Updata on Avalanche Biotechnologies (NASDAQ: AAVL)

In the past one month, the highly hyped gene and cell therapy companies such as Avalanche Biotechnologies (NASDAQ: AAVL), Juno Therapeutics (NASDAQ: JUNO), and Kite Pharma (KITE) have slid significantly. But I still have a bullish view on these stocks and see the sharp pullback as an attractive buying opportunity. Here is my own due diligence on Avalanche.

Avalanche is a biotechnology company focused on developing gene therapies for the treatment of eye diseases. Avalanche shares closed at $33.27 or market capitalization of $747 million on February 6, 2015. The company has no marketable product, and so it completely bakes in future success.

Avalanche’s lead product candidate is AVA-101 for the treatment of wet age-related macular degeneration (AMD). AVA-101 is a subretinal injection of AAV2 vector transmitting the sFlt-1 gene, which encodes a soluble isoform of the VEGF receptor, an endogenous anti-VEGF protein.

AVA-101 is currently in Phase IIa testing and top-line results from the trial are expected in mid-2015. The upcoming Phase IIa data could be a major catalyst. Following the ongoing Phase IIa trial, the company plan to conduct a Phase IIb trial in the U.S. in the second half of 2015.

Avalanche’s next generation anti-VEGF gene therapy, AVA-201, delivers the same sFLT-1 gene but uses next-generation AAV vector. It is an intravitreal injection for the prevention of wet AMD. The company intends to initiate IND-enabling studies for AVA-201 in 2015.

Avalanche’s third candidate is AVA-311 for the treatment of X-linked Retinoschisis (XLRS), a rare disease caused by mutations in the RS1 gene (approximately 10,000 patients). Avalanche has completed a preclinical study with AVA-311 in a mouse model.

Clinical data
In animal models, AVA-101 expression has been shown to last up to 17 months. Thus, Avalanche completed a twelve-month Phase I trial in Australia.

Eight patients were randomized into three groups: control, low AVA-101 dose (10^10 vg) and high AVA-101 dose (10^11 vg). All patients received two initial doses of Lucentis at Day 0 and Week 4 and the patients in the active arms received AVA-101 on Day 7. Beginning with the Week 8 visit, Lucentis was given as frequently as needed.

No significant drug-related safety concerns were observed. The AAV vector was not detected outside of the treated eye. From Week 8 to Week 52, the control patients and the patients receiving AVA-101 needed 3.0 and 0.33 Lucentis injections, respectively.

Visual acuity improved in the high and low dose AVA-101 treated groups by an average of 8.7 and 10.3 letters from baseline, respectively. By contrast, the control patients lost 3.5 letters of visual acuity. The visual acuity data appear comparable to standard Lucentis treatment.

AMD is the leading cause of vision loss in the elderly. While wet AMD represents only 10% of the number of cases of AMD overall, it is responsible for 90% of the AMD-related severe vision loss. The incidence of new cases of wet AMD in the U.S. is approximately 150,000 to 200,000 a year.

Current standard-of-care therapies include Avastin (bevacizumab), Lucentis (ranibizumab), and Eylea (aflibercept). Lucentis costs $2000 per dose, in other words, $48,000 for the recommended two years of treatment. In 2013, Lucentis and Eylea achieved worldwide sales of $4.3 billion and $1.9 billion, respectively.

Current standard-of-care therapies require frequent injections into eyes. Gene therapy offers a potential long-term solution to treat wet AMD with one injection. Assuming AVA-101 was priced at $20,000 per treatment, it would be realistic to expect peak sales at $2 billion. Moreover, Avalanche may pursue other indications, such as diabetic macular edema (DME) and retinal vein occlusion (RVO).

In May 2014, Regeneron Pharmaceuticals (NASDAQ: REGN) inked a $640 million deal with Avalanche. Regeneron has a time-limited right of first negotiation for a potential license to develop and commercialize AVA-101. Avalanche has the option to share up to 35% of the development costs and profits. Regeneron has successfully developed Eylea for the treatment of wet AMD and DME. The collaboration would reduce risks and increase chances of success.

There are multiple companies developing gene therapies for ophthalmic diseases. Genzyme, a fully owned subsidiary of Sanofi (NYSE: SNY), is testing AAV-sFLT in a Phase I trial. Genzyme’s AAV-sFLT is an intravitreal injection, which are commonly performed, and represent a relatively convenient and low-risk procedure. Applied Genetic Technologies (NASDAQ: AGTC) intends to develop gene therapy for wet AMD as well. Both Genzyme and Applied Genetic fall behind Avalanche.

It’s hard to say Genzyme or Avalanche gene therapy approach is superior over the other at such an early stage of development. Interestingly, the tight financial relationship between Sanofi and Regeneron might have influence on the competition between Genzyme and Avalanche.

CEO and co-founder Thomas Chalberg is a former Genentech executive who helped launch and commercialize Lucentis. CMO Samuel Barone served as a Medical Officer in the Office of Cellular, Tissue and Gene Therapies at the FDA before he joined in the company in June 2014.

Avalanche has a healthy balance sheet with $165 million in cash and no debt. With a burn rate of about $20 million/year, Avalanche should have enough cash to fund the remaining Phase II studies for AVA-101.

5% and Greater Stockholders include Zygtech (10.3%), Venrock (9.6%), Fidelity Management & Research (13.7%), Regeneron Pharmaceuticals (7.4%), Deerfield Management Company (6.6%), and Thomas Chalberg (7.3%).

Given $1.5 billion annual sales, 35% profits share, 50% odds of approval and 5× sales multiple, I set my price target at $58 (or market capitalization of $1.3 billion). If Avalanche’s Phse IIa results are negative, game over.


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