive Disease of Small Cell Lung Cancer GILD – Safety, Pharmacodynamics, Pharmacokinetics, and Efficacy of GS-9901 in Adults With Relapsed Follicular Lymphoma, Chronic Lymphocytic Lymphoma Leukemia, or Small Lymphocytic INCY – Study of INCB039110 in Combination With Docetaxel in Subjects With Non-Small Cell Lung Cancer INCY – Study of INCB039110 in Combination With Docetaxel in Subjects With Non-Small Cell Lung Cancer INCY – An Open-Label Study of a Novel JAKinhibitor, INCB052793, Given to Patients With Advanced MalignanciesCombination With Docetaxel in Subjects With Non-Small Cell Lung Cancer INCY – Ruxolitinib and Pracinostat Combination Therapy for Patients With Myelofibrosis (MF) NVAX – Placebo-Controlled Study to Evaluate the Safety and Immunogenicity of the RSV-F Vaccine in Elderly Adults NVAX – RSV F Vaccine Maternal Immunization Study in Healthy Third-trimester Pregnant Women PCRX - The Transversus Abdominis Plane Block: A Prospective Randomized Clinical Trial Using EXPAREL. PCYC – A Multi-Center Study of Ibrutinib in Combination With Obinutuzumab Versus Chlorambucil in Combination With Obinutuzumab in Patients With Treatment naïve CLL or SLL www.bioinvest.com | 5 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course PCYC – Tissue Collection for Biomarkers Determining Resistance to Ibrutinib (CLARITY) PCYC – A Study to Evaluate the Effects of Ibrutinib on Cardiac Repolarization in Healthy Participants PCYC – A Phase II Study of Ibrutinib Plus FCR in Previously Untreated, Younger Patients With Chronic Lymphocytic Leukemia (iFCR) PCYC – Ibrutinib Post Stem Cell Transplantation (SCT) in Double-Hit B-Cell Lymphoma REGN – Study of REGN1500 in Patients With Homozygous Familial Hypercholesterolemia (HoFH) TGTX/PCYC – A Phase I/Ib Safety and Efficacy Study of the PI3k Delta Inhibitor TGR-1202 and Ibrutinib in Patients With Select B-Cell Malignancies Company Updates ALKS, CELG, ISIS, MDCO, NVAX, PCRX, PCYC, SGMO ALKS – FDA Accepts AL Filing, Getting Closer To The Transformation – The clock is now set for August 22, 2015 for the once-monthly schizophrenia drug. The approval will be marketed directly by Alkermes, which is establishing a premier antipsychotic franchise. The NDA filing includes the positive results from the registration Phase III study in which aripiprazole lauroxil demonstrated significant improvements in schizophrenia symptoms, compared to placebo. The randomized, multicenter, double-blind, placebo-controlled study was successful at both doses tested – 441 mg and 882 mg – administered once monthly and met the primary endpoint with statistically significant and clinically meaningful reductions in Positive and Negative Syndrome Scale (PANSS) scores. In addition, AL met all secondary endpoints and demonstratedXXXsignificantXXimprovementsXXXin schizophrenia symptoms versus placebo. Aripiprazole lauroxil was generally well tolerated with the safety profile was similar to that reported with oral aripiprazole. The most common adverse events in the study were insomnia, akathisia and headache. ALKS continues to move aggressively forward with a broad current, near-term long-term portfolio of valueadded compounds. Another clinical trial was just posted on Clinicaltrials.gov (see above) for ALKS5461, another major growth driver being developed for major depressive disorder. ALKS is BUY under 55 with a TARGET PRICE of 75. CELG – Celgene’s GED-0301 Delivers Positive Phase II Crohn’s Data; Strong Q3:14 Financials & Otezla Gains Psoriasis FDA Label – Celgene released positive Phase II results for their potential blockbuster drug candidate, GED-0301, for the treatment of Crohn’s disease patients who are steroid-resistant or refractory. In a 166-patient Phase II study, GED-0301 met the primary endpoint of statistically significant remission rates at four weeks of therapy. The high dose (160mg) reported a 65% remission rate. The middle dose (40mg) demonstrated a 58% remission rate and the low dose (10mg) reported a 12.2% remission rate which was not statistically significant. Placebo patients had only a 9.5% remission rate. Most importantly, the positive results seem durable and showed at 12 weeks GED-0301 continued to demonstrate statistically significant, better remission www.bioinvest.com | 6 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course rates. The high dose (160mg) reported 67% remission rate. The middle dose (40mg) 63% and the low dose (10mg) 29%. The