In my previous article about DelMar Pharmaceuticals (OTCQB:DMPI) in early July, I discussed the opportunities and risks related to investing in the biopharmaceutical company. At that time, I believed that the risk/return profile for DMPI was balanced.
Since then, positive things have developed within the company while share price of DMPI has declined approximately 48%. The decline is not warranted in our view and we think it may be opportune to buy the shares of DMPI now.
Background of DelMar Pharma
DelMar Pharmaceuticals, Inc. is a clinical and commercial stage drug development company with a focus on the treatment of cancer, specifically for glioblastoma.
DMPI is commercial because the company's lead product candidate VAL-083 has been approved in China as "DAG for Injection" for the treatment of chronic myelogenous leukemia (CML) and lung cancer.
It's clinical because DMPI is developing VAL-083 in the US and the rest of the world for other indications such as glioblastoma.
VAL-083 represents a "first in class" small-molecule chemotherapeutic, which has been assessed in multiple clinical studies sponsored by the National Cancer Institute (NCI) in the United States as a treatment against various cancers including glioblastoma, lung, brain, cervical, ovarian tumors and leukemia. Published pre-clinical and clinical data suggest that VAL-083 may be active against a range of tumor types.
In October 2011, DelMar initiated Phase I/II clinical trials with VAL-083 as a potential new treatment for glioblastoma multiforme (GBM), the most common and aggressive form of brain cancer. The Phase I/II trial is currently recruiting patients at two clinical sites in the US.
Recent Positive Developments Within the Company
New Patent Issued by the USPTO
VAL-083 was originally discovered in the 1960's. DelMar has a broad portfolio of new patent applications to protect its intellectual property. Patent applications claim compositions and methods related to the use of VAL-083, related and next generation compounds as well as methods of synthesis and quality controls for the manufacturing process of VAL-083.
On Jul 2, 2013, DMPI received a Notice of Allowance from the United States Patent and Trademark Office (USPTO) for U.S. Patent Application No. 13/817,046, entitled, "Method of Synthesis of Substituted Hexitols such as Dianhydrogalactitol." The patent covers methods for synthesizing VAL-083, which is DelMar Pharma's lead drug candidate currently in a Phase I/II clinical trial in the United States (U.S.) for the treatment of glioblastoma multiforme).
Since DMPI was founded in 2010, management has been building a broad patent portfolio around lead drug candidate, VAL-083, for global use and to treat a number of different cancers. The U.S. patent is the first to issue as part of an international intellectual property strategy around VAL-083. In addition, VAL-083 has been granted protection under the Orphan Drug Act by the U.S. Food and Drug Administration and by the European Committee for Orphan Medical Products.
Partnership In China Will Provide Near-Term Royalty Revenue Opportunity
DelMar also obtained exclusive commercial rights to VAL-083 in China. In October 2012, the Company entered into a strategic collaboration agreement with Guangxi Wuzhou Pharmaceutical Company for the development of VAL-083, known as "DAG for Injection" in China. Wuzhou is the only manufacturer presently licensed by the China Food and Drug Administration (CFDA) to produce VAL-083 for the China market.
This agreement provides DelMar with exclusive commercial rights, which position the Company to generate near-term revenue through product sales or royalties for its approved indications in China. The Company anticipates entering into a marketing partnership which will provide ongoing funding, sales or royalties commencing in late 2013.
DAG for Injection is approved by the CFDA as a cancer chemotherapy for the treatment of Chronic Myelogenous Leukemia and lung cancer. So far, sales of DAG for Injection have been minimal since the drug is not well positioned vis-à-vis standard of care in approved indications. Use of DAG in the modern era has been limited by a preference for targeted therapies such as tyrosine kinase inhibitors (TKIs).
The two companies plan to develop new clinical and non-clinical data in collaboration with leading cancer researchers to demonstrate the utility of VAL-083 in the treatment of CML and lung cancer, particularly for patients who do not respond to, or cannot access, modern treatments such as tyrosine kinase inhibitors. The data, if favorable, will allow the repositioning of VAL-083 in the China market, and eventually global markets, for the treatment of hematologic cancers and solid tumors. Longer term, the two companies plan to expand the China market with new indications such as GBM.
The collaboration may lead to global development of VAL-083 for leukemia and lung cancer.
On July 8, 2013, DelMar announced that the Chinese Bureau of Foreign Experts has approved the application for a grant to Guangxi Wuzhou Pharmaceutical Company to support DelMar Pharma's collaboration with Guangxi Wuzhou Pharmaceutical Company. Funding from the grant, which will be paid by Chinese Bureau of Foreign Experts, will directly offset a portion of DelMar Pharma's expenditures related to the project.
Since current sales of VAL-083 in China have been minimal, DelMar is seeking to collaborate with a new company having an established, medical-affairs driven, oncology sales force in China. Currently, pharmaceutical industry in China is transitioning from pure generics to research based development. It is our belief that physician education, combined with new data and KOL support will enable the repositioning and growth of the VAL-083 in China. The Company is in discussions with a number of parties with the goal of solidifying the partnership before year end.
