2022 was a very challenging year for life science investors. At Encode, we struggled mightily to stay positive and optimistic about the sector. Conversations about the life sciences on Twitter became unproductive with constant complaining and bemoaning about the crashing XBI. We eventually arrived at a point where we felt we needed a Twitter holiday and decided to take a break from the platform. Although we have been quiet on social media, we remain active on the research front and were ready to publish a new report only to have the company enter into an acquisition process that threw a wrench into our plans. We have a few other ideas we are working on and hope to have some new content to share shortly. In the meantime, we thought we would share our thoughts on some of the names from our research past.
Delcath Systems (Nasdaq: DCTH)
Delcath (finally!) re-submitted its NDA for Hepzato to FDA on Feb 14th. FDA should respond within 30 days with an acceptance of filing letter that will include a PDUFA date (expected in August) and then the fun begins. The Delcath bears will point out the possibility of a refusal to file letter from FDA, whereby FDA finds deficiencies in the NDA (often formatting-related but can also be clinical or CMC-based) and punts the filing back to the company without doing a thorough review. Just to be clear, a refusal to file letter can occur on any NDA or BLA filing, so this risk isn’t unique to Delcath. Anyone who has spoken with Gerard over the past 6 months knows that the biggest contributor to the delay in the NDA re-filing was CRO-related report(s) and table(s) issues, so it seems the company was acutely focused on avoiding any formatting issues with the NDA. Furthermore, the company had a pre-NDA meeting where it would have discussed its clinical and CMC modules with FDA, so it seems unlikely that Delcath wouldn’t be aligned with FDA expectations here either. Interestingly, the skepticism around Delcath’s NDA probably makes the FDA’s acceptance of filing and receiving a PDUFA date more of a catalyst than it would be for most companies.
The expectation is that FDA will also convene an Adcom for Hepzato in advance of the PDUFA date. FDA may inform Delcath of its Adcom intentions in the acceptance of filing letter, but it also can inform them anytime in advance of their PDUFA date. Given that FDA convened an Adcom for Delcath’s initial NDA filing, it seems probable they will do so once again with this re-filing. A Delcath Adcom could be one of the highlights of the life sciences investment year and would undoubtedly attract substantial investor and media attention; must-watch biotech theatre. Then again, there is an outside possibility FDA opts not to convene an Adcom, denying investors of the theatre, but perhaps signaling that the NDA isn’t as contentious as some seem to think.
Ocuphire (Nasdaq: OCUP)
Speaking of NDA filings and PDUFA dates, Ocuphire has a September 28th date for Nyxol. Investors shouldn’t expect any theatre here, this appears to be a low-risk NDA. Of course, there are always unforeseen risks, such as CMC, that can surprise investors, but based on the Ph3 data, it seems Nyxol is likely to be approved for reversal of mydriasis (RM). The bigger question, is how much upside is there for investors on an FDA approval for Nyxol? Late in 22, Ocuphire partnered the asset with Famygen for $35mm upfront. Ocuphire is entitled to another $10mm milestone upon FDA approval and double-digit royalties on sales but given the modest market size for RM, it’s hard to see investors getting overly excited about the near-term rewards for Ocuphire from an RM approval. Perhaps data from the first Ph3 study with Nyxol in presbyopia, a conceivably larger yet nascent Rx market compared to RM, later this year generates some investor interest.
