Description

Summary

Ophtea (“OPT”) is a pre-commercial biopharma company with a single drug asset targeting the retinal diseases causing blindness in the elderly, advancing through a Phase 3 clinical trial that should reap results towards the end of 2023 and enable commercial launch in early 2024. In the absence of catalysts and in the context of a brutal tape in biotech this year the share price has eroded to a point where I see a 5 bagger potential and a relatively de risked profile given the strength and design of the very large and efficacious Phase 2, the patent cliff facing competition and the singular focus on improvising visual acuity rather than extending injection intervals.

What Opthea does 

Ophtea is developing a single asset, OPT302, to treat Wet Age-Related Macular Degeneration (Wet AMD) which ranks amongst the main causes of vision loss globally, with around 3 million potential patients in the US and EU alone and a $10 billion growing market with the increasing aging population.

The Standard Of Care for Wet AMD retinal diseases – how OPT 302 differentiates by targeting multiple growth factors rather than just VEGF-A.

Today when Wet-AMD patients want to restore their vision, they visit an ophthalmologist who injects a drug directly into their eyes through the white part using a very thin needle, and this few seconds process still needs to be repeated every month or so; compliance is clearly an issue.

Drugs used in this process are called anti-VEGF drugs. Vascular Endothelial Growth Factor (VEGF) is a protein produced by cells in your body that unfortunately sometimes overproduces, with abnormal blood vessels growing and damaging the eye and harming your vision, which can lead to blindness. VEGF blockers/inhibitors, first approved more than 15 years ago, work because they are slowing or stopping VEGF, hence slowing vision loss and sometimes improving vision. This Mechanism Of Action is used by the three main medicines on the market: Eylea (aflibercept) from Regeneron/Bayer, Lucentis (ranibizumab) from Roche/Novartis, and Avastin (bevacizumab) an off-label generic cancer drug.

The problem with the current SOC is that about half of the patients do not achieve significant vision gains, over 60% have persistent fluid and 25% suffer further vision loss despite the anti-VEGF treatment. In reality, most patients cannot resume routine daily activities such as driving or reading.

Those 3 drugs have in common that they only target and inhibit up to two of the factors responsible for the disease: VEGF-A and B. This may contribute to sub-optimal clinical efficacy of anti-VEGF-A treatments.

OPT 302 Mechanism of Action is differentiated: in combination with other VEGF A inhibitors, it targets and traps VEGF C and D as well, aiming for a broader blockade of the pathways active in Wet AMD.

A successful large Phase 2 showed a gain in acuity of vision, with a pivotal Phase 3 now in progress

In August 2019, Opthea reported positive Phase 2B data in wet AMD in a very large (n patients=366)  randomized study conducted in 113 sites in the US, EU and Israel, head-to-head against the standard of care VEGF A/B drug ranibizumab (Lucentis). Safety was very satisfactory with OPT 302 well tolerated and a very low incidence of ocular inflammation, comparable to the standard therapies.

Top line data showed that when you combine the drugs, acuity of vision is improved by 3.4 letters (14.2 on top of 10.8) on an eye chart. After 24 weeks, patients on the combination with the higher dose of OPT-302 could read an average of 14 letters more than they could before treatment, while patients on Lucentis alone read an average of 11 more letters. More patients gained ≥ 15, ≥10 and ≥5 letters of vision; fewer patients lost vision; and importantly, anatomical improvements in the retina in terms of thickness, fluid and lesion were significant; the combo beat Lucentis at reducing the area of abnormal blood vessels in patients’ eyes by 38% and at cutting the total area of scarring by 39%.

