William Blair analyst discusses Hep B space

Katherine Xu

Katherine Xu

As a partner and biotechnology analyst with William Blair & Co., Y. Katherine Xu was recognized in 2010 by the Financial Times/StarMine “World’s Top Analysts” listing, ranking No. 7 overall for stock-picking in the U.S., and No. 2 for stock-picking in biotech in 2011. She also received the No. 2 ranking in The Wall Street Journal’s “Best on the Street” listing in 2011. Prior to joining William Blair in 2011, Ms. Xu was a SVP and senior biotech analyst at Wedbush Securities; VP and senior biotech analyst at Credit Suisse; and a senior biotech analyst at Pacific Growth Equities. Before her move into equity research, Ms. Xu worked in investment banking for two years. In this interview with BioTuesdays.com, Ms. Xu discusses her industry-leading research report entitled, Hepatitis B: The Next Frontier, and some of her best investment ideas in the Hep B space.

Let’s begin with a brief overview of Hep B.

The hepatitis B virus (HBV) was first discovered in the 1960s and cloned in the 1980s. The virus infects the liver of humans via direct blood contact, usually as a result of contaminated hypodermic needles and infected blood transfusions; via bodily fluids; or via vertical transmission from mother to baby. Over time, chronic inflammation and progressively worsening liver damage can result in cirrhosis, liver cancer and death. Of the world’s population of six billion, some two billion people have evidence of HBV infection, of which 350 million people are now living with chronic HBV infection. China has the highest prevalence, with about 100 million people, or a third of those living with chronic HBV infection; in the U.S., it’s 1.3 million to three million people.

Of the world’s population of six billion, some two billion people have evidence of HBV infection, of which 350 million people are now living with chronic HBV infection

Of the world’s population of six billion, some two billion people have evidence of HBV infection, of which 350 million people are now living with chronic HBV infection

What’s the state of Hep B treatment?

The current goals of treatment are to improve quality of life and survival by preventing progression of the disease to cirrhosis, end-stage liver disease and death. The approved therapeutic agents for HBV include interferon (IFN) alpha and nukes, or nucleoside analogues. IFN has modest antiviral activity against HBV and boosts overall immunity to fight the infection. Nukes inhibit HBV viral replication by inhibiting the viral DNA polymerase, which inhibits the production of new viruses. There are five oral HBV polymerase inhibitors approved for chronic Hep B treatment. The top two selling nukes are Baraclude by Bristol Myers-Squibb, and Gilead’s Viread. Their worldwide sales were $1.3-billion and $1.1-billion, respectively, in 2015. These two nukes have demonstrated long-term efficacy and safety with little or no resistance, compared with others in the class. Viread is losing its patent protection at the end of 2017 and Gilead has submitted an NDA for TAF, a prodrug of Viread, which has shown to be comparable to Viread, with significantly improved renal and bone safety.

What’s the hurdle for a Hep B cure?

Hep B is harder to cure than Hepatitis C, which has been cured. The viral structure and life cycle of Hep B is different than Hep C, which is an RNA virus and does not get into nucleus of host cells. On the other hand, Hep B is a DNA virus, which gets into the nucleus of liver cells, where it remains as a mini-chromosome, or cccDNA, in the nucleus. Some of the hepatitis B DNA is also incorporated into the host genome. Chronic Hep B patients have a stable pool of infected hepatocytes that produce high levels of both infectious virus and sub-viral particles, making it much harder to eliminate as opposed to HCV, which does not integrate into the host genome. Current treatments do not yet target cccDNA directly or effectively. Hepatitis B virus also products large quantities of antigens, in particular the surface antigen, that serves to suppress the immune system to keep the virus persisting.

HBV vs. HIV and HCV

HBV vs. HIV and HCV

What’s the current state of developing a cure?

I believe a combination of direct antiviral agents and immune-modulating agents could lead to an eventual cure for chronic HBV. Curing regimens could emerge from the field in the next five years, which could generate significant value in certain stocks and lead to consolidation of the space, much like what happened for HCV. Unlike HCV, which could be cured with a cocktail of direct antiviral agents, a curing regimen of HBV might necessitate an additional immune component to achieve or accelerate an eventual cure. A wide array of approaches is in development, but all remain early. Initial proof-of-concept data from a few approaches, including RNAi, core protein modifiers, and selective interferon inducers, are set to report in the next six-to-18 months, and various combination studies are being initiated as well. I am optimistic that over the next five years, multiple curing formulas could be generated.

Let’s talk about the companies you like in the sector.