placebo rate was low at 21%. Questions still remain regarding long-term efficacy and side effects, and those will be answered in the Phase III studies. Partially supporting this is the fact that in the trial patients still did well 10 weeks after stopping the drug, hinting at its efficacy long after stopping treatment. Recruitment for Phase III studies is expected to begin by the end of the 2014, and one-year maintenance duration trial is planned, which would lead to a launch ~2018. GED-301 appears rather competitive when compared to the blockbuster anti- TNF drugs. The data for GED-0301 at the 40/60mg dose level (2 week & 4 week) showed superior remission rates of 55%/65% vs. Remicade and Humira (4 weeks only) of 48% and 12% respectively. The drug candidate is oral, has few side effects and greater ease of administration than the injectable anti-TNFs. These novel drug profiles have the potential to cause a revolution within a given therapeutic area, which was discussed last year in MTSL Issue entitled “Oral Arguments,” as new targeted therapies replace current injectable or intravenous market leaders. Q314 Financials – CELG beat Wall Street estimates this week when they reported an EPS of $0.97 versus consensus EPS of $0.95 on revenues of $1.98 billion versus a consensus estimate of $1.96 billion. The primary driver for the company is Revlimid which came in at $1.3 billion slightly above consensus estimate of $1.26 billion, and represents a 7% increase quarter-to-quarter. CELG has also raised 2014 revenue guidance to “exceed” $7.6 billion versus their previous guidance of “exactly” $7.6 billion. The pipeline remains unprecedented with the number of projects under development at all stages of development. Also since the last Issue, Otezla received it psoriasis label from the FDA on target – significantly expanding the drug’s patient population. While the quarterly sales were below consensus, the new label will lead to greater usage right away. Expectations were very high for GED-301, and the presentation in Vienna was well attended and well received. Registration studies are still required, but analysts are now beginning to discount ’301 in their mid-term CELG models. The diversified pipeline is hitting pay dirt. CELG is a BUY under 90 with a TARGET PRICE of 115. ISIS – Delivers Positive Phase II SMN Data in Both SMA Infants & Children at WMS – ISIS released anticipated incremental data for SMN-Rx in infants and children with spinal muscular atrophy (SMA) at the World Muscle Society (WMS) Congress. The update represents an additional five months of data since last reported at the American Society of Neurology (ASN). Overall, 20 infants have been dosed as of the 9/2 cutoff date, including 4 patients in the 6mg cohort (unchanged) and 16 patients in the 12mg cohort (up from 11). Patients who have completed the 3-dose induction regimen (per protocol efficacy population) include the four 6mg pts and twelve 12mg pts. In the 6mg cohort, the median event-free survival (EFS) is up to 16.3 months, and is 13.8 months in the 12mg cohort. While we are cautious when using historical control comparisons, in our view, this data is quite encouraging when compared to the ~10.3 month EFS seen in Dr. Finkle's recently published natural history study. Additionally, infants in the 12mg cohort showed a mean 11.7 point increase in CHOPINTEND (vs. an average 1.27 point/year decline in the natural history study). Lastly, the data is supported by spinal cord tissue samples from SMA infants that shows increases in SMN protein in ISISSMN-treated infants, suggesting that ISIS-SMN is acting by the mechanism of action through which it was designed to act. In the ongoing, open-label study in children with SMA www.bioinvest.com | 7 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course increases in muscle function scores, as measured by the Hammersmith Functional Motor Scale-Expanded (HFMSE), were observed in children treated with multiple doses of ISIS-SMN. As previously reported at ASN in April 2014, children in the 3 mg, 6 mg and 9 mg cohorts achieved mean increases from baseline of 1.5, 2.3 and 3.7 points, respectively. Further evaluation of these children showed that the previously observed mean increases in muscle function scores continued to show increases from baseline for an extended period after their last dose with mean increases from baseline of 1.7, 3.2 and 2.3, respectively. There has