Geniptope: Remarkable Cancer Product, But Business Prospects Weak (GTOP)

Geniptope (GTOP) is a cutting-edge biotech company, pursuing a miracle of modern science: personalized cancer treatment. It’s product is a 'wow', but GTOP’s business prospects and financial upside are weak. GTOP’s lead product is entering a highly competitive market, and the company faces deep pocket competitors. Further, GTOP’s products require lengthy clinical trials, requiring investors to wait without news for long periods of time.

GTOP’s current valuation embeds the best of all commercial outcomes. But if expectations about pricing or market share are revised downward to a more reasonable level, GTOP’s current value is zero.

Conventional Wisdom: GTOP’s lead product, now in Phase III trials, is an agent that stimulates the cancer patient’s immune system. The agent is tailored to the particular genetic markers of the cancer patient. In December, GTOP released 5-year follow-up results from their Phase II trial showing that nearly half of the 21 trial patients were in remission, despite a poor prognosis at the beginning of the trial. (The poor prognosis was a requirement for trial entry.) Interim Phase III results are expected in the first half of 2006, final data in 2008, and first revenues in 2008.

GTOP is covered by five equity analysts at companies that have performed investment banking services for GTOP or make a market in GTOP’s stock. None are first tier. Currently trading at under $9 per share, analysts expect a small rise in GTOP during 2006 if there is positive Phase III news.

Growth Option: GTOP’s lead product, MyVax Personalized Immunotherapy, is aimed at the 13,000+ patients in the U.S. with newly diagnosed Non-Hodgkin’s Lymphoma. MyVax is expected to be appropriate for 85% of these patients. GTOP plans to establish a direct sales force to oncologists in the U.S. and will partner for sales in other regions. With five other Phase II trials underway, GTOP is poised to exploit the success of its lead product, MyVax.

Management Success Story [MSS]: If all goes well, management expects to complete Phase III trials by the end of 2007, and obtain revenues from MyVax in 2008. The MSS also includes a relatively high price for treatment per patient, $65,000, and 80% gross margins. Under the MSS, GTOP expects revenues of $300 million per year or more for MyVax.

Competitors: GTOP faces extremely strong competition for patients with non-Hodgkin’s Lymphoma, both from products currently in the market and others under development. Products in the market are:

* Rituxan, made by Genentech (DNA), currently is the market leader for the disease area and generated $1.8 billion in revenues for Genentech in 2005 (treatment cost of $9K per patient) Further Rituxan is used off-label for other cancers, making it omni-present with prescribing physicians.
* GlaxoSmithKline (GSK) sells Bexxar, with product revenues under $10 million (treatment cost of $30K per patient)
* Zevalin sold by Biogen (BIIB), had nearly $20 million in revenues in 2005 (treatment cost of $30K per patient)
* Chemotherapy is also used, as a substitute and a complement, and has a treatment cost of $9K- $12K per patient.

Companies with products under development for non-Hodgkin’s lymphoma include:

* Antigenics (Phase I)
* Biovest (Phase III)
* Coley (Phase I)
* Favrille (Phase III)
* Seattle Genetics (Phase I)

Key Suppliers: GTOP uses a compound derived from sea snails in its manufacturing and application of MyVax. This compound is only available from Biosyn, a German manufacturer. GTOP’s contract with Biosyn expires December, 2005. Also, GTOP relies on Medronics for specialty containers used in manufacturing. Medtronics is not the sole supplier of this item, but a change in suppliers would be disruptive to GTOP.

Confirmation of Quality of Science: GOI looks for confirmation of the quality of science from several sources: clinical trial sites; venture capitalists; and corporate partners. GTOP has had trials underway at Stanford University, NY Presbyterian, Cornell Medical School, UC San Diego and the University of Nebraska. A fair mix. GTOP has obtained more than $50 million in venture capital financing, but none from first-tier sources. Only one of its VCs appears to have a biotech track record.

Finally, GTOP has yet to close a corporate partnership. Although their announced strategy is to go-it-alone in the U.S., one would expect them to self-finance by licensing rights for Europe and Japan with big pharma. Certainly this should happen no later than May/June’06, based on the bet that interim Phase III results are strong.

