Despite bouncing off a 2-year low, biotech is still an unpopular sector and investors are rightfully concerned about its near-term prospects. Recent drug failures, growing pricing pressure and the potential impact of biosimilars all contribute to the negative sentiment, but the main problem is the lack of growth drivers for the remainder of 2016 (and potentially 2017).

The biotech industry relies on innovation cycles to create new revenue sources. This was the case in the 2013-2014 biotech bull market, which was driven by a wave of medical breakthroughs (PD-1, HCV, CAR/TCR, oral MS drugs, CF etc.). These waves typically involve new therapeutic approaches coupled with disruptive technologies as their enablers.

In oncology, for example, the understanding that cancer is driven by aberrant signaling coupled with advances in medicinal chemistry and antibody engineering led to the development of kinase inhibitors and monoclonal antibodies as blockers of signaling. A decade later, insights around cancer immunology gave rise to the immuno-oncology field and PD-1 inhibitors in particular, which are expected to become the biggest oncology franchise ever.

Gene therapy ticks all the boxes

While there are several hot areas in biotech such as gene editing and microbiome, most are still early and their applicability is unclear. Gene therapy, on the other hand, is more mature and de-risked with tens of clinical studies and the potential to treat (and perhaps cure) a wide range of diseases where treatment is inadequate or non-existent. The commercial upside from these programs is huge and should expand as additional indications are pursued.

As I previously discussed, the past two years saw a surge in the number of clinical-stage gene therapies, some of which already generated impressive efficacy across multiple indications. This makes gene therapy the only truly disruptive field which is mature enough not only from a technology but also from a clinical standpoint. Importantly, most studies are conducted by companies according to industry and regulatory standards, in contrast to historical gene therapy studies that were run by academic groups.

To me, the striking thing about the results is the breadth of technologies, indications and modes of administrations evaluated to date. This versatility is very important for the future of gene therapy as it reduces overall development risk and increases likelihood of success by allowing companies to tailor the right product for each indication. Parameters include mode of administration (local vs. systemic vs. ex vivo), tropism for the target tissue (eye, bone marrow, liver etc.), immunogenicity and onset of activity.

Building a diversified gene therapy basket

Given the early development stage and large number of technologies, I prefer to own a basket of gene therapy stocks with a focus on the more clinically validated ones: Spark (ONCE), Bluebird (BLUE) and Avexis (AVXS).

Bluebird and Spark are the most further along (and also the largest based on market cap) gene therapy companies and should be the basis for any gene therapy portfolio. With two completely different technologies, the two companies have strong clinical proof-of-concept for their respective lead programs.

Avexis is less advanced without a clinically validated product, but recent data for its lead program are too promising to ignore.

Spark Clinical validation for retinal and liver indications

Sparks lead programs (SPK-RPE65) will probably become the first gene therapy to get FDA approval. In October, the company reported strong P3 data in rare genetic retinal conditions caused by RPE65 mutations, the first randomized and statistically significant data for a gene therapy. The company is expected to complete its BLA submission later in 2016 which should lead to FDA approval in 2017. Sparks second ophthalmology program for choroideremia is in P1 with efficacy data expected later in 2016.

Earlier this month, Spark released an encouraging update for its Hemophilia B program, SPK-9001 (partnered with Pfizer [PFE]). A single administration of SPK-9001 led to a sustained and clinically meaningful production of Factor IX, a clotting factor which is dysfunctional in Hemophilia B patients. All four treated patients experienced a clinically significant increase in Factor IX activity from <2% to 26%-41% (12% is predicted to be sufficient for minimizing incidence bleeding events). Due to the limited follow up (under 6 months), durability is still an open question.

Spark intends to advance its wholly-owned Hemophilia A program (SPK-8011) to the clinic later in 2016 with initial data expected in H1:2017. Results in the Hemophilia B should be viewed as a positive read-through but Hemophilia A still presents certain technical challenges (e.g. missing protein is several fold larger) which required Spark to use a different vector. Hemophilia A represents a $5B opportunity compared to $1B for Hemophilia B.

Bluebird

Despite being one of the worst biotech performers, Bluebird remains the largest and most visible gene therapy company. In contrast to most gene therapy companies, Bluebird treats patients cells ex-vivo (outside of the body) in a process that resembles stem cell transplant or adoptive cell transfer (CAR, TCR). Progenitor cells are collected from the patient, a genetic modification is integrated into the genome followed by infusion of the cells that repopulate the bone marrow. This enables Bluebird to go after hematologic diseases like beta thalassemia and Sickle-cell disease (SCD) where target cells are constantly dividing.

Sentiment around Bluebirds lead program, Lenti-globin , plummeted last year after a series of disappointing results in a subset of beta-thal patients and preliminary data in SCD, which represents the more important commercial opportunity. Particularly in SCD patients, post-treatment hemoglobin levels were relatively low and although some increase has been noted with time, it is still unclear what the maximal effect would be. Market reaction was brutal, sending shares down 75% in just over a year.

