Michael Sheikh, the founder of Falcon Strategic Research, delves into a biotech company whose trial results he believes could fuel takeover speculation.
- Rare Phase 1a Efficacy Data
- Approvable Drug via Multiple pathways
- Merck Must Act Quick to Avoid Bidding War
- Platform Technology Showcases Robust Pipeline
- NASH Trial Results Coming Shortly
Merck & Co. Inc. (MRK:NYSE) is one of the leaders in Immuno-Oncology (I-O) and it has a blockbuster drug called Keytruda. Most investors have heard of Keytruda if they watch prime time television; the commercials can air as much as three times an hour. The drug is associated with lung cancer and melanoma. On Monday, November 13, 2017, Galectin Therapeutics Inc. (GALT:NASDAQ) told the investment community in the title of the press release that Pembrolizumab when paired with the Galectin-3 Inhibitor GR-MD-O2 shows “Promising Early Results in Treatment Of Advanced Melanoma from a Phase 1b Clinical Trial.” The press release failed to resonate with anyone other than academicians. Investor response was muted. If GALT had simply replaced Pembrolizumab with Keytruda the stock price might be double what it is now. Investors would fuel takeover speculation since GR-MD-02 seems to make Merck’s blockbuster drug Keytruda twice as good in one-eighth the time, making this a must-have acquisition target for any drug giant including Merck.
It’s plain to see the “promising results” part of the headline however, explanation of the back story is needed. To get into this melanoma trial, you needed to be refractory, which means that you had tried all known drugs to mankind and nothing had worked. In other words, you were admitted into the trial if you were considered practically incurable. The first goal of the researchers was see if the drug was safe. Next, they wanted to see if it works, which translates into efficacy. If the drug is safe and has enough efficacy based on a large set of patients, then the company would petition the FDA for approval. This is the Holy Grail that drug companies seek. In this trial, when GALT’s GR-MD-O2 was paired with Keytruda, the response rate was nearly doubled.
Clinical Trial Analysis
Waterfall plot of best clinical response (RECIST 1.1) post-treatment. Dotted line at -30% change from baseline indicates the RECIST 1.1 threshold for definition of partial response.
When entering a clinical trial, a patient’s disease is measured via scans and vital signs taken to establish a baseline. In cancer, the rating scale is called RECIST and if it goes up from the baseline its bad because it measures the percentage of tumor growth. If it goes down, then it’s good because it means the tumor is shrinking. Each one of these nine bars represents a patient. If the tumor shrinks more than 30% then that is called an objective response and the HOLY GRAIL that drug companies are looking for. It’s extremely rare in a Phase 1 cancer trial but if you max out the chart it’s called a complete response.
All the blue bars represent patients that took between 1 to 2mg/kg. Based on mice studies, 2mg/kg is the absolute lowest level at which you might see a response with GR-MD-02 alone. The first patients dosed with 1 – 1.5 mg/kg saw their disease progress. One of the patients who had head and neck cancer was dosed at 2 mg/kg. His before and after picture is taken below. He had a softball sized tumor on his collarbone and after three injections it resolved. The bottom line is that the very first dosage of the drug GR-MD-02 expected to have no impact had a dramatic impact on at least two patients measured over a course of four months. Contrast this to the Keytruda Phase 1 Trials that were scheduled for two years.
Galectin Therapeutics Slide
These patients are depicted in red on the Clinical Trial Analysis chart above and ALL of them had an objective response in four months and one of them had a complete response. Keep in mind that they only got five injections, so this is not an apples-to-apples comparison. Keytruda’s 33% ORR is based on two years of treatment versus four months of treatment in combination with GR-MD-02 at half the therapeutic dosage.
Cohort 3—Not Depicted
The next cohort will include at least 10 patients who will be dosed at 8 mg/kg. They have begun enrolling cohort 3 and expect results in mid-2018. What is ironic about this timing is that it has taken three years to dose nine patients and now they are planning 10 and getting it done in six months. It’s impressive how a couple of complete responses in an incurable patient population gets the ball rolling.
Measuring the size of tumors is very important in the determination of cancer but the FDA ultimately cares about whether or not the patient lives, and one of its metrics is called progression free survival (PFS). The FDA wants to know if the cancer is going to come back. Clues to that question rest in the press release as well. It mentions that “there were no notable changes in the peripheral immune signature” in the low dose cohort, which confirmed in these refractory patients that Keytruda simply wasn’t effective. The peripheral immune signature are the T-Cells present in the lymph nodes. This means that the T-cells were still in the anergic state. In layman terms, the T-Cells were alive and programmed to kill cancer cells but they had a blindfold over them and couldn’t find the cancer cells.
