With hundreds of public biotech companies on the market, it can seem impossible to determine which ones are worth watching and which are worth tossing. However, for the enterprising investor, taking the time to dig often results in above-average returns. Even after gaining 800% since its low in 2015, however, small-cap biotech Aquinox Pharmaceuticals (NASDAQ:AQXP), may still have room to run.

Cracking a tough-to-treat condition

Aquinox Pharmaceuticals is a clinical-stage biotech company working on developing therapies for interstitial cystitis/bladder pain syndrome (IC/BPS). IC/BPS is a chronic bladder pain condition that affects an estimated 1.3 million Americans. The syndrome is characterized by frequent and painful urinations. To date, the cause of this disease is unknown, and there is no cure available. Currently, the only approved medication for IC/BPS is Elmiron, an oral drug marketed by Johnson & Johnson which was approved in the 1990's. However, sales of Elmiron are low due to the requirement of taking three capsules per day and the drug only being effective in a small percentage of overall IC/BPS patients.

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Aquinox's only product in development is AQX-1125, a once-daily oral being studied in IC/BPS. Back in June of 2015, Aquinox released data from its phase 2 trial of AQX-1125 in IC/BPS. The primary endpoint of this study was the difference in mean daily bladder pain score (DBPS) based on an 11-point rating scale. While AQX-1125 did reduce the mean DBPS by 2.4 points vs 1.3 points for placebo, this difference was not statistically significant (p = .061). For reference, a p-value of .05 is generally considered the upper boundary cutoff for statistical significance, and the closer to 0 the more significant.

A glimmer of hope

While this failure to achieve statistical significance in phase 2 would be disastrous for most clinical-stage biotechs, Aquinox released secondary endpoint data soon afterwards that may point toward the possibility of higher efficacy than originally thought. In particular, as measured by the O'Leary-Sant Interstitial Cystitis Symptom Index and Problem Index (ICSI/PI), a combined, comprehensive measure of the symptoms and problem index, AQX-1125 handily beat placebo with an improvement from baseline of 7.2 points vs 2.8 points for placebo (p = .008). Furthermore, upon more in-depth review of the data, the company reported that pain scores for patients receiving AQX-1125 began diverging from placebo at week 2, and this divergence increased the longer the study went on. While the final measurement was taken at week 6, management believes that a longer study would have achieved statistical significance.

Aquinox is currently enrolling patients in its phase 3 LEADERSHIP 301 trial for AQX-1125 in IC/BPS patients. The trial seeks to enroll a minimum of 300 female patients (IC/BPS disproportionately affects a greater number of women than men) and up to 300 male patients across the U.S., Canada, and Europe. The primary endpoint of this study is again the measure of the difference in mean DBPS as compared with placebo. However, this time the measurement will be taken at 12 weeks rather than 6 weeks. Top-line data from this trial is expected in the fourth quarter of 2017.

The market and valuation

Aquinox management strongly believes that the addressable market for AQX-1125 is both large and underserved. The possibility of AQX-1125's approval would result in a well-tolerated therapy with a higher degree of compliance. Aquinox, which is currently just a $400 million market cap company, has targeted peak sales of AQX-1125 at $1 billion plus. For reference, Elmiron has previously generated over $250 million in annual sales. Should AQX-1125 succeed in phase 3 trials and Aquinox management prove correct in their sales estimates, shares of the company could easily double or triple from today's levels.

The trouble with small biotechs

It must be stressed that there is almost never such a thing as a non-risky biotech. Especially in the small-cap space, a single trial failure could obliterate share prices. In addition, even if AQX-1125 is successful in phase 3, the company would almost certainly need to raise equity in order to fund commercialization of the product, as the company has just $146 million in cash and short-term investments on its balance sheet. However, for the risk-tolerant biotech investor, Aquinox might just be a smart buy.