been some criticism that the data lost its dose response with the 6mg dose now stronger than the 9mg dose. This ignores the fact that these patients are all showing increases in HFMSE, a major victory with a degenerative disease. Even if ISIS-SMN was just maintaining muscle function as measured by HFMSE it would still be an intriguing drug candidate for the infants and children facing death or severe lifelong disability. In our view, ISIS-SMN’s ability to improve HFMSE scores is clinical proof that it could be a very real drug for SMA patients. SMN-Rx Continues To Be Well-Tolerated – At the WMS, 20 infants have been exposed to 6mg or 12mg SMN for a total of 67 intrathecal injections. As of the same time point, 56 children have been exposed to doses ranging from 1mg to 12mg of SMN for a total of 183 doses. The lumbar puncture procedure continues to be well tolerated for both infants and children. Importantly, there continues to be no drug related serious adverse events. Phase III Development – ISIS is now recruiting ~110 SMA infants for the Phase III trial (ENDEAR), with the goal of testing how well SMN can improve survival and forestall the need for ventilation. The company is also on schedule to launch a second pivotal trial (CHERISH) later this year in children with SMA. In sum, we are encouraged by the combination of infant event-free survival compared to the natural history and the improvements in muscle function delivered by SMN in Phase II to date. In our view, the mechanism of action data is also pointing in the right direction. SMA represents a multi-billion dollar opportunity with market estimates showing that SMA effects approximately 30,000-35,000 patients in the US, EU and Japan, and that one in every 10,000 children born will have SMA. ISIS also has an excellent partner for SMN in BIIB and is in line to receive escalating high, double-digit royalties. ISIS is a BUY under 55 with a TARGET PRICE of 70. MDCO – Q3 Results Highlight Underappreciated Pipeline; Actavis Purchase of DRTX Underscores New Antibiotics Market Potential; Orbactiv Studies Published; Co. To Host NYC Analyst Meeting On 11/5 – While third quarter results included slightly below consensus Angiomax sales (mostly due to inventory build in Q2 vs. Q3, and weak EU markets), to us the pipeline continues to progress, as the Company adds another novel new compound to the long-term outlook. As a reminder, Angiomax is not a growth driver and not a reason to own MDCO. In our view, the stock reflects a complete loss of Angiomax patent protection by next year or so (instead of 2019 which the company continues to defend its position). The near-term pipeline includes 7 NDA or EMA decisions within the next year for cangrelor, Orbactiv, Ionsys and Replixa. Orbactiv was launched domestically two weeks ago, and has meaningful competitive advantages (see below). Minocin IV was also launched just in the hospital as well. The company is confident that it has successfully answered the four FDA issues from negative advisory panel earlier this year. A resubmission is due shortly and a six-month review is expected. An EU submission is due by year-end, with a Q1:15 opinion and potential approval 76 days after that. Nonetheless, expectations for cagrelor remain low. Ionsys has an April 15th PDUFA date. www.bioinvest.com | 8 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course Replixa, a unique powder for hemostasis, has been filed in the U.S. and overseas. Hence, the near-term pipeline will result in a number of catalysts and 4-5 global launches by next year. The most exciting and yet underappreciated chapter of the MDCO investment thesis is the long-term pipeline. Four major compounds include a) carbavance (antibiotic resistance); b) PCSK-9 RNAi; c) APO-A1 and d) ABP700, a new short-acting anesthetic with similar properties to propofol but with a much cleaner side effect profile. Either one of these compounds has blockbuster potential – and may participate in major drug and biopharmaceutical markets. PCSK-9 compounds – the new class of super LDL cholesterol drugs (AMGN and REGN/SNY) – are led by monoclonal antibodies with impressive profiles and are about to be commercialized. The MDCO/ALNY version, in early studies, appears to have an even wider therapeutic window and easier administration. APO-A1, the major subject of a NY Times/NEJM paper in June showing key cardiovascular benefits (e.g., ISIS has a novel APO