KOD - Kodiak Sciences: All Eyes For A Sentiment Turnaround After Positive Beacon Results

• Kodiak Sciences is a biotech company looking to improve standard of care in different eye indications.
• In February 2022, the stock had sold off 80% on a Phase 2b/3 failure, and never recovered.
• Kodiak Sciences now reported meeting the primary endpoint in its Phase 3 Beacon trial in retinal vein occlusion, with a $28 billion global market in 2028.
• Kodiak Sciences had $671 million in cash at the end of Q1 2022, and keeps on trading below cash value.
• With global markets in different indications worth over $40 billion, I expect sentiment on the stock to turn bullish.

Thesis

In February 2022, the stock of Kodiak Sciences (KOD) crashed 80% as the company read out results in wet age-related macular degeneration or wet AMD, thereby shedding over $2 billion in market value. It was one of the worst drops I had seen in the biotech bear market, wiping out an enormous amount of value in one trading day. The stock never recovered afterwards, and different analysts slashed their price targets, some of which were in the range of $150 and $175. The sell-off, particularly in the midst of an impressive biotech bear market, came to the point where Kodiak Sciences was featured second in Morgan Stanley’s list of companies trading the most under cash level. This is the stock’s three-year-chart.

I found three things interesting here:

- all of the addressable markets are huge; the market for retinal vein occlusion alone is worth $25 billion by 2028, and I estimate the addressable market for the US to be worth $15 billion;

- the readout was due to poor trial design, as more frequent dosing in different trial arms should have been included, but the company claimed it could address that in the upcoming trials;

- the upcoming readouts are all Phase 3 trials, meaning Kodiak Sciences’ pipeline is very late-stage.

On August 8, 2022, Kodiak Sciences reported a success in its Phase 3 trial for retinal vein occlusion. This means the stage of BLA and approval is approaching which should lead to a considerable re-evaluation of the stock. Further study results will be presented in September 2022. I believe the readout will create bullish sentiment around the stock and the other trials. I expect the market to reassess Kodiak Sciences’ potential for success in the upcoming Phase 3 trials, and to give Kodiak Sciences a valuation that is in line with the positive readout it just did in retinal vein occlusion.

Company

Introduction

Kodiak Sciences is an ophthalmology company with lead drug candidate KSI-301 in several Phase 3 trials for different retinal vascular and exudative diseases, namely wet age-related macular degeneration ((wet AMD)), diabetic macular edema and retinal vein occlusion. This includes the leading causes of blindness. KSI-301 is a novel anti-VEGF antibody. Phase 3 trials in different diseases are to test durability, efficacy and safety of KSI-301 as compared to standard of care which in most cases is Regeneron’s aflibercept/Eylea, in essence because standard of care treatment requires treatment to reoccur every month or every two months after the initiating 5-dose regimen has been administered, which is considerably often and in practice does not bring hoped-for results.

KSI-301’s goal is to reduce the number of injections patients require, with resulting long-term efficacy and improved visual acuity outcomes. It basically hopes to do better than Regeneron’s Eylea/aflibercept in different eye indications.

Kodiak considers its drug candidate KSI-301 to work much longer, and to have substantially better results than aflibercept, with regards to among other intraocular half-life, retinal bioavailability, inhibitory potency and duration of systemic clearance. This should improve treatment outcomes.

The Phase 1b study indeed confirmed that in different indications, KSI-103 had a good safety profile and indeed showed unprecedented durability (4-6 months or longer), after only three initiation doses. In practice, I do believe that a treatment regimen of only once every four or five months would make a major difference for patients.

On November 20, 2022 , Kodiak then picked up $645 million to pursue its Phase 3 goals.

Kodiak’s pipeline

This was the pipeline prior to the readout in retinal vein occlusion:

With the exception of daylight, these Phase 3 trials are fully enrolled.

The Phase 3 Beacon study for retinal vein occlusion will be discussed below.

