Protalix BioTherapeutics: Exploring Ulcerative Colitis – Seeking Alpha

Originally, I was going to write a comprehensive article that went over Protalix BioTherapeutics' (NYSEMKT:PLX) entire pipeline, but to my delight a contributor by the name of Leny Hettmansperger has already done a great job at providing a 30,000 foot overview and detailing Fabry disease, cystic fibrosis, and Gaucher disease. Thus, I selected to cover the topics that I did in an effort to build upon the recent articles instead of rehashing things.

It was Col. Mustard with a lead pipe in the ballroom

For those of you who were cheated out of a childhood, the reference above is to a board game called Clue. I selected this title because I believe the single greatest clue for how big this company can be comes via Mr. Moshe Manor being appointed as President and Chief Executive Officer in late 2014. I view Moshe Manor's appointment as a sign that there is tremendous value to be unlocked for a variety of reasons. Firstly, Moshe Manor retired from his role as the President and Chief Executive Officer of Teva Asia- Pacific in September of 2012. Mr. Moshe Manor worked at Teva for over 28 years and held senior executive positions in the company since in 1984. He had a storied career of building brands and executing on sales goals and when he left the company was valued at around $40 billion. Thus, I have one question. Why would a biotech heavy weight with a pristine track record, who worked his entire life for a single company, come out of retirement to join a micro-cap biotech company that has been around for 20 years? There can only be one answer to this question. Clearly, the man sees a tremendously undervalued asset, and I have every reason to believe in his ability to determine a great opportunity when he sees one.

OPRX-106 for the treatment of ulcerative colitis

What is ulcerative colitis?

Ulcerative colitis is a chronic disease that can best be described as an inflammatory bowel disease that causes long-lasting inflammation and ulcers in your digestive tract. Ulcerative colitis affects the innermost lining of your large intestine and rectum. Symptoms usually develop over time, rather than suddenly and can include: stomach pain or cramps, diarrhea, bleeding from the rectum, fever, not feeling hungry, weight loss, and can lead to life threatening complications. Ulcerative colitis can affect people at any age but it typically shows up between the ages of 15 and 40 and a fair amount of research suggests that it's more common in males. It's not exactly known what causes the condition, but most think that modern diets and other environmental causes are at least partially responsible because irritable bowel diseases were rare before the 20 th century. Also, genetics and disturbances in one's immune system are suspected to play a role.

Protalix BioTherapeutics solution: OPRX-106

OPRX-106 is a plant cell-expressed recombinant human tumor necrosis factor receptor II fused to an OgG1 Fc domain. Essentially, it's a biosimilar anti-TNF therapeutic. Once again we see Protalix taking its innovative platform and applying it to a new market. The real selling point here, as you will see later when I discuss the competition's current solutions, comes down to the fact that the treatment is orally administered. The large players currently dominating this space are either injections or require an IV. In August of 2015, the company announced positive results from a Phase I clinical trial of OPRX-106, which demonstrated a favorable safety/tolerability profile and biological activity in the gut. In November 2016, the first patient was enrolled in the phase II clinical trial of OPRX-106 for the treatment of ulcerative colitis. I'm not a huge fan of the trial because its open label, the sample size is tiny, and the primary endpoint deals with safety and not efficacy. The real test will come when and if the product is moved to phase three.

OPRX-106 is a biosimilar version of etanercept or otherwise known as Enbrel. Thus, OPRX-106 has an identical amino acid sequence to Enbrel. Enbrel is currently FDA approved for the treatment of: moderate to severe rheumatoid arthritis, moderate to severe plaque psoriasis, psoriatic arthritis, ankylosing spondylitis, and moderate to severe polyarticular juvenile idiopathic arthritis. As you will note, Enbrel is not FDA approved for the treatment ulcerative colitis. It's reasonable to think that OPRX-106 will likely work because TNF- blockade as a therapeutic approach has been effective in inflammatory bowel disease. However, Enbrel has been tested for the treatment of ulcerative colitis before and was found to be less effective in Crohn's disease than Remicade. This discovery surprised a lot of people. The New England Journal of medicine points out that, "in a randomized, double-blind, placebo-controlled trial in patients with moderate-to-severe Crohn's disease, the drug was shown to be ineffective". It's not exactly clear why the biosimilar would post statistically significant results, or statistically superior results to its competitors.