Near Term Catalysts
Phase I Data will be available by year end
Based on historical data and the Company's own research, DelMar initiated a Phase I/II clinical trial of VAL-083 for the treatment of refractory glioblastoma multiforme or progressive secondary brain tumor in October 2011. The Phase I/II study is an open-label, single arm dose-escalation study designed to evaluate the safety, tolerability, pharmacokinetics and anti-tumor activity of VAL-083 in patients with recurrent glioblastoma. Patients with prior low-grade glioma or anaplastic glioma are eligible if histologic assessment demonstrates transformation to GBM. Patients must have been previously treated for GBM with surgery, and/or radiation, if appropriate, and must have failed both Bevacizumab (Avastin) and temozolomide (Temodar), unless either or both are contra-indicated. Patients with brain tumors that have developed due to CNS metastases were eligible for the DelMar clinical trial at early doses.
The primary outcome measures in the dose-modernization portion of the clinical trial will be the determination of maximum tolerated dose (MTD). Secondary outcome measures include tumor response in patients and pharmacokinetics.
An initial phase of the study will involve dose escalation cohorts until a maximum tolerated dose is established in the context of modern care. Once the modernized dosing regimen has been established, additional patients will be enrolled at the MTD in a registration directed Phase II clinical trial. Up to 30 patients will be enrolled in the Phase I study.
On June 1, 2013 at the American Society of Clinical Oncology (ASCO) Annual Meeting, DelMar presented updated clinical data from the ongoing Phase I/II clinical trial with VAL-083. Three cohorts of patients have been enrolled so far, testing VAL-083 at 1.5mg/m2; 3.0mg/m2 and 5.0mg/m2.
VAL-083 therapy is well tolerated in glioblastoma multiforme and secondary progressive brain tumor patients with no drug-related serious adverse events at doses studied to date. At doses in cohorts 1-3, 25% (2/8) of GBM patients and 17% (1/6) of secondary-progressive brain cancer patients showed stable disease or tumor regression in response to VAL-083 treatment at the doses tested to date. These patients had failed prior therapy. The doses tested in these cohorts were well below those used in historical clinical studies. Cohort 3 was expanded to gather additional data on central nervous system (CNS) metastatic patients at the 5mg/m2 dose level. Maximum tolerated dose has not been reached after completion of cohort three. Continued dose escalation is planned.
There is one patient response, maintained over 15 cycles. Pharmacokinetic analysis shows dose-dependent increase in plasma exposure following doses of VAL-083.
As part of the ASCO presentation, the company also announced plans to split the protocol into two separate studies: one focusing solely on refractory glioblastoma and the other focusing on metastatic brain cancers. Due to prior chemotherapy and radiation therapy, patients with secondary brain tumors are likely more prone to myelosuppression and may have a different MTD than patients with GBM. The strategy of splitting the trial into two separate studies will enable the company to focus on accelerating the development of VAL-083 as a potential new treatment for glioblastoma while appropriately exploring the potential of the drug to treat patients with solid tumors that have spread to the brain. Cancers known to frequently metastasize to the brain where historical data from the National Cancer Institute supports the anti-tumor activity of VAL-083 include lung, breast and melanoma.
The Phase I portion of the trial will be completed by the end of 2013. The company anticipates presenting additional data at upcoming scientific and financial meetings during 2013
Registration directed Phase II trial to begin in early 2014
DelMar plans to initiate a registration directed Phase II trial in refractory GBM in early 2014. Based on historical development of other products in GBM, it's possible that DelMar may be able to obtain FDA approval to commercialize VAL-083 to treat patients who have failed other therapies from an open-label Phase II registration-directed clinical trial, which will save significant costs of a large Phase III clinical trial. It's also possible that the FDA may grant fast-track, accelerated approval and/or priority review status to VAL-083, which will enable DelMar to begin filing for commercial approval during the clinical trial process.
Based on historical precedent with the FDA, the Phase II registration directed trial are expected to mirror the Avastin approval study in that indication. Under this scenario, the Phase II trial would be:
- Single-arm; open label design;
- Primary endpoints: PFS6 & Radiographic response
- Secondary endpoints: overall survival;
- N = 80-100 patients;
- Minimum response rate = 20%;
- Enrollment: Patients with recurrent GBM who have failed or are ineligible for both Temodar® and Avastin® (i.e. the same population as in the current trial);
The recent failure of Avastin in the front line treatment of GBM has highlighted the need for new therapies in newly diagnosed patients, particularly those with unmethylated MGMT promoter regions who do not respond to standard of care with temozolomide. DelMar would plan to advance modernized dosing regimen into a Phase II/III trial in newly diagnosed patients with unmethylated MGMT promoter in parallel with the refractory GBM registration trial (i.e. in early 2014). The Company has begun designing this trial with KOLs.
