Description

OPHT is a developmental stage biotechnology company whose lead asset, Fovista, has been largely clinically de-risked due to compelling Phase 2B data and a validating ROW partnership with Novartis (with $1B in potential milestones, this is one of the largest ex-US partnerships ever signed in biotech).  We believe that OPHT trades at a large discount to intrinsic value in part due to the Phase 3 results being due in 2016 and the low average daily volume.  However, we believe that as we get closer to the Phase 3 results this stock better reflect its true value.

Fovista

Fovista is OPHT's development agent being developed in combination with anti-VEGF agents for the treatment of wet Age-Related Macular Degeneration (AMD).  Wet AMD is the leading cause of blindness in the US and EU for people over 55 years of age.  For more information on AMD please see the appendix.

Fovista's mechanism of action involves the inhibition of PDGF (Platelet Derived Growth Factor) and is meant to be combined with the current standard of care treatment for wet AMD (anti-VEGF therapies).  Fovista is believed to lead to neovascular regression and inhibition of subretinal fibrosis which can improve vision for patients.

Fovista was studied in the large Phase 2 study in AMD.  It was a double-blind, sham-controlled Phase 2b study, with 449 patients were randomized into 1 of three treatment arms.

·         In the first group, 149 patients received intravitreal injections of 0.3 mg of Fovista following intravitreal injections of 0.5 mg of Lucentis.

·         In the second group, 152 patients received intravitreal injections of 1.5 mg of Fovista following intravitreal injections of 0.5 mg of Lucentis.

·         In the third group, which served as the control arm of the trial, 148 patients received sham injections of Fovista following intravitreal injections of 0.5 mg of Lucentis.

The following graph shows the results of the 3 arms during the 24 weeks of the study.  Note how there is immediate separation of the two Fovista arms which continues for the length of the study.

The primary endpoint of mean change in visual acuity in ETDRS letters at 24 weeks showed a statistically significant benefits for the 1.5mg Fovista + Lucentis arm compared with Lucentis alone.  Importantly, there was a dose response with the lower 0.3mg Fovista dose as well.  

Secondary analysis showed a consistent trend of improvement for the 1.5mg Fovista arm.

On the strength of this data, OPHT initiated a Phase 3 development program for Fovista.  OPHT initiated 2 confirmatory Phase 3 studies of Fovista 1.5mg + Lucentis vs. Lucentis alone.  On their 1Q 2015 conference call on May 11th, OPHT announced that it had completed enrollment in their 1st Phase 3 study.  They expect that the enrollment in the 2nd Phase 3 study by the end of the 3Q15.  The company guided to top-line results of these studies to be 4-6 weeks after treatment completion as per industry standards.

OPHT has also initiated a Phase 3 study of the addition of Fovista on top of Eylea or Avastin which are the other 2 major anti-VEGF agents that are used in the treatment of wet AMD.  OPHT is talking with the FDA to determine if they can submit this as part of the NDA or if they will file a supplemental NDA for this indication.

Please see the appendix for links to the clinicaltrials.gov listings for these trials.

Novartis Partnership

On May 19th, 2014 OPHT and Novartis Pharmaceuticals (NVS) announced an ex-US licensing and commercialization agreement.  With $1B in upfront payments potential milestones this was one of the largest ex-US agreements in biotech history.  OPHT received $200M in upfront payments and another $130M in near term payments in enrollment milestones.   Future ex-US marketing approval milestones could total up to $300M while ex-US sales milestones my total up to $400M.

Competition

REGN is currently developing their own PDGF inhibitor which they intend to co-formulate with Eylea (their marketed anti-VEGF therapy).  REGN is a strong competitor, but their approach also validates the mechanism of action for Fovista.  REGN is currently 2-3 years behind Fovista.  They recently started a Phase 2 study - NCT02418754 which will determine the benefit of the co-formulation.

We believe that though REGN is a formidable competitor and has the ability to co-formulate their anti-PDGF with Eylea, the market is large enough to share and Fovista has a head start.  Furthermore, a co-formulation is beneficial but does mean that Fovista will have an advantage for patients currently on Avastin or Lucentis, a majority of the market.  OPHT is also investigating the possibility that pre-treatment of Fovista prior to anti-VEGF injections, is better than concurrent injections.

