Positive Phase III Results for GTx's Cancer Muscle-Wasting Drug Expected
It is not uncommon in the world of speculative biotech investing to come across a battleground stock. That term is commonly referred to when Wall Street analysts are split on their ratings and views on a particular stock. The battle is usually waged with countering analyst reports and notes offering a wide range of price targets and differing opinions for a particular stock. When this happens, the financial journalist community begins to notice and writers join the chorus with bullish or bearish articles.
This scenario is currently underway in the case of GTx, Inc. (GTXI), a biopharmaceutical company engaged in the discovery, development, and commercialization of small molecules for the treatment of cancer, cancer supportive care, and other serious medical conditions. GTx's current late stage drug candidate, Enobosarm (an androgen receptor modulator for the prevention and treatment of muscle wasting in patients with non-small cell lung cancer ) has just completed Phase III clinical trials in the United States, Europe, Russia, and South America. Results from the study are expected any day now which has created added drama and increased interest based on the binary nature of this catalyst for the GTXI stock.
But the battleground in which the GTx war is being fought is not typical because the forces on one side far outnumber the other side. This battle is between a large army of bullish analysts against one journalist and his unnamed short-positioned source. Despite his army of one, that journalist had the power in his July 10, 2013, article entitled, "The GTx Cancer Muscle-Wasting Drug Studies Will Fail. Here s Why," to send GTXI shares falling 25% to $5.20 as he released the bear thesis of his GTXI short-positioned friend predicting that Enobosarm's Phase III results will fail. And today, GTXI shares sit another 15% lower exactly where 2013 began at $4.52.
This article will provide an alternative, long-biased view of GTx by pointing out some glaringly misleading statements featured in the short-biased article which has caused so much damage to the stock (drop from $7.14 to $4.52) in last two weeks. I will focus on how the analyst community has responded to the article and how the article incorrectly spins the Merck/GTx collaboration relationship as a negative indicator of the upcoming Phase III results release.
(I will leave the 2008 Phase II Enobosarm data analysis debate to Adam Feuerstein, his GTXI-short positioned friend, and the medical doctor who completely dismantled Feuerstein's entire case against those Phase II results point by point in his well-researched Seeking Alpha blog post.)
Analysts Strongly Defend GTx After Hit Piece Published
Since the GTx hit piece was published on July 10, two analysts have responded by strongly defending and reaffirming their bullish forecast of positive Phase III Enobosarm results. They are calling for investors to buy on this weakness on the possibility that GTx could rise to $14/share on positive results - a 211% gain from current GTXI price of $4.50.
On July 11, Wedbush analyst David Nierengarten put out a note maintaining an Outperform rating and a price target of $9.00. Nierengarten called Feuerstein's criticisms of GTx's 2009 Phase IIB Enobosarm trial results "unfounded" and said investors should buy weakness. He strongly expressed his forecast for the imminent Phase III trial results by noting, "We expect POWER 1 and POWER 2 to meet the co-primary endpoints of maintenance of muscle mass and stair climb power."
Then on July 17th, Jefferies analyst Biren Amin put out a note saying he expects the readout of Phase III results to occur "in the next several weeks." And Amin is "expecting positive data, which is reinforced by their sensitivity analysis, leading to GTXI shares to $13-14 level on positive outcome."
And when Citigroup (C) raised their price target on GTx from $8 to $19, they noted that GTXI is "currently one of the most compelling small-cap biotech companies," based on their view of positive, upcoming Phase III results for Enobosarm.
Contrary to Feuerstein's article, current ratings on GTx heading into Phase III results are overwhelmingly bullish:
GTXI Price Target
Upside Potential ($4.50/share basis)
Merck (MRK) Partnership Funding and Dissolution is Positive for GTx
In 2007, GTx and Merck entered a $507 million collaboration agreement to combine their selective androgen receptor modulator (SARM) research programs. SARMs are the active molecules in GTx's Enobosarm. Although this relationship ended in 2010, the arrangement was and continues to be a breakthrough development for GTx and provided the necessary funding to complete the Phase III study of which results are currently pending.
In Feuerstein's article, he incorrectly implies that the Merck/GTx collaboration ended because of Phase II results and he also conveniently omits that Merck directly invested $85 million into the clinical development of Enobosarm before the collaboration ended. Feuerstein states that "in March 2010 (and after having the phase IIb cachexia data in hand) Merck decided to abandon Ostarine/enbosarm, handing rights to drug back to GTx."
The deal led to the following Merck investments beginning with a $40 million payment made to GTx from Merck in Q1 2008:
Merck Investments in GTXI
Upfront License Fee
Direct Equity Investment
Total Merck Investment
Although Feuerstein claims that Merck "decided to abandon Ostarine/enbosarm, handing rights to the drug back to GTx," GTx's CEO Dr. Steiner describes the transition quite differently. At the time of the split with Merck, Dr. Steiner said, "It was a difficult decision to dissolve our SARM collaboration with Merck. GTx's near term objective is to generate revenue so that we can transition to a self-sustaining company. Reacquiring Ostarine moves us toward this objective by allowing us to advance our lead SARM into Phase III clinical studies in cancer cachexia which is a large commercial opportunity for our company and a critical unmet medical need for cancer patients."
The reason that GTx decided to dissolve their collaboration with Merck was because of the Schering Plough merger of 2009 which put Merck's Ostarine (Enobosarm) development on the back burner because of a competing focus of the new combined company on vaccines, cholesterol, respiratory and women's drugs. Despite the temptation to stay linked with a large funder (Merck), GTx made a strategic decision to reacquire the full rights to Enobosarm and to take the drug to Phase III trials on their own therefore owning the rights and future revenue generation of the drug asset exclusively.
As a GTx shareholder, I agree with CEO Steiner that this move to take Enobosarm through Phase III without a partner maximizes shareholder value as he stated in the Q3 2012 conference call,
"The good news is it's completely unpartnered to date and, secondly, we really own 98% plus of this asset. We pay a small royalty to the University of Tennessee where the original technology originated. So and it's such a near-term thing. You're really talking about a few months. I think it's very much worth GTx's position from a standpoint of maximizing shareholder value to do that."
Any day now when Phase III results are released, we will all find out if this gutsy move by GTx management to go-it-alone with Enobosarm will truly pay off for shareholders as management expects.
The battle lines have been drawn for GTx as we await the imminent release of Phase III results for Enobosarm. While the recent short-biased article has led to a severe decline in the stock on fears of a failed outcome, the voices expecting Phase III success and a potential double or more ($19 price target by Citi) in the current stock price are very hard to ignore for opportunistic, speculative investors.
As someone who is long GTx, I understand the risk of holding the stock on the eve of such a binary event with such strong forces on each side. Volatility will reign until results are released and the stock will move strongly in one direction or the other. My risk/reward calculation puts the downside of a failed trial result at the two year support lows of $2.00/share (55% loss) and the upside on positive trial results at $11.00/share (145% gain).
Based on the strength of the Phase II Enobosarm trial data, the strong conviction of all GTx analysts, and the initial investment that Merck made in GTx for Enobosarm trials, GTXI remains in the speculative basket of my portfolio because the risk/reward proposition is just too favorable to ignore. I patiently await and expect positive Phase III trial results for Enobosarm.