Ascendis Pharma (NASDAQ:ASND) caught my eye earlier this year when I was looking at quarterly ownership changes of biotech-focused hedge funds. Many funds were aggressively buying Ascendis over the last few quarters, and the stock is a high conviction name for at least a few of them. However, the stock was up more than 50% at that point, and I decided to put it aside as there were no material catalysts during most of 2017 and wait for some form of a consolidation or a pullback before doing more research. The stock was in consolidation mode for more than six months and broke out in late September following the failure of one of its main competitors in the growth hormone deficiency market. I was actually expecting to pick up shares cheaper after the success of Versartis phase 3 trial but the opposite happened. However, I think Ascendis is a better buy after a 20%+ rally, then it would be on a 15-20% pullback in the case Versartis somavaratan was successful as I believe the market cap gain does not fully reflect the elimination of a competing product which would have had a one-year head-start over Ascendis TransCon hGH.
Ascendis has only one late-stage asset at this point – TransCon hGH, but I am more interested in owning Ascendis because of its TransCon platform rather than just this late-stage candidate. I think that TransCon hGH can at least justify the current valuation and that it could be worth more than $70 by 2020 (fully de-risked), while the rest of the companys pipeline is equally exciting with potential to add value similar to or greater than TransCon hGH in the following years.
The TransCon technology
Ascendis is developing all product candidates with its TransCon technology. TransCon combines the benefits of a conventional prodrug and sustained release technologies and is broadly applicable to proteins, peptides and small molecules. According to Ascendis, TransCon prodrugs predictably release unmodified active parent drugs and may offer advantages that include superior efficacy, safety, tolerability, and compliance, including less frequent dosing and the ability to switch patients to subcutaneous injections from burdensome continuous infusions and less frequent dosing.
What sets TransCon apart is the ability to design prodrugs that predictably release an unmodified active parent drug, allowing administration frequencies from daily up to half-yearly. The company also claims it can design TransCon prodrugs to act systemically or locally in areas that are difficult to treat with conventional therapies.
The improvement of existing products through the use of TransCon also lowers development risks and increases the chances of success in the clinic since we know that the product works in the targeted patient population. It remains to be seen whether TransCon works in the clinic as intended, but clinical and preclinical results the company reported to date look really encouraging.
Growth hormone deficiency market overview
1 in 4,000 children are born with or acquire growth hormone deficiency or GHD. A child with GHD is expected to reach approximately 70% of his/her expected adult height. Continuous treatment from early childhood can restore height to a childs genetic potential. Delayed therapy jeopardizes attaining full height potential and adherence and persistence are also significant factors. Additional pediatric complications include metabolic abnormalities, cognitive deficiencies and poor quality of life. In adults, GHD is associated with premature mortality, increased fat mass, psychiatric-cognitive, metabolic, cardiovascular, muscular and skeletal abnormalities.
The current standard of care is daily injection of human growth hormone (hGH). The market is fragmented with four major players. Novo Nordisks Norditropin is the market leader with $1.3 billion in worldwide sales in 2016 (up 12% Y/Y). Pfizers Genotropin is second, followed by Eli Lillys Humatrope and Roches Nutropin. The worldwide annual sales have exceeded $3 billion in 2016 and pediatric sales account for roughly 80% of total worldwide sales.
Daily hGH therapy has shown to increase growth and improve metabolic effects and is safe, well-tolerated with an essentially pain-free injection. Compliant children initially achieve catch-up growth, enabling them to achieve normal height. Height velocity following this catch-up growth phase normalizes and allows patients to maintain normal growth throughout the treatment period. Patients that are non-compliant achieve lower catch-up growth and fail to achieve expected treatment outcomes. This is the main problem of daily hGH therapies and has motivated many companies to develop a long-acting hGH. And many have failed to develop a safe, effective and well-tolerated long-acting hGH. Versartis somavaratan is the latest failure the drug was safe and well-tolerated but failed to match daily hGHs height velocity in a phase 3 trial.
