Seeking Alpha
, PropThink (108 clicks)
Long/short equity, deep value, event-driven, newsletter provider
Profile| Send Message|
( followers)

By Ivan Deryugin

Since making their public debut in February 2012, shares of ChemoCentryx (NASDAQ:CCXI) have risen less than 23%. They have underperformed the Nasdaq Biotechnology Index's nearly 64% rise as investors await the arrival of Phase III data related to vercirnon, the company's most advanced pipeline asset designed to treat Crohn's disease. But with the first of four Phase III trials set to see data in the second half of the year, shares of ChemoCentryx are poised to break out of their malaise.

Technological Approach and Collaboration

ChemoCentryx, as its name suggests, centers its development programs on chemokines (also known as chemo-attractant cytokines). Chemokines are a specific type of cell within the human immune system that serve a key purpose as messenger cells. These cells attract inflammatory leukocytes to a site of disease and/or injury. However, in many cases, a person's immune system fails to function properly, and inflammatory leukocytes become present where there is no medical need for them. This leads to conditions such as Crohn's disease or dermatitis. ChemoCentryx's entire development platform is based on the targeting of specific chemokine receptors in an attempt to disrupt the body's inflammatory response, targeting only the specific disease in question and leaving the rest of the patient's immune system intact. ChemoCentryx now has a pipeline of 10 distinct compounds: one Phase III asset, three Phase II assets, two Phase I assets, and four pre-clinical assets.

ChemoCentryx's partnership with pharmaceutical giant GlaxoSmithKline (NYSE:GSK) has been in place since August 2006. To date, ChemoCentryx has received over $250 million in aggregate value from this agreement, including milestone payments, R&D reimbursements, and other fees. The agreement with Glaxo covers three (originally four -one product under the agreement has been discontinued) specific chemokine targets (CCR9, CCR1, C5aR; vercirnon is the CCR9 product); under the terms of the agreement, ChemoCentryx is responsible for moving these compounds through proof-of-concept trials. After completion, Glaxo is entitled to the right to receive an exclusive license to these compounds, as well as two "back-up" compounds for each of the three chemokine targets. Should Glaxo exercise these options, it assumes all further global development, regulatory, and commercialization costs, and must make milestone and royalty payments on global sales. These milestone payments are broken down as follows:

  • $47 million per NDA filing per compound
  • Up to $75 million in aggregate approval milestone payments
  • $250 million in sales milestones for vercirnon
  • $125 million in sales milestones for CCX354 (covering the CCR1 target, in Phase II trials for the treatment of Rheumatoid arthritis)
  • $125 million in sales milestones for CCX168 (covering the C5aR target, in Phase II trials for the treatment of ANCA vasculitis)

The royalties that ChemoCentryx is entitled to vary by product and geography. For vercirnon, the company is entitled to royalties in the high-teens to low twenties for domestic sales, and a low- to high-teens royalty on international sales. ChemoCentryx is entitled to a co-development option to increase its royalty rate by as much as 5%. Royalties for both CCX354 and CCX168 range from 10% to the mid-teens on a global basis. Glaxo has already exercised its rights to both vercirnon and CCX354, and a decision on whether or not to exercise on CCX168 is due in Q4 2013. We note that the agreement with Glaxo does not cover ChemoCentryx's entire pipeline. The company's remaining seven compounds are wholly owned.

Vercirnon: A New Approach to Treating Crohn's Disease

As stated above, ChemoCentryx's most advanced pipeline asset is vercirnon, now in Phase III trials for the treatment of Crohn's disease (ChemoCentryx and Glaxo have changed the name of this asset several times; it was previously known as Traficet-EN and CCX282-B, and is also known as GSK1605786A). CCXI is evaluating vercirnon in 4 separate Phase III trials (SHIELD-1, -2, -3, and -4) at different dosages and dosing lengths.

