The subject of this research report is a tiny development-stage biotechnology concern, which means its common stock is, almost by definition, incredibly volatile. Significantly, too, the dual facts that the company's lead new-drug prospect has only completed Phase 2 clinical testing and could be years from commercial viability inject substantial additional uncertainty and risk. That's not all, the results of the two Phase 2 studies haven't even been released yet. Now that all of the prudent investors have been scared off, we highlight here the reasons why we're recommending the shares of Prana Biotechnology Ltd (NASDAQ: PRAN), even if only as an issue worthy of close monitoring. First, an impressive 40 of 42 patients (95.2%) enrolled in one study completed the planned 12 months of treatment. Second, an equally impressive 104 of the 109 (95.4%) enrolled in the second six-month study stayed through completion. Third, Data Safety Advisory Committees convened five times for each study and recommended no changes to the original trial protocol. Last, since patients suffering from the two diseases targeted by Prana's prospect are in dire need of a treatment that's even moderately effective, decent Phase 2 results could lead to a fast-track approval. And below, the interested speculator will find the mind-numbing details that only seasoned biotech investors can appreciate.
Significantly, Prana is scheduled to report the results of the two clinical trials later this quarter. Important, too, the company has relatively few shares outstanding and a small market capitalization, which, combined with the new-drug prospect's blockbuster potential, could allow for eye-popping capital appreciation. All that said, we reiterate the shares are speculative and remind readers that no more than a relatively small amount of risk capital be allocated to any event driven special situation.
Prana Biotechnology Limited
Prana Biotechnology is a tiny Parkville, Australia-based concern that was established in 1997 to research and commercialize age-related neurodegenerative disorders. The company's primary focus is on Alzheimer's, Huntington's, and Parkinson's diseases. Its lead product is PBT2, which recently completed Phase 2 clinical trials for two separate indications - the treatment of Alzheimer's and Huntington's. Far deeper in the pipeline is PBT434, which is in pre-clinical studies for the possible treatment of Parkinson's, and a library comprised of over 900 MPACs (Metal Protein Attenuating Compounds) of various chemical scaffolds.
Prana only had nine employees at the end of fiscal 2013 (June 30, 2013). All research and development activities are conducted by third parties. As is typical of the vast majority of development-stage biotechnology enterprises, Prana has incurred losses every year since beginning operations. The red ink totaled A$7.8 million, A$5.2 million, and $6.4 million in fiscal 2013, 2012, and 2011, respectively. As of last June 30th, the accumulated deficit was A$97.9 million. Losses are likely to continue for the foreseeable future, which means the company will most likely have to return to the capital markets. Cash reserves stood at A$13.3 million at the end of fiscal 2013, but they had probably increased to an estimated $25 million by the end of calendar 2013, since management had raised additional funds in the year's second half through stock sales.
Prana ordinary shares were listed on the Australian Securities Exchange in March 2000. They've traded in the United States as American Depository Receipts (ADRs) since September 2002. Each ADR is equivalent to 10 ordinary shares, and the company, which has roughly 42 million ADRs outstanding, has a market capitalization of about $370 million.
The Lead New Drug Prospect
PBT2 is a Metal Protein Attenuating Compound, which essentially serves as a courier, taking metals like copper and zinc from areas of excess to areas of deficiency, thereby facilitating more normal neurotransmission. The rebalancing also serves to prevent the formation of toxic metal-laden oligomer formation, which can lead to synaptic toxicity. This process just targets the toxic amyloid beta, while leaving the non-toxic forms that may be necessary for normal cognition and immunity. PBT2 has previously shown improvement in executive function with dose response in an earlier Phase 2a trial, after just 12 weeks of treatment in 78 patients with mild Alzheimer's dementia. Important, too, Prana released new mouse data last year showing that PBT2 reverses memory loss in normal aged mice with increases in the number of neurons and synapses in the brain. As well, previous mouse data in transgenic Huntington's mice showed improved survival, motor function, and brain volume.
