XBiotech Inc.: Attractive Takeover Target After Compelling Phase II Atopic Dermatitis Results – Xbiotech (NASDAQ:XBIT)

XBiotech Inc. (XBIT) has not been kind to longs – especially over the last 3 years, as the promise of its key drug Xilonix for colorectal cancer was dashed in mid-2017. First, in April ’17, the EMA issued a negative vote sending the stock from $16 to $10 and then a further steep descent while failing the all-important US phase III trial into the $4 range where it has oscillated until today.

ChartXBIT data by YCharts

With the loss of colorectal cancer’s estimated $8B addressable global market, XBIT’s future seemed doomed to a slow death or very long recovery until any one of its unheralded drug prospects were to move forward.

Then, earlier this year in April, the company announced 2 separate phase II proof of concept trials for its drug candidate Bermekimab: one to evaluate atopic dermatitis or AD and the other targeting Hidradenitis Suppurativa or HS. HS has an addressable market of around $500M with negative 4.2% CAGR.

On the other hand, atopic dermatitis has a $4B addressable market with a positive 7.8% CAGR. There are an estimated 18 million people with AD in the United States and the incidence is believed to be increasing in industrialized countries. Nearly 7 million people in the U.S. are believed to have atopic dermatitis that is considered moderate to severe, which is the disease severity of subjects to be treated. Overall, the disease affects about 10% of children and 7% of adults in the U.S. and can often be debilitating, particularly when it is accompanied by severe and unrelenting itch.

With an addressable market of almost tenfold over HS and Xilonix out of favor, the AD trial pathway has become the last real hope for the company. Nobody was holding their breath.

The company split the trial for AD into a low dose cohort of 200mg/weekly injection over 4 weeks to be followed by a high dose cohort of 400mg/weekly over 8 weeks. The low dose cohort results were released September 13 (see here) and even though the results were touted by the company as significant, the numbers were simply not impressive enough compared to Sanofi’s (NYSE:SNY) already approved Dupixent (Dupilumab) and AbbVie’s (NYSE:ABBV) phase II candidate Upadacitinib’s announced results (see here). Investors were not excited. The stock languished.

Last week, though, the company released some stellar results for the high dose cohort. See the full release here: high dose cohort results. Here are the key findings:

While clinically and statistically significant improvement was seen for all clinical endpoints in the high dose group, also notable was the speed, magnitude, and trajectory of responses seen. In the high dose group, for example, after only four weeks of treatment, 61% of patients achieved a 4-point improvement in the Pruritus Numerical Rating Scale (NRS), a key method used to measure itch in clinical trials for atopic dermatitis and 75% of patients achieved a 4-point improvement by week 7. For the only biological therapy currently approved to treat atopic dermatitis, dupilumab, which was granted breakthrough designation by the FDA, only 16-23% of patients achieved a 4-point NRS improvement after 4 weeks of therapy and only 36-41% of patients achieved a 4-point improvement by week 16.

Another key measure of efficacy in the XBiotech study was the EASI. In the study, 39% of high dose patients achieved 75% improvement in EASI score (EASI-75) after 4 weeks of therapy and 71% of patients achieved EASI-75 at week 7. Of note, participants were not allowed to use concomitant topical corticosteroids during the study and thus these improvements were most likely due to the study drug alone. The only approved biological therapy, dupilumab, reports only 44-51% of patients achieved EASI-75 by week 16.

The competition which the study refers to, Sanofi’s/Regeneron’s (NASDAQ:REGN) Dupixent (dupilumab), is clipping along at forward annual sales approaching $1B in just over a year from approval.

So, here we have a drug that clearly outperformed the standard of care, did it without using corticosteroids, and did it over a much shorter time frame.

Potential risks to this thesis are that the small size of this proof of concept trial may not be representative of a larger full-scale trial. And safety concerns were not addressed in this trial – although one lead investigator reported, “Bermekimab provided relief to my patients with skin disease with excellent safety.”

These extremely impressive early results for a drug in a large addressable market with only one recently approved drug will no doubt attract outside interest from Big Pharma.

In July, Novartis (NYSE:NVS) agreed to pay MorphoSys AG (NASDAQ:MOR) up to $1B in upfront and milestone payments plus low teen to low twenties royalties for their own AD candidate in the wake of its Phase I study (here). And here again, Bermekimab’s results appear to be clearly superior with 71% (out of 38 patients) achieving Easi 75 (a much higher standard) vs. MorphoSys 83% achieving the lower Easi 50 level and with a smaller sample size (5 out of 6 subjects).

Last week’s compelling results clearly warrant an incremental re-rate of the stock. And, if Bermekimab is able to replicate these results over a larger sample size in upcoming trials with a safety profile equal or better than the approved drug, XBiotech will likely receive a market re-valuation, either organically or through takeover, at a significant multiple to current levels.

Disclosure: I am/we are long XBIT. 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.

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