Biotech Values

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AAVL> Avalanche Biotech – approaching the moment of truth

http://www.orf-blog.com/avalanche-biotech-approaching-the-moment-of-truth/

If AVA-101 reaches the market with similar efficacy to available drugs, it is likely to capture a meaningful market share, especially in “frequent users”. This could turn it into the biggest franchise in ophthalmology with $3B-$4B in global sales using conservative assumptions (lower pricing and competing gene therapy products).

What makes AVA-101 even more interesting is the competitive landscape of the VEGF market which is controlled by 3 players (Roche, Regeneron, Novartis) who are fighting for dominance and would be willing to pay a lot for such a disruptive product. Avalanche has a broad collaboration with Regeneron (REGN) on multiple indications, the most advanced of which is XLRS (a rare genetic disease). As part of this collaboration, Regeneron also has a right of first negotiation for AVA-101 upon completion of the ongoing trial. This right gives Regeneron a slight advantage over other potential suitors but it is unlikely to prevent a bidding war to acquire Avalanche.

…but market continues to evolve

Next-generation programs beyond VEGF add another layer of complexity. Many companies are developing anti-PDGF agents that may further slow vision loss when added to anti-VEGF treatment. Ophthotech’s (OPHT) and Novartis’ (NVS) Fovista (anti- PDGF aptamer) is in P3 for AMD based strong efficacy in P2. Fovista has to be given as a different injection on top of the anti-VEGF agent, which increases the number of overall shots. Regeneron is developing an anti-PDGFR antibody it is evaluating in combination with Eylea. Although Regeneron’s anti-PDGFR is years behind Fovista, Regeneron plans to co-formulate it with Eylea and administer the two agents in a single shot. If both AVA-101 and anti-PDGF agents reach the market, patients may still need to receive local injections of anti-PDGF with AVA-101 as background. From a patient convenience standpoint, AVA-101 + anti-PDGF may be similar to Regeneron’s co-formulation of Eylea + anti-PDGFR. Therefore, in the long run Avalanche may have to develop a dual gene therapy targeting both the VEGF and PDGF pathways.

Favorable risk/reward going into P2 readout

I view Avalanche as an attractive stock with a favorable risk/reward ratio based on the preliminary efficacy data, the external validation for retinal gene therapy and VEGF as a proven target. I assign a 50% likelihood of a positive outcome in the Phase II (i.e. a significant reduction in anti-VEGF rescue treatments and a 6-letter improvement in visual acuity). Although this means I believe the trial has an equal likelihood of failing, I expect the stock to have a ~200% move (~$2.5B market cap) with good news vs. -80% in case of a failure.