Our Approach / Our Blindspot
We don’t put buy or sell ratings on the companies we discuss. We don’t volunteer price targets. We share provocative ideas, almost always ideas that we like (and generally own), but stop short of saying buy here or sell there. We have volunteered some names that have worked very well, such as Xenon Pharmaceuticals (Nasdaq: XENE), Soleno Therapeutics (Nasdaq: SLNO), Bright Minds Biosciences (Nasdaq: DRUG), and most recently, Nektar Therapeutics (Nasdaq: NKTR). We have also had our fair share of ideas that haven’t played out as expected, such as Processa Pharmaceuticals (Nasdaq: PCSA), Perimeter Medical (TSXV: PINK), and Epigenomics (US: EPGNF). If we have a blind spot, it’s that sometimes we were perhaps too early in sharing our enthusiasm for a name.
Delcath Systems (Nasdaq: DCTH) is a prime example, where we first highlighted it as a name of interest back in 2020 ($7.35), only to see it spend most of the next four years treading water before finally vindicating us last year (more on Delcath later in this note). A more recent example of being “too early” was Ovid Therapeutics (Nasdaq: OVID), when we penned our November 2024 note, highlighting the similarities between the development plans for their anti-seizure medicine OV329 and Xenon’s azetukalner (XEN1101). Unfortunately, a few weeks after publishing our note, Ovid announced that their Phase 1 results, including proof-of-concept biomarkers from transcranial magnetic stimulation (TMS) and magnetic resonance spectroscopy (MRS) models, would be delayed until 3Q2025 (from their original guidance of year-end 2024). The delay was due to Ovid needing to meet with regulators regarding the addition of extra cohorts to the study. The data delay has undoubtedly contributed to Ovid’s stock’s steady decline since our initial note; however, it appears to have stabilized recently and even begun a modest rebound. We may have introduced Ovid as a provocative name a little too early. Still, if it caught our interest at a $85 million market cap in November, it’s even more compelling at a $30 million market cap today, especially with impending data.
Reiterating The Parallels
In our initial note on Ovid, we spilled a fair amount of ink around the parallels between Xenon’s XEN1101 and OV329’s early development. Investors can refer to that note for further details, but we think it’s worthwhile to highlight these parallels again.
Big Rewards For Biomarker Data
Xenon’s lead asset, XEN1101, is a second-generation Kv7 opener, developed to enhance the efficacy and address the safety liabilities of the first-generation Kv7 product, ezogabine. Ezogabine was an FDA-approved anti-seizure medicine, launched by GSK, but a commercial flop, due to a perceived ocular toxicity. In 2017, GSK voluntarily removed ezogabine from the market. Meanwhile, in 2018, Xenon conducted an elegant Phase 1 study for XEN1101, which included a Phase 1b cohort that utilized TMS as a pharmacodynamic biomarker. The TMS data demonstrated that XEN1101 dampened neuroexcitation in healthy volunteers as well as, if not better than, ezogabine. These data were very well received; the street accepted them as proof-of-concept data, Xenon’s stock increased 2- 3 times, and the company raised $65M shortly thereafter.
Ovid’s lead asset, OV329, is a second-generation GABA-AT inhibitor, designed to improve the efficacy and address the safety liabilities of the first-generation GABA-AT product, Lundbeck’s vigabatrin (Sabril). Approved by FDA in 2009, vigabatrin had a known ocular toxicity, which, similar to ezogabine, limited its commercial potential. However, unlike ezogabine, vigabatrin remains on the market today, being used predominantly for infantile spasms. Ovid has run several preclinical experiments that show that OV329, unlike vigabatrin, does not preferentially accumulate in the eye. The company is currently enrolling a Phase 1 healthy volunteer study that includes a placebo-controlled Phase 1b portion. This portion, similar to Xenon, will consist of a TMS assessment, as well as a GABA-specific MRS assessment for target engagement. As we stated in our earlier note, “Developing a next-generation drug to overcome the safety liabilities of a first-generation drug was a formula that unlocked substantial value for Xenon; could it do the same for Ovid?”
Setting Expectations
Last month, Ovid hosted a webinar to discuss the Phase 1b biomarker data they would be presenting later this quarter. During the presentation, the company outlined its expectations for OV329’s impact on the multiple biomarkers it will be measuring. Interestingly, vigabatrin is the only other anti-seizure medication to have been tested across MRS, TMS, and EEG, allowing Ovid and investors to compare OV329 directly with the first-generation GABA-AT inhibitor.
As Ovid’s Chief Medical Officer, Dr. Amanda Banks, stated, “…if we see signals across multiple of the biomarkers, it should be very convincing for us.” Dr. Alex Rotenberg, Epileptologist and Professor of Neurology at Harvard Medical School, added during the webinar when discussing OV329, “If we have MRS and GABAergic TMS and EEG move in a favorable direction…then chances are we have something meaningful for patients.”
Will History Repeat?
In 2018, when Xenon released its Phase 1b results, we were actively monitoring the company (Xenon was our first note in 2019). We can confirm that TMS was not a pharmacodynamic measure familiar to many investors when Xenon initially shared its data. Xenon did an excellent job educating investors on the value of TMS as a predictive biomarker of anti-seizure activity, which was reflected in its stock and balance sheet. In 2021, Xenon reported positive Phase 2b data with XEN1101 in patients with focal epilepsy, rewarding investors who had bet on the translatability of the TMS data to actual anti-seizure efficacy.
Fast forward to today, Ovid is borrowing from Xenon’s early-stage playbook by including TMS in its Phase 1b. However, Ovid’s study will be even more biomarker-rich than Xenon’s, as it will also incorporate an MRS assessment for target engagement (while acknowledging that MRS is not relevant for voltage-gated epilepsy drugs like XEN1101). To their credit, Ovid has actively educated investors through their June webinar about what to expect from the biomarker data and has provided benchmarks they hope OV329 can meet or exceed, based on the first-generation GABA-AT inhibitor, vigabatrin. If OV329 shows favorable biomarker results, will investors see these data as proof of concept? Will they reward Ovid as they did Xenon? Or are we still too early in our enthusiasm for Ovid? The answers will be available later this quarter.
Still In Growth Mode
Delcath has fallen 35% from its May highs. The fall is directly correlated with the company’s May 22nd announcement that, starting in Q3, Hepzato would enter the Medicaid National Drug Rebate Agreement (known as 340B). Under the 340B program, Hepzato’s price will be discounted approximately 25% from its current price of $187,500/kit. Hepzato’s inclusion in the 340B program is expected to attract more hospitals to offer the procedure, which, over time, will lead to greater kit volume than if the product weren’t in the program. However, in the short term, even with increasing volume, the discounted price will result in more tempered revenue growth for 2H2025. Nonetheless, even with the temporary slowdown in growth in 2H2025 (likely only Q3), Delcath guided that it expects FY2025 revenue to be between $94 million and $98 million, representing 150% growth over FY2024, and to continue generating positive cash flow.
The 340B news has undoubtedly led some investors to exit the name, as they perceive the short-term opportunity cost of holding Delcath to be too great, particularly as risk has been slowly coming back on for biotech. However, the recent plunge to $11 feels overdone. We understand the concern about the potential for flat(ish) Q3 revenue, but this should be a transient quarter. There should still be growth; although it may not be reflected in the top line in Q3, it should be evident in hospital activations and kit volume, the metrics that truly matter for long-term growth. Delcath continues to be in growth mode, two years into the launch of a highly differentiated and profitable product with substantial platform potential. Maybe it’s too early to call $11 a bottom, but we aren’t afraid to be early.