New Drugs and Therapies for Alzheimer's Disease

New drugs in development for Alzheimer’s disease have disappointed in recent years. Perhaps this is because the current consensus on the causes of Alzheimer’s disease is wrong? The existing approach to treating the disease follows the ‘amyloid hypothesis’ of which, I will go into more detail later.

 However, since this is an investment focused site, and we are looking for biotech stocks to buy., let’s look at the companies (stock market listed) that are involved in new drug developments for Alzheimer’s disease. I’ve included previous failures in the table, by way of comparison. I’ve previously written about Morphosys in this blog and I hold the stock, even though I don’t proscribe much chance of success for gantenurumab. It has similarities to bapineuzumab, which I think has given weak results so far.

Company	Compound	Action	Status
Forest Laboratories	Neramexane	NMDA receptor antagonist	Failed Phase III 2004
Axonyx	Phenserine	beta amyloid Modulator	Failed Phase III 2005
Neurochem	Alzhemed(tramiprosate)	Inhibits plaque formation	Failed in 2007
Myriad Genetics/Lundbeck	Flurizan(tarenflurbil)	Secretase Modulator	Failed Phase III 2008
Elan/Pfizer/Johnson & Johnson	bapineuzumab	Anti beta amyloid antibody	Phase III Results 2012
Eli Lilly	solaneuzumab	secretase inhibitor	Phase III Completion due 2012
Roche/Morphosys	gantenerumab	Anti beta amyloid antibody	Phase II
Prana Biotechnology	PBT2	Inhibits oligomer formation	Phase IIb

Source: Earnings View, Company Results

The first thing to note is the high degree of failures in Alzheimer’s drugs, this suggests that it is a difficult indication to treat and has a low probability of success for drugs in clinical trials. Perhaps this could be because most of the drugs in development follow the amyloid hypothesis?

Amyloid Hypothesis for Alzheimer’s Disease

Amyloid Precursor Proteins is an integral membrane protein which is concentrated in neuron junctions and, therefore highly present in the brain. When these proteins are engaged in proteolysis they degrade into smaller parts and, one of these parts can be a piece of beta amyloid.

 The ‘Amyloid Hypothesis’ holds it that these pieces are sticky and aggregate together to form oligomers. These oligomers then go on to form sticky plaques which ultimately cause Alzheimer’s disease. They are seen as disrupting and then ultimately destroying brain cells. As outlined above, most of the therapy approaches have involved applying this hypothesis.

Alzheimer’s Drugs in Development

The failures of drugs targeting the plaques that form in the brain have been spectacular. In 2005, Axonyx reported on Phenserine in a 384 patient trial  and stated that "Phenserine showed no statistically significant effect on cognition endpoint ADAS-Cog in each of these two Phase 3 trials."

Neurochem's tramiprosate was intended to be able to inhibit the growth of amyloid accumulation and therefore plaque formulation; however it failed in a 1052 patient Phase III trial in North America. The European trial was discontinued.

The next high profile failure was with Myriad Genetics Flurizan. The drug was intended to inhibit an enzyme responsible for the formulation of amyloid (specifically AB42). Flurizan failed in 1684 patient trial, which was the largest Phase III trial to date. No doubt Lundbeck investors were livid, after having- only recently -bought the co-marketing rights for Europe.


Bapineuzumb Another Failure?

Wyeth (Pfizer) and Elan had previously reported disappointing results in Phase II for bapineuzumab. These results suggested some efficacy in patients who didn't have the APOE4 mutation gene (about 35% of total) but no statistical significance for the remaining 65%  They decided to take it into Phase III and results were due in 2010, however this timeline has been extended to 2012. This is usually a bad sign. Moreover, hopes for this trial were dealt a blow when a study released in the Lancet reported that imaging scans had revealed that bapineuzumab reduced brain plaques by 25% yet had no effect on patients cognitive ability.

The latter point, if confirmed in the trial, will cast serious doubts on the amyloid hypothesis. There is growing disagreement over whether amyloid plaques are the cause or possibly a consequence of Alzheimer's disease. New R & D into the disease could be focused on attaching the oligomers rather than the plaques.