Next update for Lenti-globin is expected at ASH in December. Despite the disappointing efficacy observed in SCD and beta-thal, I am cautiously optimistic about Bluebirds efforts to optimize treatment protocols and regimens. These include specific conditioning regimens and ex-vivo treatment of cells that may improve transduction rate and hemoglobin production in patients. Some of these modifications are already being implemented in newly recruited patients and hopefully longer follow up will lead to higher hemoglobin levels in already-reported patients.

The only clinical update so far in 2016 was for Lenti-D in C-ALD, a rare neurological disease that affects infants in their first years. Results demonstrated that of 17 patients treated to date (median follow-up of 16 months), all remain alive and free of major functional deterioration (defined as major functional disabilities, MFD). The primary endpoint, defined as no MFD at 2 years, was reached for 3/3 patients with sufficient follow-up and assuming the trend continues Bluebird may be in a position to file for approval in H2:2017.

Lenti-Ds commercial opportunity is limited (200 patients diagnosed each year in developed countries) so investors understandably focus on Lenti-globin, which is being developed for beta thal (~20k patients in developed countries) and SCD (~160k patients).

Bluebird is expected to end 2016 with ~$650M in cash. Current market cap is $1.7B.

Avexis

Avexis is developing AVXS-101 for Spinal muscular atrophy Type 1 (SMA1), a rapidly deteriorating and fatal neuro-muscular disease. SMA1 is characterized by rapid deterioration in motor and neuronal functions with 50% of patients experiencing death or permanent ventilation by their first anniversary. Most patients die from respiratory failure by the age of two. SMA Type 2 and Type 3 are also caused by SMN1 mutations and are characterized by a later onset and milder disease burden (but unmet need is still significant in these indications). The US prevalence of SMA is 10,000, 600 of which are SMA1.

In contrast to Bluebird and Spark, Avexis does not have conclusive proof it can lead to expression of the missing protein (SMN1) in the target tissue nor does it have randomized clinical data but the results generated to date are simply too provocative to ignore.

At the most recent update, Avexis presented data for 15 patients who received AVXS-101 in their first months of life. 3 patients were treated with a low dose and 12 were treated with a high dose. Strikingly, none of the children experienced an event (defined as ventilation or death), including patients who reached 2 years of age. All 9 patients with sufficient follow up, reached the age of 13.6 months without an event in contrast to historical data that show an event-free survival of 25%. AVXS-101 also led to a dose dependent increase in motor function which had a quick onset especially at the higher dose.

As with any results from an open label study without a control arm, these data should be analyzed with caution, as they need to be corroborated by large controlled studies (expected to start next year). Still, the data point to an overwhelming benefit in a very aggressive disease. One of the most exciting aspects of this program is the fact that it is given systemically via IV administration, which implies the treatment reaches the neurons in the CNS. Avexis plans to start a trial in SMA2 in H2:16 using intrathecal delivery (directly to the spinal canal). This decision is surprising given the results with IV administration in SMA1 and the fact that the BBB immaturity hypothesis in babies is not considered relevant anymore. (See this review)

AVXS-101s main competitor is Biogens (BIIB) and Ionis (IONS) nusinersen, an antisense molecule that needs to be intrathecally injected 3-4 times a year. As both drugs generated encouraging clinical data in small non-randomized studies, it is hard to compare them, however, AVXS-101 has an obvious advantage of being a potentially one time IV injection. Nusinersen is in P3 with topline data expected in mid-2017.

AVXS-101 is based on an AAV9 vector developed by REGENXBIO (RGNX), which licensed the technology to Avexis. Beyond the 5%-10% in royalties REGENXBIO is eligible to receive, data for AVXS-101 bode well for the companys proprietary programs in MPS-I and MPS-II, two other rare diseases with neurological involvement where BBB penetration is crucial. These programs are also based on REGENXBIOs AAV9.

Beyond AVXS-101, REGENXBIO has an impressive partnered pipeline which includes collaborations with Voyager (VYGR), Dimension (DMTX) , Baxalta and Lysogene.

Portfolio updates Immunogen, Marinus, Esperion

June was a rough month for three of my holdings. Immunogen (IMGN) had a disappointing data set at ASCO, Marinus (MRNS) reported a P3 failure in epilepsy and most recently, Esperion was dealt a regulatory blow from the FDA that may push development timelines by several years. I am selling Immunogen and Marinus due to the lack of near-term catalysts although long-term their respective drugs could still be valuable. I decided to keep Esperion as I still find ETC-1002 very attractive and hope that PCSK9s CVOT data will soften FDAs concerns about LDL-C reduction as an approvable endpoint.

Three additional companies with important binary readouts in the coming months are Array Biopharma (ARRY), SAGE (SAGE) and Aurinia (AUPH). Array will have P3 data for selumetinib (partnered with AstraZeneca) in KRAS+ NSCLC. SAGE will report data from a randomized P2 in PPD following a promising single-arm data set. Aurinia will report results from the AURA study in lupus nephritis patients, where there is a strong rationale for using the companys drug (voclosporin) but limited direct clinical validation.

Portfolio holdings July 4, 2016

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