- Randomized groups: Temodar vs. VAL-083;
- Primary endpoints: overall survival;
- Secondary endpoints: PFS6 & radiographic response;
- N = 500 - 600 patients (with interim endpoint at ~10% enrollment);
VAL-083 Advantages for GBM
VAL-083 has been assessed in multiple NCI-sponsored clinical studies in various cancers including lung, brain, cervical, ovarian tumors and leukemia. However, the results for brain cancer were most compelling. VAL-083 has been assessed as chemotherapy in the treatment of newly diagnosed and recurrent brain tumors. In general, tumor regression in brain cancer was achieved following therapy in greater than 40% of patients treated and stabilization was achieved in an additional 20% - 30%. In published clinical studies, VAL-083 has previously been shown to have a statistically significant impact on median survival in high grade glioma brain tumors when combined with radiation vs. radiation alone.
Currently, Temozolomide (Temodar, TMZ) is a front-line therapy for the treatment of GBM, however, it is often ineffective due to drug inactivation by O6-methylguanine-DNA methyltransferase (MGMT).
The mechanism of action of VAL-083 is understood to be a bi-functional alkylating agent. Alkylating agents are a commonly used class of chemotherapy drugs. They work by binding to DNA and interfering with normal DNA replication processes within the cancer cell, which prevents the cell from making the proteins needed to grow and survive. After exposure to alkylating agents, the cancer cell becomes dysfunctional and dies. There are a number of alkylating agents on the market that are used by physicians to treat different types of cancer.
Based on published research, the functional groups associated with the mechanism of action of VAL-083 are understood to be functionally different from commonly used alkylating agents, including Temodar. VAL-083 has previously demonstrated activity in cell-lines that are resistant to other types of chemotherapy. No evidence of cross-resistance has been reported in published clinical studies. Based on the presumed alkylating functionality of VAL-083, published literature suggests that DNA repair mechanisms associated with the leading brain cancer therapies, including Temodar and nitrosourea resistance may not confer resistance to VAL-083. Therefore, VAL-083 may be effective in treating tumors that have failed or become resistant to other chemotherapies.
VAL-083 is a novel alkylating agent that creates N7 cross-links on DNA. The ultimate effect of VAL-083 is to inhibit DNA replication, which will consequently result in cell apoptosis. The alkylation site of VAL-083 is different from those led by other alkylating chemotherapeutic agents, such as temozolomide, which creates O6 methylation on DNA. Temodar often becomes ineffective due to DNA repair by MGMT in tumor cells.
Currently, two chemotherapeutic agents (including one targeted therapy) approved by the FDA are frequently used for the treatment of glioblastoma in combination with radiation therapy. They are Temodar (temozolomide) from Merck/Schering Plough for newly diagnosed GBM and Avastin from Roche for recurred GBM.
Temozolomide is a front-line therapy for the treatment of GBM, however, it is often ineffective due to drug inactivation by O6-methylguanine-DNA methyltransferase (MGMT). The US FDA recently approved Avastin (bevacizumab) to treat patients with recurred glioblastoma (but not newly diagnosed GBM) after standard therapy.
Temodar in combination with radiation is the front-line therapy for GBM following surgery. However, approximately 60% of GBM patients treated with Temodar experience tumor progression within one year.
As a second line treatment of GBM in patients failing Temodar, Avastin only demonstrated 20%-26% response rate in clinical studies. Therefore, approximately 48% of patients who are diagnosed with GBM will fail both front-line therapy and Avastin.
Clearly, there is an unmet medical need for the treatment of glioblastoma. All these have highlighted the need for new therapies in both newly diagnosed and recurring GBM patients.
VAL-083 has a differentiated mechanism of action for the treatment of glioblastoma, which will help VAL-083 capture a significant share of the glioblastoma market when it reaches the market. Also, unlike Temodar which only targets newly diagnosed patients and Avastin which only targets recurring patients, VAL-083 targets both newly diagnosed and recurring glioblastoma patients, which will help drive revenue growth more dramatically if approved.
The market potential is even greater if we consider that VAL-083 can also target other cancer indications, such as lung cancer, breast cancer, ovarian cancer and leukemia. If DelMar only develops VAL-083 for lung cancer and GBM to be conservative, the potential market size for those two indications is huge.
Valuation Is Attractive Now
Currently, DMPI shares are trading at around $1.1 per share, which values the Company at about $31 million in market cap based on 31 million outstanding shares. This is a discount compared to its peers. We noticed that most small biotech companies of development stage are valued from $50 million to $500 million depending on how advanced the pipeline is and which indications the company is targeting. DMPI's lead drug candidate VAL-083 is in a Phase I/II clinical trial and will enter a registration directed Phase II trial in early 2014.
As we previously discussed, VAL-083 could be approved by the FDA in 2017 for recurring GBM. The broad application of VAL-083, including first line, second line and third line treatment of GBM, and other cancers, means a great market potential for VAL-083, which could be a blockbuster for DelMar. We estimate DMPI will be profitable in 2018 with an EPS of $0.06 based on product sales of $35 million. EPS will grow to $0.35 in 2019 based on total product sales of $70 million.
We think DMPI should be valued at about $140 million in market cap, which translates into a share price of $4.50 per share.
Although DMPI has a limited pipeline, but we remind investors that VAL-083 is a platform which could be modified chemically to generate different drug candidates. The company is also researching other compound for further development.