compound in the clinic), will present new data at next month’s AHA meeting. Finally, ABP700 has impressed management enough that it will exercise its option to acquire the company where it came from, Annovation Biopharma, in H1:15. While investors remain focused on Angiomax predominantly, we remain steadfast that this pipeline will eventually be reflected in MDCO’s valuation. On October 6, Actavis purchased antibiotic small cap maker DRTX for $675 million in cash (plus another potential 20% based on sales milestones). The acquisition is based solely on the recent approval of Dalvance, a novel gram-positive antiobiotic that will compete directly with MDCO’s Orbactiv. Subsequently, two registrational trials of Orbactic (oritavancin) were published in the recent Journal of Clinical Infectious Diseases. The SOLO II clinical trial studied Orbactiv (oritavancin) as a single dose treatment of acute bacterial skin and skin structure (ABSSS) infections caused by gram-positive bacteria,XXXincludingXXXmethicillinXXXXresistant staphylococcus aureus (MRSA). MRSA remains a major epidemic in hospitals, the key target market for MDCO’s salesforce. In addition, with its single dose profile (vs. 2x per day for Dalvance), we believe Orbactiv is in excellent competitive shape. MDCO is shockingly undervalued to us. As of this writing MDCO’s market cap is $1.3 billion. Excluding Orbaciv, total revenues for 2014 which will be approximately $750 million. Including the earlier compounds, MDCO may introduce possibly ten new products over the next several years. Also as of this writing, Bridger Management, one of the most sophisticated and value-oriented health care investors, filed a passive 5.1% stake in MDCO. The Company will hold an Investor & Analyst Day in NYC on November 5. MDCO is a BUY under 42 with a TARGET PRICE of 60. NVAX – RSV Vaccine Begins Key Elderly Trial; RSV Trial Published & Data will be Presented at Important Vaccine Conference; SNY Inferior Pandemic Vaccine Trials Published; Some Insider Buying – The elderly study will be the fastest path to market for the RSV vaccine. The longer-term data from the previous trial in this population is the basis for this next study and the follow on offering in June. The Phase II trial is a traditional design with a solid sample size – a randomized, observer-blinded, placebo-controlled study in 1,600 elderly subjects (>60 years of age) – at ten sites in the United States. The trial will evaluate the incidence of all respiratory illnesses due to RSV, including medically-attended respiratory illnesses due to RSV, and hospitalizations for respiratory illness NVAX will also evaluate the safety and immunogenicity of a 135ug dose of the RSV F Vaccine compared with placebo. The trial will also estimate the efficacy of the RSV F Vaccine in reducing the incidence of respiratory illnesses due to RSV. Results will be due after the RSV/flu season www.bioinvest.com | 9 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course most likely in Q2/Q3:15. After the pregnancy study announced last month, it is the second RSV trial starting this Fall; a third one in pediatrics is also due to begin shortly. For some time we had expected NVAX to publish data on its RSV vaccine. On October 15, the gold standard paper for vaccines, ironically called Vaccines, delivered the first printed preclinical results entitled, “An insect cell derived respiratory syncytial virus (RSV) F nanoparticle vaccine induces antigenic site II antibodies and protects against RSV challenge in cotton rats by active and passive immunization. Highlights include the following: • RSV F nanoparticle vaccine induced palivizumab competing antibodies (PCA) • PCA is in excess of serum protective levels than IM injected palivizumab • Live virus infection induces little or no PCA • Passively administered RSV F antibodies protects cotton rats against RSV virus • RSV F vaccine does not induce disease enhancement in comparison to Lot 100 FI-RSV. RSV Data to be Presented at Important Vaccine Meeting – Gregory Glenn, M.D., Senior Vice President, Research and Development at Novavax will present new immunogenicity data from Novavax' RSV F-Protein Nanoparticle vaccine candidate (RSV F vaccine) clinical trials at the 8th Vaccine & ISV Congress to be held October 26-28, 2014 in Philadelphia, (http://www.vaccinecongress.com/). The session presentation title, date and time is listed below: The data continues