It is worth emphasizing that it remains the only current therapy to have demonstrated superior visual outcomes over anti-VEGF–A therapy, and this is even more remarkable that this was achieved in a high performing control arm, so the bar was higher so to speak. In the words of a Key Opinion Leader who published and summarized the Phase 2 results in Ophthalmology Retina, a leading ophthalmic peer-reviewed journal of the American Academy of Ophthalmology:

“To be able to have this drug that will improve efficacy for 15 letters, which is three lines of vision, which we really have only dreamt about, but have never really come close to achieving, is a monumental achievement and a monumental delta for my patients.” Dr Pravin Dugel, USC Roski Eye Institute, Retinal Consultants of Arizona

Thanks to the impressive strength of this Phase 2 clinical research outcome, the company decided not to partner and instead to go-it-alone with a US listing that raised about USD 120m in October 2020 in order to fund two global, definitive Phase 3 trials against the Standard Of Care. The two Phase 3 trials are highly statistically powered: in each trial, 990 patients will be recruited to test OPT 302 as a combination versus Lucentis’s ranibizumab alone, (once again) and Eylea’s Aflibercept alone, with standard and also extended dosing.  Recruiting is advancing fast as per the CEO’s last comments and top line data is expected in the second half of calendar year 2023. (Megan Baldwin on Citi's retinal panel on Sep 9th "We expect the readouts of those clinical trials in 2H2023 and they are progressing very, very well.") I feel very confident that Opthea will succeed in those Phase 3 clinical trials which is by and large a repeat of Phase 2, albeit with different dosage regimens and timings.

In a large (>$10 bln) market with just 3 drugs, competition is merely trying to extend duration of treatments whereas Opthea is focused on a gain in acuity of vision

By way of market background, Eylea, from Regeneron/Bayer, generates about $ 6 bln in sales worldwide;  and Lucentis from Roche/Novartis generates about $ 4 bln. Approximately 50% of wet AMD patients worldwide receive Avastin (bevacizumab) as an off-label, less-costly treatment option which is effectively the most widely prescribed anti-VEGF-A treatment. Avastin reaped US$7 bn in sales for Roche in 2019, although the great bulk of those were not related to eye treatments: Avastin is approved for the treatment of colon cancer. Because only 1/40th of this cancer drug is required for each injection, Avastin merely costs about US$50 per treatment versus $1800 - $2000 per treatment for Eylea and Lucentis.

In the gene editing sphere, Adverum Biotech and Regenxbio represent a new paradigm shift away from monthly injections of anti VEGF. Adverum Biotech is trying to code sequence for the  protein  aflibercept by and in the body itself, thereby removing the need for administering them every few weeks, but it  has encountered  problems with ocular inflammation and its future seems highly compromised now. Regenexbio is trying to develop a viral vector that encodes an anti VEGF protein that is similar to ranibizumab and is injected intravitreal which is intended to be a one and done injection.The injection is sub retinal,  a quite invasive surgical procedure, and carries a small risk of retinal detachment.

It is key to understand that Opt 302 is pretty much unique in pursuing improvement in visual acuity. With the notable exception of gene editing solutions, most of the competitive research in the field taking place is now focused almost entirely on durability: less injections, less frequent dosing for better patient compliance and comfort, rather than better efficacy.

The million dollar question is what really matters to patients and retinal specialists? Is the largest unmet need efficacy, or durability?

I would say efficacy and durability are like value and growth: they are joint at the hip.

According to some of my contacts in the field, in the long term, efficacy of results for anti VEGF therapy wane after 6 months and does not quite match the results seen in the clinical trials. There is a progressive loss of visual acuity as measured by letters and confirmed with worsening retinal thickness. Besides, they tell me, in the real world, the retinal specialists’ clinics have been overrun with patients that require intra vitreal injections for Wet AMD. There are just too many patients coming into the clinics and there are not enough retinal specialists to do the injections. Opthamologists cannot keep up with the patient volume and the patients do not want to come into the clinic every month;therefore it would seem both the retinal specialists and the patients want a solution that gives a longer duration of therapy.

So is Opthea’s emphasis on the gain of letters, rather than convenience, wise? I would think so. Dr Pravin Dugel (Principal Investigator) offered his thoughts on the durability versus efficacy question during the Conference Call that followed the release of Opthea’s Phase 2b Wet AMD results. For him, “improving efficacy wins hands down. Durability is important, sustainability is important but there's nothing that's more important, or more challenging, or higher bar, than efficacy. It matters to [my] patients whether they can drive. It matters to [my]patients whether they can read their cheque books.”