The Phase 3 Daylight study in treatment-naïve wet AMD treats 500 patients worldwide for a duration of 10 months, with among others the goal to show improved patient outcomes and to reduce barriers to market access. This study uses monthly dosing, and on May 10, 2022, Kodiak announced that it would be extending the duration of the study to 48 with mean change in best-corrected visual acuity (BCVA) from baseline at the average of weeks 40, 44 and 48 as primary endpoint.

The Gleam and Glimmer in treatment-naïve diabetic macular edema treat 450 patients each for a duration of one year. On May 10, 2022, Kodiak announced that the trial design was modified to avoid risk of undertreatment. Retreatment of patients would be possible earlier, and in cases of persistent disease. The primary endpoint of the trial was also extended by three months so as to better evaluate durability, efficacy, and safety at the average of weeks 60 and 64. Patients will continue to be treated for two years after the initial readout.

The Glow study in patients with non-proliferative diabetic retinopathy treats 240 patients for a year.

The Phase 2B/3 ‘Dazzle’ readout in wet AMD

However, its Phase 2b/3 ‘Dazzle’ trial readout in wet AMD is where it went wrong. In essence, Kodiak Sciences had to report that KSI-301 did not meet its goal of non-inferiority to aflibercept in. Its top-line results , followed by a webcast , showed that, whereas the majority of patients achieved durable visual gains, a minority did not, which would have been due to undertreatment of patients.

However, what the study did show was that 60% of the patients that were on the five-month regimen did tremendously well. In essence, Kodiak Sciences alleged it hit the balance between durability and efficacy wrong, and there was undertreatment in a strong minority of patients that influenced the results. That led the company and some analysts to consider that, had the trial been designed differently addressing that the minority of patients that required a more frequent treatment interval, the results would have been better. Also, the type of indication was different each time.

Retinal vein occlusion, for instance, is a more acute indication. The trial was designed to start with two loading doses, then further dosing every eight weeks and at week 20, to then have its endpoint at week 24.

Kodiak Sciences considered that the concerns coming from the failed readout were addressed in its other studies, namely in the Beacon study where proactive dosing was to take place every (eight) weeks, the Gleam and Glimmer where dosing was also possible as frequently as every eight weeks, and in the Daylight study where all patients are proactively treated on an every four week regimen.

The press release read:

As our understanding of KSI-301 and the different patient populations within retinal vascular diseases evolved, our study designs have also evolved. One significant factor that likely contributed to this Phase 2b/3 study missing its primary endpoint – undertreatment of a minority of patients – is addressed in BEACON (proactive dosing every 8 weeks) and GLEAM and GLIMMER (tighter dynamic retreatment criteria and dosing as frequently as every 8-weeks) and is not present in DAYLIGHT in which all patients are proactively treated on an every 4-week regimen.

The successful Phase 3 Beacon trial in retinal vein occlusion

The Beacon study enrolled 550 patients with treatment-naïve macular edema due to retinal vein occlusion (RVO). Retinal vein occlusion is in indication in which a vein in the retina which serves to drain the eye becomes blocked. As a results, the retina becomes swollen.

For the first six months which is the moment of the primary endpoint, patients would receive either KSI-301 every eight weeks, or aflibercept monthly. Thereafter, patients would receive individualized treatment, after which for an additional six months, patients can continue to receive KSI-301.

On August 8, 2022, Kodiak reported positive topline results from this study. Kodiak reported that two-month dosing of KSI-301 compared to dosing each month of aflibercept met the primary endpoint of non-inferior visual acuity gains, while being well tolerated. The study results will be announced at a scientific meeting in September 2022.

This is good news, particularly because Beacon was the study for which Kodiak had been unable to change the trial design. This had led Citi’s analyst Neena Bitritto-Garg to place a sell rating and a price target of $6 on the stock on August 2, 2022, only days ahead of the readout.

