The biotech “run-up” trade has always attracted a wide array of traders looking to take advantage of potentially high alpha price moves before the actual catalyst/binary event come to fruition. Holding through these events does carry a certain amount of risk that traders should be aware of.  Such examples of these risks include, but are not limited to:

• Market conditions; specifically biotech ETFs such as The iShares Nasdaq Biotechnology ETF (IBB) and the SPDR S&P Biotech ETF (XBI)
• Near-term dilution before the actual catalyst/binary event.

Below, we list 4 biotech ‘plays’ we think should provide nice short term upside with a couple of them having longer term potential:

G1 Therapeutics, Inc. (NASDAQ:GTHX). The company’s lead asset, Trilaciclib, is currently being evaluated in a number of settings as a tack-on to the standard of care in both front line and 2nd-3rd lines of small cell lung cancer (SCLC) and triple-negative breast cancer (TNBC). The mechanism of action for Trilaciclib offers a unique take on the popular and widely successful class of CDK4/6 inhibitors. CDK4/6 keeps cells in stasis, known as the G1 phase of the cell cycle, rendering it difficult to undergo cell division.

However many tumor types can function independently of CDK4/6 co-opting various resistance mechanisms. In these CDK4/6 independent tumors, the goal is to use Trilaciclib which is a short acting IV drug to protect the rest of the body during chemotherapy. It’s important to remember that chemo only attacks cells in the cycle which are past the G1 resting phase (platinum in the S phase and taxanes in the M phase). Trilaciclib is administered just before chemo exposure to prevent off-target effects. Not only can this help protect rapidly dividing healthy cells during chemo such as the Hematopoetic Stem Cell (HSC) compartment, it may also improve on-target effects. If the hypothesis is proven, this agent has the potential to be a backbone that could tackle the tough IO-chemo combination space, keeping the immune cells protected while heating up the target tumor.

G1 Therapeutics plans to present topline Phase 2a data for Trilaciclib in combo with SoC chemo in the front line SCLC setting during the first quarter of 2018. This data is a follow up to the earlier phase 1 data which demonstrated an impressive 88% ORR in an 18 patient set. An increased dosage from 200mg/m2 to 240mg/m2 demonstrated an improved safety profile; SAEs for the blood compartment such as Neutropenia dropped from 50% (1 grade 3, 4 grade 4) to 11% (1 grade 3), and Anemia dropped from 40% (4 grade 3) to 11% (1 grade 3). Historically speaking, the chemo combination used in this study without additional agents (Etoposide and carboplatin) is rather myelo-suppressive. In a phase 3 study, this combination showed a grade 3/4 rate of 86.5% neutropenia, 10.6% febrile neutropenia, 11.5% Anemia, and 19.2% thrombocytopenia. Also, notable was the ORR rate of 43.6% in this study which is roughly half of the response rate for G1. If G1 can continue to demonstrate notable improvements in ORR as well as continued protection from off-target impact, we should see significant appreciation in share price over the coming months.

Conclusion on GTHX trade: G1 offers a high value run-up potential, a unique differentiated approach, and promising early data – worth a strong run-up and a buy and hold in our view.  Longer term speculative ‘big alpha’ upside relies upon the company’s ability to enable more settings for IO-chemo combinations with Trilaciclib.

Next up on our list is Sierra Oncology (NASDAQ:SRRA), whose focus is on the development of its lead Chk1 inhibitor (SRA737), a class of drugs looking to build on earlier success of the PARP class of inhibitors. Chk1 like PARP, targets the DNA damage response (DDR) network mechanism co-opted by tumor cells to repair itself before it undergoes replication. Many anti-tumor agents such as Gemcitabine (Gem) induce DNA damage, but demonstrate limited efficacy due to the existence of the DDR network. This network arrests progress through the cell cycle in order to buy the cell time for repair. Blocking Chk1 is theorized to force the cell through the cycle regardless of the DNA damage present in the tumor, eventually resulting in mitotic catastrophe (cell death as the result of division with errant DNA). Within the DDR network, PARP targets single strand breaks whereas Chk1 targets double stranded breaks and stalled replication forks.

Targeting the DDR network is a hot space for oncological development. Two larger pharmas are also looking into inhibition of Chk1, Eli Lilly’s (NYSE: LLYLLY) IV Prexasertib and Roche’s (OTC: RHHBY) oral GDC-0575. Last year Merck (NYSE: MRK) expressed interest in the space by signing a deal with Vertex (NASDAQ: VRTX) for two ATR inhibitors, which works upstream of the Chk1 response pathway in replicative stress.  Roche’s asset in-licensed from Array (NASDAQ: ARRY) has been tested in combination with Gem, but efficacy of this combination was unimpressive, with only 4 clinical PRs out of the 83 patients tested across tumor types and 3 disease stabilization.

This could be attributed to the fact that such a trial was broad across solid tumors, and did not look to differentiate via biomarkering. Lilly’s drug has shown modest activity by selecting to test in high-grade serous ovarian cancer (HGSOC) that were BRCAwt, a tumor type known to express p53 dysfunction. Here, Lilly shows a 38% response rate in these patients as a mono therapy. However, both the Roche and Lilly study were dogged with significant hematologic toxicity including high rates of neutropenia and thrombocytopenia.

