It can be a difficult process to try and identify the best stocks in the biotechnology world. Each biotech claims to have perfected its relevant science and investors need to look past that and actually decide which ones are contenders and which ones are pretenders. Threshold Pharmaceuticals (THLD) appears to be an undiscovered gem.
Threshold Pharmaceuticals is a clinical stage biopharmaceutical company focused on the discovery and development of cancer therapeutics based on a novel and powerful approach of targeting tumor hypoxia.
With all the news and earnings reports that Threshold released in 2012, it's no surprise that the stock went for a wild ride. As the chart below shows, investors were extremely pleased with the performance.
Threshold went on quite a ride last year. The early part of the year was extremely positive and after the partnership deal with Merck KGaA was signed, the stock skyrocketed. It fell off by about 50% after that due to competition concerns, but as I will discuss below, I believe those concerns are overblown.
Investors might be curious about the past history of Threshold and will notice that the chart looks pretty ugly back in 2006 and 2007. Unfortunately, in March 2006, the FDA placed Threshold's development of TH-070 on clinical hold. This caused a very large sell-off in the stock. Additionally, in 2008, the company declared a reverse stock split which caused some pressure in the share price as well.
However, as we will see below, Threshold has been able to refocus, build a deep pipeline, establish a corporate partnership, and keep its fundamentals strong.
Hypoxia, also known as severe oxygen deprivation, is a characteristic of virtually all solid tumors as well as the bone marrows of patients with some hematologic malignancies. Normal healthy tissues are not usually hypoxic because they are well oxygenated due to their regular and highly structured network of blood vessels that provide for adequate blood flow and delivery of oxygen and nutrients.
On the flip side, when solid tumor masses are present, the environment is typically highly aberrant, resulting in inadequate blood flow and thus, hypoxic regions begin to develop. The cells found in hypoxic regions of tumors are typically extremely resistant to conventional cancer therapy. Additionally, hypoxia is known to play a large role in tumor progression, metastasis, and the failure of typical therapies.
Threshold is trying to design molecules that will be activated under conditions of severe tumor hypoxia. With this methodology, the company is building a pipeline of "hypoxia-activated prodrugs" that selectively target tumor cells. The company believes that this pipeline will be shown to be more effective and less toxic than conventional cancer therapies.
Company's Pipeline of Drugs
Threshold's HAP platform allows the potential to create therapies that target most solid tumors and blood cancers. Because of this, the company has developed an extensive pipeline of therapies offering the potential to treat many forms of advanced, aggressive, and difficult to treat cancers.
TH-302 is a therapy being tested in multiple studies for the treatment of pancreatic cancer, soft tissue sarcoma, and other solid tumors. TH-302 is currently being tested in clinical studies involving different tumor types as well as being combined with anti-cancer therapies including chemotherapy and antiangiogenic therapies.
The company currently has 5 major trials in progress:
TH-CR 406: A Phase III randomized clinical trial of TH-302 in combination with doxorubicin alone to treat patients with locally advanced unresectable or metastatic soft tissue sarcoma. The company expects to release interim results later this year with full trial results due out by the end of 2014.
MAESTRO: A Phase III randomized, double-blind, placebo-controlled trial of TH-302 in combination with Gemcitabine in previously untreated subjects with metastatic or locally advanced unresectable pancreatic cancer. The company expects to release interim results later this year with full trial results due out by the end of 2014.
TH-CR 410: A Phase I dose-escalation study of TH-302 in combination with sunitinib to treat patients with advanced renal cell carcinoma, gastrointestinal stromal tumors, and pancreatic neuroendocrine tumors. The company expects to release results later this summer.
TH-CR 408: A Phase I/II open-label trial of TH-302 and dexamethasone with or without bortezomib in subjects with relapsed/refractory multiple myeloma. The primary objectives are to evaluate the safety and tolerability, identify the dose-limiting toxicities, and identify a recommended dose for Phase II. The company expects to release results later this summer.
TH-CR 407: A Phase I study of TH-302 to treat advanced leukemias. The company expects to release results later this summer.
When investors look to determine what kind of potential a biotech company has, it's important to look at the potential treatments the company is offering, and what the need is.
The two types of cancer that Threshold is attempting to treat within the next couple of years are pancreatic cancer and soft tissue sarcoma.
Cancer Research UK has estimated that there are almost 280,000 cases of pancreatic cancer diagnosed every year. Pancreatic cancer is currently the fourth most common cause of cancer across the world. Since there are no current effective treatments for this illness, the potential sales could be in the hundreds of millions. So clearly the MAESTRO trial will be a big determinant in the future valuation of Threshold.