Valuation

There are 312,000 eyes with Wet AMD and approximately 287,000 of them being treated currently in the US with anti-VEGF therapies (this is based on JPM's model).   The current anti-VEGF agents do not cure the disease, there is a temporary improvement in vision but this decreases over time. Indeed a Leerink survey found that only 53% of patients were responding to therapy with an improvement, why 47% were stable or doing worse than when they started on VEGF therapy.  The percentage responding will likely decrease over time as average time on treatment with the anti-VEGF therapies goes up.

With a 50% share of the market at $1,500 per injection and 7 injections a year, that would imply $1.25B in annual sales.  This market has seen rapid adoption of new agents.  For example Eylea did $838M in sales in its first 4 full quarters of launch, and this is as a newcomer into an existing market competing against both Avastin and Lucentis.  I believe that Fovista will be priced at a discount, but that it can also do north of a $1B in US sales.  There are only 2,000 retinal docs in the US, so OPHT will be able to commercialize the market with a very small sales force of under 100 people.

The OUS potential will be similarly as large, and we estimate that OPHT will get a ~35% royalty rate (it is a mid-30's royalty rate).  Novartis is a great partner as they currently already market to all these retinal specialists as they sell Lucentis.

On an EV/REV basis, biotech companies are trading at a 4 multiple at the lower end and significantly higher for higher growth companies.  Thus with perhaps $1B in sales even at a 4x multiple, and 34.3M shares outstanding would imply a $116 per share valuation.

Catalyst

Approaching Phase 3 data in 2016 will give investors a concrete timeframe to buy the stock.  Given the size of the Phase 2 study and consistent results, the large validating partnership with Novartis and the validation of the mechanism of action by REGN makes this a largely de-risked asset in the very large and profitable retinal market.

The next catalyst will be completion of enrollment of the 2nd Phase 3 study by the 3Q of 2015.  Data on both Phase 3 studies will read out around 3Q 2015 (it can take 4-6 weeks from trial completion to analyze and release top-line results).  We would expect OPHT to file shortly thereafter and garner approval in 2017.

Cash situation

OPHT had $484M in cash at the end of the 1Q 2015.  There is no debt outstanding though the Novo Royalty Purchase Liability does appear on their balance sheet as debt.  This will be paid as a royalty on Fovista sales.

Fovista Economics

OPHT owes a number of royalties on Fovista including:

·         A mid-single-digit percentage royalty based on worldwide sales of Fovista based on financing that Novo has provided the company (the Royalty Purchase Liability)

·         OSI Pharmaceuticals, a subsidiary of Astellas is owed a royalty at a low single digit percentage of net sales for anti-PDGF products including Fovista

·         NKTR is owed tiered royalties at a low to mid-single-digit percentage of net sales with the royalty percentage determined by the product sales and extent of patent coverage

All told, we estimate that OPHT owes royalties on sales of Fovista of 10-12%.  As Fovista is an aptamer, which is relatively cheap to manufacture, the COGS on this product will be under 20% even with the royalties due.

Patents

The composition of matter patents for Fovista expire in 2017.  The patents covering methods of treating wet AMD are expected to expire in 2024.  The Drug Price Competition and Patent Term Restoration Act of 1984 permits a patent restoration term of up to five years.  Given the long development time of Fovista we would expect a 3 plus year extension of the patent.

Overall it is fairly difficult to develop generics for ophthalmologic  drugs given the localized effect of the agents.  Most drugs are approved through bioavailability which measures the levels of the drug in the bloodstream.  Since these agents are confined to the eye, these tests are not relevant making the development path for generics more difficult.  

Pipeline

Zimura is expected to enter a pivotal Phase 2/3 study in dry AMD later this year.  Based on the results of Roche's lampalizumab which acts on a similar target

Appendix

Fovista Phase III Studies:

·         https://clinicaltrials.gov/ct2/show/NCT01940900 (in combination with Lucentis)

·         https://clinicaltrials.gov/ct2/show/NCT01944839 (in combination with Lucentis)

·         https://clinicaltrials.gov/ct2/show/NCT01940887 (in combination with Avastin or Eylea)

The following is an excerpt from the 10k for OPHT providing background on AMD and Wet AMD

