Fighting Infectious Disease, the World's Number Two Killer

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George S. Mack, The Life Sciences Report

Think beyond cancer for big gains in biotech.

I'm not alone in thinking that cancers have assumed more than their share of interest from investors. In fact, sometimes it feels like oncology is all biotech and pharma care about. Blood-related cancers and solid tumors account for 13% of deaths worldwide, but a disproportionate 70% of investment dollars flow to oncology research. This is not to argue against funding cancer research, but without knowing anything else it sounds like an arbitrage opportunity for investors. Doesn't it?

Senior Managing Director and President Stephen Dunn of LifeTech Capital sees a clear disconnect in investor perception versus disease reality. He points out that nearly one out of five people die of some sort of infectious disease worldwide, yet it commands only half as much investment capital as oncology. I posed a few questions for Dunn following his firm's Biotech Showcase in San Francisco in January. I wondered why the disparity. "Most people don't realize that globally more people die from infectious diseases than from cancer," he says. "We currently think of cancer as a terminal disease of the developed world while we believe infectious diseases are a third-world problem and are treatable if only they had proper access to medical care." The reality, however, is that many cancers can be cured or managed for some period of time while there are way too many infectious diseases for which no vaccines or definitive therapies are available. Indeed, more than 300 infectious diseases are known today, but only 15% of them have an effective vaccine. At the same time, about 60% of biotech startups are focused on oncology, and they received nearly 70% of all venture and investment bank capital.

Dunn told me that there is real opportunity for investors who take the time to survey the landscape. Moreover, from a purely selfish perspective, citizens of the developed world may soon be heeding a clarion call as neglected tropical diseases (NTDs) begin to find their way to the developed world via cheaper global travel and greater cultural interaction. The U.S. National Institutes of Health (NIH) recognizes the issue and will invest $15 billion (B) in the infectious disease realm, excluding HIV, in 2012 compared to $8 billion (B) for oncology. So far Wall Street, according to Dunn, has been "ambivalent." However, "We expect investor sentiment to grow during 2012," he says. "We are beginning to see pathogens that are resistant to current vaccines and antibiotics."

Drug developers worry that the U.S. Food and Drug Administration (FDA) will label new antibiotics for second line use to delay evolution of bacteria to resistant strains. One of the few recent success stories is Optimer Pharmaceuticals Inc. (NASDAQ: OPTR) which developed Dificid (fidaxomicin) for Clostridium difficile Infection (CDI). Dificid is especially effective in preventing recurrence of CDI, which occurs in approximately 20% of cases treated with archaic first line vancomycin. The FDA approved Dificid as a first line treatment for CDI because it was shown to be clearly superior. But, "Even today, there is a lingering risk that vancomycin will be prescribed first by some physicians who will keep Dificid in reserve despite its effectiveness." says Dunn. "The bottom line is that antibiotic development is not an attractive space to most drug developers, nor is it to most investors." Nevertheless, uptake of Dificid by physicians has been good so far.

One partial solution to the antibiotic dilemma is to use alternative therapies when possible, but there are not a lot of companies developing these options for clinicians and patients. One interesting play Dunn follows is NovaBay Pharmaceuticals Inc., which is developing a new class of drugs called Aganocides that mimic mammalian neutrophils, which kill disease-causing bacteria without using the lock-and-key mechanism typified by antibiotics. NovaBay's small molecules have very different characteristics than antibiotics which are relatively easy for bacteria to surmount. The mechanism is quite similar to the natural oxidative bursts that overwhelmingly assail bacteria during phagocytosis, which has served mammals quite well for more than 100 million years. NovaBay's molecules also work on viruses, something that antibiotics cannot do. The clear limitation is that these products cannot be used orally or by injection for systemic infections. They must be applied topically, which includes skin, eye, ear and mucous membranes such as those that line bladder and urethra. The company has an unpartnered program with its NVC-422 (N,N-dichlorodimethyltaurine) molecule that has already demonstrated proof of concept and is in phase 2b for urinary tract infections (UTIs). In a partnered program with Galderma Laboratories (a joint venture between Nestlé SA and L'Oreal) NVC-422 is also in phase 2 trials for impetigo where results have been stunning. It is also in phase 2 for eye infections. The advantages of going antibiotic-free in children cannot be overstated, and because the mechanism of action has been part of innate mammalian immunity for so long, the company is confident that resistance will not develop.

Dunn follows Stellar Biotechnologies Inc. (TSXV: KLH), which has a very distinguishing technology. The company is the world leader in keyhole limpet hemocyanin (KLH) production for use as an immunogenic adjuvant and carrier protein. KLH, which can be used in many different vaccines, is produced by the great keyhole limpet, a marine animal, and the molecule is so large and complex that no investigator has been able to synthesize it as yet. KLH is now being employed in more than 30 clinical trials for a range of diseases with many partners. "KLH is considered so important to medical research," says Dunn, "That Stellar receives government funding to ensure that it can maintain a sustainable supply."

One company to watch in the DNA vaccine space is Vical Incorporated (NASDAQ: VICL), according to Dunn. The company has several DNA vaccine-proposed products in clinical trials. Another company he likes is Inovio Pharmaceuticals, which uniquely combines DNA vaccines with electroporation, a small electric impulse that increases cell membrane permeability for fractions of a second to speed the uptake of the DNA vaccine into the cell. A larger DNA vaccine company he follows is Dynavax Technologies Corporation and Novavax Inc. is another.

Improved and more portable diagnostics are important because the faster a disease is detected, the more successfully in might be treated. One important player in infectious disease diagnostics is Cepheid (NASDAQ: CPHD), and another is Quidel Corporation (NASDAQ: QDEL).

"The infectious diseases space is very large but very fragmented, and there are relatively few publicly-traded companies, especially when one considers the huge potential markets," says Dunn. "We believe investors would do well to enter the infectious disease space during 2012."

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