to show that NVAX’s vaccine candidate is as good if not more protective than Synagis (palivizumab). For our susbscribers’ information, we covered MedImmune as analysts during the entire clinical process and launch of Synagis. That is why we are so confident in the Fprotein vaccine at Novavax. It is relatively easy to compare what is approved and what trials got it approved to the NVAX trials. As another reminder, more than a third of NVAX employees currently are ex-MEDI employees. On October 8, Sanofi published results of its H7/N9 vaccine in JAMA. The results portray an inferior profile to the NVAX vaccine – just 59% of subjects (n=700) responded with protection and those needed a high-dose adjuvant (MF59) and no responses were seen without adjuvant. In the NVAX trial released last month 89-100% showed seroconversion with a tiny adjuvant dose (n=610). In our view, NVAX easily remains the leader in the development of an H7/N9 vaccine. A few insiders – CFO and SVP manufacturing – both took advantage of the market’s dislocation and purchased stock around the $4.15 level. In our view, it is yet another positive sign of confidence in the outlook of NVAX. Lastly, with all the Ebola headlines of late, we have received questions as to whether or not NVAX is making an Ebola virus vaccine. Frankly, while we do believe they may be conducting Ebola virus research (e.g., CEO Erck was quoted as such in two recent articles), they have yet to announce anything publicly. We are long-term investors and believe the entire NVAX portfolio and VLP platform are quite valuable. NVAX is a BUY under 6 with TARGET PRICE of 13. Vaccines against Viral Pathogens Sunday, October 26, 2014, 3:10 to 3:15 p.m. Immunogenicity of the RSV nanoparticle vaccine in humans and the induction of palivizumab competing antibodies: Review of immunogenicity data from 4 recent clinical trials. PCRX – EXPAREL Nerve Block Follow On Suggests Similar Safety Profile As Placebo – The analysis is based on six clinical trials and were part www.bioinvest.com | 10 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course of an oral presentation at the annual meeting of the American Society of Anesthesiologists (10/11-15, New Orleans). The comparative analysis showed all groups experienced a similar rate of adverse events (AEs) — 76% for EXPAREL vs 76% for placebo vs 61% for bupivacaine HCl — and that these appeared to be related to the procedure or opioid rescue rather than the study medication itself. The most common events were in the gastrointestinal disorders class, followed by general disorders/administration site conditions and nervous system disorders. This is PCRX’s first comprehensive review of the peripheral nerve block program and it reinforces the safety profile of the product. As a result, EXPAREL may improve patient quality of life by providing longer-term, safe, postsurgical analgesia while eliminating pumps and catheters. Furthermore, the drug will also save money by conserving hospital and provider resources typically associated with the placement and management of continuous nerve blocks. PCRX will report earnings on October 30. PCRX is a BUY under 75 with a TARGET PRICE of 105. PCYC – An Awesome & Busy Period for Imbruvica – Since the last Issue alone, PCYC has announced the following: • Formed a collaboration with Bristol Myers to test Imbruvica in combination with Opdivo (nivolumab), BMY’s leading PD-1 inhibitor. It is Imbruvica’s first foray into immune-oncology (see BSA above). • Received full European Union approval in R/R CLL, front line del p17 CLL and R/R MCL via partner and global powerhouse Janssen (JNJ). • Formed a collaboration with Roche/Genentech to test Imbruvica in combination with Gazyva – probably the leading combo for current patients. • Filed an sNDA for Imbruvica in Waldenstrom’s Macroglobulimia (WS) – of which it received BTK designation last year; hence we expect rapid FDAXOK. • Initial full-week October prescriptions have started off strong, signaling a solid end of year performance. • Company raised Imbruvica’s price by 7% in early September. • Seven new Imbruvica trials were posted on Clinicaltrials.gov (see above). There are now 75 trials posted that have either been completed, are underway and/or about to begin. Each one of these events is positive, continues to broaden usage and helps further establish Imbruvica’s dominant position in oncology. Furthermore, taken together they