However, an orally administered solution would be a leap forward in treating mild to moderate ulcerative colitis. Already, based upon early results and how the drug is administered, you're looking at advantages in ease of use and likely and advantage in the safety profile. However, the product will need to show advantages in efficacy in order to make it into a blockbuster. At first glance it's easy to think that the drug will be a winner even if its efficacy is only on par with the current standard of care because there certainly are advantages to oral dosing, but there are a lot of challenges that OPRX-106 will likely face. I will touch on some of these later on in the article.

The market

It's estimated that 550,000 to 748,000 people in the United States have ulcerative colitis. According to the US Center for Disease Control, there is an ulcerative colitis prevalence rate of 238 per 100,000 adults. The conditions has a low mortality rate and that along with other factors lead experts to believe that the population of individuals with ulcerative colitis is expected to continue to grow into the foreseeable future. According to Mordor Intelligence: "the global ulcerative colitis market accounted for 5.2 billion in 2015 and is expected to reach $5.450 billion by 2016. Furthermore, the market is expected to reach $6.798 billion by 2021, growing at a CAGR of 4.52% during the forecast period from 2016 to 2021."

Competition

There's a fascinating amount of research going on in this field in various categories such as downstream signaling blockade, Immunomodulators, Cytokine, and IL-inhibitors. However, most of the categories I just mentioned are still in development or are merely of interest for further research. I will go more in depth into the two categories of biologics that dominate the market.

Anti-TNF

TNF, tumor necrosis factor, is a signaling molecule in the immune system that can cause inflammation and other issues in the gut. Anti-TNF drugs block the TNF molecule, which stops the signal and thus prevents inflammation. Approved options include AbbVie's (NYSE:ABBV) Humira; Johnson and Johnson's (NYSE:JNJ) Remicade, and Scientific research company's Cimzia. Also, you have companies, like Intrexon (NYSE: XON), which have biologics of their own in development. I examine the two big names in the group so that you can see how OPRX-106 will fit in to the already developed market.

Humira: administered via an injection. The first does is given to the patient at the doctor's office, but beyond that they can inject themselves. The biologic needs to be refrigerated so if you're traveling it can be a pain because you need to pack your Humira in a cooler. Overall, the safety profile is solid and most patients think that the drug is worth the hassle.

Remicade: administered via an IV infusion which involves going to your doctor for each does. This is certainly a hassle, but depending on what your doctor states you only have to come back once every 6 to 8 weeks for follow up treatment after initial dosing. This option comes with about 1 and 10 people having to deal with infusion related reactions or infection

Overall, the safety and efficacy profiles of both options are fairly solid, but the reviews by patients are certainly mixed. The market certainly looks like it could benefit from the first ever oral enzyme treatment.

Anti-adhesion molecules

Adhesion molecules allow white blood cells, leukocytes, to leave the bloodstream, enter gut tissue and cause inflammation. Anti-adhesion molecules prevent the leukocytes from crossing over. Takeda (OTCPK: OTCPK:TKPHF) has a blockbuster on its hands with Entyvio. Total Entyvio sales for 2015 were about $530 million and analyst project that the drug will do over $2 billion by 2020.

Entyvio: administered via an IV. The infusion process is slow and take about 30 minutes. You are given your second injection after two weeks, your third after 6 weeks and then you will receive an injection every 8 weeks.

Lastly, it should be noted that generics like azathioprine, which is a purine analog immunosuppressive drug, corticosteroids; Aminosalicylates; antibiotics; changes to one's diet; antidiarrheal medications or some form of combination therapy are often the first line of defense when it comes to inflammatory bowel disease. Thus, these solutions are often utilized first when dealing with mild to moderate UC.

The big opportunity in Ulcerative Colitis

The market is saturated with large entrenched players that are working on refining their current products. Also, there are numerous companies with products in the pipeline. The real opportunity in ulcerative colitis is to treat individuals with sever UC because the biologics currently in use only help about 40% of individuals with severe UC. OPRX-106 is not focused on this area, but rather mild to moderate cases of ulcerative colitis.

General Concerns for biosimiliars

The marketplace and legal framework for biosimilar therapeutics is in its infancy. Thus, things are constantly changing and even experts on the topics of biosimilars are at times uncertain in their assertions. Thus, a lot of what will be covered should be considered with that in mind. The amount of sure uncertainty and the ever changing goal posts involved in taking a biosimilar to market can be complex and is a part of the inherent risk found in this particular market.

