Summary

Bio Blast is a small Israeli company with 3 interesting drug platforms.

These platforms target rare genetic disorders, and its Cabaletta has 2 ODDs and one FT designation.

If successful, ORPN has 40% upside to current levels.

Bio Blast Pharma (NASDAQ:ORPN) is a small company targeting some rare diseases with its three technology platforms. These diseases are rare enough that there's little competition, but each can produce sales of a few hundred million US dollars, making the total windfall not insignificant.

On top of that, the company has a decent cash position and can run operations for 2 more years without significant dilution. If the science has any promise, therefore, this should be a good time to buy this company.

The company has three platforms - Protein Stabilizing Platform, Read-through Platform and Mitochondrial Protein Replacement Platform.

Protein Stabilizing Platform

A mutant protein is one whose originating gene was a mutant. For example, a mutant protein may be missing a single amino acid, or have entire chains missing or added, producing far-fetched biological effects. Stabilizing a mutant protein may help eliminate the dysfunction produced by its mutation.

Add to that enhanced autophagy, or cell suicide, and dysfunctional material may be degraded out of the body. At least, that is the science behind Bio Blast's protein stabilizing platform.

The name of the actual molecule is Cabaletta, which is a mutant protein stabilizer and autophagy enhancer based on trehalose. Trehalose is a small, repurposed molecule, which is the non-active or excipient ingredient for IV protein-based drugs like Avastin or Herceptin, and is widely used in the food and pharma industry as a protein stabilizer. Trehalose is easy to extract from natural sources, and doesn't cost a lot.

According to some studies, notably this one, trehalose also has an impact on stabilizing misfolded or partially folded protein. According to Bio Blast, intracellular and intranuclear aggregates of mutant unstable cellular proteins cause several genetic diseases characterized by PolyA/PolyQ (polyalanine/polyglutamine) stretches, including

  • Oculopharyngeal muscular dystropy, or OPMD,
  • Spinocerebellar ataxia type 3, or Machado Joseph disease, or SCA3 and
  • Spino bulbar muscular atrophy, or SBMA.

ORPN's preclinical data shows that Cabaletta can prevent mutant protein aggregation and enhance autophagy in humans. Cabaletta can significantly increase the bioavailability of trehalose. For OPMD, here's research that shows the effectiveness of trehalose, according to which it is "thought to elicit its effect by binding and stabilizing partially folded polyglutamine proteins and inhibiting the formation of aggregates."

Cabaletta has an ongoing Phase 2/3 trial for OPMD. Called the HOPEMD trial, this was planned to be a 70-patient trial, which was curtailed to just 24 patients because of positive indications before time. The remaining patients will be enrolled in the pivotal Phase 3 trial, to be concluded in 2016.

I asked Bio Blast's CEO, Colin Foster, why they did this. Apparently, they had expected an 18-month period before positive indications, based on preclinical data; however, positive indications from interim results in various muscle group strength tests, functional muscle tests, drinking tests and patient reported quality of life were observed within 6 months.

So Bio Blast decided to conclude the Phase 2 trial and begin the Phase 3 trial, especially because subjects in a rare disease like OPMD are, as he observed, precious. I will be doing an interview with Mr. Fraser next week, to be published here. I am also asking him to do a LIVE discussion with my subscribers next week - we will see how that goes.

It also has a Phase 2 trial for SCA3, where research has shown the effectiveness of trehalose in non-clinical settings, and the EU has granted an ODD to another party on trehalose for SCA. Apart from these, Cabaletta is also being studied for SMBA.

Read-through Platform

There's a certain type of genetic defect called nonsense mutations, which can cause various diseases. A nonsense mutation occurs in a codon and changes it to a stop codon or a nonsense codon. A codon is a nucleotide triplet that translates genetic code into amino acid; a stop-codon is like punctuation in the code. Just like in grammar, improper punctuation can lead to problems in biology too, specifically in the proteins synthesized.

It has been widely researched that macrolides like azithromycin can induce read-through or bypassing of premature stop codons. As the above-quoted research indicates, "use of aminoglycosides and macrolides induce nonsense mutation read-through and restore levels of full-length protein." Macrolides are known to be safer than aminoglycosides.