  • SHIELD-1 has enrolled 600 patients in three different arms: one placebo, one 500 mg once-daily dose of vercirnon, and one 500 mg twice-daily dose. The trial's primary endpoints are the proportion of patients achieving a clinical response within 12 weeks, as defined by a 100-point or more decline in their CDAI (Crohn's disease Activity Index Score). Secondary endpoints include safety, as well as the proportion of subjects in clinical remission, defined by a CDAI score below 150 by week 12. With a primary completion date of August 2013, ChemoCentryx has affirmed that data from SHIELD-1 is expected to be released in the second half of 2013.
  • SHIELD-2, with a primary completion date of April 2015, was in April 2011. SHIELD-2 has the same trial design (in terms of dosing and trial arms) as SHIELD-1, with the exception of timeline and endpoints. SHIELD-2 will measure the effects of vercirnon over 52 weeks, with the primary endpoint being the proportion of subjects in clinical remission at week 52. Glaxo, which is now responsible for all clinical trials associated with vercirnon, will enroll patients into SHIELD-2 from either SHIELD-1 or SHIELD-4 (patients from either trial that have shown disease improvement/remission are eligible).
  • SHIELD-3 is an open-label extension trial, with a primary completion date of July 2015 (enrollment began in April 2011). SHIELD-3, unlike the first two trials, has only two trial arms: placebo and twice-daily 500 mg doses of vercirnon. SHIELD-3 will enroll 800 patients over the course of 108 weeks, with safety being the primary endpoint of the trial (defined by the number of adverse and serious adverse events), with various efficacy measured serving as secondary endpoints. Patients that have completed treatment in previous vercirnon clinical trials are eligible, as are patients who withdraw early from SHIELD-2.
  • SHIELD-4, with a primary completion date of November 2013, is a double-blind trial enrolling 900 patients into two arms: 500 mg of vercirnon, dosed either once daily or twice-daily for 12 weeks. The purpose of SHIELD-4 is to determine which subjects are eligible for enrollment into SHIELD-2, and the trial's primary endpoint is the proportion of patients that see a clinical response, as defined by a drop of more than 100 points in the CDAI scores.

Existing clinical data for vercirnon has been encouraging. Phase II/III data from the PROTECT-1 trial showed statistically significant clinical improvements in Crohn's disease patients. This Phase II/III trial tested 500 mg once-daily doses of vercirnon in comparison with placebo over the course of 12 weeks. Patients in the vercirnon arm saw a 70-point response of 61%, versus 47% for the placebo group (p=0.039); and a 100-point response of 55%, versus 40% for the placebo group (p=0.029). In addition, vercirnon showed statistically significant clinical effects when measured by the Crohn's disease Endoscopic Index of Severity (another measure of disease activity, also known as CDEIS); patients in the vercirnon arm saw a decrease of 8.4 points, versus 1.1 in the placebo arm (p=0.049). Safety was also acceptable, with no increases in infection risk reported in PROTECT-1, key to commercialization.

We note that there are potential patent issues related to vercirnon, but that both ChemoCentryx and Glaxo are aware. Millennium Pharmaceuticals holds certain patents in the United States related to small molecules that modulate CCR9, their compositions, and the ability to treat inflammatory bowel diseases. To date, ChemoCentryx and Glaxo have been shielded from litigation due to the fact that their CCR9 activities are non-commercial in nature and are occurring only in an attempt to secure regulatory approval. However, should vercirnon be commercialized, there is a likelihood that Millennium will sue. ChemoCentryx holds its own CCR9 patents and a total of 280 patents related to its 3 lead development programs (CCR9, CCR1, and CCR2). Under the terms of the collaboration agreement, Glaxo has the right to defend vercirnon against "third party" infringement claims, and fees associated with litigation are to be split equally. In our view, this potential issue isn't a key concern in the near-term and is unlikely to meaningfully derail vercirnon's commercial potential. Simply put, Glaxo would not have in-licensed vercirnon without a strong ability to protect the asset, and CCXI would not have agreed to an expensive fee-split without conviction on the product. Large pharma has the resources and were-withal to avoid poorly protected assets, and Glaxo's involvement speaks volumes to the vercirnon franchise.

Vercirnon will enter a dynamic and competitive Crohn's disease marketplace. The existing market is dominated by Humira (AbbVie (NYSE:ABBV) and Eisai) and Remicade (Johnson & Johnson (NYSE:JNJ), Merck (NYSE:MRK), and Mitsubishi Tanabe), which together control around 75% of the Crohn's disease market; it's a market estimated to grow to $5.6 billion by 2021. However, ChemoCentryx and Glaxo have a solid shot at successfully challenging both Humira and Remicade because of vercirnon's unique profile relative to Humira and Remicade. First, unlike these tumor necrosis factor-alpha inhibitors (TNF-a), vercirnon is not administered via injection or infusion. Vercirnon is available orally, a major boon to patient compliance and convenience. Second, the fact that vercirnon is not a biologic will lead to significantly lower manufacturing costs and competitive pricing capabilities. Third, and perhaps most importantly, vercirnon does not have broad immunosuppressive side effects. Both Humira and Remicade, as TNF-a inhibitors, broadly suppress a patient's immune system. As a CCR9 inhibitor, vercirnon targets only the aspects of the immune system that play a role in Crohn's disease (its side effect profile also compares favorably to drugs such as Entocort and Asacol). Although vercirnon is unlikely to dethrone either Humira or Remicade quickly, it does have potential in quickly cornering the market for patients refractory to TNF-a inhibitors, and in time a larger pierce of the overall Crohn's disease market.