tell us that the drug’s life cycle is in the earliest of the stages – it has been on the market for less than a year; despite a relatively narrow initial label, sales are already annualizing at a ~$600 million run rate; and the exUS markets – where almost every new cancer drug surpasses its domestic sales – are about to begin commercialization. It is important to understand that, with a duration of action that is approaching three+ years, a rising percentage of 2014 Imbruvica patients will remain on drug for 2015 as well. Therefore, we expect year-over-year sales growth could double when one includes upcoming foreign launches. As time goes on, healthier patients will start on Imbruvica and remain on drug even longer than the initial traunch. Management continues to execute at a very high level. PCYC – Meeting With Management Re-Affirms Top Tier Likelihood – This Tuesday, we had the opportunity to meet 1-on-1 with PCYC management in NYC. Included were CEO Bob Duggan, COO Maky Zanganeh, EVP Corporate Affairs Ramses Erdtmann, and VP, Head of CLL Program Danelle James. As true investors, we are less concerned with quarterly sales forecasts, although we still expect them to meet or exceed Q3 consensus of $140 million in Imbruvica sales. What intrigues us is the www.bioinvest.com | 11 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course company’s insight regarding their recent foray into immuno-oncology and the solid tumor clinical expansion for Imbruvica, plus the inflammation program as the R&D pipeline is about to expand with new, optimized BTK compounds. In addition, witnessing the comraderie amongst the team, in our view, this is an incredibly exciting (and always busy) period for PCYC. Taken together with the events of the past two weeks (see note above), we are more confident than ever that this company is headed for the Top Tier of biotechnology valuations. I/O Begins - The recent deal with Bristol to test Imbruvica with Optivo (PD-1 inhibitor) marks the beginning of another new era of Imbruvica development. Preclincal and anecdotal evidence supported by the compound’s effects on the tumor microenvironment, coupled with ease of administration and unique safety profile make this the ideal combination drug. There will likely be additional collaborations with immuno-oncology players (not unlike INCY’s IDO joint ventures). In fact, the company is receiving almost 40 proposals a week for combination trials from investigators and other companies around the world. There are now 75 trials (completed, underway or about to start) with Imbruvica posted on Clinicaltrials.org. MM & Immune Function at ASH – We have always been optimistic for the multiple myeloma potential of Imbruvica based on its activity in the mircoenvironment (see chart from Oncotarget, 9/12) and its encouraging effects on osteoclasts (i.e., Blood 8/12). Hence, an update at ASH will finally reveal if the drug can find a place in this big market – consensus expectations are almost zero. entitled “Introducing The AutoImmune Program, The Next Chapter.” While we may have been a bit early in our analysis, we expect this to emerge soon and add yet another major long-term growth driver. The first compound(s) is currently in an RA trial (US patent expires in 2035), and the company (conservatively) expects to report results in H1:15. However, like the R/R CLL indication, PCYC will take the lead BTK inhibitor for inflammation into a niche condition that the company can dominate, enroll key opinion leaders and (maybe once again) change the paradigm. Subsequently, various additional studies will be conducted to broaden clinical (and eventual commercial) applications. As a reminder, the company owns full rights to BTK (and Imbruvica) in inflammation (although JNJ has rights to the GvHD trial that is underway). In the meanwhile, the Company continues to be granted U.S. patents on additional BTK compounds. Imbruvica Keeps Widening Space Between The Competition – The recent Roche collaboration testing Imbruvica with Gazyva is yet another admission by the majors that Imbruvica is an important component to the current standard of care. The fact that doctors are much more familiar with (and get paid to give) Rituxan makes the joint venture important for PCYC to gain further inroads with more oncologists. In addition, PCYC has a trial underway with Imbruvica vs. Imbruvica + Rituxan > ONCOTARGET Chart: In addition, ASH