In an acute indication, Beacon successfully doubled the treatment interval without notable side effects. It probably could have done even better if it would have had the chance to incorporate the teachings of the Dazzle study in its trial design. I therefore rate this readout as a big success, one I had not expected, truthfully.

KSI-301 was well tolerated, although a slightly higher level of intraocular inflammation was detected compared to aflibercept ((1.4% vs 0.4%)).

That means Kodiak Sciences will now be setting up to file a biologics license application (BLA) for retinal vein occlusion.

Estimates of the addressable markets

The markets Kodiak Sciences is addressing are huge, and if Kodiak has success in any or more of these, then BLA filing and chances of approval may be right around the corner. To give an idea, these are some numbers for retinal vein occlusion alone.

Retinal vein occlusion ranks second as the most common retinal disorder worldwide, affecting 16.4 million people. The US market for retinal vein occlusion would be 2.5 million patients. At an estimated cost of KSI-301 of $1,500 per treatment, with at least four treatments and probably more, for the U.S. alone, this leads to a total addressable market of $15 billion.

In earlier coverage, Seeking Alpha author Terry Chrisomalis had reported that the global retinal vein occlusion market was estimated to be worth $25.66 billion by 2028.

The global diabetic retinopathy market for is estimated to be worth 10.78 billion by 2030.

The global market for wet AMD was reported to be worth $8.6 billion in 2018.

The diabetic macular edema market is estimated to be worth $4.87 billion by 2028.

Combined, that would be a market of at least $40 billion.

Meanwhile, Kodiak Sciences keeps on trading significantly below cash value.

Catalysts

The readout of August 8, 2022 in the Beacon trial was clearly a catalyst which the market has not yet fully appreciated in my opinion. I saw the price open at +20%, to then quickly drop to single digits. Meanwhile, I do see a good amount of trading volume in the stock.

As for future catalysts, I see the following:

- further data of the Beacon trial at an ophthalmology conference in September 2022;

- data from the Daylight trial in wet AMD in mid 2023;

- data from the Gleam and Glimmer trial in diabetic macular edema in mid 2023;

- I expect data from the Glow study in diabetic retinopathy some time in the second half of 2023, but this is to be confirmed.

Financials and ownership

At the end of the first quarter of 2022, Kodiak Sciences sat on a cash position of $671.7 million. For the year 2021, its average cash burn was around $65 million. With all of its studies enrolled, Kodiak burnt $95.7 million last quarter and $267 million in 2021.

Insider ownership stands at 7.91%. Institutions are holding 86.14% of Kodiak’s stock. The short interest is 8.77%.

Risks

Risks here are that the company’s upcoming readouts are not as expected above. The Phase 3 readout in wet AMD could be inferior to aflibercept, even with a changed trial design. If a drug fails in a Phase 3 trial, this will always impact the stock negatively.

Furthermore, any approval depends on regulator’s screening, and it's still not sure whether the FDA will approve KSI-301 as a novel treatment for eye diseases.

Conclusion

Kodiak Sciences has now successfully read out the first of its Phase 3 trials, namely the one in retinal vein occlusion. The total addressable market here could be worth $15 billion for the US alone. Global markets for the different indications it is testing its drug KSI-301 in are worth over $40 billion.

Meanwhile, Kodiak Sciences keeps on trading below cash value. In fact, in February 2022, the stock sold off tremendously after a negative Phase 2b/3 readout in wet AMD. The company stated, however, that this was due to sub-optimal trial design, which it addressed in the upcoming Phase 3 trials, including the one in wet AMD.

The Beacon study in retinal vein occlusion, which has now read out and which had not been able to be designed differently, has nonetheless led to positive topline results without notable safety issues.

The stock keeps on trading below cash value. For me, the question "how long will this be" is a question of timing.

My assessment here is that positive sentiment will return to this stock, and that it will slowly grow to a position substantially higher than a position around its cash value. In fact, after a Phase 3 trial, the only thing that is left is approval.

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