Initiating Coverage of Omni BioPharma
By Jason Napodano, CFA
Summary Recommendation
Alpha-1 Antitrypsin (A1AT) is a protease inhibitor belonging to the serpin family. A1AT acts as a serum trypsin inhibitor, inhibiting a wide variety of proteases, protecting tissue from enzymes of inflammatory cells, especially neutrophil elastase. During an acute phase of a disease, the body may increase circulating levels of A1AT to protect tissue, for example in the lungs, liver and pancreas, from inflammatory response.
In the absence or low levels of circulating A1AT, proteases such as neutrophil elastase are free to break down the connective tissue fiber elastin, which contributes to the elasticity of the lungs, resulting in respiratory complications such as emphysema or chronic obstructive pulmonary disease (COPD) in adults and hepatic cirrhosis in children. Alpha-1 Antitrypsin deficiency (A1AD) is a generic disorder that causes the defective production of A1AT, characterized by circulating A1AT levels below 0.5 mg/mL. Low levels of A1AT in the blood and lungs cause panacinar emphysema or COPD, as well as liver disease in young children. In fact, A1AT deficiency represents the most common inherited condition that leads to liver failure and the need for transplants in infants and children
A1AD has no cure. Instead, physicians attempt to manage the symptoms of the disease, either by treating the related lung or liver conditions or augmenting circulating A1AT levels with weekly infusions of plasma-derived A1AT (p-AAT). Augmentation by weekly infusions of p-AAT is recommended only for patients with severe A1AD. Data suggests that weekly infusions of p-AAT can help reduce pulmonary exacerbations and the rate of progression of emphysema, although statistics from adequately powered, randomized clinical trials is lacking. We estimated the total global market for p-AAT is around $600-700 million. The average cost of therapy is around $2,000 per 60 mg/kg weekly infusion, or around $100,000 per year. The infusion process typically takes about 2 hours at infusion clinical centers.
There is significant interest from the academic and medical community in using p-AAT in non-deficient individuals suffering from inflammatory or immune-mediated diseases. These include type-1 and type-2 diabetes, acute myocardial infarction, rheumatoid arthritis, inflammatory bowel disease, cystic fibrosis, gout, transplant rejection, graft versus host disease (GvHD) and multiple sclerosis. However, p-AAT is currently manufactured by only four companies. The supply of p-AAT is limited because it is a plasma protein and must be purified from plasma obtained from human blood. The infusion process typically takes about 2 hours at infusion clinic centers. Under these economics, supplying enough p-AAT to tap new markets such as diabetes, GvHD, gout, or myocardial infarction seems a significant challenge. Providing adequate supply of p-AAT for a diseases and disorders outside of A1AD, such as type 1 or type 2 diabetes, GvHD, gout, and myocardial infarction, seems a significant challenge, especially considering varying requirements of duration of therapies.
In January 2012, Omni Bio announced its intention to commence research and development on a synthetic form of A1AT, where a synthetic fusion protein involving A1AT is linked to an Fc fragment of immunoglobulin (IgG1). Omni Bio’s lead Fc-AAT molecule, which they refer to internally as Fc-AAT-2, is a fusion protein that combines human A1AT with an Fc fragment of human IgG1 immunoglobulin molecule. This fusion protein spontaneously binds together to form a dimer. Each dimer contains two A1AT molecules and two Fc molecules connected by molecular bonds. Omni Bio believes the technology used to construct Fc-AAT is similar to that already used to create highly successful drugs for human application, such as Enbrel. Omni Bio’s CEO, Dr. Bruce Schneider, was a senior R&D executive at Wyeth and was intimately involved in the development of Enbrel. Through our conversations with Dr. Schneider, he tells us that many of the experiences with Enbrel are transferable to the development of Omni Bio’s Fc-AAT molecule.
For additional information on Omni Bio's strategy with Fc-AAT, please see our article from April 2013.
We are encouraged by the fact that Fc-AAT is following the development path of a highly successful drug in Enbrel, and that Dr. Schneider brings significant experience to table in this regard. Fc fusion proteins have a remarkable safety record that is recognized by the FDA; as does p-AAT. Of course there is always development risk, but at this stage we think there concept of Fc-AAT makes excellent sense from a development standpoint.
Another attractive feature of Fc molecules is that they are inherently designed to extend duration of action. Omni Bio has generated preclinical data indicating that Fc-AAT has 100x more potency in vitro than p-AAT. Animal studies show Fc-AAT may be 40-50x more potent than p-AAT and also have a longer duration of effect. For example, Fc-AAT in models of gout and myocardial infarction that show good dose response and also that a 50ug dose of Fc-AAT performed at least as well as a 2mg dose of p-AAT.
This significant reduction in dose facilitates the potential for self-administered subcutaneous dosing of Fc-AAT – a huge advantage compared to the 2 hour intravenous infusions currently required with p-AAT. Omni Bio has submitted this preclinical data for publication to the Proceedings of the National Academy of Sciences. Omni Bio is currently pursuing a strategic partner to help with drug scale-up and formulation activities. It is expected that manufacturing of CHO cells systems will enable Fc-AAT to be produced at substantially lower cost and in greater volumes than can be accomplished by purifying A1AT from the limited human plasma resources.
If successfully commercialized, we see the opportunity for Fc-AAT eclipsing $1 billion given potential indications in type-1 diabetes, GvHD, and gout. We have built heavily discounted financial projections in an attempt to value this opportunity. Below is a representation of these projections, which yield a fair-value in the area of $30 million, or $0.50 per share. This represents attractive upside given the current stock price at only $0.35 per share.
However, the company just recently raised cash to the tune of $1.54 million at the end of May 2013 at $0.25 per share. We estimate the company will report around $0.350 million in cash when they report year-end 2013 financials (period ending March 31, 2013). Adding in a net of $1.369 million from the raise and subtracting out around $0.400 million in operating burn for the first quarter fiscal 2014 (period ending June 30, 2013), we forecast the cash position to be around $1.325 million on June 30, 2013.
The company notes being in active discussions to raise an additional $4.5 million in cash, with similar terms to the financial just completed in late May 2013 (straight stock at $0.25 per share with no warrants). Despite the fact that we like the story and the potential for Fc-AAT, we hesitate to tell people to buy the stock today at $0.35 knowing future offerings are likely at $0.25. Our two primary concerns at this stage are:
1) The need for cash and future dilutive offerings, and
2) The lack of meaningful catalysts on the clinical development front.
We are pleased to see the company addressing the first issue by raising $1.54 million in late May 2013. As noted above, more is coming by the end of June 2013 – potentially as much as $4.5 million more. Just how successful the company is over the next month in pulling in more cash at $0.25 per share should give investors a sense of the interest and upside in the stock. Take note, if the company can close an additional $4.5 million, the floor in the stock will be $0.25, and that might be a great entry-price for new investors.
The second issue, a lack of catalysts, stems from the fact that the company does not have enough cash to push forward with the necessary scale-up synthesis and safety and toxicity studies on Fc-AAT required prior to filing the investigation new drug (IND) application. Essentially, concern No. 2 listed above is a direct result of concern No. 1. Therefore, as the company addresses concern No. 1, which they are doing now, concern No. 2 disappears.
Thus, we are initiating coverage today so that investors can better familiarize themselves with the story, perhaps even establish long-term positions, but more importantly put Omni Bio on their radar as the company completes its financing and pushes forward with a potential blockbuster drug in Fc-AAT.
