Today, the S&P biotech index (XBI) is down around 60% from its all-time high. Most biotech companies have been impacted significantly in this drawdown – including some companies with later-stage, derisked assets and enticing clinical readouts. One such is CymaBay, a sub-$200mm biotech with a best-in-class Phase 3 asset for primary biliary cholangitis (PBC). At a stock price of $2.41, we believe CymaBay could be worth nearly 3x its current equity value, with an important inflection point in Q2/3 2023 that could realize some of this value.

Background

CymaBay was founded in 1988 as Transtech Corporation, and it began trading publicly in 2010 as Metabolex. At the time, the company was primarily focused on several unrelated disease areas including gout, hypercalciuria, and diabetes. However, through a series of business changes including an outlicensed lead asset, a switched secondary asset indication, and a name change, CymaBay decided to divert its attention away from the broad portfolio, and instead streamline into a single asset.

The asset in question was seladelpar, a PPAR-agonist positioned as a best-in-class treatment option for primary biliary cholangitis (PBC) and nonalcoholic steatohepatitis (NASH). By 2019, the single-asset strategy seemed to be paying off. The company had completed a successful Phase 2 study for PBC and was three months post-enrollment on a pivotal trial, with concurrent trials running in NASH and primary sclerosing cholangitis (PSC). In November however, the floor caved in from underneath when the FDA forced CymaBay to halt development on all three fronts after inflamed liver cells were found in biopsies of patients in their Phase 2b NASH trial. With no future left for CymaBay, the stock responded appropriately, crashing 75% the next day.

Without many options available, CymaBay assembled an independent committee of industry-leading histopathologists and hepatologists to analyze the data from the NASH trial. The committee’s findings were unanimous: the two pathologists responsible for the original liver examinations had mischaracterized over two-thirds of the treatment patient samples. Furthermore, the proportion of abnormal pathology findings was noted to be similar across both the placebo and the treatment group. CymaBay placed these updates before the FDA, and within three weeks, all three clinical holds were promptly removed. Thanks to further rigorous examination of those initial patients over the coming years, seladelpar’s clinical perception is virtually unchanged from before.

However, the setback did cost CymaBay over a year-and-a-half of clinical development, particularly on the first Phase 3 PBC trial (ENHANCE). To salvage efforts, CymaBay released three-month data from the ENHANCE trial; the data revealed several indicators placing seladelpar at the front of the PPAR-agonist pack (which we dive into below). The company then raised $100mm in non-dilutive financing from Abingworth on the heels of this, with the final $25mm arriving earlier in Q1 2022 – enough to fund the Phase 3 RESPONSE trial and potentially kickstart recruitment in NASH and PSC.

Disease, Mechanisms of Action, and Clinical Trial Results

Primary biliary cholangitis is a chronic disease in the liver characterized by progressive destruction of the bile ducts. It is found in around ~200,000 patients split evenly between the U.S. and the E.U. Diagnosed primarily in women, PBC is associated with fatigue, extreme skin itchiness or pruritis, and several symptoms associated with disrupted liver metabolism including high cholesterol. As a chronic disease, PBC can last in patients for several years (sometimes up to a decade) before necessitating treatment. First-line treatment comes in the form of ursodeoxylic acid (UDCA), which has shown enduring benefits (66% vs. 32% in 15-year transplant-free survival, treated vs. untreated patients) over long periods of time. However, progression is still noted in around 40% of patients, for which second-line therapies are necessary. While multiple compounds are in earlier stage development, the three that lead the pack are Intercept Pharmaceuticals’ Ocaliva, CymaBay’s seldelpar, and Genfit’s elafibrinor.

Ocaliva is a farnesoid X receptor (FXR) agonist, a compound that upregulates important genes involved in the homeostasis of bile acids. Specifically, by decreasing the synthesis of bile acids and increasing the export of bile salts, OCA manages to decrease the toxic accumulation of bile acids in the body overall.

