Description

Summary

Axovant Sciences Ltd. (AXON) is running a Phase 3 trial of interpirdine in Alzheimer's Disease (AD) which is likely to fail.  We are recommending buying the Oct 10/5 put spread to take advantage of the trial results which are due by the end of the month.  Shorting the stock is an option as well, but AD is a large therapeutic indication and the stock could be up a lot if the trial somehow succeeds.  

Background

AXON licensed interpirdine, a failed AD drug from GSK, and is running it in the subset of patients in combination with donepezil, where it showed potential effect in post hoc analysis.  GSK also ran 3 monotherapy trials for the agent that also failed.  Furthermore, other 5HT6 receptor antagonists (drugs with the same mechanism of action) from Lundbeck and PFE have also failed in AD.  

GSK ran 3 monotherapy studies, and one combination study of interpirdine combined with donepizil (Aricept, an approved therapy for AD).  The monotherapy studies were failures.  

The Phase 3 study is based on the Phase 2 combination data.  This Phase 2 combination study had 3 arms, comparing donepizil only with donepezil combined with either 15mg QD (once daily) or 35mg QD.  This trial was a failure as well.  However, it is did hit on one of the co-primary endpoints - ADAS-COG (Alzheimer's Disease Assessment Scale-cognitive) but not on the endpoint of CDR-SB (Clinical Dementia Rating-Sum of Boxes).  The secondary endpoint of ADCS-ADL (AD Co-operative Study-Activities of Daily Living).  

There is some reason to believe that there is a synergistic benefit to combining interpirdine and donezpezil based on pre-clinical models.  However, while that may be suggestive of why iterpirdine failed as a monotherapy but showed some signs of benefit as a combination, PFE’s agent actually showed a negative effect - even in combination with donepezil.  

Their Phase 3 trial is based on the single combination Phase 2 trial, with the primary endpoint changed from CDR-SB which did not hit statistical significance to ADCS-ADL.  

In February of 2016, PFE announced that they were discontinuing develop of their competitive agent.  Based on the results, PF-05212377 was actually doing worse than the control arm on the ADAS-COG.

Similarly, for the Neuropsychiatric Inventory at 16 weeks, the PF-05212377 agent was also worse (negative scores indicate improvement).    

This was a combination study of PF-05212377 on top of donepezil, a similar combination indication that AXON is pursuing.  Furthermore, Lundbeck’s Phase 3 trials of their competitive agent (idalopirdine) also failed in Phase 3.  AXON argues that it is because Lundbeck reduced the dosing from Phase 2 to Phase 3.  However, based on Lundbeck’s modeling they believed they should still have an efficacious dose.  The failure could be due to a number of reasons, including the fact that the mechanism of action is a dead-end or that it could be agent specific.  

Company Structure

AXON is 69.8% owned by Roivant.  Prior to the IPO AXON was wholly owned subsidiary of Roivant, which was a biotech company created by QVT (a hedge fund).  Thus the actual float of the stock is quite low.  The current $2.7B marketcap is likely driven by the extremely small float and positive risk/reward story pumped by the sell side.  

On April 10th, 2017 AXON announced that they had hired David Hung, former founder and CEO of Medivation as their CEO.  As a reminder Medivation was bought by PFE for approximately $14 billion in September 2016.  The stock ended the day up 23%.  On April 11th, AXON announced a secondary offering and raised $143M.  

Put Spread

At the midpoint of the close, the 10/5 October put spread costs $1.72.  With ~$2.25 in net cash we believe it will trade at close to $5.00 on MINDSET failure.  

The October puts are highly likely to capture the event.  At the Morgan Stanley Conference on September 12th, the CEO confirmed that they expect to see MINDSET data by the end of the month.  

Catalyst

MINDSET trial results by the end of September