New Therapies in Development for Alzheimer's Disease

Morphosys/Roche gantenerumab, like bapineuzumab, is an anti-amyloid antibody (in early stage trials) and this casts some doubt on its chances of success. Solanezumab is a humanized monoclonal antibody which binds to soluble amyloid beta. It was taken to phase III on the back of safety data, rather than having achieved efficacy in Phase II. Solanezumab is believed to be similar to bapineuzumab but with less toxicity issues. The latter was found to cause brain inflammation in its highest dose in Phase II.

The last of the featured drugs is Prana Biotechnology PBT2 which is entering Phase IIb trials having demonstrated efficacy in a small Phase II trial. It is intended to inhibit the formulation of oligomers. This is interesting because of its focus on oligomers rather than plaques, or plaque reduction.

According to the American Association of Retired Persons (AARP) new research by Dr Sam Gandy is suggesting that the symptoms of Alzheimer's are caused by the oligomers and not the plaques. This conclusion would be consistent with the Lancet published research on bapinezeumab. However, if true, it would cast serious doubt those drugs that are focused on plaque.

Source:

AARP "Alzheimer's A New Theory" AARP Bulletin, September 2010

Lancet Neurology "C-PiB PET assessment of change in fibrillar amyloid beta load in patients with Alzheimer's disease treated with bapineuzumab" Lancet Neurology, Volume 9, Issue 4, Pages 363-372, April 2010

Phenserine Results

PBT2

Inspire Pharmaceuticals Denufosol and Vertex 770 & 809

Some interesting news flow today related to the failure in Phase III of Inspire Pharmaceuticals cystic fibrosis drug denufosol tetrasodium. I'm particularly interested in how this might relate to the probability of success of Vertex 770 and 809 which are both due to report on Phase II trials in 2011. I'm a great believer that probabilities of success for drugs in FDA clinical trials need to be looked it in the context of a variety of factors other than just plucking an industry standard number out of the air. Why biotech analysts insist on pencilling in 50% for almost every phase III trial, is a mystery to me.  I think one of the key factors is the class of drug, hence my concern for Vertex.

I've previously written about Vertex's pipeline here and also featured one of their drugs in an article about Rheumatoid Arthritis here.  On balance, I think the Inspire news is a net positive for Vertex. It will remove a competitor who could have grabbed market share with a drug that works in a similar way in targeting the underlying cause. However, I think the mode of action is sufficiently different to not effect Vertex and the probability of success of 770 and 809.


New Drugs in Development for Cystic Fibrosis

Incidentally, Gilead Sciences had Cayston approved in 2010 for cystic fibrosis but it is an inhaled antibiotic therapy which acts on the pseudomanal infection in order to provide an increase in forced expiratory volume (FEV).  Discovery Laboratories has recently reported good results with lucinactant in Phase IIa, but again this is drug targets mucus airway adhesion. In contrast, Inspire and Vertex's drugs target the underlying cause.

In Cystic Fibrosis (CF) the basic problem is that the epithelial cells have a defect, which is caused by the production of faulty Cystic Fibrosis Transmembrane Regulator (CFTR). This defective CFTR causes poor ion flow across membranes. The result being that chloride outflow is restricted and sodium inflows are unrestrained. Eventually, this build up causes the heavy mucus that creates lung infections and damage. As noted above the Gilead Sciences and Discovery Labs act on the mucus build.


Inspire Pharmaceuticals Denufosol and Vertex 770 and 809

This drug acts on the underlying cause by trying to activate an alternative chloride pathway that is believed to be in the epithelial cells. Essentially, denufosol is a synthetically created version of uridine triphosphate (UTP) which is believed to be able to trigger the appropriate receptors in the epithelial cells, in order to create this alternate chloride pathway and clear the mucus.

However, Vertex 770 is different to denufosol in that it acts as on the CFTR protein itself. It is a CFTR potentiator which is aimed at increasing the function and efficacy of the CFTR proteins in ion transfer. Increasing chloride flow such action will obviously reduce mucus build up. Moreover, what makes Vertex 770 attractive is that it can also be used for cystic fibrosis in other organs such as the pancreas.

