Clarity Pharmaceuticals

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Clarity, along with most Aussie biotech, has been caught in a double whirlwind: a sharp sell-off in US healthcare stocks and the failed trial results of Opthea.

This has led to liquidations by both funds and retail investors alike.

Short selling and finance

Shortselling has been a key driver, often accounting for over half the daily volume, perhaps by the same managers who were in Opthea.

Part of this is simply a momentum unwind. Clarity went up in basically a straight line from $1 to ~$9. At the peak everyone was talking about it, and anyone who liked the story bought it. This is very different from some of our other holdings, who nobody seems to have ever heard of.

Usually, it’s best for companies to raise into this kind of enthusiasm.

But once the whole market acquainted themselves with the opportunity and either bought or didn’t, the buying burned out and momentum reversed. A friend asked how far momentum unwinds go… the answer is all the way.

Clarity has two ambitious programs - there’s ~$20 billion of market cap in diagnostics, and the therapeutics opportunity is even greater: Pluvicto made US$1 billion in its first year, and is targeting US$5+ billion/year after a recent label expansion.

Tackling markets this size needs capital - but it’s worth highlighting the scale of the opportunity relative to Clarity’s US$400m market cap.

There’s two good things about a high level of short interest:

1. If the company needs it, there’s capital available. In a way, it’s like spreading a raise over an extended period of time, though I’m sure management will do their utmost to make sure shortsellers don’t get stock. In that case, shortsellers will be in a tough position, stuck with large bets against a freshly funded company, 6-12 months further along in their clinical pipeline, with no capital overhang.

2. The same way momentum burned out at the top, shortselling burns out too. Once a stock puts in a low and starts rising, shortsellers quickly come under pressure. A long-term investor can buy a stock and effectively never sell. Shortsellers have to buy back, and given the uncapped risk, have to close positions as they rise. Carvana was the most stark example of this.

Shorting is a risky game down here. It’s a lot easier to lose money selling in the hole than it is making it back another way - trust me.

I also prefer it when the short thesis is out in the open.

The company has options, with $106 million of cash. Last week they announced a non-dilutive $11 million R&D grant and cut non-core programs, pushing out their runway, which already extends past major readouts over the next year. And there is always the prospect of a non-equity deal/licensing arrangement, which would again leave shortsellers stuck in their positions.

Biotech market

The last two months have been particularly bad for biotech. In the United States:

1. There were significant funding cuts (and more threatened) to universities and research institutes. Some of this is political brinkmanship, with aggressive moves against institutions like Harvard, who have responded by saying they will cut R&D, rather than say, administrative overhead.

2. RFK Jnr, Secretary of Health and Human Services is openly hostile to big pharma, and it’s not clear how that manifests or affects big pharma appetite for deals. Clarity’s rise last year was supported by major acquisitions in the space, but pharma CEOs may be more inclined to wait and see how all this this all plays out before making moves.

3. There has been headcount reduction at the FDA. The administration insists these are to non-essential staff, and every company I’ve spoken to says they’re still dealing with the same people. And there was a massive expansion in headcount over the last few years, so in context this looks overplayed. But it’s not helpful for sentiment.

This interview with new FDA Commissioner Marty Makary is worth listening to - you’ll probably find yourself agreeing with most of it. There’s a keen focus on speeding the approval process in areas like rare diseases.

In Australia, institutional and retail investors are digesting losses at Opthea, and at least one firm is pulling back from the market (also rumoured to be a shortseller of CU6).

This may have been behind the odd movement in $EBR last week, when an FDA approval lead to a falling share price. There are only certain days where big funds can trade, so it looks like a fund took the liquidity opportunity to raise cash.

A shortseller has to consider whether Clarity’s price today, reflecting the bleak outlook above, might be very different in 6-12 months time, after another year of clinical progress.

Which is worth going through again, as Clarity has put out some great recent updates that have not been appreciated by the market.

Therapy

Clarity expanded the number of patients in their major dose escalation trial, including earlier stage patients and a group that will pair their treatment with Enzalutamide.

Professor Louise Emmett showed combining radiotherapy with enzalutamide improved survival, and including this cohort in a future Phase III could position a Clarity/enzalutamide combination as best-in-class for the large pre-chemotherapy patient population.

[Enzalutamide is a first-line androgen receptor pathway inhibitor (ARPI) which knocks out testosterone, which can dramatically slow prostate cancer progression, albeit with significant side effects.]

The cohort expansion phase has been expanded from 14 patients to 24. This will push out the readout date to early next year, but gives important data for an expanded Phase III which could lead to approval in an earlier setting, and with a proven combination.

Therapeutic Data

In Clarity’s current dose escalation study, after only a single cycle, Clarity is running ahead of Pluvicto’s result.

Summarizing the highlights of their therapeutic data so far:

• Disease control was achieved in 78% of patients, all who had failed multiple rounds of treatment,

• In the prechemo setting:

  • disease control was achieved in 11 out of 12 patients,

  • 62% of patients had a PSA drop of over 50%, 47% had drops of 80%,

  • In one very sick, heavily pretreated group, three patients had already been treated with an actinium radiotherapy, and one with Pluvicto, to no avail. With Clarity’s treatment all showed reductions in PSA, with one over 80%.

    • Improving patient outcomes at the end stage after competing approved and experimental radiotherapies gives us significant confidence CU6’s reagent will have a role somewhere in the treatment timeline. There is certainly value here.