The press release also said “clinical responders to the combination of GR-MD-02 and pembrolizumab may have reduced myeloid-derived suppressor cells following treatment.” Myeloid-derived suppressor cells (MDSC) are responsible for the tumor immunity. Reducing these cell counts restores the immune system to normal function, breaking up the tumors immunity and allowing the body’s immune system to continue destroying the cancer cells. Unfortunately Phase 1 studies are not designed to follow up on the patients to see if their bodies were able to cure themselves after treatment ended but the statements by the Principal Investigators suggest that as a possibility.
Chronic inflammatory factors stimulate myeloid-derived suppressor cells (MDSC) generation, migration and activation of immunosuppressive functions at the tumor site. Various cytokines and growth factors produced by tumor and stroma cells (such as VEGF, GM-CSF, IL-1β, IL-6, HIF-1α, TGF-β, COX-2, etc.) induce MDSC generation and expansion. Chemokines (like CCL2, CCL3, CCL4, CCL5, CXCL1, CXCL8, etc.) stimulate migration of MDSCs into the tumor microenvironment. At the tumor site, MDSCs undergo activation (via TNF-α, IL-10, IL-1β, IL-6, IFN-γ, COX-2, HIF-1α, etc.) and strongly inhibit anti-tumor reactivity of DC, T and NK cells.
Bidding War Imminent
The drug giant Merck is constantly facing pressure from Bristol-Myers Squibb Co. (BMY:NYSE). In early October, Amgen Inc. (AMGN:NASDAQ) announced data from its Phase 2 combination therapy trial with BMY’s Yervoy and AMGN’s Imlygic (tamlimogen laherparepvec). Combination therapy produced an ORR of 39% compared to 18% for Yervoy alone. The Keytruda and GR-MD-02 combination has an ORR of 62.5% based on half the therapeutic dose! GR-MD-02 makes Keytruda twice as good as a minimum and within the next six months we might find out its makes Keytruda three times as good. The key point that investors need to realize is that this is clearly an approvable drug at this point. There are no safety issues and if the trend were to continue the higher dose of the drug might realistically yield all complete responses. Right now there are two complete responses and if they get an additional four that would represent a 46% complete response rate, which is unheard of and possibly will lead toward negotiations for a Phase 2 trial partnership or buyout.
There are at least 20 well documented diseases that implicate the galectin in the spread of these diseases and up to 100 diseases likely linked to galectins. So when big pharma talks about expanding platforms and pipelines, then one of the largest emerging pipelines in biotechnology is waiting to be developed with GALT’s galectin inhibitors. Imagine being able to target all of these indications including CANCER with one novel molecule. The chart below is hypothetically what GALT’s pipeline would look like if it had access to the right financial resources. With the potential to treat many diseases, many suitors should want to possess this technology.
Upcoming NASH Results—Risks
GALT’s management team seems to have positioned the upcoming NASH trial results as a binary event, and if they are good the stock will go up and if they are bad the price will fall. Let me be clear that these results could be extraordinarily good but there is a small risk that they might not have used a high enough dose. The NASH CX study is powered at 95%, which means that any hint of efficacy would show up in the data. If the dosage was not high enough to meet the endpoint then those favorable trends would be seen as well. The FDA’s bar for efficacy seems extremely low. Intercept Pharmaceuticals (ICPT) Phase 2b study that was stopped short and hailed for early efficacy pushing ICPT’s share price to $497 only showed a 3% improvement in Stage 3 fibrosis over placebo. For a disease without any treatment, the bar for showing efficacy seems to be extremely low. If the drug is safe, and GR-MD-02 falls into that category, then registration could be likely with the faintest hint of efficacy.
The primary endpoint in the upcoming NASH CX trial is a reduction of Hepatic Venous Pressure Gradient (HVPG) by 10%. Over a year after GALT’s announcement that it failed to meet endpoints there continues to be chatter that since GALT failed its NASH FX trial it’s unlikely it will show efficacy in the upcoming CX trial. This logic is completely flawed because the NASH FX trials endpoint was measuring biomarkers that were not approvable endpoints by the FDA and no approved measure of efficacy like a biopsy was taken. The FX trial NEVER MEASURED THE DISEASE. The upcoming CX trial measures the disease by the methacetin breath test, liver biopsy and HVPG.