Going back to compliance, research has shown that it is a big problem, especially in the pediatric market. Persistence tends to drop below 70% after just 12 months of treatment with daily hGH.
Source: OPKO Health presentation
By the sixth year of treatment, persistence was shown to drop to 20%.
Source: OPKO Health presentation
And as mentioned above, poor compliance leads to lower growth.
Source: Ascendis presentation
Once-weekly therapies should significantly improve compliance rates as they would reduce the injection burden from 365 times per year to 52 times per year. The GHD market is growing in the low/mid-single digits and I think the growth should accelerate once safe, effective, well-tolerated, easy-to-use long-acting treatments enter the market. Assuming pricing parity with daily hGH, improved compliance should lead to growth acceleration in the 2020s and I think the GHD market will exceed $4 billion by then and that long-acting hGH products should comprise at least 50% of the market by mid-2020s and dominate the market by late 2020s.
Versartis somavaratan was the only company trying to develop a twice-monthly hGH treatment and its failure leaves three long-acting contenders (all targeting once-weekly administration):
Novo Nordisks somapacitan, which is in a phase 3 trial in adults and in a pediatric phase 2 trial. Somapacitan was successful in a Phase 3a study in adults (page 20 of the 1H 2017 report) it has achieved statistical significance versus placebo on the primary endpoint truncal fat percentage decrease as well as significant increases in lean body mass and muscle mass. The pediatric study is behind and I did not find enough information that shows the potential competitiveness of somapacitan. And given the status of the pediatric trial (phase 2 started in 2016), somapacitan is at least three years behind the other two products. OPKO Healths (NYSEMKT:OPK) hGH-CTP (also called lagova, or mod-4023) failed in a phase 3 study in adults due to significant outliers in the placebo group that deviated from the study protocol. OPKO conducted some post-hoc analyses that showed statistical significance for the primary endpoint when those outliers are excluded and the company plans to meet with the FDA to discuss the path forward in adults, but my base case here is that it will need to conduct another phase 3 trial in adults. The phase 2 pediatric study was a success and I think hGH-CTP is one of the potential market leaders. OPKO partnered hGH-CTP with Pfizer and stands to collect royalties on net sales in the adult indication which should transition to a gross profit split of both hGH-CTP and Genotropin if/when approved for the pediatric indication. Ascendis TransCon hGH a potential best-in-class product.
hGH-CTP and TransCon hGH have shown solid efficacy, safety, and tolerability and I think both have the potential for significant disruption of the GHD market. I would leave room for somapacitan here as well, but its clinical profile and market potential remain to be determined and it will be a late-comer (at least three years behind).
TransCon human Growth Hormone (hGH) a potential best-in-class product for growth hormone deficiency
I believe Ascendis TransCon hGH has the potential to become a best-in-class long-acting hGH product. It is the only product candidate that releases unmodified growth hormone, maintaining the same mode of action as daily hGH therapies. In a phase 2 trial, TransCon hGH has shown comparable efficacy to once-daily Genotropin. The height velocity (HV) TransCon hGH achieved was in the 11.9cm to 13.9cm range compared to 11.6cm for Genotropin. At the same weekly dose as Genotropin, TransCon hGHs HV was 12.9cm compared to 11.6cm.
Source: Ascendis presentation
Being within the range of daily hGH is important because it is the right amount of growth. Too little is not good as children wont grow to reach their targeted height, and too much hGH can lead to another condition acromegaly, which leads to tissue overgrowth, diabetes, heart disease, stroke and poor quality of life.