Before I get into some concerns, I think it would be useful to fully understand what exactly biologics and biosimilar are because it sheds light on to why some of these issues exist. A normal drug is made through chemical synthesis, but biologics are made in a living system such as a microorganism, or animal or plant cell. Below Amgen (NASDAQ:AMGN) provides a nice explanation:

Biologics and biosimilars are produced in living cells with a multi-step process. Initially, a basic protein structure is "translated" from a DNA sequence and then modifications, including changes and additions, are made to that basic protein structure. These later changes and additions are called post-translational modifications. The impact of post-translational modifications on a product is similar to the impact of a farming environment on growing tomatoes. The look and taste of the same type of tomatoes will vary in different farm environments because of the quality of the soil, use of fertilizers, type of irrigation and weather elements like rain, air, sunlight. Similarly, differences in biological systems (e.g., type of living cell with slightly different cellular environments) used to manufacture biosimilars may cause different types and levels of modifications, which in turn may affect the quality, safety or effectiveness of the product.

Thus, a generic can be identical to a small molecule reference product, but a biosimilar cannot and are not required to be exactly like the biologic reference product.However, this creates a difficulty for regulatory authorities, and medical professionals are often suspicious of biosimilars. The concerns below are concerns facing biosimilars in general.

Firstly, medical professionals seem to be suspicious of biosimilars due to the very nature of them and because the amount of research behind a biosimilar is typically very small in comparison to the main biologic. This is a problem because you obviously need medical professionals to prescribe the biosimilars. However, I think ultimately that medical professionals will get use to the idea of biosimilars and uptake in general for biosimilars will go up. For example, a survey conducted by Biosimilars Forum found that 91% of doctors would be willing to prescribe biosimilars under the "right conditions". This sounds like maybe the issue has largely already passed, but you have to remember who is conducting the survey because incentives matter, and that same survey found that, "only 45 percent of doctors polled agreed that biosimilars would be "safe and appropriate for use in naive and existing patients." Thus, educating medical professionals on biosimilars and the building of a brand that doctors can trust is key.

Secondly, the government is often viewed by some as a helpful hand in pushing along the adoption of biosimilars because they have the ability to reduce costs. Evidence of support can be seen in the FDA approval of Erelzi, which followed a unanimous vote by the FDA's Arthritis Advisory Committee. However, at the same time various governments will do things that limit market penetration. For example, English pharmacists are not allowed to swap out a biologic with its biosimilar unless a doctor explicitly states that it's okay. The way that biosimilars are viewed and the restrictions or limitations put upon them varies from country to country.

Thirdly, there are always legal issues. For example, Amgen recently received FDA approval for its biosimilar of AbbVie's Humira. However, AbbVie will do everything in its power to protect its market and the two parties are in the middle of litigation and it looks like the biosimilar's launch will be delayed till at least 2018. OPRX-106 is not going after the currently approved markets for Enbrel, but Amgen does have interests in the ulcerative colitis market and it's not clear what action can or will be taken if OPRX-106 ever gets approved. However, count on a giant multinational corporation to protect their interest through any means necessary.

Lastly, the nature of biosimilars. Biosimilars are generics in essence so the name of the game is inherently I can do x at a lower price point. Combine this reality with the fact that multiple biosimilars are coming to market for the same conditions and you arrive at a situation where competition to lower prices gets extreme. Also, biosimilars face lots of margin compression because it's difficult to protect them through patents. Basically, you're looking at only being able to patent aspects relating to the manufacturing process or non- clinical advantages like improved shelf life. If OPRX-106 is a hit then you can bet it will get knocked off as fast as the regulatory process allows. Sure, it won't be plant based, but an orally administered biosimilar is a possibility. This is why I really like the new vision that the CEO is bringing to the company, which I will discuss further in my bottom line opinion. One should remember that the current pipeline was put in place under the previous CEO.

Concerns specifically related to the ulcerative colitis market

Lastly, I would like to note that doctors are able to receive markups on injections and IV's so there is somewhat of a financial incentive for doctors to resist an oral formulation. For example, infusion treatments of infliximab have a markup of about 6 to 8 percent when Medicare is billed. There use to be a larger margin between the cost to physicians and hospitals, but the Medicare modernization act helped to reduce it.