Financing & Cash Flow: GTOP completed a secondary equity offering in February 2006, raising $58 million and bringing its total cash on hand $151 million. GTOP has a shelf registration of $62 million remaining. The company currently burns $4 million per month, and this is expected to increase in 2006 and 2007 to $7 million per month by 2008 as the sales expenses begin. GTOP is expected to go cash flow positive in 2010. While GTOP has more than two years of cash burn on hand, analysts expect it to need more than $150 million in the next 3 years to fund its numerous drugs currently in Phase II and ramp up in sales expense. At a current market cap of $246 million, an all-equity financing of the capital needs would lead to nearly 50% dilution.

Key Risks:

* GTOP is going after a small and crowded market. Its lead product addresses the needs of only 11,000 U.S. patients a year, so maintaining pricing is key to profitability.
* The MSS forecasts an average treatment cost of $65,000 or more per patient, but alternate treatments cost $30,000 and $9,000. (Two points of comparison: Genentech charges $54,000 per year for Avistan, a colon cancer treatment; and Bristol-Myers Squibb/ImClone charge up to $100,000 for Erbitux, a treatment for advanced colon cancer.)
* There is some concern in the industry that insurance providers and Medicare won’t pay for expensive treatments that only prolong life for some months or a few years.
* GTOP has not had the quality of its science confirmed by smart investors, either venture capitalists or big pharma partners.
* GTOP’s clinical trials are lengthy, so there is no quick resolution of risk.
* Gordon Denny, a financial manager at a clothing company in Arlington,Texas holds one of the six board seats. He appears to be a close relative of the founder and CEO, Dan Denny.

GOI Thesis: GTOP has higher than usual business risk for a biotechnology company because of the small size of the market it is addressing, potential price erosion and the need to gain market share from a strong incumbent. GTOP has the typical biotech capital needs, but its go-it-alone strategy might severely dilute shareholders.

What and When to Watch:

* By June 2006: Interim Phase III results will be released.
* By June 2006: A corporate partner for Europe and ROW should be announced, if GTOP is serious about making this happen.
* In Q306: 2nd Interim analysis of Phase III results.
* In Q406: Interim Phase III results will be released by Favrille, a competitor.
* By end of 2007: Phase III analysis complete, NDA to be filed
* Mid-2008: First revenues.

GTOP 1-yr chart:

Comments

[SevePC:]

This report is blatantly inaccurate and misleading on many counts. There could be a very strong value proposition given that it can help about 60% of NHL patients and of those it cn actually cure 50%.

Rituxin is standard of care currently and costs a lot more than $9,000. It actually costs between $500,000 and $1,000,000 from diagnosis to death. Rituxin, unlike MyVax kills all b-cells. Patients eventually become refractory to Rituxin and no other treatment alternatives exist. Iterestingly, Rituxin was invented by Ron Levy from Stanford University who is also the inventor of the personalized vaccine method that Genitope is commercializing. Furhtermore, the company isbeinning trials soon on a more targeted from a Rituxin which if successful would be a blockbuster drug inits own right.

The company has never disclosed what they intend to charge for MyVax so I don't know where Will Ray came up with $65,000. As far as it being a small market--nothing could be further for the truth as it is the 4th or 5th most common cancer with ~40,000 new cases per year (350,000 currently diagnosed) a large percentage are of the indolent variety which is what MyVax is aimed at.

Around 175 people have already been treated in a combination of phase 1 and 3 trials all of which showed similar results.

What Will Ray is missing is that NHL usually affects older people and being that the variety that GTOPis treating is slow to progress, there is no rush to treatment. They will likely find out about MyVax and demand it from their onclogists. Who would not want a 25% chance to be cured and worst case you can still go on to Rituxin at a later date given that the immune sytems are not compromised.

Valuing GTOP as worth 0 is ridiculous. I value this report a 0.

2006 Jul 26 11:32 AM

[martin belkin:]

Great analysis, Will, and right on the mark. Price fell from $9 to @2.40 in a three months. Thanks. We'll stay tuned to your future reports. BTW, someone posted your report on the GTOP board and it stimulated a huge response of animosity from the VCs backing Genitope. They don't like being told the (truth) that they don't have biotech experitse. On a related note, one of those VCs, (I wont say which) is juicing the perceived return of their fund by 1) not taking the managers fees they are due; and 2) taking the best investments from their own PERSONAL portfolios and selling them to the fund. This to avoid being associated with a failed fund.

Log on to Yahoo Finance / GTOP and search for your name. re: steven cordovano, one of the Genitope directors told me they expected to price it around $100,000. Follow up and toot your own horn.
ARR

2006 Aug 14 06:35 PM