Age-Related Macular Degeneration

       AMD is a leading cause of vision loss in people over the age of 50 in the western world. There are two forms of AMD, dry AMD and wet AMD. According to AMD Alliance International, approximately 10 million people in the United States and 30 million people worldwide suffer from some form of AMD. AMD Alliance International estimates that dry AMD accounts for 85% to 90% of all AMD cases, while a study published in Ophthalmology in 2012 analyzing age and gender variations in AMD prevalence estimates that approximately 8 million people worldwide are affected by geographic atrophy, a form of dry AMD. A study on the burden of AMD published in 2006 in the peer reviewed journal Current Opinion in Ophthalmology, estimated that 1,250,000 people in the United States, suffer from wet AMD. In addition, AMD Alliance International reports that approximately 200,000 new cases of wet AMD arise each year in the United States. Based on U.S. Census Bureau data, we estimate that over the next two decades in the United States the number of people aged 55 or older is expected to increase by approximately 36% and the number of people aged 65 and older is expected to increase by approximately 69%. We expect that this increase in the number of elderly people will result in a significant increase in the number of cases of both dry AMD, including cases of geographic atrophy, and wet AMD in the United States.

       AMD is a major public health problem that has a devastating effect on patients and a significant adverse impact on the economy. AMD distorts the acute central vision necessary for daily activities such as reading, face recognition, watching television and driving and can lead to loss of central vision and blindness. According to a 2010 study sponsored by AMD Alliance International, the annual direct healthcare system costs of visual impairment worldwide due to AMD were estimated at approximately $255 billion. According to the same study, wet AMD patients suffer a reduced quality of life and experience difficulty performing daily activities, social isolation, higher than normal rates of clinical depression, twice the risk of premature death as those who are not visually impaired, increased risk of falls and related hip fractures and premature admission to nursing homes. Wet AMD represents approximately 10% of all cases of AMD, but is responsible for 90% of the severe vision loss associated with the disease.

       According to a study on the burden of AMD published in 2006 in Current Opinion in Ophthalmology, an average patient with AMD experiences a decrease in his or her quality of life equivalent to that of patients suffering from other diseases often perceived as more severe. For example, moderate age-related macular degeneration, defined as vision of 20/50 to 20/100 in the better-seeing eye, causes a 40% decrease in the average patient's quality of life, similar to that associated with severe cardiac angina or renal dialysis. Normal visual acuity is commonly referred to as 20/20 vision, and a person with 20/50 vision can read letters on an eye chart from 20 feet away as well as a person with normal vision can read the chart from 50 feet away.

Wet AMD

       Wet AMD is preceded by dry AMD. In a subset of patients, dry AMD converts to wet AMD when new and abnormal blood vessels invade the retina. These abnormal new blood vessels originate beneath the retina, in a layer called the choroid, and invade into the overlying retinal layers. This abnormal new blood vessel growth is generally referred to as pathological angiogenesis. In the context of wet AMD, pathological angiogenesis is associated with both the development of neovascular cells and the accumulation of other cell types and altered tissue. The pathological neovascular tissue in wet AMD is called the choroidal neovascular complex or choroidal neovascularization. Choroidal neovascularization and adjacent and contiguous areas of blood and altered tissue are referred to as a lesion.

       Abnormal new blood vessels tend to be fragile and often bleed and leak fluid into the macula, the central most portion of the retina responsible for central vision and color perception. Untreated, blood vessel growth and associated leakage typically lead to retinal distortion and eventual retinal scarring, with irreversible destruction of the macula and resulting in loss of vision. This visual loss occurs rapidly with a progressive course. Approximately 90% of wet AMD cases involve subfoveal choroidal neovascularization, which is blood vessel growth directly under the central portion of the macula, known as the fovea. Our Phase 3 clinical program for Fovista is enrolling patients with subfoveal wet AMD.

       Wet AMD traditionally has been divided into subtypes based on the pattern of the abnormal new blood vessels using the diagnostic imaging technique fluorescein angiography or cross sectional location of the abnormal new blood vessels using the diagnostic imaging technique spectral domain optical coherence tomography, or SD-OCT. These subtypes form a continuous spectrum of pathological neovascularization based on whether the abnormal new blood vessels are well defined and delineated as determined by fluorescein angiography or whether they have invaded the RPE layer of the retina. The RPE layer of the retina lies between the choroid and the neurosensory region of the retina.