Idiosyncratic risks to investing in Protalix BioTherapeutics

Anybody thinking of investing in Protalix should be aware of some of the unique risks, which go beyond the concerns that I addressed above. Firstly, UPLYSO is starting to turn around with multiple shipments from the Brazilian Ministry worth $24.3 million, but you can't trust Brazil to pursue their rational self interest because they've neglected do so in the past. Thus, I caution investors from aggressively extrapolating on what this development will ultimately lead to. Another risks deals with the reality that the entire future of the company is dependent upon both further developing the pipeline and then ultimately bringing those therapeutics to market. Furthermore, you have a lot of results that will be coming out over the next 12 months, and obviously the market won't like to see failed trials. A investor should be aware of the dates that possible results will come out. Lastly, the new vision for the company is fantastic but it will involve a lot of money and time to bring such things to fruition.

Financials

The company recently announced that it is currently well funded. A major change to the capital structure occurred in November of 2016. A press release issued on January 9th, 2017 outlines the net results of those actions:

Exchanged $54.1 million principal amount of the Company's $69.0 million 4.50% Senior Convertible Notes due 2018 for $40.2 million principal amount of newly issued 7.50% Senior Secured Convertible Notes due 2021 and approximately 23.8 million shares of common stock. Concurrently, the Company sold, in a private placement, $22.5 million principal amount of 2021 Notes.

The company had a strong cash balance of approximately $63.0 million as of December 31, 2016, which is currently projected to fund operations into late 2019.

I think the projections of being able to fund into the later half of 2019 is perhaps a little aggressive. Based upon on their cash flow statements they typically burn about 20 million a quarter, which isn't going to slow down given the trajectory of the current pipeline and based upon the new vision of the CEO. Clearly, the company sees UPLYSO delivering on sales into the future, and there are also partnership opportunities that could take place on the biosimiliars currently under development.

My Bottom Line

Overall, I think that OPRX-106 has the potential to be interesting, but I'm personally not very excited about it. However, I am very excited about this company! First, a conservative discounted cash flow model will show that the company is currently undervalued, and thinking about sales multiples on the potential future revenues makes me very interested. I also think the quality of the assets you're getting are a steal at today's prices.

An investor in Protalix BioTherapeutics get a revolutionary platform that has the ability to produce plant based biologics and biosimilars at a reduced cost, along with other advantages, and it's already shown that it can produce an FDA approved product. UPLYSO looked to be in a sad state, but it appears that Brazil is finally coming though. PRX-102 has the potential to be the go to treatment for Fabrazyme. PRX-110 for cystic fibrosis is exciting due to the results thus far and due to the fact that it's being design to address the entire market of cystic fibrosis. Also, the company claims to be funded well into 2019. Last, but certainly not least you have an elite professional running the company that possesses real vision. The CEO announced in the strategic outlook for 2017 that: "New Pipeline Candidates for Indications for which there are Currently No Approved Drugs or that address Significant Unmet Medical Needs anticipated to be announced publicly and to progress into Clinical Development". I think this is huge because it transcends what the company is doing and brings the potential value proposition of the platform to a new level. I have long thought that Protalix was capable of more and now you have a man determined, and I think capable, of delivering on the full promise inherent in the technology. Overall, you're getting an undervalued company that potentially could have a big future. Given the sort of long-term reward to risk available I think it's a highly compelling equity.

Author's note: To get more investment ideas like this as soon as they are published, click on my profile and hit the big orange "Follow" button and choose the real-time alerts option. I write about various topics, but I have a particular passion for biotech equities and gold.

My latest activities: I will be posting brief notes on my instablog when I see an interesting speculation. I'm doing this because big winners often develop so fast that I can't write and publish a detailed article in time for readers to be able to capitalize.For example, my last post detailed why you should consider buying Protalix BioTherapeutics and the next day it ran over 20% and in the same post I said that Catabasis Pharmaceuticals (NASDAQ:CATB) was a gap fill candidate and the next day it went up over 50%. I enjoy the community on Seeking Alpha and I'm excited to continue to help people build their brokerage accounts. Thanks for reading and good luck.

Disclosure: I am/we are long PLX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Originally posted here:
Protalix BioTherapeutics: Exploring Ulcerative Colitis - Seeking Alpha