On a smaller scale, soft tissue sarcoma also represents an illness that has not yet found any effective treatments. The National Cancer Institute estimates that there were 11,410 new diagnosed cases in the U.S. alone in 2013, and there were 4,390 deaths.
Clearly, pancreatic cancer will be the backbone of Threshold in the future, but both areas represent large untapped markets that investors need to look towards.
One of the things I always look for in a development stage biotech company is a partnership with a larger company. The larger company can provide guidance and money, both of which are necessary in order for an early stage biotech company to survive and prosper. Threshold was lucky enough to sign such a deal with Merck KGaA, a biotech giant in Germany, on February 6, 2012.
The partnership provides Threshold with the opportunity to earn up to $550 million in milestone payments. Additionally, Merck KGaA will pay 70% of worldwide development costs for TH-302.
Threshold reported its 2012 annual statement on March 7, 2013. Threshold made incredible strides from the prior year. Let's start with the balance sheet. One of the most important things biotech investors look for is enough cash to fund the trials going forward. Threshold's current cash position sits at $11.03 million, an increase of roughly $5.2 million from 2011. Additionally, it increased its short term marketable investments by roughly $45.4 million and the amount currently sits at $58.82 million. Its net receivables also went from nothing to $15.64 million.
Now as far as debt goes, the company does have a few items to pay. Threshold has roughly $17.45 million of current liabilities and $32.56 million of other liabilities. Another thing that really catches my eye is that the company has no long-term debt. So if we combine the company's cash and short-term investments, Threshold is in great financial shape for the future. Additionally, as discussed above, Threshold will have many opportunities to generate additional cash from milestones, which will decrease the likelihood of future secondary offerings.
Now if we jump over to the income statement, we'll find that Threshold made even bigger improvements. The company generated a paltry $62,000 in revenue for 2011. However, last year, Threshold generated $5.87 million. The company also did this while managing to narrow its operating loss by more than $10 million.
Clearly the fundamentals are improving, but let's see how that translated on the stock graph during 2012.
Here Come Celgene, Peregrine, and Ziopharm
Because of Threshold's deep pipeline of potential therapies, there were bound to be competitors. Two of those competitors have failed in their attempts and one remains as a viable competitor. Let's start with the two that failed.
First, Peregrine Pharmaceuticals (PPHM) was attempting to combine bavituximab and gemcitabine, in attempt to treat pancreatic cancer. Unfortunately, their Phase II trial recently ended in failure. The study only prolonged life by 12 days over gemcitabine by itself, and clearly that is not good enough to advance to a Phase III trial. That being said, the company is still operational and may attempt a redo at some point in the future.
The next company attempting to challenge Threshold was Ziopharm (ZIOP). Ziopharm was attempting to challenge Threshold for the treatment of soft tissue sarcoma. However, just like Peregrine, Ziopharm recently announced that its Phase III trial had failed. In the announcement, Ziopharm announced that it would stop trying to develop a drug to treat soft tissue sarcoma and instead would focus on its synthetic biology program, which creates DNA-based drugs that enable controlled delivery of genes producing proteins to treat cancer.
So while that's two fewer companies that Threshold needs to worry about, it will need to worry about Celgene (CELG). Celgene's drug is called Abraxane used in the treatment of pancreatic cancer. Just recently, Celgene completed its Phase III trial and the results showed that when Abraxane is combined with gemcitabine, the average overall survival was 8.5 months. Gemcitabine by itself only provides 6.7 months of survival. However, one problem for Celgene, is that Abraxane only extended life by about 1.8 months. During Threshold's TH-302 Phase II trial for pancreatic cancer, data indicated that it extended life by 2.2 months. So although Celgene's Abraxane is a competitor, how much of a competitor remains to be seen.
Besides the obvious risks of its ongoing Phase III trials failing, the company faces cash burnout risks. Now while this isn't as large of a risk because of the partnership with Merck KGaA, it still is a risk. If there were to be any delays in its trials, the company would be delayed in receiving milestone payments from Merck KGaA and may have to consider secondary offerings at that point.
And of course, there are competition risks from Celgene. It's unclear who has the advantage as Threshold still needs to complete its Phase III trial, but Celgene is such a giant that it should cause at least some uneasy feelings for Threshold management.
Threshold is my favorite investment in the biotech space. It has a deep pipeline, a strong partnership with a biotech giant, strong fundamentals, and a stock graph that would make most envious. Investors should also know that big money is backing Threshold. One of the most successful biotech funds in the world, Baker Brothers, took a significant stake in Threshold in the early part of 2012. All the signs seem to be there for Threshold, I just hope they can execute the plan.