Strong Case for Efficacy
The preclinical studies for NASH, Immunology, psoriasis, Idiopathic Pulmonary Fibrosis (IPF) and atopic dermatitis implicate the Galectin-3 receptor. Mice studies are very effective at validating drug targets such as the Galectin-3. Even though the genome of the mouse and a human is 99% similar, studies fail when it comes to side effects and luckily GR-MD-02 has no issues in that regard. Knockout Galectin-3 mice are “protected from fibrosis formation,” which means no matter how much poison they are given fibrosis cannot take root. A mountain of peer-reviewed work has been done on Galectins and preclinical galectin studies have translated to human trial results. The results of GR-MD-02 in a human pilot study of atopic dermatitis achieved an improvement in the patients’ EASI score by 50%. Another human pilot study of psoriasis achieved a reduction of over 50% in the patients’ PASI score. Galecto’s TD139 galectin blocking drug helped slow the disease of IPF in a Phase 2 clinical trial.
The strong case for efficacy is based on the fact that the mouse trials seem to be completely correlated to the human trials when it comes to efficacy and safety. The GR-MD-02 mice study for NASH was the most rigorous study ever done and was actually designed to fail yet it passed and actually reversed fibrosis. Investors really need to think twice before betting that this drug won’t work in humans. In some clinical trials the dropout rate can be used to handicap the trial results. In the NASH CX trial only 11 out of 162 patients dropped out of the trial. This represents a 6.8% dropout rate when the company was expecting 25% dropout rate. These metrics are way ahead of expectation and the galectin blockers are four-for-four in human trials.
Presentation Is Everything
These clinical trial results on melanoma were so good that the company should have had a conference call to go over them and explain how they might have cancer on the ropes and ready to deliver the knockout blow. Instead the press release was buried by an announcement that Galectin Therapeutics CEO Dr. Peter Traber was named chair of the Anti-Fibrotic Drug Development Summit 2017. The author of the GALT press release should have explained things better to investors and this is why there is such a large disconnect between the stock price and the true value of the company. The single biggest risk in this stock is having Dr. Traber give another poor presentation for the NASH CX trial results. Research by the author has shown the stock averages a 3.1% drop on his news announcements. This presentation risk could be mitigated by the Board of Directors. A new slate of directors proposed by the 10X Fund and strategic investor Richard Uihlein could mean an overhaul of the corporate image in the nick of time.
The bottom line in my view is that if the company nails the endpoints in NASH, this stock has the potential of being the biggest biotech story this decade with a $5.0 billion+ starting offer, which is roughly double the Allergan (AGN) offer to buy Tobira for $2.1 billion for a drug that barely works. The timing on this could literally be any day. Price appreciation could be dramatic because approval of this drug that targets the largest unmet medical need in the world is probably worth tens of billions. All investors have to do is look at the six-fold appreciation of ICPT in one day on the FLINT trial results in January 2014. In the event the presentation is flubbed or the efficacy is non-existent, there is still a downside put in the stock because all investors have to do is wait for the melanoma results due in Q2 2018 on what appears to be a clearly approvable drug for cancer and atopic dermatitis. In the past, on bad presentations, Uihlein has stepped in to support the company for funding two times before and there is no reason to think he wouldn’t step in a third time as a newly elected director of the company. It’s reasonable to speculate that Uihlein has stepped on the board because he is frustrated with the poor communications of the company or wants to make sure the sale of the company on good trial results is negotiated favorably.
In my opinion, investment in GALT has very little downside risk at this level compared to potential upside profit. Investors should keep in mind that a Tobira-sized offer assuming full dilution at 50 million shares puts the stock price at $40/share. The stock is severely discounted and not even remotely taking in the probability of a successful outcome. With a market cap of about $100 million, this represents a 98% discount to the expected $5.0 billion valuation of the trial results should they meet their endpoint expected to be released in the next two weeks. It’s highly likely that a bidding war will ensue. There is only ONE publicly held galectin-blocking biotech. Galectin blockers have a four-for-four track record on efficacy in the past year and a half alone; this disconnect in value makes no sense in my opinion with a company that also has a platform technology that could potentially use the drug on 20 other indications once approved. There clearly seem to be no other NASDAQ biotech with more upside potential because NASH is the largest unmet medical need in the world and this $100 million biotech may be presenting the solution to the world in as little as two weeks.
Michael Sheikh is the founder of Falcon Strategic Research, which focuses on small-cap and micro-cap companies that are not covered by traditional analysts on Wall Street. Sheikh is an Air Force Academy graduate with a degree in economics; he was a KC-135 pilot. He was a stockbroker for Dean Witter and a research analyst for National Securities, covering the aerospace sector. He is a contract CFO for various public companies.
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1) Michael Sheikh: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: I am long Galectin. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company currently has a financial relationship with the following companies mentioned in this article: None. I determined which companies would be included in this article based on my research and understanding of the sector.
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