The past six months have not been kind to microcap biotech stocks, as it is hard to find a lot of love in today’s market for tiny, high risk, cash burning biotech companies. Honestly, who can blame investors for throwing stocks that offer a distant dream with minimal success rates and heavy spending? Surprisingly (or not), the negative sentiment also presents unprecedented opportunities in the microcap arena, as some microcaps are making tremendous progress, which is not yet reflected in their stock prices.
There are quite a few companies with market cap under $100M active in the fields of oncology and inflammatory diseases, the two fastest growing segments in the pharmaceutical industry. Hypothetically, these companies represent huge upside potential in the form of imaginary returns over a period of several years. The issue with these companies is that they usually have only one or two drugs in very early stages, the vast majority of which are doomed to eventually fail. While identifying the right drugs based on concrete clinical data is complicated but possible, evaluating drugs based on earlier results is even more challenging. The idea is therefore to identify companies who have already reached proof of concept in humans, thus facilitating better visibility to investors. Since investors today focus primarily on risk mitigation, they typically ignore potential reward and shrug off any positive developments. This, in turn, may result in an “arbitrage-like” situation, where companies with a potential success rate of 25% are traded as if they had a potential success rate of 10%, simply because the progress they have made is not factored into stock price.
In order to identify some of these companies, two primary criteria should be employed. First, the company must be financially stable (as much as a cash burning biotech company can be), with cash reserves for at least one year of activity. The next thing investors should look for is a drug candidate with clear signs of activity as a single agent. This is highly important because when an investigational agent is given in combination with another drug it is very hard to evaluate each drug’s contribution to the activity. In oncology, the most important early sign of activity is tumor shrinkage, although it does not necessarily mean the drug can lead to real benefit in the form of prolonged survival or slower disease progression. On top of these two criteria, there are obviously the usual factors such as the indication for which the agent is designated, registrational path, competitive landscape and management team.
We managed to identify two companies that meet these pre-requisites: Curagen (CRGN), and Curis (CRIS). These companies have promising agents with early signs of activity and a broad market potential, coupled with a cash position that should last for at least 18 months. The two companies are still highly speculative plays, but at current prices, both represent an attractive risk/reward ratio.
Curagen
Curagen has only one drug in clinical development, CR011-vc-MMAE (CR011), an antibody-drug conjugate (ADC) currently evaluated in two phase II studies, one in metastatic melanoma and the other in advanced breast cancer. The company identified GPNMB, a novel target which is highly expressed on some tumor cells and tried to hit this target with an antibody. In preclinical studies, the antibody did not demonstrate any anti-cancer capability, so instead of abandoning it in favor of other candidates, Curagen took a bold step by arming the antibody with Seattle Genetics’ (SGEN) ADC technology, which was still not validated back then. This step turned out to be brilliant, as the initially ineffective antibody became a potent anti-cancer agent and one of most advanced ADCs in the clinic.
CR011 entered the clinic in the summer of 2006, only two months after Genentech (DNA) had launched the phase I study for T-DM1 and approximately five months before Seattle Genetics’ SGN-35 entered the clinic. The first indication Curagen was going after was metastatic melanoma. CR011 demonstrated impressive activity in a phase I study, including multiple cases of tumor shrinkage and a dose dependent response. I discussed the data in some of my previous articles here and here. Several months ago, Curagen announced initial results from a 40 patient phase II study that were very encouraging as well.
Originally, CR011 suffered from two major drawbacks. It was directed against a novel target with no prior validation and relied on a non-validated ADC technology. This has dramatically changed by 2008. Curagen showed that targeting GPNMB not only results in some sort of clinical benefit, but is also very safe, whereas the ADC technology was validated by Seattle Genetics’ SGN-35, which employs the exact same conjugation technology of CR011. Despite the promising signs, I remained cautious about Curagen’s prospects since metastatic melanoma is considered the toughest cancer indication in the industry, with a 100% failure rate to date. Many of the drugs that failed had demonstrated good activity in early testing, which could not be reproduced in large comparative trials. It was the clinical development in breast cancer that turned CR011 into a promising agent.
Shortly after announcing initial clinical data in melanoma, Curagen launched a trial in metastatic breast cancer patients. Data from the trial will be presented later this year at ASCO, and according to remarks made by the company, there is a good chance of a positive surprise.
During a business update call last week, Curagen’s CEO, Timothy Shannon, said they are seeing early signs of activity in the breast cancer study, including tumor shrinkage. Despite the vague nature of this remark, it instantly turned CR011 into a very interesting drug, for several reasons. First and foremost, we now know there is some sort of single agent activity in breast cancer, a huge indication with a multi-billion dollar potential and a relatively high success rate (especially compared to that of melanoma…). The strong activity in the melanoma studies further supports CR011’s activity and serves as a prior validation of GPNMB as a relevant target in cancer. Finally, as a targeted agent, CR011 enjoys a good safety profile, so there is no limit on the cycles patients can receive. This bodes well for the durability of responses and perhaps for turning minor tumor shrinkage into objective responses over time.