The IMAGINE Clinical Trial
Based on the significant improvement in executive function in mild Alzheimer's Disease (AD) patients treated with 250 mg of PBT2, as established by the aforementioned Phase 2a trial, patient enrollment in the Phase 2b IMAGINE clinical trial commenced in 2012. The double-blind, placebo controlled trial eventually enrolled a total of 42 patients, approximately two thirds of whom received 250 mg of PBT2 while the remaining third received placebo once daily over 12 months. The study was designed primarily to investigate the effect of PBT2 on beta amyloid protein aggregation in the brains of patients with mild or prodromal Alzheimer's by using Positron Emission Tomography (PET) brain imaging techniques.
It has been shown in animal studies that metals such as zinc and copper can induce the formation of beta amyloid protein aggregates in the brain and that treatment with PBT2 can both inhibit the aggregate formation and promote the degradation of these toxic aggregates. The brain imaging will enable the company's scientists to investigate if PBT2 lowers the 'burden' of these aggregates or amyloid in the brain, measure any changes in brain volume, and also determine whether brain metabolic activity is improved. In addition to the improvement in executive function, as assessed by the Neuropsychological Test Battery, the IMAGINE trial will look for any improvement in measures of cognition and daily functional abilities. The study, conducted at five sites in Australia, was supported, in part, by the New York-based Alzheimer's Drug Discovery Foundation through a US$700,000 project based investment.
On December 9, 2013, Prana Biotechnology announced the completion of the treatment phase of the IMAGINE clinical trial. Of the 42 patients with prodromal or mild AD enrolled, a total of 40 patients completed the planned 12 months of treatment with PBT2 or placebo. Only two patients withdrew during the trial, representing a trial retention rate of 95.2%. An independent Data Safety Advisory Board met five times during the course of the trial and on no occasion made any recommendations to vary the original trial protocol. The results are expected to be released in March 2014.
The IMAGINE-extension Clinical Trial
In early July 2013, Prana's request to conduct an open label 12-month extension study was granted. The request was made, in part, due to substantial enthusiasm and encouragement from clinicians and patient groups in need of effective treatments to deal with ever increasing patient suffering and community burden. All patients in the extension study, whether originally assigned placebo or PBT2 in the IMAGINE study, are to receive 250mg of PBT2 per day. At the end of the extension study all participants will have a PET, MRI scans to determine the amyloid burden, brain activity and volumetric changes. In addition, cognitive and functional measures will be assessed. Accordingly, the trial will permit Prana to study the long-term effects with PBT2 administration over either 24 or 12 months. On December 11th, the company announced that a total of 33 patients chose to go into the Extension trial, representing 83% of the 40 patients who completed 12 months of treatment in the IMAGINE trial. The independent Data Safety Monitoring Board recently met to review the available safety data from the Extension trial and recommended that the study proceed without change to the original protocol.
The Reach2HD Clinical Trial
Late in December 2012, Prana's Phase 2a double-blind, placebo-controlled study in early- to mid-stage Huntington's Disease (HD) completed enrolment. One hundred and nine patients were randomized to receive 250 mg, 100 mg, or placebo once daily for six months. The study was designed to assess safety and tolerability of PBT2, along with cognitive, motor, behavioral and functional changes in HD patients. A small sub-study within Reach2HD was investigated for the effects of PBT2 on brain metal iron mapping using Magnetic Resonance Imaging (MRI). In addition, possible biomarkers of HD are to be assessed from plasma and urine samples. This study is the first clinical trial with PBT2 in this patient population.
On July 23, 2013, the company announced the successful completion of Reach2HD. Although the initial plan was to recruit 100 patients, 109 were enrolled, reflecting strong support for the trial within the HD clinical research community. Of the total enrolled, 104 patients completed the trial, translating into an impressive retention rate of 95.4%. Reach2HD was conducted across 20 sites in the United States and Australia in collaboration with the U.S. based Huntington Study Group located at the University of Rochester, New York. A Data Safety Monitoring Board met on five occasions throughout the trial and on each occasion recommended that no changes or modifications to the study protocol be made based on their review of the safety data. The trial was completed on time. The results were expected to be reported last October, but are now projected to be released in early 2014.