Ocaliva was approved in May 2016 for primary biliary cirrhosis on a Phase 3 trial in 217 PBC patients with an inadequate response to UDCA. Patients were split 1:1:1 between placebo, a 5-mg daily dose (who could later be adjusted to 10 mg; i.e. 5-10-mg group), and a 10-mg daily dose. Across all three cohorts, patients were required to have elevated levels of ALP at 1.67-times the upper limit of normal (ULN), and elevated bilirubin below 2-times the ULN. The primary endpoint was the proportion of patients in each cohort below the 1.67-times threshold for ALP and had a 15% reduction from baseline, as well as a bilirubin reduction to below the ULN. A key secondary endpoint was the reduction in ALP, which was recorded well after the 52-week trial during the long-term follow-up study.

On a standard-of-care background, 46% of 5-10-mg patients and 47% of 10-mg patients hit the primary endpoint criteria, versus 10% in the placebo group. 77% of patients in both groups saw a significant reduction in ALP, as opposed to 29% in the placebo group. Ocaliva was an effective therapy. But it was not safe – in 59% of the 5-10-mg group and 68% of the 10-mg group, patients experienced significant pruritus, or itchy skin. Pruritus appeared to increase in significance with higher doses of therapy; in the 10-mg group, a shockingly high 10% of patients discontinued therapy because of pruritus. The implications were significant; prescribing physicians grew averse to administering above the 5-mg dose unless patients hit a certain point of severity.

Pruritus was only the first of a series of issues. In 2017, the FDA issued a warning about incorrect dosing of Ocaliva even at the 5-mg level, which was leading to serious liver injury and death. They advised starting patients with pre-existing liver impairments on a 5-mg weekly dose rather than a daily dose, hardly enough to impact. Furthermore, following 11 cases of liver injury and 19 deaths associated with Ocaliva within the year of approval, patients were advised to stop Ocaliva treatment on any new instance of liver injury. The recommendations were enforced in 2021 as contraindications, when the FDA restricted any patients with advanced cirrhosis in the past or present from taking Ocaliva. Despite this, revenue have increased steadily to $260.8mm in the US and $102.7mm outside the US in 2021.

Taken together, there lies a clear opportunity to outperform Ocaliva within the US, both in the non-cirrhotic population and in the PBC indication overall. Seladelpar and elafibranor are the two compounds that lead the pack – furthermore, both are PPAR agonists. Seladelpar is a PPAR-δ agonist; seeing as PPAR-δ lies at the center of several physiological mechanisms, upregulation can decrease bile acid synthesis, increase anti-fibrotic effects, increase the anti-inflammatory response, and improve liver function with increased lipid metabolism. Elafibranor on the other hand is a PPAR-α/δ agonist. While elafibranor more potently targets the bile acid synthesis pathway with PPAR-α binding, seladelpar has a physiological edge with stronger PPAR-δ binding, enabling a slightly better anti-fibrotic and anti-inflammatory profile.

In practice frankly, both mechanisms of action are quite similar. Perhaps most critical factor from a physician/patient point-of-view is the safety profile. As opposed to the ~59-68% of Ocaliva Phase 3 patients with pruritus, only 11% and 7% of patients on seladelpar and elafibranor experienced pruritus. After the Phase 3 ENHANCE trial was halted in fact, KOLs noted an outpouring from patients. “They said, ‘What do I need to do to get back on the drug? I can get a biopsy then; I can do whatever you want.’ Because the itching improved, the fatigue improved, maybe because they had a better night of sleep.” Unlike elafibranor, ENHANCE also provided seladelpar with quantitative pruritus data, justifying the decrease of pruritus on a QoL basis from 6.2/10 to 3/10.

PPAR-agonists also maintain a functional edge over other mechanisms of action. At the same primary endpoint used in the Ocaliva Phase 3 trial, 78% of both seladelpar Phase 3 patients and elafibranor Phase 2 patients were cleared at the optimal dosing points. Seladelpar also performs slightly better at three months on ALP normalization (27.3% vs. 21.4%). On most other biochemical metrics, as confirmed by key opinion leaders, the two PPAR-agonists behave about the same.