It is also important to monitor IGF-1, or insulin-like growth factor 1. IGF-1 amplifies the anabolic effects of hGH, but has insulin-like effects in fat tissue, thus stimulating fat formation. This is in contrast to hGH which stimulates the breakdown of fat. The normal IGF-1 level varies with age, so IGF-1 levels are expressed as IGF-1 standard deviations scores or IGF-1 SDS. The normal range is defined as IGF-1 between -2 and +2 SDS. In the phase 2 trial, the mean IGF-1 response for all TransCon hGH dose levels was maintained in the normal range. Transient point values of IGF-1 SDS of greater than +2 were observed in a small number of patients and only in the high-dose treatment arm, and there were no reports of safety issues in connection with these transient elevations. The high dose will not be used in the phase 3 trial.
Source: Ascendis presentation
Safety is also very important and TransCon hGH was safe and well-tolerated:
Adverse events were consistent with daily hGH therapy observed and not different between cohorts. The immunogenic profile was comparable to daily hGH therapy. Injection site tolerability was also comparable to daily hGH therapy. There were no reports of lipoatrophy or nodule formation.
Ascendis is also developing an auto-injector for the administration of TransCon hGH that will be easy-to-use in the pediatric population. The device has a single low-volume injection for all patients of less than 0.6ml and requires a small 31 gauge needle, four millimeters in length and comparable to needles used to administer daily hGH. The device provides for room temperature storage, includes an empty-all design, is expected to last four years and will be enabled for Bluetooth connectivity. Ascendis expects to use the device in the open-label extension study that follows the phase 3 trial and the company plans to launch TransCon hGH with this device if/when approved. Room temperature storage should provide a slight competitive edge over OPKOs hGH-CTP, which needs to be refrigerated.
The annualized HV TransCon hGH achieved in the phase 2 study compares favorably to HV reported in a large pharmaco-epidemiological survey known as KIGS-Pfizer International Growth Database. KIGS is a registry of real-world outcomes from daily growth hormone therapy which includes the negative effect of non-compliance on treatment outcomes. The reduced burden of daily injections with the use of TransCon hGH should improve treatment outcomes. The potential difference between TransCon hGH and the age-matched KIGS historical controls is shown below, assuming phase 2 efficacy is confirmed in longer-term studies. I doubt that real-world compliance with TransCon hGH will be 100%, but I think it should be much better than daily hGH and that treatment outcomes should be better with TransCon hGH. Better treatment outcomes should provide the incentive for physicians and patients to use long-acting hGH.
Source: Ascendis annual report
Does somavaratans failure have a negative read-through for TransCon hGH or OPKOs hGH-CTP?
No, I dont think it does. Somavaratans phase 3 results were consistent with results achieved in the phase 2 trial. The problem with somavaratans phase 2 trial is that it did not have an active comparator and the fact that Versartis was comparing the results to historical Norditropin registry results. Somavaratans height velocity in both phase 2 and phase 3 trials was inferior (below 10cm) to those achieved by TransCon hGH and OPKOs hGH-CTP – both had HV above 11cm and both were non-inferior to the active comparator (Pfizers Genotropin in both cases). I think chances of success of both TransCon hGH and hGH-CTP in their respective phase 3 studies are high.
TransCon PTH potential new standard of care for hypoparathyroidism
Hypoparathyroidism is another rare disease Ascendis is targeting. It affects approximately 75,000 patients in the United States. Shires (SHPG) Natpara was launched in 2015 and represents an important advance but it does not address all aspects of the disease. Natpara improves serum calcium and reduces pill burden (patients take a lot of pills otherwise) but does not improve hypercalciuria which results in renal complications of the disease and/or may contribute to them. Prior to Natpara, the standard of care included oral calcium and vitamin D, and off-label use of Forteo, which, based on Natparas slow uptake, are still being widely used.
Source: Ascendis presentation
Ascendis believes it can address the shortcomings of current therapies and that TransCon PTH can be a true enzyme replacement therapy it is designed as a sustained-release prodrug, providing free PTH in the physiological range over 24 hours with once-daily dosing. The development risk for hypoparathyroidism is lower for TransCon PTH than it would be for a new compound since Ascendis is using what we know works. TransCon PTH is based on parent drug teriparatide (Forteo) with clinical proof of principle. Preclinical data have also demonstrated that daily injections of TransCon PTH provide the desired target profile of physiological PTH replacement.