Conclusion on Vertex 770 & 809 Chance of Success

I don't think it is fair to reduce Vertex chances with 770/809 because of the denufosol failure. The denufosol results were surprising, as they had a very strong Phase II and more analysis needs to be made. However, if anything, I think it is a net positive for Vertex. A competitor drug has been taken out of the immediate running.

 Vertex has 770 in Phase III for G551D Mutation. They could submit by year end 2011. This is shaping up to be an exciting year for Vertex.

Cal Maine Foods Playing its Very Own Cyclical Game

Cal Maine Foods CALM gave Q2 results over the festive season and, I confess I found them intriguing. Cal Maine is the largest single US producer and distributor of eggs (about 16% of US market) which suggests they are an easy company to analyse. However, performing equity research analysis on a stock like Cal Maine is actually more difficult than it superficially appears. It would be easy to look at rising feed costs and immediately conclude that margins are about to get crushed, but it is a lot more subtle than that. High feed costs are usually good news for Cal Maine!

 It is an attractive stock to buy because its profit drivers are diversified from the mainstream economy. Therefore, its profit and share price drivers should not be correlated with the S & P 500, which means it should work well in giving portfolio diversification. It seems to operate in an isolated industry cycle.  Indeed a quick look at its share price demonstrates this. Note how well it does in 2008...

source: bigcharts.com

What Drives the Cal Maine Foods Share Price?

I will list them in bullet form below and then articulate these points in turn

• Egg pricing is highly sensitive to small shifts in production and demand as it is a price inelastic good
• High Food Prices do not necessarily mean Cal Maine’s margins will fall, on the contrary, they are usually good news for Cal Main
• Production is cyclical and follows end demand and feed prices
• Demand can be guided by dietary fads and health concerns, but the marginal demand is guided by the economy (people eating out etc)
• Cal Maine pays a third of its net income in dividend within the quarter, so it is a dividend play
• Speciality egg sales (health/ethical) are less cyclical, higher margin and are growing quickly as a portion of total sales
• Cal Maine tends to be highly cash generative
• They are a consolidator in the industry
• They have had some near term weakness due to product recalls, which could be creating a buying opportunity

Cal Maine Gross Margins and Pricing Power

Firstly, looking at long term gross margins and feed costs I see that it is a cyclical business with some interesting aspects to it

	2004	2005	2006	2007	2008	2009	2010	H1 2011
Gross Margins	30.69%	9.44%	13.03%	19.83%	32.60%	22.04%	21.39%	18.34%
Feed Costs (cents)	23.4	22.5	20.2	25.2	33.4	39.1	34.9	36.1

Source: Cal Maine Foods (feed costs are per dozen)

I think that as feed costs rise, their gross margins tend to do so too! This shouldn’t make sense in a competitive and commoditised business such as egg production. It does appear that high feed costs are passed onto the customer via higher prices.

	2004	2005	2006	2007	2008	2009	2010	H1 2011
Price (cents)	91.4	62.5	75.1	93	137.7	120.9	112	101.2
Feed Costs (cents)	23.4	22.5	20.2	25.2	33.4	39.1	34.9	36.1

Source: Cal Maine Foods, price and feed costs are per dozen

However, I do not think this is the key profit driver. On the contrary, it is the marginal shift in production that guides the business cycle of the egg industry. For example, in 2004 revenues expanded rapidly as low carbohydrate diets reached their nadir of popularity. The industry geared up for growth and the resulting fall in demand hurt pricing, as the producers had too much supply coming on tap. Here is the relationship between supply and margins. I have used Cal Maine’s gross margins and compared them with industry wide supply numbers...

	2003	2004	2005	2006	2007	2008	2009	2010	H1 2011
Gross Margins		30.69%	9.44%	13.03%	19.83%	32.60%	22.04%	21.39%	18.34%
Total Supply	7346	7427	7586	7636	7643	7609	7584	7641	7674
growth		1.10%	2.14%	0.66%	0.09%	-0.44%	-0.33%	0.75%	1.04%

Source: USDA (shell egg equivalent, million dozen), Cal Maine foods (cost per dozen), Earnings View

I have adjusted the yearly numbers too equate with Cal Maine’s year end of May. Similarly, the H1 2011 numbers are adjusted.