So where is the differentiator for CymaBay? Our view is that there are two: power and physician familiarity. CymaBay ran their Phase 2 trial in 121 patients, including a group of 53 patients on a 5 mg dose and 55 patients on a 10 mg dose. Of the 5 mg patient group, 81% were uptitrated to the 10 mg group after 3 months, meaning 90 patients had been dosed at the highest dose before the Phase 3 trial. Genfit, on the other hand, opted to recruit 15 patients each into the 80 mg and 120 mg dose groups. While the trial was controlled, the sample size simply wasn’t compelling for physicians, who struggled to make the apples-to-apples comparison. Genfit also noticed a lower composite readout for its higher dose, therefore making the 80 mg dose more attractive. However, the lower readout may be attributed to variance in the small sample size, as seen in the improved ALT readout in the 120 mg group. With a lower dose, Genfit might be compromising efficacy based on a mere 30-patient trial.

While both compounds are currently scheduled for market at the same time, CymaBay’s commercialization strategy benefits heavily from physician awareness. After having followed the CymaBay saga through the first Phase 3 trial and into the second, many physicians appear to have marked elafibranor for the second fiddle. Furthermore, with more data between ENHANCE and RESPONSE, CymaBay can justify a short-term efficacy signal off twice the number of patients Genfit has, providing more validation for physicians to work with. Finally, CymaBay is working with 162 sites in its Phase 3 trial, almost 50 more than Genfit has. This speaks to a higher concentration of physician awareness in the United States, supplemented by broader awareness in non-penetrated markets like the LATAM countries.

Financing

With only a few months left in trial recruitment CymaBay has $193mm in cash as of Q1 2022, providing runway into late 2023/early 2024. The company will look for another cash infusion in early-to-mid 2023, likely on the magnitude of ~$100mm. Considering the current state of the biotech markets and its sub-$200mm valuation, it is unlikely CymaBay can rein this amount in from the public markets, barring a substantial valuation bump on the Phase 3 trial. As a result, CymaBay’s best strategic option is to sell ex-U.S. rights for seladelpar. There is some precedent for an ex-US transaction: just last month, Intercept sold ex-U.S. rights for Ocaliva to Advanz Pharma for $405mm upfront and $45mm in milestones. We must account however for the fact that Ocaliva received marketing authorization in the EU in 2016. The drug has been on the market for five years now, so a sales strategy is already firmly in place. Commercial costs are steadily declining, so the income stream over the next 3-4 years should be reasonably secure. Accounting for similar costs, CymaBay should be able to receive at least half the amount Intercept did at ~$200mm. This should be enough to secure seladelpar’s commercial efforts, with plenty left over for the NASH and PSC studies.

Valuation

CymaBay stock is currently worth $2.41 per share, resulting in a total equity value of $204mm. Analysts currently predict ~$500-600mm in peak sales for seladelpar in PBC by 2030. With a steady commercial ramp starting around early 2025, approximately $150-200mm in development and sales expenses a year going forward, a 70% probability of success on the RESPONSE trial, and a 2% terminal growth rate accounting for a patent till this implies an equity value around $650mm – or a 3x multiple over today’s prices.

However, this is assuming the biotech markets run efficiently. Reality suggests the period of drawdown may continue into the unforeseeable future. So why buy a company over a year out from its key inflection point? In our view, with sponsorship so low for small biotechs, there may be a path forward in purchasing beaten-down companies with a high likelihood of success at a far-out readout. While these companies aren’t likely to react in the short-term (they might even react poorly), one can anticipate greater investor attention approaching the binary point, and hopefully a spike in stock price should the clinical thesis play out. Finding compounds that are highly likely to hit data readouts is a significant to this strategy – and given the obvious clinical benefit over placebo, the safe design for the Phase 3 trial, and the controversy in hindsight – we believe CymaBay fits the bill of an overlooked but attractive small biotech narrative in today’s markets.