       Retinal specialists historically have used fluorescein angiography to determine the extent and location of abnormal new blood vessels relative to the RPE. This technique involves injection of a fluorescent dye into the systemic circulation and capturing its image during transit through the retinal circulation using a specialized camera. Fluorescein angiography is very sensitive in detecting the

presence or absence of neovascularization. However, fluorescein angiography's accuracy in subtype detection can be inconsistent. In addition, the use of fluorescein angiography is limited in detecting the location and position of the abnormal blood vessels relative to the RPE due to the variability and subjectivity inherent in the reading of the fluorescein angiogram. Currently, there is a shift toward using the latest, high resolution SD-OCT models to image the abnormal new blood vessels and the associated leakage in wet AMD patients. Increasingly, retinal specialists, in determining the subtype classification, use SD-OCT to assess whether the presence of abnormal new vessels is located above or below the RPE. Because of technological enhancements in SD-OCT machines, the resolution of SD-OCT retinal tissue imaging has increased markedly over the last few years. SD-OCT is the current standard for retinal imaging in the United States and the European Union. SD-OCT utilizes specialized light scattering through the biological tissues and obtains high-resolution retinal tissue images using a specialized camera. SD-OCT images show a cross-sectional view of the retina that permits enhanced resolution of the space under the retina and at the RPE level where the neovascularization associated with wet AMD is present. SD-OCT images allow for a more precise analysis of anatomical differences between various angiographic subtypes of CNV lesions in neovascular AMD, especially with respect to the location of the abnormal new vessels relative to the RPE.

       The abnormal new blood vessels are made up of "classic" and "occult" components. The term "classic" applies to the portion or component of the patient's abnormal new bloods vessels or neovascularization that is well defined by fluorescein angiography and usually represents their location above the RPE. The term "occult" applies to the portion or component of the patient's abnormal new blood vessels that are poorly defined or usually located below the RPE. The quantification of the amount of the patient's "classic" or "occult" components with respect to the neovascular lesion determines whether the lesion is "pure classic," "predominantly classic," "minimally classic" or "pure occult." The term "pure classic" applies when 100% of the lesion is composed of the classic component. The term "predominantly classic" applies when 50% or greater of the lesion is made up of the classic component. The term "minimally classic" applies when less than 50% of the lesion is made up of the classic component. The term "pure occult" or "occult lesions" applies when none of the lesion consists of the classic component and therefore the entire, or 100%, of the lesion is made up of the occult component. Based on enrollment of untreated wet AMD patients in third-party clinical trials, the pure occult subtype accounts for approximately 40% of the cases of subfoveal wet AMD in the wet AMD patient population. Some component of occult choroidal neovascularization is present in predominantly classic and minimally classic choroidal neovascularization. For example, in minimally classic choroidal neovascularization, as observed through fluorescein angiography, up to 99% of the blood vessels may be composed of the occult component, thus only 1% different from 100% or pure occult.

From the OPHT 2014 10K <http://www.sec.gov/Archives/edgar/data/1410939/000104746915001507/a2223280z10-k.htm>

Management

Both the CEO (David Guyer) and President (Samir Patel) have experience in the retinal market from their previous company Eyetech which they co-founded.  While Eyetech was ultimately  bought by OSI Pharmaceuticals, Macugen was supplanted in the market by the newer anti-VEGF therapies such as Lucentis and Eylea.  We believe that the important thing to focus on is that management has extensive experience develop treatments for eye diseases managing them through the clinical process.  The full management bios can be seen here:

http://www.ophthotech.com/about-ophthotech/management-team/

Catalyst

Approaching Phase 3 data in 2016 will give investors a concrete timeframe to buy the stock.  Given the size of the Phase 2 study and consistent results, the large validating partnership with Novartis and the validation of the mechanism of action by REGN makes this a largely de-risked asset in the very large and profitable retinal market.

The next catalyst will be completion of enrollment of the 2nd Phase 3 study by the 3Q of 2015.  Data on both Phase 3 studies will read out around 3Q 2015 (it can take 4-6 weeks from trial completion to analyze and release top-line results).  We would expect OPHT to file shortly thereafter and garner approval in 2017.