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AZRX: Non-systemic Focus on the GI Market

01/25/2017
By John Vandermosten, CFA

NASDAQ:AZRX

We are initiating coverage of AzurRx BioPharma, Inc. (NASDAQ:AZRX) anticipating a 2020 launch of AzurRx’s lead compound either alone or with a partner.  AzurRx specializes in non-systemic therapies focused on the micobiome and gastrointestinal diseases.  Their in-development biologic products are currently focused on exocrine pancreatic insufficiency and the prevention of Clostridium difficile infections.

The lead compound, MS 1819, is a yeast-derived lipase enzyme used to compensate for exocrine pancreatic insufficiency (EPI).  The compound has several superior characteristics compared to standard EPI therapy, demonstrating increased efficacy in low pH environments and derivation from a non-porcine source.  Currently MS 1819 is in a Phase 2 trial which we anticipate will be concluded before year end 2017.

The company’s second compound in development is AZX 1101.  This is a recombinant β-lactamase derived from a bacterial source to address hospital-acquired infections acquired as a result of antibiotic use.  AZX 1101 is currently in preclinical development and will soon commence in vivo studies in animal models.  While the market opportunity is substantial, due to the early stage of development we do not attach any value to AZX 1101 in our analysis.

Based on the anticipated length of the Phase 2a trial, we expect the initial topline data readout from the first treatment cohort to occur in 1H:17.  Assuming necessary funding is obtained, we expect the larger Phase 2b trial to start shortly after, with results available in early 2018.  The company’s first priority is to launch in the United States then pursue other regions as approvals are obtained.

Several factors support our positive view of AzurRx, including market size, favorable characteristics of their lead compound which support market share gains and pricing power, and a pipeline of assets focused on non-systemic recombinant proteins.

Investment Thesis

AzurRx has developed a core competency in non-systemic biologics that employs recombinant proteins for the treatment of gastrointestinal diseases and microbiome related conditions.  The company’s pipeline consists of two compounds.  The first of which is a recombinant lipase enzyme for the treatment of EPI, which is currently in Phase 2 testing with expected topline results in 1H:17.  The second is another recombinant enzyme intended for the prevention of nosocomial infections; specifically Clostridium difficile.

The company’s lead product, MS 1819, is produced from the genetically modified yeast Yarrowia lipolytica, and has shown favorable characteristics compared to the current standard of care for EPI.  Shortcomings in the use of currently approved pancreatic enzyme replacement therapy (PERT), such as pill burden, animal sourcing and poor efficacy in low pH environments may be solved with MS 1819.  The agent’s profile appears to address many of the shortcomings based on the preclinical and Phase 1 data generated to date and current Phase 2 efforts should produce results which strengthen the argument for AzurRx’s lipase product.  The market for MS 1819 is potentially large given the size of the baseline cystic fibrosis (CF) and chronic pancreatitis (CP) patient groups and possible expansion into other disease states.  Given the non-systemic nature of MS 1819, the off-target effects of the drug are expected to be minimal, supporting a favorable safety profile.

EPI is associated with CF and CP but may also be the result of other conditions including diabetes and irritable bowel syndrome.  Based on a variety of data sources, a conservative estimate of EPI incidence in the United States is approximately 120,000 patients and potentially a similar number outside the United States.  Currently, there are no disease modifying therapies or a cure for EPI, leaving PERT as the standard of care.

Due to the benefits that MS 1819 provides over current PERT therapy, we believe that the company will be able to price MS 1819 at a premium to current products, assuming clinical trials continue to bear out the superior efficacy and safety of the drug.

While our target price is generated based on the anticipated performance of MS 1819, the other asset in the portfolio could also potentially add substantial value.  AZX 1101 is a non-systemic, recombinant β-lactamase designed to protect the natural gastrointestinal microflora from the use of intravenous β-lactam antibiotics in a hospital setting.  While it is currently specifically intended to protect against the β-lactam family of antibiotics, AZX 1101 has the potential to inhibit the activity of aminoglycoside, fluoroquinolone and other antibiotic groups as well.  Potential addressable market size could be from $4.5 to $11 billion
 and consist of 14 million patients.

AZX 1101 is currently in the preclinical stage and progress is expected to move slowly given the emphasis on MS 1819.  The company is in the process of developing an investigational new drug application which may be submitted in FY:17.

Key reasons to own AZRX shares:

Lead candidate MS 1819 adresses many of the shortcomings in other PERT
- Non-systemic, non-porcine derived lipase enzyme
- Improved efficacy in acidic environments
- Elimination of exposure to porcine and animal contamination risks
- PERT addressable market size in AZRX territories is several hundred thousand
- Potential for development of other non-systemic recombinant proteins

MS 1819

At current, the most widely used therapy for exocrine pancreatic insufficiency is the administration of pancrelipase, however, it has a number of limitations.  These include poor stability in gastric environments, limited effectiveness and the related problem of a high pill burden, reliance on porcine inputs and the related issue of exposure to infectious agents, and possible adverse events at high doses. Of the three primary enzymes present in pancreatic enzyme supplements, lipase is the most important target given that the majority of calories consumed come from fat.  The other digestive enzymes produced by the pancreas, amylase and protease, are also produced in the mouth, stomach and small intestine.

Microbial lipases with a fungal origin have shown promise, especially with respect to their stability in highly acidic environments.  Two of the leading candidates in this class include Aspergillus niger and Yarrowia lipolytica that, in contrast to some other fungi, are not sensitive to trypsin or the action of bile salts.  They show stability in acid and alkaline environments, and can function without bile or colipase.  AZRX has recognized the potential efficacy of Yarrowia lipolytica and is currently developing MS 1819 based on this unicellular organism.

MS 1819 is a non-systemic, yeast derived recombinant lipase enzyme.  Enzymes are catalysts for chemical reactions where they act upon substrates to convert them to different molecules.  The non-systemic nature of MS 1819 allows it to work and remain in the gut, without reaching systemic circulation and therefore avoiding potential negative side effects outside the GI tract.  The recombinant enzymes are manufactured in a controlled laboratory setting in contrast to the process used to manufacture pancrelipase derived from a porcine source.

MS 1819 is delivered as an oral capsule for the treatment of EPI for the treatment of CP and CF.  The recombinant formulation avoids potential pork viral contamination risk and offers superior features evidenced in preclinical testing.

Conclusion

Exocrine pancreatic insufficiency is a disease with a treatment that has seen little improvement in the last century.  The disease affects 120,000 cystic fibrosis and chronic pancreatitis patients in the US alone, as well as others with diabetes, irritable bowel syndrome and related conditions.  Currently, there is no cure for EPI and treatment with porcine derived pancreatic enzyme replacement therapy representing the recognized standard. There are a number of shortcomings with current PERT, and MS 1819 serves to address some of them.

Based on the preclinical and clinical work, MS 1819 has shown superior activity in highly acidic environments, and acceptable safety in animal models and humans. Given this advantage and others, we believe that the agent can command a premium to current PERT and take share from what we feel is an inferior product.

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