Opthea

Edge in equities investing comes both from your decisions and the decisions of the companies that you own. In my second last post, I discussed edge in the macro sense, the investor's decisions. In this article, I will discuss edge from a business perspective, and specifically in negotiating and getting the 'best deal'.

Opthea

Opthea Ltd (OPT:ASX) is a drug development company that is trying to solve eye disease and in particular Diabetic Macular Edema (DME) and Wet Age-related Macular Edema (wAMD). Macular Edema is caused by a build-up of fluid in the back of the eye, this causes black spots in vision and can lead to blindness. Their drug-candidate is OPT-302.

What OPT-302 does is it blocks receptors that cause the build-up of the fluid. It does this by blocking VEGF-C and VEGF-D receptors in the eye. Interestingly the standard drugs for treating DME and wAMD targets the VEGF-A receptor in the eye. OPT-302 is intended as a combination therapy to be used in conjunction with a VEGF-A inhibitor.

Macular Edema (source: Opthea's May 2019 presentation)

Further and even more interestingly the drug makers that create the VEGF-A inhibitors are running out of their patent protection (see below). The other main drug used to treat wAMD and DME is Avastin (Bevacizumab, by Roche) which is used off-label. But these drugs have an efficacy and durability issue that seems to be lessened in combination with OPT-302.

Molecule Brand Name Indication Maker Patent Expiry Aflibercept Eylea DME Regeneron/Bayer 2020 ranibizumab Lucentis wAMD Genentech/Novartis 2020 (Source: here)

In August last year, Opthea announced positive results in a Phase IIb wAMD trial with 366 treatment-naive patients, soundly meeting its primary endpoints. The results were very interesting, as on the investor call it was stated that Lucentis scored the best it ever had in a trial increasing letters seen in an eye test by 10.8 but OPT-302 had done better with 14.2 letters (transcript of the call here & results from the announcement, p3). This was all with a similar safety profile as Lucentis.

ETDRS chart (Early Treatment Diabetic Retinopathy Study) used to estimate visual acuity

Almost immediately the stock went up ~148%. As of the 10 March 2020, the stock is up 204% since August 2019. At the peak, the share price had increased by more than 400%.

In December Opthea announced an AUD50 million placement to fund Phase III trials in wAMD with 660 patients in two concurrent trials. This was against the backdrop of an ongoing Phase IIa DME trial with readouts due early-to-mid 2020.

Knowing that the patent protection runs out for two of their competitors, it was interesting to see this placement. There are multiple ways to fund a trial and going at it alone is not the norm. In general, a lot of drug development companies prefer to partner with a bigger partner, this is to reward shareholders and to offload some financial risk. This is as drug trials can be very financially risky due to the expense. For example, Novartis is roughly ~200x larger than Opthea. Furthermore, Dr Megan Baldwin, the companies Managing Director and CEO, stated at an investor briefing the company had been in talks with global pharmaceutical companies.

So why do a placement?

In the Phase Ib DME study, Opthea showed that OPT-302 worked really well. Five out of nine patients in the study had DME in both eyes. They treated one eye but not the other and if you look at the results below, OPT-302 really seemed to work.

Phase Ib DME study (source: Opthea's Jan 2020 presentation)

Add in the information gleaned from the Phase IIb study in wAMD, the Opthea team may be confident that the drug-candidate works. The more positive information that Opthea gets on OPT-302 the more derisked the company is from an adverse result and the stronger the negotiating hand in any partnership deals or takeover deal.

For Novartis and Regeneron/Bayer, OPT-302 becomes an even more interesting molecule to get their hands on. As a combination therapy, OPT-302 could increase patent protection for their molecules to treat DME/wAMD.

A derisked drug-candidate commands a lower discount rate in evaluating its NPV, hence OPT-302 (and the company behind it) should have a higher value.

Furthermore, Novartis has tried to create an alternative to OPT-302 with Beovu, another VEGF-A inhibitor, but the drug has shown recent safety issues. This further raises the need for Novartis to plug an earnings gap when Lucentis comes out of patent protection. Other competition in the space all seem to use VEGF-A inhibitor drug-candidates. For example, Kodiak Sciences, listed on the Nasdaq (KOD:NASDAQ), has their drug KSI-301 already recruiting for Phase IIa. They are capitalised at USD2.53bn (as of 11 Mar 2020).

Again, to reiterate the point, OPT-302 is for use in combination with a VEGF-A inhibitor. These molecules pose little threat.

Information on Opthea Trials

DME Phase IIa (ongoing)

• 108 patients in two treatment groups (2:1 ratio)

• randomized, double-masked

• OPT-302 2.0mg with 2.0mg of Eylea compared to Eylea + sham

• 12 weeks trial

• Readout expected 2Q2020

wAMD Phase IIb (finished)

• 366 treatment-naive patients in three groups (1:1:1 ratio)

• randomised and quadruple-masked

• OPT-302 (0.5 mg and 2.0 mg) each in combination with Lucentis (0.5 mg) compared to ranibizumab (0.5 mg) + sham injection.

• 24 weeks trial

wAMD Phase III (planning stages)

• Two concurrent trials with 660 patients, 330 per arm

• Initiation of the trial expected 1H2021

• Readout expected 1H2023

M&A/Licensing Deals in Ophthalmology

• Xiidra which was sold by Takeda to Novartis in July 2019 for USD3.4 billion upfront and USD1.9 billion in milestones

• Nightstar Therapeutics acquired by Biogen for a pipeline of gene therapy candidates in ophthalmology for USD800 million in March 2019

• Aerie Pharmaceuticals acquired Avizorex Pharma for $10 million + milestones in late 2019

• Novartis spun out Alcon to shareholders in April 2019, 1 Alcon share for every five shares held in Novartis. At the time Novartis had a market capitalisation of USD190bn.

Conclusion

Before getting positive results in the Phase IIa DME and Phase III wAMD a pharmaceutical company may pay a lot less for licensing rights. If successful though, and results show that it may well be, the premium could increase. Add in the need for competing companies to want to increase their patent protection, there is a lot of shareholder value from taking the risk of the Phase III trial in wAMD.

Approved VEGF-A inhibitors have generated revenues in excess of USD10 billion in 2018, by showing that the investment community is interested in funding Opthea's trials only creates leverage with pharmaceutical companies in any negotiations, getting them a better deal.

Leverage is just another word for an informational edge in negotiations in this case.

Their competitors need a deal with Opthea to plug a revenue hole. That commands a premium. With Kodiak Sciences worth 5x more than Opthea, Opthea is a massive albeit risky opportunity.

Disclosure I own shares in OPT