Phase 1 trial was initiated recently and the company expects to skip the phase 2 trial and go directly to the phase 3 trial. The reason for moving directly from phase 1 to phase 3 is the knowledge of the active compound and the fact it demonstrated efficacy in hypoparathyroidism and the company also said that the PK/PD profile is the same in healthy volunteers and in patients (which should be demonstrated in the phase 1 trial). The pivotal trial is expected to start in 2018 and Ascendis expects TransCon PTH to reach the market (assuming it is successful in the clinic) at roughly the same time as TransCon hGH.
As mentioned above, the addressable market in the U.S. is 75,000 patients, and 10% market share translates to roughly $750 million in annual sales. Natparas disappointing uptake is a reason to be cautious about peak sales estimates, but Natpara is not doing that bad it reached a $155 million annualized run rate in Q3 2017 (thats U.S. only for now) after roughly two years on the market despite the above-mentioned shortcomings. If TransCon PTHs clinical profile looks like what Ascendis expects, I believe this could be a $2 billion+ drug in the 2020s (worldwide sales) and that it is potentially more valuable than TransCon hGH as it would be far more differentiated in hypoparathyroidism than TransCon hGH would be in GHD.
Source: Shire earnings reports
TransCon CNP targeting achondroplasia
TransCon CNP represents another lower-risk development opportunity for Ascendis. It is being developed for achondroplasia, the most common form of dwarfism. There are currently no FDA-approved pharmacological treatments and patients often face multiple invasive surgeries to alleviate its many complications. Administration of CNP and its analogs has been demonstrated to stimulate growth in preclinical models. BioMarin (NASDAQ:BMRN) has a clinical candidate vosoritide (daily injections of CNP analog) in development and has presented positive phase 2 data in October 2016 it increased height velocity from baseline by approximately 50% after 12 months of treatment. Vosoritides phase 2 results and Ascendis preclinical results indicate that treatment with systemic CNP could be a promising therapy for achondroplasia.
TransCon CNP is designed as a once-weekly formulation of a CNP peptide and Ascendis believes it could address the fundamental limitations of daily administration of CNP:
CNP released from TransCon CNP maintains small enough size to allow penetration into the growth plates of patients who may use the treatment. TransCon CNP is designed to avoid hypotension, which is a problem with CNP.
Source: Ascendis presentation
TransCon CNP has a half-life of approximately 75-hours, a substantial increase to wild-type CNP which has a half-life of 2 minutes and vosoritide, which has a 20-minute half-life. The company believes this substantial half-life extension would enable once-weekly dosing that could achieve higher overall CNP exposure levels in the body with improved tolerability due to low peak serum concentration and that it could improve efficacy and avoid hypotension associated with daily injections of CNP analogs.
Source: Ascendis presentation
Achondroplasia affects approximately 250,000 patients worldwide and Ascendis estimates the annual opportunity north of $1 billion. BioMarins vosoritide could come to market sooner and help establish the pricing benchmark and make peak sales estimates more accurate. Vosoritide peak sales estimates are north of $1 billion and up to $2 billion.
Partnerships provide additional technology platform validation
In addition to (soon to be) three clinical-stage drug candidates, Ascendis also has two partnered programs:
TransCon ranibizumab (Lucentis) Roche/Genentech. The goal is to develop a half-year injection of ranibizumab, Genentechs anti-VEGF product, thereby reducing injection frequency and associated patient burden. The worldwide anti-VEGF sales exceeded $7 billion in 2014, with Regenerons Eylea and Lucentis generating the major part of those sales (Lucentis generated approximately $1.4 billion in net sales in 2016). The application of the TransCon technology should allow predictable release of the unmodified drug with up to half-yearly administration. Genentech is currently conducting preclinical studies. Genentech paid $20 million upfront and Ascendis is eligible to receive up to $100 million in milestones for ranibizumab and up to $80 million for each compound not containing ranibizumab (the agreement is not limited to ranibizumab). Ascendis is also eligible to receive tiered royalties on net sales starting in the mid-single digits but not exceeding low-double digits for ranibizumab and in the mid-single digits for compounds not containing ranibizumab. TransCon peptides Sanofi (NYSE:SNY). The two companies are researching and developing prodrugs for the treatment of diabetes. Ascendis received 25 million upfront and is eligible to receive up to an aggregate of 170 million in development and regulatory milestones for the first two products and up to 100 million in sales-based milestones.