I would posit patients, when faced with the choice, would want both to gain and preserve their vision and lower injection frequency; and this is precisely what a more efficacious treatment like OPT 302 achieves. It is worth insisting again that Opthea is not directly competing with the incumbents, it has always positioned itself as a combo therapy with the incumbent treatments. As such, there is negligible additional treatment burden, because it will be administered at the same anti VEFGF A injection visit, in the same clinical practice settings, within minutes following the standard injection, utilizing the same diagnostics.

What kind of valuation does OPT 302 deserve?

Thanks to their US IPO in late 2020, Opthea boasts a net cash position as of June 2021 of USD 120m, thus with the current market cap of about USD 320m, EV is a paltry USD 200 million.

Any way you slice and dice it, $200 million or $320million (probably more relevant because the cash will deplete fast as they advance the pivotal Phase 3 trials) compared to a $ 10 billion (and growing) market opportunity seems grossly inappropriate and at odds with peer valuations past and present:

Back in 2014, Opthotech, in the exact same segment as Opthea, managed to close a licensing deal package with Novartis for non US rights only, and before its phase 3 results, that reached $330 million in upfront and near-term payments and potentially worth 1 billion when adding marketing approvals and meeting certain sales milestones … and please note the market pie has expanded since then. Before Opthotech failed their Phase 3 trial, they were listed on the Nasdaq and were valued between $1 and $ 2 billion for 3 years.

Regenexbio, in the gene editing space, which is running a non-inferiority Phase 3 trial versus Lucentis’ ranibizumab, boasts a market cap of USD 1.4 billion.

In the duration enhancer space, Kodiak is running a Phase 3 anti-VEGF treatment to extend treatment-free durability of about 3 months, and has been awarded a market cap of USD 4 billion.

Both Lucentis and Eylea are rapidly approaching patent expiry cliffs starting from 2020 and 2023; this should open the door to more challenges by generics. It does not take a genius to figure out why industry majors such as Novartis, Regeneron, Bayer, Allergan, Roche/Genentech… should be all over the research being undertaken by Opthea, since it would protect their existing treatments. A co-formulation with OPT 302 would enable to create new IP and protect the lucrative income streams of those companies, effectively restarting the patent life clock. I believe such a partnership deal would have to be worth more than US$ 1 billion; with the extreme weakness in the share price in this raging biotech bear market of 2021, I would even suspect the company has become a prime takeover target.

Risks, and Conclusion

Biotech being biotech, especially in the pre-commercial stage, the usual caveats apply: Phase 3 top line data may not quite replicate the success of Phase2. I think this is partly mitigated by a relatively similar design and the fact that Phase2 was already very large. Opthea chose to keep the integrity  of the upside by not partnering and self-financing the pivotal trials. Some may find it disappointing why a deal with a large pharma was not struck already, especially that Megan Baldwin the CEO was always very transparent that  she was willing to entertain such partnerships. Cash at hand should be just enough to reach top-line data at the end of 2023, especially that there were no delays so far; but the company will have to fund itself one way or the other to replenish the coffers before this catalyst.

Set-up wise, I take comfort in the presence of credible institutions like the Baker Brothers (at 8%) and the Liberman family -office, as both are experts in the field. It should be noted that Regal Fund management, a long/short Australian fund, top holder with a 17% stake, was a forced seller because of leverage which did add some pressure on the share price in the past.

Overall, I fail to fully comprehend the utter lack of marginal bid of late; admittedly, there are no catalysts to expect for a very long time, but I find it hard to find similar profiles with such remarkably positive convexity.

Catalyst

Early read-outs of Phase 3 interim results before Year-End 2023

partnership deal for ex- US rights before Year-End 2023

a takeover bid interest