Nivalis Therapeutics (NASDAQ:NVLS) and why Deerfield Management is betting big on it

A recent IPO caught my eyes as Deerfield Management has about 24% of the company. As far as I know, Deerfield is fundamental-driven, scientific and successful. There must be something. So I took a deeper look.

Nivalis Therapeutic Inc., (NASDAQ:NVLS) is a small development stage biotech company targeting cystic fibrosis, IPO priced at $14, and underwriter subscription helped them take home $88 million. The leading drug candidate N91115 is currently in phase 1b. The company said it will use $12 million to complete a phase 2 trial and $35 million for an anticipated phase 3 trial. From the time Deerfield took positions in the board, it seems they helped the company design the strategy and redirect research focus to current leading drug.

The drug N91115 piggybacks on soon-to-be approved treatments from Vertex Pharmaceuticals (NASDAQ:VRTX) to enhance effectiveness and outcomes. Basically, the success of NVLS hinges on three things:
a).Successful commercialization of Vertex’s Orkambi;
b).Proof of clinical benefits in N91115;
c).Vertex’s willingness to acquire them.

Let me elaborate from Vertex.

1). Orkambi

For science and clinical aspects of the disease CF, interested reader should read this article NCBI CF papaer.

Most recently, Vertex’s new treatment Orkambi received favorable votes from an advisory board, and an approval is much expected by July 5, 2015. However, the degree of improvement in the primary endpoint of breathing ability was modest, and could be a reason for FDA to reject the application. But think about: a). in the end, the FDA will look at Orkambi’s safety and efficacy profile, both are positive; b).there is no other treatment targeting the underlying genetic cause of the CF; c). Real-world benefits in secondary endpoints such as decreased exacerbation of the disease and decreased hospitalizations seen in the clinical trials are significant.

In all, the treatment NVLS piggy-backed on is very likely to be commercially successful.

2). Vertex

I quite like the company for a few reasons: plenty of cash, significant moat, and good execution.  As for the valuation, the company forecast $560-580M in 2015, potential sales from Orkambi are not included. The company should profit ~$300k annually from their Kalydeco patients if they stay full course. The potential market for Orkambi is around 26,000 in US and EU. If average profit is down to $150k, it is a $3.9B market. If we assume profit margin of 40%~50%, peak P/E is around 15.

Below is a page from the company’s presentation.

VRTX strategy

What’s relevant is “Enhance the pipeline through internal and external investments”. And NVLS makes a good supplement for Orkambi.

3). Science

Starting from Vertex’s products:
A normal CFTR protein channel allows proteins to flow freely outside the cell. In CF patients, the CFTR channel is blocked and chloride ions are unable to get outside of the cell.

And how does N91115 work?
This is from their S-1:

“By decreasing degradation of this misfolded CFTR, as illustrated by Step 1 and 2, N91115 permits more CFTR to bind to lumacaftor, which is designed to improve folding, as illustrated by Step 3. The folded CFTR then traffics to the cell surface where ivacaftor binds to it, opening the chloride channel, as illustrated by Step 4 and 5. However, as preclinical data have suggested, CFTR bound to lumacaftor and ivacaftor at the cell surface remains unstable and degrades. The net effect of N91115 is to increase and prolong CFTR activity by increasing its stability at the cell surface, as illustrated by Step 6 and inside the cell, as illustrated by Step 2”.


In plain English:
a). A normal CFTR protein channel allows proteins to flow freely outside the cell. In CF patients, the CFTR channel is blocked and chloride ions are unable to get outside of the cell.
b). Ivacaftor is a potentiator, it helps to open chloride channel. It is effective if there are enough CFTR on the surface to cell but is closed.
c). The F508del mutation causes misfolded CFTR proteins and they couldn’t reach the cell surface. Lumacaftor is a corrector, it helps improve CFTR folding and trafficking to cell surface.
d). the duo therapy is not very effective because CFTR shows premature degradation and is not stable on the cell surface. N91115 acts as a stabilizer to increase and prolong CFTR activity.

And development progress:

Trial Design Results
Preclinical Cell and animal models CFTR activity significantly increased.
Phase 1a (2014-2014.11) Multiple ascending dose, safety and pharmacokinetic trial in health subjects. Four cohorts each with six patients Well-tolerated with no dose-limiting toxicities noted up to 500 mg per day.
Phase 1b (2015.2~) Safety and tolerability; randomized, double-blind, placebo-controlled, parallel group trial with three doses of N91115, at 50 mg, 100 mg and 200 mg. These doses and a placebo are administered over 28 days in 48 patients Ongoing;
DSMB is reviewing data; no safety signals raised. Expected to complete in Q3 2015.
Phase 1 Open label in six CF patients for the F508del mutation dosed with 50 mg. No dosing adjustment need for CF patients.
Phase 2 Triple therapy with Orkambi.Six to nine months. Primary endpoint is ppFEV1. Plan to initiate as soon as commercial launch of Orkambi.
Phase 3 Two randomized, placebo-controlled, larger number of patients. Planned

Safety looks not a problem; efficacy shows a significant increase of CFTR activity, but remember data are only from mouse model.

4). Valuation of NVLS

A lot biotech sector practitioner use probability weighted NPV or relative value. NVLS now has enough cash for phase 2 and 3 clinical trials; with current cash burn rate, they won’t need financing for more than 4 years.

If N91115 indeed improves the efficacy of Orkambi by a wide margin, we should expect at least $50,000 price increase for the triple therapy. It translates to at least $150 million peak sales for the drug. If we assign P/S=6, i.e., the acquisition price $900 million, 30% discount rate, the company is worth $242 million now. Currently NVLS commands a market cap of $200 million. To note, this is only a rough estimate, and no premium is included in the acquisition.

5). Summary

VRTX: It is Ok to buy high-growth stock at fair price if the growth is sustained.

NVLS: It is risky speculation by nature. Some de-risk events should be monitored such as a). the approval of Orkambi on July 5th; b). Orkambi launch; c). clinical results from N91115. It could be investments if you have faith in the three assumptions, like Deerfield.

Disclosure: I don’t have any name mentioned in this article in my personal portfolio, nor do I plan to buy or sell in the next 72 hours.


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