presentations will discuss the recent T1/T2 impact of ibrutinib that led to the BMY collaboration. Inflammation – Mimicking Imbruvica – Back in February, we published what we believe to be the most comprehensive inflammation report on PCYC www.bioinvest.com | 12 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course Rituxan in CLL, that we believe will be a win-win regardless of the outcome. Gazyva is Roche’s new Rituxan, a new anti-CD20 antibody that has some direct tumor killing ability, but its efficacy will be enhanced with Imbruvica (early combo studies have resulted in 100% response rates). Hence, combining the two newest leaders will, in our view, create the ultimate new standard of care in CLL. With 75 trials underway (7 alone posted the past two weeks), the competition will never be able to catch up and more likely, fall farther behind. ABT-199, the compound most touted by PCYC naysayers, is not being heavily invested in by ABBV besides CLL, notably delp17 (of which PCYC just received front line approval in the US and more recently the EU). The shortcomings of ‘199 are becoming increasingly evident by the lack of an expanding clinical program by ABBV. Overall, the situation could not be better for PCYC. With Imbruvica on the market for less than a year, it already has become the second best oncology launch ever. The life cycle for such dominant drugs in biotech is well more than a decade (US patents expire end of 2028). It was evident by our meeting with management (which undertook a Wall Street marketing trip this week led by JPM, Goldman Sachs and Nomura) – that they are moving into high gear and steadily accelerating. PCYC is BUY under 160 with a TARGET PRICE of 200. SGMO – Sangamo Provides Optimistic Q3 Update & Remains Visible at Scientific Forums – SGMO reported on progress with their HIV program which is currently enrolling a Phase II trial in ~12 additional subjects for functional control proof-of-concept. Enrollment completion is anticipated by year-end, which should lead to a data readout in 2015. The company also reiterated timelines for upcoming IND filings in Beta-thalassemia (partnered with Biogen) by year end and two lysosomal storage disorders (wholly owned) and sickle cell anemia (partnered with Biogen) in 2015. On the Shire partnered programs, SGMO noted that while timelines remain uncertain in the wake of the Shire/Abvie breakup, they are still guiding to IND filings for Hemophilia A, B, and Huntington's disease in 2015. Importantly, the company emphasized that from a technical/science perspective, there are no outstanding issues with Shire. While SGMO has near term catalysts including the Beta Thal IND filing and preclinical data at ASH, 2015 will also be catalyst rich with the aforementioned six INDs all on target to be filed next year. SGMO will present an overview of the SB-728-T clinical program at a "bench to bedside" discussion forum of the annual European Society of Gene and Cell Therapy ESGCT meeting, October 23-26, which will be held in The Hague. SGMO’s Dr. Gregory and Sangamo collaborator Luigi Naldini, M.D., Ph.D., Director, San Raffaele Telethon Institute for Gene Therapy (TIGET) will discuss the larger field of genome editing, utilizing the company's HIV studies as a model. They will also be discussing the use of Sangamo zinc finger nucleases in preclinical and research studies of SCID-X1, cancer and WiskottAldrich Syndrome. Last week, SGMO’s Dr. Gregory presented an overview of the SB-728-T program at the "Strategies for an HIV Cure 2014" conference organized by the National Institute for Allergies and Infectious Diseases at the NIH. Earlier in October, SGMO’s Dr. Nichol was invited to deliver the Foundation Lecture, reviewing recent clinical data from the SB-728-T program at the Autumn Conference of the British HIV Association which was held in London, UK. SGMO’s stock has not bounced back in the recent biotech rally that has lifted many of the smaller cap biotechs. With the Shire/Abvie merger done, Shire has received a $1.6 billion breakup fee which could easily be used for an acquisition. The rumor mill has already churned out multiple potential targets including BMRN, NPSP, SRPT, BLUE, ALNY, TKMR www.bioinvest.com | 13 Medical Technology Stock Letter l Despite Extreme Volatility, Staying the Course and ISIS. While any of these may make sense, in our view, SGMO may be the most attractive. Shire and SGMO already have a strong