Curing chronic Hep B infections is the next frontier after solving the Hep C problem, and the markets for both disease cures could be similar in size, reaching $200-billion each in cumulative global sales over a span of two decades. The four companies that I have initiated coverage on with “outperform” ratings have a combined market cap of around $800-million, which is quite small compared with how mammoth this market is. In Hep C, Big Pharma eventually acquired the developed drugs and the sector had a transaction value of $20-billion. I believe the Hep B sector will end up with a similar transaction value. Plus, all four companies are reporting important proof-of-concept data over the next 12 months. My recommendation would be to buy the four stocks as a basket because it’s difficult to predict which one is going to win. But if one or two win, the multiples could be significant.

Okay, let’s start with Arrowhead Pharmaceuticals.

We believe Arrowhead (NASDAQ:ARWR) is a pioneer in understanding how to employ RNAi technology in treating chronic Hep B. Their lead candidates, ARC-520 and ARC-521, are in Phase 2 and Phase 1 studies, respectively, against chronic Hep B infection by knocking down all viral RNA transcripts, hence subsequent viral protein production. Arrowhead developed ARC-521, which contains the better trigger from ARC-520 and another trigger that targets the mRNA from integrated HBV DNA. While ARC-520 will be studied in certain nuke-naive patients, ARC-521 could address all HBV patients. Proof-of-concept data for ARC-521 is due out in early 2017. In addition, Arrowhead is using its RNAi platform for other indications, so the company has a buffer if HBV doesn’t work out.

[Editor’s note: On Sept. 29, Ms. Xu raised her price target on Arrowhead to $12 from $9 after the company licensed exclusive worldwide rights for two RNAi preclinical cardiovascular programs to Amgen (NASDAQ:AMGN) for an up-front fee of $35-million, $21.5-million in equity and up to $617-million in options and milestones, plus royalties. The stock closed at $7.04 on Friday.]

What do you like about Arbutus Biopharma?

Arbutus (NASDAQ:ABUS) has the broadest HBV pipeline in the industry and the company’s goal is to develop curing combinations in-house. Arbutus has disclosed eight separate programs, with seven mechanisms of action targeting HBV at multiple points along the HBV life cycle. We believe that Arbutus’ strategy of housing a broad array of HBV programs under one roof to test various combinations might give the company a strategic advantage over other companies focusing on a specific mechanism. The eight programs can be broadly categorized into agents that engage in viral replication suppression, immune system stimulation/reactivation, and elimination of cccDNA. The furthest along is ARB-1467, which is a small interfering RNA molecule designed to silence the expression of all viral transcripts. ARB-1740 is a next-generation candidate, with higher potency and more ease of administration, entering the clinic in second half 2016. The next to the clinic, also scheduled for second half 2016, is AB-423, a “capsid” assembly inhibitor. Key proof-of-concept data for lead asset ARB-1467 is expected by the end of 2016. INDs for the second-generation RNAi agent, ARB-1740, and capsid inhibitor, AB-423, are expected in the second half of 2016 and initial data in 2017. We expect various combinations to be in the clinic in 2017. [Ms. Xu’s price target is $7 and the stock closed at $3.32 on Friday.]

Your next pick in the sector is Assembly Biosciences. Why?

Assembly (NASDAQ:ASMB) is developing a portfolio of oral small molecule compounds that directly target the core protein of the Hep B virus, with the potential to not only prevent new cccDNA formation, but also degrade existing pools of cccDNA. Assembly appears to be a leading core specialist in the industry. Over the past few years, Assembly also has entered the microbiome area, developing a technology and manufacturing capability to deliver high loads of live bacteria to targeted sites in the gut. For the HBV franchise, Assembly’s ABI-H101 is entering the clinic in second half 2016, and a more potent backup, ABI-H102, is poised to enter the clinic by mid-2017. For the microbiome franchise, ABI-M101 for C. difficile infection is entering the clinic in second half 2016. What I like about their business model is that Assembly hopes to partner the microbiome platform by therapeutic categories with multiple companies as a way to raise non-dilutive financing to partly fund the HBV program. [Ms. Xu’s price target is $16 and the stock closed at $8.85 on Friday.]

What do you like about your final pick, Spring Bank Pharmaceuticals?

Spring Bank’s (NASDAQ:SBPH) lead asset, SB 9200, could become the backbone immune component of a future curing regimen for Hep B. SB 9200 is a once-daily, oral, immuno-modulatory drug candidate that has both antiviral and anti-inflammatory properties. By selectively activating the innate immune response of interferon and inducing interferon expression only in virally infected cells, SB 9200 represents a novel and safer mechanism to combat various viral infections. SB 9200 already has demonstrated an antiviral potency similar to conventional interferon. Currently, SB 9200 is in the Phase 2 study in chronically infected HBV patients and we expect to see low dose data by the end of the year and the full data in mid-2017. As HBV is a stealth virus that expertly evades the immune system, an immune component is highly likely to be necessary for achieving an eventual cure. Besides HBV, SB-9200 can be effective in combating other viruses as well and the company is contemplating on what next indications to go into. [Ms. Xu’s price target is $26 and the stock closed at $11.96 on Friday.]