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By Jake King

The spotlight has been on Astex Pharmaceuticals (NASDAQ:ASTX) in the last month, and as investors have taken notice of the oncology developer, shares have rallied 66%. While ASTX seems to be tiring out a bit on the chart, we believe fair value is at least $1.00 per share higher than the current level. With important oncology meetings approaching like AACR (this weekend), ASCO (late May) and ASH (early December), we think the stock can continue to work higher. On Wednesday, an 11% gain was driven by a "Buy" rating from RBC Capital Markets, which gave the stock a $9.00 price target. Astex already has one revenue-generating cancer therapy on the market, Dacogen (decitabine, a hypomethylating agent), partnered with Eisai in North America and Jansen (J&J (NYSE:JNJ)) ex-US. Astex collects significant royalties on Dacogen, and we believe that this existing product, despite possible generic entrants next year, combined with the company's strong balance sheet, creates a partial valuation backstop.

Its lead clinical candidate, SG-110, is a "second generation" Dacogen being tested as a treatment for myelodysplastic syndromes (MDS), acute myeloid leukemia (AML), advanced hepatocellular carcinoma (HCC), and platinum-resistant ovarian cancer (PROC), and early clinical results have shown that SGI-110 may offer valuable improvements over Dacogen. In addition, Astex develops an Hsp90 inhibitor, AT13387, in Phase II studies for refractory gastrointestinal stromal tumors (GIST), castration resistant prostate cancer, and ALK+ lung cancer. The company has a number of meaningful catalysts this year, and we believe there's upside left in the stock ahead of the major cancer meetings, which tend to drive oncology companies, particularly those with product candidates that are going to showcase good data, to new highs. As the stock gives back some of its gains from the RBC coverage initiation, investors can start building a position in ASTX.

The Pipeline and the Year in Catalysts

SGI-110 is being developed, essentially, as an improved Dacogen; it's administered subcutaneously as opposed to Dacogen's IV formulation, has a longer systemic exposure time, improved pharmacodynamics, and greater half-life (translating into potentially better efficacy). While SGI-110 incorporates a similar structure to decitibane, it's actually a dinucleotide of decitabine and deoxyguanosine form, which slows degradation compared to Dacogen. SGI-110 is currently in a Phase I/II clinical trial in MDS and AML that began as a dose escalation study (Phase I), which subsequently rolled into a dose expansion phase to evaluate safety and efficacy at maximum tolerated doses. The AML/MDS study enrolled 78 patients, and Phase I data were presented at the meeting of the American Society for Hematology (ASH) in December of last year. The trial has since moved into the dose expansion phase, and the company initiated a Phase II trial in advanced HCC in January. Given the open-label design of these trials and the Phase II PROC study, the company will be updating the medical community throughout the year, creating numerous catalysts that can create shareholder value.

For instance, this weekend at the meeting of the AACR in Washington D.C., Astex will present six posters on SGI-110, and although all of these posters will offer just pre-clinical and updated Phase I data, the company plans to release Phase II preliminary data at ASH in December of this year, and possibly early results at the European Society for Medical Oncology (ESMO) in September. Phase II data presents a key catalyst for investors, as it will reveal SGI-110's efficacy, safety, and thus, clinical benefit. Analysts speculate that positive Phase II results could lead to a partnership with a major drug or biotech company, or perhaps a buy-out of ASTX. Meaningful catalysts anticipated this year include:

  1. On April 6, the company will present updates to the Phase I data set for SGI-110 in MDS/AML.
  2. Following, Astex will present more mature data at the meeting of the American Society for Clinical Oncology (OTC:ASCO) at the end of May.
  3. Analysts have opined that a preliminary Phase II read-out could occur at ESMO in September.
  4. The company has said definitively that preliminary data from the Phase II MDS/AML trial will be presented at the ASH meeting this December.
  5. Further, investors can expect final results from the Phase II study of AT-13387 in combination w/Gleevec in patients with advanced GIST in the second half of the year.

Backdrop Support from Royalties and a Strong Balance Sheet

Astex collects impressive royalties on Dacogen sales, up to 30% worldwide. In 2012, the company reported $71.1M in royalty revenue, which in fact generated a net income of $8.2M, or $0.08 per diluted share. Considering that most drug developers incur substantial losses as the pipeline develops, seeing EPS generation from Astex is highly encouraging, and whether the company can continue producing profit or not, Dacogen royalties will be used to partially offset operating expenses, primarily R&D. The company is guiding for $55M in revenue for 2013, and with ongoing operating costs, the company expects a net loss of $30M this year. Astex ended the year with $138.3M in cash and equivalents, meaning the company has plenty of resources to get to critical milestones without further diluting investors.

It's worth noting that Dacogen may face generic competition this year, a detriment to sales, but generic Dacogen coming to the market is known, and if trial data supports SGI-110's superiority (Phase II data later this year), generic Dacogen may not be relevant to the long-term story. Importantly, Dacogen is not approved for AML in the U.S., thus, there remains an exclusive market opportunity for SGI-110 in this indication. And, Dacogen retains exclusivity in the EU for AML through 2022. Despite the generic threat, SGI-110 has two potential opportunities in the MDS and AML markets: as a better agent in first-line treatment (if superior to Dacogen and/or Celgene's (NASDAQ:CELG) Vidaza), or if it demonstrates activity in relapsed or refractory patients it would become the go-to second-line therapy, as there are currently none approved.

Given its numerous catalysts this year and robust financials, which is a preferred in the biotech space, we believe ASTX provides an opportunity for investors this year. However, chasing the stock in the mid-$5 range may not be wise, so entering slowly and on pullbacks makes the most sense. RBC's recent $9 target for ASTX is a little stretched in our opinion (without Phase II data), although we agree with the attribution of ~$2/share for Dacogen royalties (4x ~$50M sales after U.S. generic competition), $4 for SGI-110, and roughly $1.21/share for cash (although some of this capital will be used this year). We consider the rest of the pipeline a free option in the stock. Given the momentum that surrounds oncology meetings like AACR, ASCO, ESMO and ASH, we believe there's at least a dollar of upside left in ASTX from current levels. As a result, we think the ASTX story will continue to gain visibility in the coming weeks, taking the stock higher.

Source: Astex Pharmaceuticals: A Catalyst-Driven Year Ahead

Additional disclosure: PropThink is a team of editors, analysts and writers. This article was written by Jake King. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article. Use of PropThink’s research is at your own risk. You should do your own research and due diligence before making any investment decision with respect to securities covered herein. You should assume that as of the publication date of any report or letter, PropThink, LLC and persons or entities with whom it has relationships (collectively referred to as "PropThink") has a position in all stocks (and/or options of the stock) covered herein that is consistent with the position set forth in our research report. Following publication of any report or letter, PropThink intends to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation. To the best of our knowledge and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and not from company insiders or persons who have a relationship with company insiders. Our full disclaimer is available at www.propthink.com/disclaimer.