Consider The 2-3x Upside In This Most Overlooked Hepatitis B Stock

GlobeImmune (GBIM) IPO’d in June to little fanfare and has underperformed the biotech sector considerably since. Now, however, this overlooked stock is trading at all-time lows and only marginally above its cash position, with a key driving event in the next six months that should put the company back on the radar, particularly for investors focused on the evolving landscape for infectious diseases affecting the liver.

GlobeImmune develops targeted treatments for oncology and infectious diseases based on the company’s proprietary Tarmogen platform. Essentially therapeutic vaccines, Tarmogens are designed to activate the immune system to target particular proteins on infected or malignant cells. The technology has been around for some time - GBIM was founded as Ceres Pharmaceuticals in 1995 - and investors have watched therapeutic vaccines fail in the recent past. These have contributed to little interest in GBIM.

Despite little to show in nearly 20 years of drug development, the company has made some interesting advancements in the last five years, one of which informs exclusively our interest in trading this illiquid stock.  GlobeImmune’s lead infectious disease candidate, GS-4774, is partnered with Gilead Sciences (GILDfor the treatment of hepatitis B. Two phase 2 proof of concept studies are ongoing and one will readout in the first half of 2015, testing GS-4774 combined with standard of care HBV regimens in treatment-experienced chronic HBV patients. Gilead recently initiated a third trial with GS-4774, following previously treated patients once they have completed participation in another -4774 trial.

Further, GlobeImmune is partnered with Celgene (CELG) for one of its early oncology candidates, also a Tarmogen-driven therapeutic. GBIM has been under pressure since mid-October when the company released data from a phase 1 study of GI-6301, a Celgene-partnered candidate, in the rare bone cancer, chordoma. For traders/investors interested in the forthcoming HBV data, this makes for an attractive opportunity to get involved in the stock at all-time lows.

  • GBIM is partnered with two leading biopharma companies, Gilead and Celgene, on its proprietary Tarmogen platform. Stock has underperformed since June IPO and is overlooked as an early HBV story.
  • Risk/reward coming into year-end is incredibly favorable: the stock has cash support at roughly 50% of the current valuation, and we see the stock returning to $10 (IPO price) prior to next major inflection points, early next year. We see GBIM as a table-pounder into year-end.
  • Own GBIM at all-time lows (around $5.50) for short-term trade as investors come around on beat-down story (avoid holding through data), OR long-term and riskier holding through upcoming HBV readouts. Early entrance may allow for "free" involvement (playing with profits) when HBV data emerges.

After the sharp sell-off in GBIM shares on thin volume (<500,000 shares) with the release of initial chordoma data in mid-October (details below), risks in GBIM are limited setting up an attractive risk-reward ahead of value unlocking data in 1H2015. Importantly, all oscillators are in very oversold conditions, and we believe initiating positions ahead of AASLD (November 7th) and pivotal data in 1H2015 could see shares test $11.00 (61.8% retracement) that implies only a 5% probability of success. As a trade, this allows investors to go into the HBV event risk-free, with only profits at risk.

Leading into the event, we’re defining “good data” as a 30-50% improvement in Viread monotherapy response rates (11%), or reduced time to response, which may propel shares to our fundamental base case DCF valuation for GS-4774 of $17/share.  Any beat of our expectations and shares could trade to a 50% probability adjusted approval DCF valuation of $36 per share.

In the near-term we think shares test the down trend at least once, currently at $8.48 (66% upside), and upon favorable data in 2015 shares could easily triple past all time highs of $15 per share. On Friday, shares closed up 11% at $5.63, generating a mechanical buy signal on the Slow Stochastic, with an imminent MACD cross, albeit still below the zero line. In short, we think we see $8 before we see $3.

GlobeImmune, Inc., Background

Established as Ceres Pharmaceuticals in February of 1995 to develop Targeted Molecular Immunogens – Tarmogens – based on research in-licensed from the University of Colorado, the company changed its name to GlobeImmune in 2001 and went public this June with a $17.25M initial offering. The IPO follows a 2012 attempt to come to market, which the company pulled in October of 2013. Clearly, the Street takes a dim view of GBIM and/or the Tarmogen therapeutic approach, considering the company’s failure to list publicly two years ago as the biotech IPO window was wide open. This, and the company’s long development track record, is certainly worth acknowledging as “hair” to the story.

What is a Tarmogen, how does it work in HBV? 
GS-4774 (Tarmogen from GlobeImmune) is derived from a heat-inactivated yeast vector containing the entire HBV antigen signature (core, surface, and envelope) being developed as a therapeutic vaccine. The proposed mechanism of action is believed to be re-sensitization of dendritic cells to initiate a targeted T cell immune response. Additionally, the GS-4774 Tarmogen expresses a fusion protein utilizing a highly conserved sequence of the hepatitis B virus that is homologous in all four major HBV genotypes and is thought to be pangenotypic. We note that ARC-520, Arrowhead Research’s (ARWR) highly anticipated HBV candidate, consisted of two siRNA’s with the hopes to have broader genotype coverage, but it validates the importance of GlobeImmune’s pangenotypic approach.

HBV is characterized by its capacity to inactivate the immune system, or deplete the immune system’s capacity to elicit an immune response to the HBsAg (immune exhaustion), and actively inhibits dendritic cells.  This is where Tarmogens may prove unique, as they are absorbed and processed by dendritic cells into peptide fragments that are then presented onto the exterior with class II MHC complexes.  A brief analogy to small molecules: think of Tarmogens as the pro-drug, and the dendritic cells (liver) as the bioactivation site for releasing an active form. In this case, dendritic cells having processed Tarmogens containing the HBV antigens are cleaved into peptide fragments that are then transported to the cell surface in conjunction with cytokine release in a traditional autocrine response.

These antigen-presenting cells now display on class II MHC-Tarmogen Peptide complexes on their extracellular membranes that rely upon IL-12 to activate CD-4+ T-helper cells (Th). Once IL-12 is released, it chemo-sensitizes circulating CD-4+Th cells toward the antigen-presenting dendritic cells (chemo-sensitization) that are now able to communicate with the dormant immune system through a traditional cell-cell, receptor-ligand interaction between the class II MHC-Tarmogen Peptide antigen presenting cells and the CD-4 Th cells.

The ultimate immuno-pharmacological objective of this cascade is to stimulate the release of Interferon-gamma (IFNg)that in this context re-activates dormant CD-8+ Killer T- cells, becoming immunocompetent to target diseased cells with the same antigen and to induce cytotoxicity through a variety of mechanisms.  Systemic interferon therapy results in a similar pharmacologic effect; however, we adamantly caution investors not to oversimplify this complex pathway by deducing “Tarmogens are similar to interferon.

While acknowledging the fact that this program has significant early stage risk, on an unproven platform, the mechanistic rationale remains sound. We heavily discount projected cash flows at 20% WACC, and risk-adjust by 25% below the average probability of success (30-35%) for a Phase 2 asset.  Lastly, in our GBIM model we only value the HBV program despite two other Phase 2 assets in oncology with one already licensed to CELG, further validating the platform. Celgene has an option to opt-in on the remaining oncology asset, triggering a milestone payment as soon as year-end.

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Disclosure: Dr. De Santis is Founder and CEO of Alpha BioPharma Advisers, a healthcare research firm ...

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