Unlike these two assets, Sierra hasn’t shown any serious adverse events or DLTs in its phase one monotherapy trial, which could offer broader optionality for combinations. The company is now testing SRA737 further as a single agent and in combination with low dose Gem, presumably to press the safety advantage over Roche’s higher dosed Gem combo. The challenge for Sierra will be to maintain or build upon the efficacy seen to date by narrowing down biomarkers for sensitivity.  Sierra will be updating progress in both of its SRA737 trials during its R&D day in February.

Conclusion on SRRA trade: Worth a run-up trade as the asset is somewhat undervalued relative to the potential upside. Data as well should be acceptable, but may be a bit murky due to the many different potential mechanisms of action and correlative biomarkers. SRRA also is in a good position to become a partner for a larger pharma.

However, it’s too early to offer a longer term view of success here as many uncertainty’s need to be addressed in our view.

MyoKardia, Inc. (NASDAQ:MYOK) is a name we cover extensively now and in the past.  We have collectively owned this stock from the high $10 range, and correctly predicted its top-notched data readout that occurred in mid-2017.

Our keen interest has been in the company’s asset Mavacamten (formerly MYK461) program partnered with Sanofi in the treatment of obstructive Hypertrophic Cardiomyopathy (oHCM). Initial data last year was very impressive with an 85% post-exercise LVOT gradient improvement that correlated with a benefit of 17% in peak VO2 . Most (8/10) patients reverted back to near baseline levels that would only be seen with surgery. The drug was well tolerated with only one patient dropping out due to the initial design mandating discontinuation of beta blocker therapy.

This quarter we are anticipating data from the low dose cohort B of Mavacamten that allows for background therapy with beta blockers. Rather than aiming for a dramatic reduction in LVOT gradient with the high dose cohort A, cohort B is designed to look at Mavecamten as a lower dose maintenance therapy for oHCM patients over a longer time-line. We do not anticipate initial data from this cohort at week 12 to be nearly as dramatic (in terms of huge response and depth) as the readout last year – the lower dosed Mavecamten isn’t likely to get a statistically significant result in VO2 over this period.

However, continued improvements in LVOT as seen prior can correlate with VO2 benefit in time. This cohort will better inform us on any potential DDI issues as well as to help the company tune into the right dosing window based on the patient’s cardiac function as the company prepares for its pivotal trial initiation in Q2.

Conclusion on MYOK trade: This one is a strong acquisition candidate, with Sanofi (NYSE: SNY) being our favored potential acquirer here. Myokardia continues to make incremental progress in the untapped cardiomyopathy field. As its lead asset and platform continue to de-risk, we think the odds of an acquisition will increase likewise. However, if the market is less-than-impressed with the DCM read-out, the stock price could take a substantial hit. Notwithstanding, we would see such an event as a buying opportunity as we think The U.S. Food and Drug Administration (FDA) is very likely to approve Mavecamten, which we see as a multi-billion dollar opportunity.

Jounce Therapeutics, Inc. (NASDAQ:JNCE) is pioneering a new IO target on T-cells known as Inducible T cell CO–Stimulator (ICOS), a checkpoint that may help potentiate the immune system against the tumor. The company is targeting the ICOS axis with a monoclonal antibody against the target, JTX-2011. Jounce is not alone in this endeavor as the company signed a rather significant co-development deal with Celgene in 2016. The economics of the deal are quite favorable for Jounce, as it retains 60% of future profits and are eligible for up to $2.3B in future milestones with $225M paid upfront by Celgene, with the deal also encompassing up to four earlier stage preclinical development programs. This antibody is currently being tested in ICOS expressing tumors types (i.e HNSCC, NSCLC, TNBC, Melanoma, and GI), and Jounce has already made significant headway on stratifying patients by biomarkers (expression of ICOS2/3).

In a phase 1 study where JTX-2011 was tested as a mono agent and in combination with PD-1, the safety profile was benign enough to continue testing. Curiously enough, the combination of JTX-2011 with Nivolumab did not show any grade 3/4 events in the 12 patients tested whereas the monotherapy of JTX-2011 showed a 32% severe adverse event rate. Only one patient however dropped from the monotherapy cohort at the out due to toxicity from the trial.  Notably, 75% of patients in monotherapy and 83% in the combination study are continuing treatment.

While efficacy has not been measured yet, this is an early encouraging sign. As for the phase 2 portion of the study, the patients are going to be stratified into cohorts by ICOS expression and will be dosed with the recommended dose from the phase 1 (0.3mg/kg). By enriching its population by ICOS expression, the company is giving itself the best chance for success with potential upshot if efficacy can be demonstrated in patients with a weaker ICOS signal. The phase 2 data including efficacy is expected to read out in the first half of this year, a key proof of concept for JTX2011. If the data is strong, JTX-2011 has the potential to be a major player in the burgeoning IO combination space which is desperate for meaningful advancements over the first wave of checkpoint inhibitors, like CTLA-4.

Conclusion on JNCE trade: Jounce offers a new target in IO that may be able to distinguish itself in terms of safety over current combinations. We expect investor interest to increase as we get closer to the initial proof of concept. If the proof of concept is a success (superiority over CTLA-4), we believe this will be a major inflection point for the share price. The company’s ability to make early but meaningful deals with significant long term upside helps to de-risk this new asset’s path to commercialization.

As always when trading, it’s a good idea to define entry and exit prices, along with setting disciplined stop loss target areas. We think after some initial biotech weakness to begin the year, we should see good index appreciation as we move into and past Q1, 2018.