There is a clear pattern to these numbers. High margins attract high industry growth rates, which then lead to lower margins, then low production followed by higher margins. So high feed prices are not necessarily bad for Cal Maine but strong growth in industry production is. The company itself sees long term egg consumption has trending with population growth, in other words its volumes should grow long term at around 1%

Specialty Eggs: Egg-Land’s Best, Farmhouse and 4-Grain

Cal Maine producers and markets a range of specialty eggs. Egg-Land’s Best are believed not to increase serum cholesterol levels, whilst Farmhouse layers are non-caged and fed solely on natural grains. 4-Grain eggs range includes natural, cage-free, vegetarian and omega-3 options. Specialty eggs tend to be higher margin and less cyclical, therefore their percentage contribution to total sales (dollar) will go up in bad times. Furthermore, their volume percentage contribution is also going up because of their strong growth. This is very positive for Cal Maine and will reduce cyclicality in future

 

		2007	2008	2009	2010
Specialty Eggs Sold		59,486	80,997	107,025	116,083
growth			36.16%	32.13%	8.46%
Specialty Eggs % volume		8.68%	11.94%	13.76%	14.41%

Source: Cal Maine Foods

At the recent H1 2011 interims the percentage volume of sales coming from specialty eggs rose to 15.2% and in dollar sales terms it was at 24.1%

Cal Maine Free Cash Flow Generation

As you would expect, this follows the cyclicality of its earnings. In particular working capital requirements fluctuate with higher feed costs. Capital expenditure requirements are relatively light.

	2004	2005	2006	2007	2008	2009	2010
FCF	74,465	-2,363	8,559	36,252	126,730	85,170	95,882
FCF % rev	13.01%	-0.63%	1.79%	6.06%	13.84%	9.17%	10.53%

Source: Cal Maine, Earnings View

I will use these numbers in the concluding remarks and try to 'guesstimate' some value scenarios for Cal Maine.

A Stock to Buy?

The short answer is not right now, but perhaps later this year.

The key thing I am looking at is the United States Department of Agriculture numbers of egg supply. As indicated above, Industry production rates do tend to guide Cal Maine’s margins. This could create an interesting scenario whereby the stock gets sold off due to high feed cost fears. I think this would be a misguided approach. The key is industry production. I would like to wait and see when/if high feed costs start to hurt the smaller industry players, who should then cut back on production. I haven’t seen evidence of this yet.

Moreover, if I go by Cal Maine’s gross margins, then they could still be seen as attractive to producers to increase supply. Indeed as Cal Maine notes in the recent results

We continue to monitor the national chick hatch, which has been trending higher, and will affect future supply. Feed costs also remain a concern for fiscal 2011. For the second quarter, feed cost per dozen produced increased by four cents compared with the same quarter last year.

In evaluation terms, if you take a ‘trough to peak’ approach to their free cash flow (ex 2005-2008) you get an average of $42.23m or around 5.6% free cash flow yield across one cycle. The current share price is $31.53 giving a market cap of $753m.


Mitigating Factors

That approach is ok, but I think there are positive and negative mitigating factors here. Firstly, the low carbohydrate Atkins diet boom is unluckily to disturb the supply/demand imbalance in future, as much as it did in 2004-2006. This is positive. However, it is unlikely that the financial turmoil of 2008-2009 will be replicated any time soon. I suspect the smaller producers couldn’t expand production then –even if they wanted to- because of lack of funding. This was a good scenario for Cal Maine but I think it is unlikely to return.

Long Term Buy?

I like the longer term trend of reducing cyclicality by increasing specialty egg sales and, the company is an impressive industry consolidator. However, my hunch is that analyzing long term fundamentals such DCF evaluation, is not the way to trade this stock. I think you want to be in this stock as industry production starts to slow below 1% and then sell it as it goes above. This is not a definitive trading heuristic but rather, a primer for looking at it in more detail.

In addition, in 2011 there could be rising feed costs matched with continuing rising production and this could hurt the company prospects. However, if industry production decreases and feed costs stay high, this will be a net positive. I will monitor and wait for evidence of the latter. The data in table 3 indicates that it is probably too early just yet. The key to this stock is the supply/demand balance and not necessarily its feed costs.