Celldex Therapeutics (CLDX) was one of biotechnology's best performing stocks last year. The company grew from a small $160 million company to a larger $415 million market cap in 2012, and has continued to appreciate in 2013 with a current market cap of $470 million. The company's great year has been due to a combination of data from several products in its pipeline, but most specifically CDX-011. Now with the stock trading at 52-week highs, let's take a look at it and evaluate the two biggest questions of 2012 to determine if it's worth the risk.
Background Information and 2012 in Review
Celldex Therapeutics is a biopharmaceutical company focused on the development and commercialization of several immunotherapy technologies for the treatment of cancer and other difficult-to-treat diseases. The company has two late-stage products that have led to its gains in 2012 and in early 2013: Its breast cancer drug, CDX-011, and its glioblastoma brain cancer drug, Rindopepimut. The company also has an expanded pipeline of early-phase products that have shown promise in early analysis.
In 2012 the stock was mostly connected to early data, speculation, and then final data from its breast cancer drug, CDX-011. The product is a monoclonal antibody drug conjugate that targets cancer cells expressing the protein GPNMB. The drug attaches to this protein and then releases high levels of chemotherapy using a technology licensed from Seattle Genetics (SGEN).
In early 2012 the company announced response rates for those treated with the drug. It worked exceptionally well in patients with high levels of the protein, which is also linked to the most aggressive forms of the cancer, with a response rate of 32% for those being treated with CDX-011 compared to 13% of those treated with a chemotherapy of choice. This news, which made CDX-011 appear favorable over other breast cancer drugs, helped to lead the stock higher. However, one fundamental question remained: Whether or not the drug would improve survival in patients expressing GPNMB.
In December we learned that CDX-011 did in fact improve survival in its Phase 2, 120 patient study. Those treated with CDX-011 had an overall survival of 10 months compared to 5.5 months for the control group. Also, the study proved that CDX-011 doubled the period before regrowth in the breast cancer patients. While these results might not sound good for a disease as common as breast cancer, CDX-011 is targeting the most deadly form of breast cancer, those patients who have not responded to at least five previous treatments. It can be concluded that this is a highly effective treatment, one with very impressive clinical study results.
While CDX-011 was the company's most important drug of 2012, it is its drug Rindopepimut that is closest to an approval. The drug is in a "wait-and-see" stage, in Phase 3 trials with no expected news for another two years. Yet to date, all data has been positive for the glioblastoma drug. Much like CDX-011 targets a specific protein, so does Rindopepimut by targeting those who are EGFRvIII-positive, an aggressive form of glioblastoma. The company has tested the drug in two trials, for patients with newly diagnosed EGFRvIII-positive glioblastoma and another for recurrent EGFRvIII-positive glioblastoma.
Last year, the company announced positive three-year Phase 2 data for this drug with a median overall-survival of 24.6 months and overall survival of 26% at three years. Celldex has two late-stage products with good data in treating deadly diseases that could eventually lead to FDA approvals. Yet the investor's chief concern is if 2013 will continue to produce gains and be as rewarding as 2012. I think it might, but there are a few concerns that the company must address in order to continue its trend towards two FDA approvals. Following are my two biggest concerns, which could also be the two biggest catalysts.
What Happens When Celldex Runs Out of Cash?
The most obvious concern for any biotechnology company in the clinical trial phase is cash and funding the expensive clinical studies. The company has already said that it has enough cash and liquid assets to make it into the fourth quarter; but the company is in trials with products that will not be approved in 2013. Undoubtedly, Celldex will need cash at some point, or preferably a partner to avoid the need of raising cash and diluting shares.
There's nothing good about a company having to raise cash and dilute its shares, but it's necessary for companies in this stage of development. As of September 30, Celldex had over $75 million in cash, cash equivalents, and short-term investments with operating expenses of $17.9 million for the third quarter alone. With the company preparing for a Phase 3 trial, continuing a Phase 3 trial for its brain cancer drug, and advancing early stage trials, I am not sure how the company will have enough money to operate throughout this year.
Even though Celldex has enough cash to operate through the third quarter and into the fourth quarter, I feel reluctant to think that management will operate until the money is gone without raising money. If management were to wait until the third quarter, then the market would expect an offering, and the price would decline on the expectations of an offering. It makes more sense for Celldex to raise money now, or in the coming four months, to limit dilution. This is a concern that investors need to monitor because it could bring shares lower by 15%-20%.
There is one other possibility for Celldex, and that is finding a large partner such as Pfizer (PFE) or Eli Lilly (LLY). With the patent cliff in full force, large pharma companies are looking for low-risk and high-reward investments; and both CDX-011 and Rindopepimut are possibly $1 billion per year products. Finally, there is a realistic possibility of a buyout. Now that Celldex has answered many questions in 2012, the company should see interest from large pharma companies. This leaves the company with three possibilities for raising cash: An offering of sorts, a partnership, or being acquired. All three are equally possible, and two would lead to a stronger stock.
What Will the FDA Say About CDX-011 Data?
Celldex's Phase 2 trial for CDX-011treated 122 patients. However, the data that we've come to know was based on a subset of just 38 patients who elicited the high levels of GPNMB. The analysis for all 122 patients showed results that were far less favorable, as those treated with CDX-011 had just a 16% response rate compared to a 14% response for the control group. There's nothing wrong with this study or Celldex's method of treatment. In fact, this might benefit Celldex because it shows that the drug's treatment does work more efficiently on the high levels of the protein. However, we don't know how the FDA will respond to such a small patient subgroup.
The FDA will react in one of two ways: It will either realize the large difference between patients with high, low, and zero levels of GPNMB and use the data as a positive catalyst for an accelerated approval, or it will discount the 122 patients and only look at the subgroup, then require a large and extended Phase 3 trial. Investors must ask themselves if the difference between studies on patients expressing the protein will allow for better Phase 3 results (since all patients will express high levels) or if results will be worse when tested on a larger population.
The results from the Phase 2 study were very reassuring, and are enough to lead the investor public to anticipate an FDA approval. At this very moment, the only concern is how will the FDA react? We have no way of knowing, and this could greatly move the stock. If a large trial is required and the FDA responds with pessimism the stock will trade lower, or if the drug is given fast-track designation then the stock will go much higher. We can probably assume that large companies are also waiting for this decision before either making bids to acquire or partner with Celldex.
Despite questions in 2013 it's hard to deny that this is a company that will most likely see at least one, and probably both, of its late-stage products approved in the next few years. The year is setting itself up to be either very rewarding or potentially disappointing for Celldex, meaning it will most likely see another year of movement.
An investment in biotechnology is risky itself, and investors in the space understand the risk/reward ratio that is attached to such an investment. In the last year, Celldex has continued to play all of its cards very effectively. The company recently announced positive Phase 1 study results from two products: CDX-1401 for treating solid tumors and CDX-301 for use in conjunction with stem cell transplants. The company will continue to develop these products and will receive Phase 1 results from a Yervoy-like candidate, CDX-1127, in 2013. As evident, there are a lot of potential catalysts for this stock in 2013. My take after seeing data, considering its valuation and its potential, is that any pullback should be seen as an opportunity. With a market cap under $500 million, Celldex is properly valued for a company with one clinical late-stage product, not two, and should be a great long-term investment regardless of its short-term 2013 trend.
Disclosure: I am long LLY.