A Side Catalyst: CCX140

Although SHIELD-1 data is the primary catalyst for ChemoCentryx in the second half of 2013, Glaxo's deadline to exercise its right to CCX168 will also occur in Q4 2013. Furthermore, Phase II data for CCX140 for the treatment of diabetic nephropathy is due during the quarter. CCX140 is ChemoCentryx's most advanced independent drug candidate. Historically, diabetic nephropathy has not been known to be associated with inflammation, but in recent years, there has been a shift in thinking within the medical community. For example, research conducted by Greg Tesch (of the Monash Medical Center in Victoria, Australia) and published in the Seminars in Nephrology in 2010 presented evidence of macrophage accumulation in diabetic kidneys (as evidence by renal biopsies), implying that there is a role for macrophages in diabetic nephropathy. Animal models have also shown that macrophages can enter kidneys (in both type 1 and type 2 diabetes), and cause renal injury. This Phase II trial, with 270 patients enrolled, has a primary completion date of August 2014 and is designed to assess the safety and tolerability of CCX140 in patients with diabetic nephropathy over the course of 52 weeks (the data to be reported in Q3 2013 will be 12-week interim data).

Existing clinical data for CCX140 has been positive, showing statistically significant efficacy as well as an acceptable safety profile. An earlier Phase II trial (159 patients with type 2 diabetes) was designed with three arms: 32 patients received placebo, another 32 received Takeda's Actos (pioglitazone hydrochloride), and 63 patients received 5 or 10 mg of CCX140 dosed daily for 4 weeks. Results from this trial showed mixed results for the 5 mg dosing arm, but did show statistically significant declines in HbA1c in the 10 mg dosing arm (p=0.045), a key indicator of glycemic control. Neither CCX140 dosing arm reported SAE's, but one patient in the 5 mg arm discontinued treatment due to an incident of dyspepsia, and three patients (in the 5 mg arm) experienced hypertension -- subsequent investigation showed that there was no significant worsening trend in the CCX140 arm relative to placebo. Within the 10 mg dosing arm, one patient experienced gouty arthritis, leading to the discontinuation of treatment. However, this patient had a documented history of gout, and subsequent investigation concluded that the incident was most likely unrelated to CCX140. ChemoCentryx has noted that it intends to commercialize CCX140, if it receives FDA approval, on its own in North America, but will seek a partner for international commercialization.

Financials

ChemoCentryx's balance sheet is stable for the time being; the company ended the first quarter of 2013 with nearly $110 million in cash & investments and no debt. And with a quarterly burn of around $10.2 million (for Q1 2013; the company burned an average of around $8 million per quarter in 2012), the company is well positioned to continue funding its research and development programs. In April, ChemoCentryx raised $64.4 million in a secondary offering of 5.75 million shares at $12, an 11.63% discount to its prior day close (the offering priced on April 16). ChemoCentryx ended Q2 2013 with a pro forma cash balance of almost $164 million, or $3.38 per share, nearly a quarter of the company's current market capitalization. Even with a meaningful ramp in expenses, ChemoCentryx's present cash balances are, according to the company, sufficient to fund operations for the next 12 months. A quarterly burn rate of $20 million gives the company 2 years of capital -- that's without considering potential milestone payments from Glaxo.

With a pipeline of 10 clinical assets, including one Phase III asset, two Phase II assets, and multiple early-stage programs, as well as a stable balance sheet, we believe that ChemoCentryx is undervalued at its present market capitalization of around $596 million. Vercirnon offers a compelling new mechanism of action when it comes to treating Crohn's disease, and with the backing of GlaxoSmithKline, the drug could play a meaningful role in the global Crohn's disease market. With multiple catalysts in the second half of 2013, we're buyers at present levels.

Disclosure: I am long CCXI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: PropThink is a team of editors, analysts, and writers. This article was written by Ivan Deryugin. 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.

Source: ChemoCentryx: Upcoming Phase III Data Readout To Catalyze Shares