Ocuphire recently announced data with its other asset, APX3330, from a Ph2 DR/DME study. The primary endpoint of improvement in diabetic retinopathy severity scale (DRSS) was not met, but a pre-specified secondary was, demonstrating a statistically significant prevention of worsening in DRSS for APX3330 vs placebo. This was a Ph2 proof-of-concept study and it is not uncommon at this stage for a small company to cherrypick the best data in order to label the study a success and justify moving the asset deeper into the clinic. There is certainly some of this phenomena at play here with Ocuphire, especially after partnering Nyxol, the company needs APX3330 as its raison-d’etre. However, there also seems to be merit in the argument that prevention of worsening DRSS is a clinically meaningful endpoint, especially for an oral treatment intended for earlier-stage DR patients. Ocuphire believes that FDA will allow prevention of worsening DRSS as an approvable endpoint for Ph3. They plan to discuss it with the agency at a midyear end-of-Ph2 (EOP2) meeting. If FDA was agreeable to this endpoint, it would be a big win for Ocuphire. The setup looks similar to what Vistagen (Nasdaq: VTGN) went through in 2020 when they met with FDA to discuss a unique endpoint for their social anxiety disorder (SAD) Ph3 study. After they announced alignment with FDA on its unique endpoint, the stock began a steady climb and the company was able to raise $100mm to support Ph3 development (granted the finance climate was completely different in 2020 than it is today). Vistagen eventually failed in their Ph3 SAD program but investors who played the FDA EOP2 decision had plenty of opportunity to make a healthy profit before the high-risk data card was turned over years later. It wouldn’t be surprising to see a similar scenario play out for Ocuphire.
Perimeter Medical (TSXV: PINK, US: PYNKF)
The last name we will quickly comment on is Perimeter Medical and its intra-operative OCT imaging technology. In our opinion, investor emphasis has been too heavily focused on the commercial rollout of the 510(k) cleared S-Series, and not enough on the development of their AI-enabled B-series. The S-Series is great technology, and something you hope is available if you have a loved one going through a lumpectomy procedure. However, the S-Series only appeals to a subset of the surgeon market, those who are comfortable reading their own images. Furthermore, the S-Series lacks broad reimbursement, most notably from CMS, which can be an impediment to the pace of adoption. Over time, we are confident Perimeter can win over surgeons with the S-Series and achieve better reimbursement, but for the immediate future, it seems unlikely that the pace of commercial adoption is going to lead to an inspired income statement. Hence the reason we think investors shouldn’t obsess about the commercial rollout of the S-Series and instead focus on the impending clinical catalyst and big blue-sky potential of the AI-enabled B-Series.
Perimeter is running a randomized controlled IDE study with its B-Series OCT technology in 330 women undergoing a lumpectomy. The company expects enrolment to be completed in Q2 and top-line data should be available midyear. This warrants repeating, Perimeter Medical has a large, well-designed, pivotal study reading out top-line data within the next 6 months! If these data are successful they will form the basis of a 510(k) De Novo submission for the B-series. Unlike the S-Series, which requires the surgeon to read their own images and determine if / where positive margins exist on the excised tissue, the B-Series, using its AI, highlights the areas of interest where a surgeon should suspect positive margins. The AI opens up the market for Perimeter, making the technology accessible and usable for a much broader audience of surgeons. Did we forget to mention that the B-Series has breakthrough device designation from FDA? This designation should ensure an expedited review for the B-Series by FDA, and once cleared by the agency, could provide it with immediate CMS reimbursement (legislation pending). Suffice it to say that success in this study could be huge for Perimeter.
As biotech investors, we covet clinical data, embrace the clinical intrigue, and are willing to take clinical risk for the potential violent upside from clinical success. Medtech often has a different risk profile, there’s less emphasis on clinical data (although this is thankfully changing) and medtech management, therefore, isn’t hardwired, like biotech management, to emphasize the clinical intrigue in their story. Maybe that’s why we like the setup for Perimeter right now. The stock is depressed because the story has been all about commercial installs of the S-Series and not enough people are thinking about the upside of a clinical win with the B-Series. We view the S-Series as our downside protection. It is excellent technology, even without the AI, and over time, we are convinced the commercial adoption will eventually translate to income statement success. The B-Series is our upside. This is a well-designed study, intended to get real answers, and success should have enormous rewards. The newsflow from positive data is a life science investor’s dream; presentations at scientific conferences, media coverage (this is breast cancer after all), additional data releases, FDA submission, FDA clearance, etc. Assuming management starts getting loud about the B-Series, there is no reason the stock should remain mired here. So even for those investors who don’t have the stomach for the turning of the data card (FWIW we think there is a good chance of success), we would expect the stock to have a healthy move in advance of B-Series data. For those interested, we would point them to our Podcast with Social Capital, who invested $43.5M CAD, at a price that was double where the stock is today (link here https://www.youtube.com/watch?v=H7uqenTs28Q).