Description

Historically I’ve found that investing in a basket of biotech companies that are trading with substantial negative enterprise values relative to their market capitalizations and have drugs in development where the jury is still out has been an attractive strategy.  The list of opportunities has dwindled as several have seen the market become more optimistic on their prospects so far this year including  TTPH (up 82% year to date), LIFE (up 59% year to date), VSTM (up 95% year to date), and  ZFGN (up 18% year to date).

Although I will at times invest across a wide basket of biotechs trading with negative enterprise values, I prefer to invest when there is:

A)     At least three years of cash left on the balance sheet at their current burn rate

B)     At least one year of cash burn built into their current valuation before they would be at a positive enterprise value

C)    The drugs at the forefront of their pipeline have never missed their primary endpoint in any study and they have the potential to generate substantial revenues if they are approved.

Frequently the reason that these opportunities exist is that a prior drug didn’t demonstrate statistical significance / missed its primary endpoint and the existing shareholder base sold to move on to the next interesting story.  These stocks are usually orphaned until they are able to advance another drug into their pipeline far enough to allow a new story to be told.  The key in my view is avoiding companies that lack the capital to advance the next drug in their pipeline or where the management team continues to try to advance the same drug that has already missed its primary endpoint in a way that seems unlikely to lead to different results in the next trial.

In this write up I’m going to focus on Chimerix.

The key takeaways are that the company has two quarters at its current burn rate before the enterprise value would become positive and it has 20 quarters until it would run out of cash.  CMRX’s pipeline is significantly more advanced than the typical negative enterprise value biotech which is why I’m comfortable investing in it despite being at a zero enterprise value in 2 quarters.

Pipeline

Oral Brincidofovir (BCV)

Brincidofovir is being investigated to prevent and treat DNA viruses such as smallpox, adenovirus (AdV), cytomegalovirus (CMV) and herpes. It has demonstrated strong anti-viral effects against double stranded DNA viruses but it has also suffered from negative GI side effects including diarrhea.  

Oral BCV for Smallpox

BCV has shown 100% effectiveness in treating smallpox in rabbits that are treated as soon as symptoms are seen and 93% effectiveness in rabbits treated within 48 hours.  If similar results are shown in 2018 in mice then it will likely receive between $100 mm and $435 mm worth of orders in 2019 and 2020 from the US Department of Health and Human services.

https://globalbiodefense.com/2015/06/05/u-s-moves-forward-with-stockpiling-of-second-smallpox-antiviral/

The EU granted orphan status to BCV for the treatment of smallpox in November 2016.  If the results in mice are positive, there is a substantial chance that European nations will choose to stockpile BCV as an insurance policy against a smallpox outbreak.

SUPPRESS

Their Phase 3 SUPPRESS trial in hematopoietic cell transplantation (HCT) patients showed strong efficacy during the 14 week treatment period.  However, after the treatment period a large percentage of the patients who received BCV got diarrhea.  Many of the investigators assumed that the diarrhea was caused by graft-vs-host-disease (GVHD) and responded by giving them steroids.  The BCV arm of the study had a median cumulative exposure to steroids that was 8x more than the placebo arm.   The use of steroids is known to increase the rate of late CMV infection which is what occurred.  Because of that the combined period narrowly missed being statistically significant.  

Afterwards the investigators realized that BCV was likely causing the diarrhea rather than GVHD.

The results of the SUPPRESS trial led the company to formulate an IV version.

IV BCV

In November 2016, CMRX reported that IV BCV demonstrated limited GI/small intestine exposure relative to the oral formulation and uniform drug exposure levels to key organs including the small intestine, liver and kidney.  In addition, it had higher central nervous system concentrations which may support testing it on viral infections in the brain.

Potential market size for IV/Oral BCV

CMRX points out that orphan drug costs in the US have averaged around $140k recently with an $84k median price.  European and US pricing is fairly comparable for orphan medicines.

There are 22,200 HCT transplant patients per year in the US and 38,100 in Europe.  There are 30,900 Solid Organ Transplant (SOT) in the US and 31,900 in Europe.  In addition, there are 7,000 US AdV hospital discharges per year.

If 10% of those patients were treated with BCV at $84k each that would lead to $1.1 bln in annual sales.  Many patients would be treated prophylactically with BCV given its effectiveness against a broad spectrum of potential viral infections.  The broad spectrum protection should be a large advantage against its likely primary competitor, Letermovir.  Letermovir has shown efficacy only in preventing CMV in adults and not in treating it.  Letermovir’s  lack of activity against other DNA viruses that affect transplant patients is a large drawback relative to BCV. There will probably be other competitors over time as well but the market potential is clearly large.

Oral BCV is being tested in Europe starting in H2 2017 as a short course treatment for AdV.  Results are expected in 2019 with potential approval in 2020.

IV BCV is being tested in multiple trials vs. CMV, BK virus and for multi-viral prevention.  Data is expected to come in starting this year with approval anticipated in 2021.

What makes me optimistic about CMRX is that the Phase 2 results and the Phase 3 SUPPRESS trial through 98 days both showed strong statistical significance against CMV.  If the investigators hadn’t given oral BCV patients steroids, there is a high likelihood that BCV would have demonstrated statistical significance at the 24 week mark.  For future oral trials the investigators will be less likely to mistake the symptom of diarrhea as caused by GVHD which should lead to fewer steroids being prescribed.  In addition, they were able to find subsets of patients with higher response rates which should also increase the probabiity of the next trial being successful. IV BCV appears to avoid causing diarrhea while still getting the same level of the drug to the organs.  The lower prevalence of diarrhea should alleviate some of the steroid usage and increase the probability of a successful trial.