Both programs are preclinical and we have yet to see a candidate move into the clinic, but the interest and commitment of two large pharma companies provide additional validation of Ascendis technology platform.
Ascendis is also developing TransCon Treprostinil for the treatment of pulmonary arterial hypertension, a $4 billion-plus worldwide market opportunity. Treprostinil is the active ingredient in Remodulin, developed by United Therapeutics (NASDAQ:UTHR) and Ascendis is developing an inhaled formulation of TransCon Treprostinil for once-daily administration and a formulation designed as a once-daily subcutaneous injection with the goal to offer the same efficacy as infused prostacyclins with a safer and improved tolerability profile. In April 2015, Ascendis announced phase 1 data which showed dose-dependent increases in plasma treprostinil levels, but injection-site tolerability issues did not meet the criteria defined in the target product profile and the company is now working on two new formulations. TransCon Treprostinil is outside of Ascendis area of interest and it plans to partner this candidate.
In addition to the three promising pipeline candidates and the collaborations with Genentech and Sanofi, Ascendis technology platform has the potential for additional applications and the pipeline will likely expand in the following years with in-house and out-licensed products.
I believe TransCon hGH alone, in its current state, is worth between $35 and $46 per share. De-risking of TransCon hGH in 2019 (moving the probability of approval to 100% and reducing the time to peak sales by 2 years) results in a valuation range of $76 to $100. The $1-1.2 billion annual sales estimate is based on 25-30% market share of what I believe will be a $4 billion-plus market in the 2020s and TransCon hGH and OPKOs hGH-CTP splitting the market and taking (at least) 50%+ market share from daily hGH therapies if they are proven to be effective, safe and well-tolerated in phase 3 trials and in the real world following their respective approvals. I am leaving some room for Novo Nordisks somapacitan as well, though its clinical profile remains to be determined. Please notice that I am using a 44 million share count and that the current, fully diluted share count is around 40 million. I included a 4 million share buffer to account for additional dilution as the company will likely need more capital for TransCon hGHs commercial launch.
Source: authors estimates
There is also a super-bullish scenario here for TransCon hGH – if OPKO’s hGH-CTP fails in the pediatric phase 3 trial or if it shows an unfavorable safety profile. In such a case, TransCon hGH would become the only long-acting player (assuming it is successful in its phase 3 trial, of course) and I think it could fetch 50% market share by mid-2020s, which would translate to roughly $2 billion in annual sales.
I think TransCon PTH could be as valuable as TransCon hGH in 2-3 years, if not more valuable as it would be the unmatched standard of care for hypoparathyroidism and TransCon CNP could also prove to a be a very valuable and differentiated asset. So, I think the upside potential for Ascendis is substantial even if just one of the three products reaches the market. Additional upside could come from Genentech and Sanofi collaborations and from partnering/moving forward the TransCon Treprostinil candidate.
Ascendis is in very good financial shape. The company used the late-September rally to raise $145 million and ended Q3 with 222.5 million (approximately $260 million) in cash and equivalents on a pro-forma basis (the underwriters took advantage of the overallotment option in early Q4). Cash burn in Q3 2017 was roughly $35 million but will probably increase in 2018 since two candidates are advancing into the clinic in the following months/quarters. The company may need to raise additional funds in late 2018 or in 2019, but it also has other options to raise cash it could partner one or more of its three candidates. The company said it intends to keep the U.S. rights and that it might partner outside of the U.S. Given the size of the addressable markets, strong pricing and potential differentiation of these three products, ex-U.S. partnerships could bring solid upfront and future milestone payments and generous royalty rates. But we may have to wait for positive phase 3 results of TransCon hGH to get partners really interested considering the high failure rates of long-acting hGH products.