• The first patient to be treated with two doses of 8GBq achieved a Complete Response, despite having already had chemotherapy, Androgen Deprivation Therapy, 2 different ARPIs, and another investigational treatment. This was a very sick patient, and the complete response was confirmed by PET and PSMA.

• In Cohort 2, which received a single 8GBq dose, 3 out of 3 patients had disease control, with PSA reductions of 81%, 95%, and 99%.

  • In the expanded cohort, patients will receive six 8 GBq cycles

• The first patient to have a Complete Response (after 2 x 8 GBq cycles) still has undetectable disease (there are now two complete responses).

Diagnostics

This is the more controversial part of Clarity, as two existing competitors have built substantial businesses over the last few years by replacing bone scans. Their radioactive isotopes of fluorine and gallium isotopes have short half-lives (1 hours and 2 hours respectively), so this was no mean feat of execution.

The question is, what would it take for physicians to replace their current work flow?

Conversations with KOLs confirm a firm willingness to do this, if the data shows it worthwhile. Existing agents have low sensitivity, uncovering lesions of ~4-5mm, so they miss smaller metastases which might otherwise be successfully treated. Furthermore, a negative test can only give so much comfort, given the scans can miss dangerous lesions. If you missed it, you can watch our interview with Professor Louise Emmett here.

In trials so far, Clarity’s agent has been able to identify lesions as small as 2mm, and prior trials changed treatment plan in roughly half of patients.

Along with two Phase 3 trials in diagnostics, Professor Louise Emmett is running a head-to-head comparison of Gallium-68 vs Clarity’s Cu-64. This is highly encouraging, as biotech companies generally only do head-to-head trials when they’re highly confident of the outcome, as a failure can kill a program. And within a year we will have readouts from all three trials, and a firm body of evidence targeting significant revenues in 2027/2028.

Diagnostic Data

In prior trials, Clarity identified lesions in 90% of patients on next-day imaging, vs only 60% using current standard-of-care diagnostics, a difference of 30%.

This is game-changing if repeated, as if you have metastatic lesions you really want to know, and as soon as possible, to give the next line of treatment the best chance of success.

Clarity identified 52.6 lesions on average vs the current standard-of-care identifying only 20.

This means lesions can be identified and treated earlier - 29 days to 6 months, which can mean the difference between successful treatment and fatal progression.

Biochemical recurrence is the larger of the two diagnostic target markets. Early detection is critical, as Salvage RadioTherapy (SRT) is potentially curative, particularly if recurrence is detected early and lesions are precisely and aggressively targeted, which Clarity’s more precise next-day imaging allows.

This needs to be confirmed in the current Phase 3 trials, but unlike a drug, where early trials include healthy patients and skew the data, and side effects often only appear in larger populations, there’s little reason to think the result won’t be repeated.

Ultimately diagnostics are only relevant if they change treatment. There are a number of ASX diagnostic companies periodically doing the rounds, but a challenge some of them face is that the test works, but is unlikely to change treatment plans and outcomes.

Which is why it’s so relevant that in this case, investigators said they would change their treatment plan in 48% of patients with Clarity’s diagnostic.

Notably, the head-to-head trial and Phase III trial testing Clarity’s diagnostic in biochemical recurrence will both read out this year. So shortsellers will have to sit through these readouts or derisk in advance.

Outlook

Over the next twelve months we’ll have readouts from multiple diagnostic trials, and additional cohort data from the dose escalation trial.

This is no Opthea - from multiple trials that is highly consistent and market-leading.

The unlock comes from the chemistry - the sarcophagine cage with two PSMA linkers is clearly more powerful than single linkers, and the longer half-life (12.7 hours for Copper-64) vs the 1-2 hours of competitors is a major chemical advantage, allowing for next day imaging when the radioactive particle is concentrated in cells.

The context is also important - prostate cancer is arguably over-treated, with many patients being cured at the cost of impotence and incontinence. A test that can only see 4-5mm lesions is clearly capturing them too late, but more importantly, is not sensitive enough to give patients and physicians confidence that a negative test won’t missing lesions that will lead to incurable progression.

The diagnostics market is forecast to reach US$3 billion by the end of this decade, and if there’s a test that offers significantly greater sensitivity, physicians will use it and patients will insist on it.

Meanwhile Clarity’s therapeutic is clearly effective in the sickest patients who have failed all prior lines of treatment, including other radiopharmaceuticals. With low side effects, this will almost certainly find a use. But the data so far suggests it may well prove superior to the existing radiopharmaceutical on the. market for prostate cancer. It may be hard to imagine a company outcompeting a major pharma co like Novartis, or taking market share from companies with $18 billion of market cap, but if the data shows it that’s exactly what will happen.

Understandably, patients and physicians are desperate for the best possible treatments and diagnostics.

Aussie bio got whacked in 2022, but nothing like what we saw in the United States, when nearly half of biotechs (which discover 50-60% of new drugs) traded below cash.

In the immediate aftermath there was a wide dispersion. Companies with ‘platform’ or ‘thematic’ value didn’t recover, but from low bases, those that succeeded in the clinic appreciated 5-20x from the lows, sometimes in a matter of days or weeks.

If Clarity’s data continues to shine and the data readouts match earlier trials, they stand to gain a decent chunk of US$3 billion near-term diagnostic and US$5 billion therapeutic markets in the mid-term, though at moments like this market participants, professional and retail alike, discount long term plays to oblivion.

In other words, with more data, the risk is lower today than a year ago, and off a much lower base, potential return much higher.

We’ve recently bought back the shares we sold several turns higher, and Clarity is ~8% holding for us. If anything, we would buy more.

Michael