CMX521

This is being developed to treat and prevent norovirus.  There are 20 million cases per year with >60% of them at health care facilities.  CMX521 will be used for the first time in humans in the next 6 months.  Approval could come in 2022.

CMX157

This is a  Hepatitis B Virus (HBV)  treatment that was licensed to Contravir in 2014.  It is currently in Phase 2a.   

Summary

This is the rare case where the lead drug failed but likely actually works and is worth continuing to develop.  There are multiple chances to win between the BARDA contract for smallpox and a reasonable probability that BCV ultimately gets approved in either the oral and/or the IV form. The upside if BCV gets approved is significant.  Given the potential for BCV to be a blockbuster drug, the stock could easily trade back into the $30-$50 per share range upon approval.  If BCV is approved for smallpox but ultimately fails for everything else, CMRX would still be worth more than last sale given its market capitalization is only $225 mm with $267 mm on the balance sheet and the BARDA order alone would produce revenues between $100 mm and $435 mm with likely additional orders coming from Europe.  

I’m providing a company history below for those who would like to better understand the timeline at CMRX.

Company History

September 9, 2003- NIH awards $36 mm in grant money to develop BCV for smallpox.

April 18, 2006 - CMRX and the US Army agree to allow the testing of BCV in animals infected with smallpox and monkey pox

June 28, 2006 - FDA grants IND approval for Phase 1 smallpox trials for BCV

December 11, 2007- Initiates a multi dose trial for BCV for smallpox

January 6, 2008 - Phase 1 study is complete  and a Phase 2 smallpox study is initiated

March 29, 2010 - Phase 2  study of BCV in stem cell transplant recipients with Cytomegalovirus (CMV)

May 4, 2010 - George Painter moves from CEO to CSO and Chairman of the board.  Kenneth Moch is named CEO.

May 13, 2010 - Phase 1 study of CMX157 is initiated for treating HIV

September 15, 2010 Announced that BCV demonstrates positive safety in patients with compromised renal function

October 21, 2010 - BCV demonstrates an ability to reduce adenovirus load in patients with compromised immune systems.

November 9, 2010 - BCV demonstrates an ability to selectively inhibit the replication of human polyomavirus JC (JCV).

November 22, 2010 - BCV demonstrates an ability to penetrate the blood-brain barrier and be a potent inhibitor of the Herpes Simplex viruses

December 13, 2010 - CMX157 Phase 1 results demonstrate a favorable safety profile

January 7, 2011 - BCV open label clinical study for 12 different double stranded DNA viruses is begun enrolling 200 patients

February 14, 2011 - CMRX raised $45 mm led by New Leaf Venture Partners

February 16, 2011 - BARDA awards a contract to help develop BCV as a countermeasure against smallpox

July 13, 2011 - CMRX commences a Phase 2 study for the prevention of Adenovirus in pediatric and adult hematopoietic stem cell transplant patients

February 6, 2012 -CMRX announces that BCV met the cytomegalovirus (CMV) primary endpoint in the Phase 2 study of stem cell transplant patients

July 23, 2012 - CMRX announces that BCV has the potential to reduce end-organ damage associated with BK virus in stem cell transplant patients

July 24, 2012 - Merck agrees to pay $17.5 mm upfront to license CMX157 and to be responsible for its development and commercialization towards treating HIV.  Merck also agrees to pay milestone payments and royalties depending on future performance.

November 12, 2012 - Michelle Berrey is named Chief Medical Officer

February 19, 2013 - BCV demonstrates stable to improved renal functions vs. a decline seen in the placebo.  They believe that may be related to the antiviral effect of BCV against BK virus.

March 12, 2013 - FDA grants fast track designation for BCV for the prevention of CMV.

April 11, 2013 - CMRX comes public selling 8.4 mm shares at $14 per share.

June 3, 2013 - BARDA extends the contract to develop BCV for smallpox

August 14, 2013 - CMRX announces lack of statistical significance against Adenovirus (AdV) in the Phase 2 trial.  Trends favored BCV vs. placebo.

September 9, 2013 - Phase 3 SUPPRESS trial for the prevention of CMV in HCT is initiated

April 9, 2014 - Moch resigns as CEO to pursue other interests. Michelle Berrey is appointed CEO

May 16, 2014 - Merck returns the rights CMX157 back to CMRX

May 27, 2014 - CMRX sells 8.4 mm shares at $14.22

September 2, 2014 - BARDA extends the contract to develop BCV for smallpox

September 3, 2014 - BCV showed in vitro activity against the Ebola virus

October 8, 2014 - Preliminary data showed BCV improved survival against AdV in the Phase 3 AdVise trial

November 5, 2014 - CMRX sells 4.2 mm shares at $29

December 18, 2014 - ContraVir licensed CMX157 for $1.2 mm upfront in a deal where ContraVir will develop the drug and pay milestone payments and royalties depending on future performance.

June 16, 2015 - CMRX sells 4.3 mm shares at $39.75

July 23, 2015 - BCV showed a survival benefit against smallpox in an animal model

September 14, 2015 - BARDA extends the contract to develop BCV for smallpox
December 28, 2015 - BCV missed primary endpoint for prevention of CMV after stem cell transplants.

February 8, 2016 - 100% survival demonstrated in animals with smallpox given BCV at the time of confirmed infection. 93% survival for animals given BCV after a 24 or 48 hour delay.

May 9, 2016 - BCV showed a rapid antiviral effect in patients with AdV and a correlation of viral response to mortality at day 90 and week 24 in the AdVise trial.

November 17, 2016 - IV BCV demonstrated limited GI/small intestine exposure relative to the oral formulation

Catalyst

Smallpox mouse data in 2017

IV BCV data in 2017 & 2018

Data from the Oral BCV for AdV trial in the EU in  2019