By Kris Tuttle
It’s nearly impossible these days not to be personally touched by cancer. The disease has to be on the top of everyone’s list for finding new, more effective treatments.
Putting our personal feelings aside for the moment, we also recognize that any company fielding a valuable new treatment in this area will deliver strong investment returns. However, even the best scientists in the world have differing opinions of what may or may not ultimately work. So we have to be careful in doing our research and limiting our risk in this area.
After looking for some months, we discovered one company that we decided to invest in, Curis (NASDAQ: CRIS - $2.40). They have focused on the cellular signaling paths that are the basis of cellular development, including those that make up cancer tumors. To say this a complicated topic is a great understatement but those interested will find weeks of reading material online. (We believe that we can short-circuit this process on Curis but more on that later.)
A very simple analogy for this approach is to disrupt the mechanism that cancer cells rely upon to develop and grow rather than try and destroy the cancer cells after they come into existence. As described below, the results of some Phase I testing shows that the therapy can be very effective at reducing existing cancer by interfering with the signaling pathways they sustain themselves with. Of course we are dealing with complex systems here that are at the borderline of our level of understanding so the description above masks the difficulty in actually making this work.
Recent results, however, have been quite encouraging. The stock has moved up recently on some stunning results from Phase I trial data where the majority of patients showed a positive response to treatment and side effects were fairly limited (although still present.) In fact there is a striking example of a 22 year old patient who had exhausted all treatment options, was emaciated, in constant pain and in need of ongoing blood transfusions with tumors spread out throughout his body, “some of which could be felt through the skin,” the report indicates. After two months the tumors had shrunk, he was pain free, and riding a bicycle. But in a sobering reminder about how far we have yet to go, the cancer had developed resistance (probably through mutation) and progressed to the point of killing him only months later.
What does it mean? Nobody can say for sure. Scientists agree that the therapy obviously works but will work far better on patients in situations where the tumors are not so advanced, have not already been barraged with an array of mutation-generating therapies and where the patient and tumor biology will lend itself best to blockage of these pathways.
Like many effective cancer treatments, this one will not be a “silver bullet” against the disease, even if it makes it through all the approval hurdles. However, doctors and scientists see cancer as an adversary that will need all methods available to bring it under control. Being able to “cut the knees out” of the new cell formation process while using other treatments to kill existing cells makes intuitive sense. We’re still learning new things about cancer. Scientists were startled to discover that cancer circulates in the blood for as long as a year before it finds a place to “set down” and cause trouble in the body.
As we said before, we short-circuited some of our due diligence here by relying on Genentech (DNA)/Roche (OTCQX:RHHBY) to do it for us. As can be seen by the slide here, Curis has been able to partner with them on their lead drug GDC-0449. All that means to us is that Curis has something of value and if it in fact works, we can be confident that it will be developed.
Because Curis remains a very early-stage company and we know hardly anything about the mechanism by which cancer cells will compensate against this treatment, this is a very speculative investment to make.
On the financial side the picture is pretty positive. The company has about $29M in cash. The company burns a few million each quarter but receives milestone payments that serve to eliminate funding risk as long as trial results continue to support the development of these therapies.
The current market capitalization using the fully diluted share count is just a shade under $200M. There is little or nothing to support the valuation if the therapies don’t progress in clinical trials but these levels don’t suggest that success is fully baked into the stock yet. Investors should think about this investment as a call option which will become worthless in one scenario but stands to be worth much more if results prove out.
On the corporate side, the company has been in place since 2000 and the senior management team looks solid with a long tenure. The company has kept a low expense profile with just 34 employees which is certainly the right approach in developing therapies where progress has been measured in decades. Management does have a bit of a reputation for being promotional, although to be fair, not to an alarming level. This can be seen to some degree from their homepage (http://www.curis.com) which includes a link to their (very good) investor presentation, front and center on their homepage.
To add a little intrigue to our story, the company was recently granted an extension of confidentiality for their 8K, filed back in 2003, that covers their agreement with Genentech. The agreement is very detailed (82 pages) as it stands and highlights $9M in licensing fees from Genentech and a $3.5M investment in the stock (at $2.66/share.) The specifics around the size of milestone payments and royalty percentages are missing, however.
Some other matters worth considering in the short term: The company is scheduled to present at an investment conference in NYC next week on September 9th and it will be webcast, so it’s a good chance to hear management speak. Other upcoming events include the quarterly earnings call on October 26th. The company also has 540K warrants expiring in October that may result in some extra volatility depending upon their exercise price and who holds them.
Ownership of the public shares is concentrated and increasingly so ,as Arnhold & S. Bleichroeder now holds nearly 19% of the shares outstanding after buying up more than four million shares offered for sale by the Biotechnology Value Fund. The good news is that as a recent buyer, ASB may represent “strong hands” for the shares, but it also means they are likely to know more about developments sooner than the average stockholder. Thus if things go wrong in CRIS, it will probably show up first in the share price. Buyer be very very aware.
Disclosure: Research 2.0 holds a long position of CRIS in their "research proving ground" fund.