The primary outcome of the trial is safety and tolerability. The trial also includes a number of secondary outcome measures from the cognitive, motor and behavioral domains affected in Huntington disease. A positive result of Reach2HD will identify signals of therapeutic benefit in one or more of the domains measured, which will inform the design of the crucial Phase 3 clinical trial. Similar to Alzheimer's Disease, HD is characterized by the buildup of toxic protein aggregates, loss of normal neuronal metal homeostasis, and metal induced oxidative stress. As such, biomarkers of oxidative stress and mutant huntington protein aggregation are also to be assessed.
Huntington's disease is a complex and severely debilitating genetic, neurodegenerative disease, for which there is no cure. The disease often affects young adults and, whilst associated with severe physical movement symptoms, progressively impacts the mind and emotions as well. HD causes incapacitation and death about 15 to 25 years after onset. It affects over 30,000 people in the U.S. and 70,000 worldwide. There is a paucity of treatments available, with just one drug approved for treating HD, Tetrabenazine, and it only works on the motor symptoms; there are no treatments approved for the cognitive or behavioral symptoms of the disease.
Assessing the Upcoming Potentially High-Impact Events
PRAN shares spiked 11.3% after the company announced the completion of the Reach2HD study and another 16.5% after the IMAGINE trial concluded, the gains were accompanied by a sharp increase in trading volume. All told, the shares have appreciated some 244% in the six months since the Reach2HD trial-related news. As noted in previous reports, though, triple-digit percentage gains for small-cap biotechnology issues is nothing usual and certainly not preclusive of further outperformance.
Looking to the forthcoming trial results, success in the Reach2HD would be the best outcome as it would undoubtedly shorten the time for PBT2 to come to market, as there are no disease modifying drugs presently available for Huntington's disease. The trial will probably achieve its safety outcomes considering more than 95% of participants stayed in the trial and previous experience with the drug. Efficacy outcomes are certainly far less clear, though. While never assured, we think the IMAGINE trial has a high probability of success, in terms of both efficacy and safety, in view of the results attained in the Phase 2a trial plus the fact that 95% of the participants completed testing and 83% opted to move on to the Extension trial. Patients suffering from Alzheimer's disease have few good options for treatment so PBT2 could rapidly achieve blockbuster status if results are respectable.
According to The World Alzheimer's Association, the global cost of dementia is about $600 billion every year, and growing. By 2050, more than 115 million people are predicted to be living with dementia across the globe. Significantly, too, the United States Food & Drugs Administration (FDA) recently created a faster pathway for Alzheimer's drugs, such as PBT2, to get approved. More specifically, if a drug has been shown to be safe, FDA Industry Guidance on Early Stage AD Trial Designs provides an "accelerated approval mechanism" under 21 CFR 314.510 - meaning that "a valid and reliable cognitive assessment used as a primary efficacy measure will support marketing approval." This could significantly reduce the commercialization pathway for Prana.
Ways to Play this Special Situation
The biotechnology sector has been on fire for some time, fueled by both the large, well-established names that have soared and the many small emerging names - like Intercept Pharmaceutical - that top stock leader boards seemingly on a daily basis. Even tiny Prana has not been ignored. As noted above, its shares advanced 244% in the past six months, and the forthcoming high-impact events are clearly being heavily anticipated, with options on PRAN selling at very rich premiums. The bid/ask on the May $9.00 calls, for instance, is $3.90/$4.10, meaning the price would have to move above $13.10 for the option to be profitable. The May $11.00 calls aren't much cheaper, at $3.00/$3.60. On the flip side, the May $9.00 puts are trading at a bid/ask of $4.10/$4.50, meaning that the shares would have to fall below $4.50 for the buyer to make a profit. These rich premiums make a straddle prohibitively expensive; buying both puts and calls on the $9.00 strike level would cost $8.60, assuming one paid the asking price. The expensive options also make protecting a long stock position with a put option extremely costly. A May $9.00 put, for example, would fully protect 100 shares of PRAN, but it would add $450 to the $885 cost of buying those 100 shares. This strategy would protect against a catastrophe, but the breakeven price would rise to $13.35; the most that could be lost would be $435. All things considered, we would be inclined to take a small naked long position in the stock.
Disclosure: I am long PRAN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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