Bio Blast's lead product candidate in its read-through platform is BBrm (1 and 2 ), especially BBrm2, a proprietary formulation of a small repurposed molecule, azithromycin for intrathecal (inter-spinal canal) delivery. In preclinical studies, BBrm2 has indicated efficacy in treating several diseases caused by nonsense mutation. ORPN plans to start a Phase 1/2 study in 2015 for one of these, spinal muscular atrophy, or SMA.

Isis Pharmaceutical (ISIS) has its exon-skipping RNA based platform based drug ISIS-SMNRx in Phase 3 for SMA, which is directly competing with BBrm and may also be complementary to it. ISIS-SMNRx functions in a different way (exon 7) to read-through (exon 8), and it may be possible that both together may work better than any one alone.

Mitochondrial Protein Replacement Platform

This platform is in a preclinical stage so I am not going to discuss it right now - especially because there is some competition in the space. It is targeting two diseases, Friedreich's Ataxia and ornithine transcarbamylase deficiency, both caused by missing or mutant mitochondrial proteins.

The lead drug candidates, two of them, are fusion proteins with two components, the protein to be replaced, and two extra sequences that allow it to transport through the plasma and cytoplasm into the mitochondria.

(click to enlarge)

Pipeline - Source

Valuation

Cabaletta is the key value driver for ORPN in the medium term as it is the company's most advanced product candidate. I have based ORPN's valuation on the potential of Cabaletta in OPMD and SCA3. The complete spreadsheet is available on drkkd.com.

There are an estimated 4,000-6,000 OPMD patients in the U.S., according to orphanet. Given that this is a rare disease, it can be assumed that Cabaletta treatment cost would be around $100,000 per patient. Based on this assumption, the addressable market in the U.S. alone is estimated at between $400 million and $600 million.

SCA3 affects between 3,000 and 6,000 patients in the U.S., according to orphanet. So the addressable market in SCA3 is between $300 million and $600 million.

In OPMD, I have assumed that Cabaletta is launched in 2018, given that it has a Fast Track designation. Cabaletta is also an Orphan Drug status so will have marketing exclusivity for seven years. In SCA3, I have assumed a launch in 2020. I have assumed Cabaletta to capture 75% of the OPMD and SCA3 market at peak, which is possible considering there is no competition in this space.

I have assumed a drop in sales once Cabaletta's exclusivity ends. For OPMD, the exclusivity will end in 2025 and for SCA3 it ends in 2027. I have assumed a steep decline in Cabaletta OPMD sales in 2025 and a further drop in SCA3 sales in 2028. I have calculated the terminal value in 2029.

Cabaletta is currently about to enter Phase 3 so I have assumed a probability of approval at 50%, which is the average for drugs entering a Phase 3 stage.

Given that ORPN is a clinical stage biotechnology company, I have assumed a discount rate of 12%. I have assumed a continued growth rate of 3% to calculate the terminal value for Cabaletta.

The addressable market for Cabaletta in OPMD in the U.S. is assumed at $500 million, which is the mid-point of the estimates given by the company. I have assumed the market size to be roughly the same in the EU. In SCA3, I have assumed the addressable market in the U.S. and Europe at $900 million.

I have assumed that Cabaletta will capture 40% of the market at launch in each of the indications and will increase its share gradually.

Based on these assumptions, I get a fair value of $12.57 for ORPN. This is based just on the potential of Cabaletta in two indications. The company has two other technology platforms.

The major risk with ORPN of course is failure of Cabaletta in clinical stages. The company's other products are in early stages of development so the company's fortunes to a large extent depend on the success of Cabaletta. Having said that, the company is targeting diseases where there is an unmet need.

In addition, Cabaletta has already been granted an Orphan Drug Designation so regulators see some potential in the drug. Moreover, trehalose has been studied for over 150 years in various ways, and there's considerable external research indicating probable efficacy in the targeted indications.

The other risk is dilution. The company ended Q2 with $26.2 million in cash on its balance sheet. ORPN's cash balance is sufficient to fund operations at least until the end of 2016. But even after taking into account significant dilution, there is upside in ORPN.

If the outstanding shares increase by 50% to around 21 million, ORPN's fair value based on Cabaletta's potential comes to around $8.50, which still represents an upside of more than 40% from current levels.