partnership and Shire understands the potential of ZFN to be a disruptive technology. At current prices, SGMO is significantly undervalued and an acquisition offer anywhere north of $20 would have to be seriously considered by the company’s Board. SGMO is a BUY under 20 with a TARGET PRICE of 30. www.bioinvest.com | 14 Medical Technology Stock Letter | Despite Extreme Volatility, Staying the Course “The Back Page” Price (52-week) # of Mkt. Value Symbol Company Orig.Rec. Lo Hi Current Target Shrs. (m) ($mil.) Recommendation ALKS Alkermes 10.13 34.28 54.25 45.28 75 140.3 6,176.0 BUY under $55 ANTH Anthera 3.04 1.53 3.79 1.90 20 19.3 57.9 BUY under $6 BMRN BioMarin 12.68 55.04 84.25 75.01 75 140.8 8,087.6 BUY under $55 CELG Celgene 24.97 66.85 100.91 100.40 115 817.6 60,849.9 BUY under $90 CNDO Coronado 6.63 1.25 3.31 1.79 N/A 35.2 61.2 HOLD FPRX Five Prime 16.29 8.02 23.33 12.09 32 21.40 275.8 BUY under $22 IMGN ImmunoGen 4.86 7.70 18.19 9.22 20 86.1 983.3 BUY under $12 INCY Incyte 5.88 35.21 70.86 54.95 85 170.6 8,692.1 BUY under $68 ISIS Isis 7.63 22.25 62.66 42.37 70 115.1 2,938.5 BUY under $55 MDCO Medicines Co. 31.98 19.92 41.28 21.99 60 61.8 1,619.8 BUY under $42 NKTR Nektar 4.66 8.87 15.34 13.25 20 116.9 1,289.4 BUY under $13 NVAX Novavax 2.44 2.68 6.95 4.99 13 208.5 871.5 BUY under $6 OGXI OncoGenex 36.82 2.10 14.25 2.20 N/A 15.4 58.8 HOLD PCRX Pacira 15.78 45.68 109.94 104.13 105 33.7 2,534.6 BUY under $75 PCYC Pharmacyclics 17.00 82.51 154.89 121.32 200 74.8 7,480.0 BUY under $160 SGMO Sangamo 4.77 8.93 24.69 11.25 30 60.4 796.1 BUY under $20 The Trader’s Portfolio The Model Portfolio Company Shares Owned Total Cost Today’s Value LONG positions Today’s Value LONG positions 27,189 90,560 Anthera 1,625 39,057 3,088 Coronado 3,700 24,776 6,623 Five Prime 2,900 40,420 35,061 Incyte 3,139 51,176 172,488 Isis 3,300 53,501 139,821 Medicines Co. 1,250 40,375 27,488 13,194 Nektar 6,000 36,411 79,500 86,125 Novavax 35,965 124,520 Anthera 2,875 68,731 5,463 Coronado 6,000 40,178 10,740 Five Prime 3,700 60,876 44,733 ImmunoGen 2,000 9,938 18,440 Incyte 3,662 42,500 201,227 Isis 4,750 58,333 201,258 600 19,380 6,500 63,277 Novavax Total Cost 2,000 2,750 Nektar Shares Owned Alkermes Alkermes Medicines Co. Company 25,000 58,025 124,750 OncoGenex 2,000 62,495 4,400 Pacira 1,000 15,938 104,130 30,000 67,670 149,700 OncoGenex 3,000 63,892 6.600 Pacira 1,500 23,907 156,195 Pharmacyclics 1,000 42,804 121,320 Pharmacyclics 1,450 52,892 175,914 Sangamo 5,000 23,250 56,250 Sangamo 5,000 23,250 56,250 23-Oct-14 Equities Cash Portfolio Value $1,250,358 $61 $1,250,419 Position Total Margin Portfolio Value $965,478 -$291,125 $674,353 www.bioinvest.com | 15 Medical Technology Stock Letter | Despite Extreme Volatility, Staying the Course Benchmarks NASDAQ S&P500 Model Trader’s Last 3 weeks 0.5% 0.2% 9.8% 15.4% 2014 year-to-date 6.6% 5.5% 5.2% 7.1% Calendar year 2013 38.3% 29.6% 103.4% 214.7% Calendar year 2012 13.4% 15.9% 25.7% 68.7% Calendar year 2011 -1.8% 0.0% -3.2% -16.0% Calendar year 2010 16.9% 12.8% 19.6% 4.3% Model Portfolio Contact Info The Model Portfolio is designed to reflect specific recommendations. We began the Model Portfolio on 12/23/83 with $100,000. On 4/13/84, we became fully invested. All profits are reinvested. Stocks recommended since then may be equally attractive, but may not be in the Model Portfolio. Transactions and positions are valued at closing prices. No dividends are created, and a 1% commission is charged. We don’t use margin. Interest income is credited only on large cash balances. Medical Technology Stock Letter John McCamant, Editor Jay Silverman, Editor Jim McCamant, Editor at Large Mahalet Solomon, Associate Joan Wallner, Associate Trader’s Portfolio The Trader’s Portfolio joined the Model Portfolio on 1/6/05 with $500,000 and is designed to take advantage of short-term opportunities throughout the biotech sector. Te Trader’s Portfolio will hold both long and short positions in stocks, trade in options, and use margin. These strategies increase risk. Although there is no limit on the time any purchase can be held, the time frame for most investments will be weeks to months. P.O. Box 40460 Berkeley, CA 94704 www.bioinvest.com Tel.510.843.1857 [email protected] New Money Buys (when under our limit) 1st Tier: ALKS, BMRN, CELG,INCY, ISIS, PCYC nd 2 Tier: IMGN, MDCO, NKTR, NVAX, PCRX, SGMO rd 3 Tier: ANTH, FPRX *Change Recommendation www.bioinvest.com | 16