Significant insider ownership and institutional accumulation
Based on Ascendis 2016 annual report, board members and senior management own approximately 10 million shares (roughly 20% of outstanding shares after the September offering). I havent seen any changes in insider ownership since then and assume their stakes are still substantial. Seeing such strong ownership and no insider sales is always a good sign.
Source: Ascendis 2016 annual report
And as mentioned in the introduction, strong institutional sponsorship is what attracted my attention in the first place. For a $1.3 billion company, Ascendis has really broad institutional ownership and is a high-conviction name for several biotech-focused funds. The offering in late Q3 has drawn additional interest.
The risks to the thesis are the usual ones for a development stage biotech company:
One or all candidates may fail in the clinic based on currently available data, this seems unlikely but is nonetheless possible. Even if they reach the market, the products might not live up to their potential due to competition, safety, tolerability or efficacy issues. The company will need to raise additional capital in the following years unless it partners one or more late-stage assets in the next 12-24 months. Raising capital could prove to be difficult if we see one or more setbacks of TransCon hGH and/or the other two candidates. Industry-related headwinds, such as pricing and/or reimbursement in the U.S. and elsewhere could reduce the peak sales potential of all of the companys products. Conclusion
I believe Ascendis TransCon technology platform is underappreciated and that TransCon hGH alone could drive significant upside in the following years. The company should soon have two late-stage assets as TransCon PTH should move from a phase 1 trial straight to a phase 3 trial in 2018 and TransCon CNP should not be far behind these two candidates. The company is in strong financial shape after the September equity raise. Important catalysts over the next two years include:
TransCon hGH enrollment closing by the end of 2017. This is not exactly a strong catalyst but will provide a timeline for the phase 3 readout in late 2018/early 2019. TransCon PTH phase 1 results in healthy volunteers in Q1 2018 (it could be as soon as early January, at the JP Morgan Healthcare conference, according to management comments on the Q3 earnings call) followed by the phase 3 trial initiation in 2018. TransCon CNP moving into the clinic in early 2018 phase 1 trial in healthy volunteers. TransCon hGH phase 3 topline results in late 2018/early 2019. This is by far the most important catalyst for the stock in the next two years. Partnered programs (Genentech, Sanofi) moving into the clinic no timeline here, the company did not provide any guidance. TransCon Treprostinil partnership and/or ex-U.S. partnership for TransCon hGH or other two candidates no timelines here either but possible in 2018 or 2019. Additional products entering the clinic and/or additional partnership announcements.
The stock is near all-time highs as a write this and could be considered as extended in the near-term, but I am not buying it for a short-term bounce or momentum run, this is a long-term investment with significant value creation potential. And what seems like a high price right now often proves to be a bargain in the long run. Of course, I would like to buy it cheaper if possible and will look to continue building my stake in the following weeks. I also think that the market has not fully accounted Versartis failure the stock is up roughly 25% since the failure, adding approximately $300 million to its market cap and a potential competitor with a 1+ year head-start that would have taken solid market share is now out of the picture. Based on my current model for TransCon hGH and the assumed market share split between OPKOs hGH-CTP and TransCon hGH, the elimination of somavaratan is worth at least $11-12 per share (or a third of the low-end of the valuation range) and probably more. I actually like Ascendis more at $35 with somavaratan out of the picture than I would have liked it at $25 for example with somavaratan approved and with a one-year head-start.
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Disclosure: I am/we are long ASND, OPK.
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.
Additional disclosure: This article reflects the author’s personal opinion and should not be regarded as a buy or sell recommendation or investment advice in any way.
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