Wider Than Expected Losses At Endocyte May Not Mean A Pullback

| About: Endocyte, Inc. (ECYT)

Biopharmaceutical company Endocyte (NASDAQ:ECYT) reported a second quarter 2013 net loss of 23 cents per share, which amounted to almost three times the loss of Zacks Consensus Estimate of 8 cents per share, and a larger loss compared to the same quarter the previous year; the stock did not experience a decline. It appears as though investors have maintained confidence in the company whose stock has more than doubled over the past year. And I believe there are good reasons for such confidence in the company, and the stock. The first reason is its pipeline of drugs led by its flagship proprietary technology novel small molecule drug conjugates (SMDCs) that actively target receptors that are over-expressed on cancer cells relative to healthy cells. And the second reason is that the SMDC technology has led to its collaboration with Merck (NYSE:MRK) on a cancer treatment vintafolide (EC145) that has the potential to net Endocyte $1 billion.

Endocyte Lead Treatment Vintafolide

Endocyte and Merck continue to develop the SMDC vintafolide for a number of indications aimed at targeting the folate receptor and then deliver the anti-cancer agent DAVLBH intracellular to the cancer tumor. Folate receptors are found only on rapidly dividing cells like developing fetuses or cancer cells, and there are over 1 million new cancer patients each year that have folate receptors. Vintafolide is designed to identify these patients by delivering a radioactive imaging agent that is attached to the same folate that delivers the drug.

According to Endocyte's president and CEO Ron Ellis "We just take off the drug and add an imaging agent but leave the targeting ligand. We can look at all the cancer or target lesions and understand the presence of the receptor throughout the body." Once the patient is shown to have the folate receptor, using the SMDC technology, vintafolide attaches a targeting agent and folate together with highly potent dose of DAVLBH and directly targets the cancer tumor.

One of the variables that differentiates SMDCs from another cancer treatment in development, like Seattle Genetics' (NASDAQ:SGEN) antibody-drug conjugates (ADC), are that SMDCs are 100-150 times smaller than an antibody. These small conjugates are able to penetrate solid tumors more effectively than large molecules ADCs. In preclinical studies, Endocyte saw a 20 to 30 fold improvement in drug concentration inside solid tumors with small molecule drug conjugates compared to large molecule drug conjugates. The small size also demonstrated faster excretion, which helped to reduce the drug's toxicity.

Currently, vintafolide is in a late Phase 3 trial (PROCEED) for platinum resistant ovarian cancer and has submitted a marketing authorization application with the U.S. Food and Drug Administration. In March 2012, the European Union granted orphan drug status to the drug.

Endocyte has already received a $120 million payment upfront from Merck and could receive up to $880 million based on the successful achievement of six cancer indications through development, regulatory and commercialization goals for vintafolide, including (TARGET) for non-small cell lung cancer which is in Phase 2 study, and triple negative breast cancer which is in a Phase 1 study. If vintafolide receives U.S. regulatory approval, Endocyte will receive an equal share of the profit as well as a double-digit percentage royalty on sales in the rest of the world. Endocyte will also retain the right to co-promote vintafolide with Merck in the U.S. though Merck has the exclusive right to promote the drug in the rest of world.

If vintafolide gains approval for its indications, it has the potential to be a blockbuster drug. According to the American Cancer Society, ovarian cancer is the ninth most common cancer in women. There are about 22,240 new cases of ovarian cancer, and roughly 14,230 women each year will die from the disease. One in eight women will develop invasive breast cancer, and each year approximately 10-20% of these breast cancer patients will be diagnosed with triple negative breast cancer. Triple negative breast cancer can be more aggressive and difficult to treat compared to other types of breast cancers as it does not contain any of the receptors such as estrogen, progesterone or HER2 that are targeted by common treatments such as hormone therapy or Genentech's (OTCQX:RHHBY) Herceptin.


Endocyte, a $631 million market cap company, reported second quarter revenues, which were solely from its collaborations, of $16.5 million, well above second quarter 2012 of $7.8 million. R&D expenses rose 111.4% to $18.6 million, due in large part to the research and development expenses related to the PROCEED and TARGET trials; however, a portion of the PROCEED trial expenses and all of the TARGET trial expenses are reimbursable by Merck. General and administrative expenses rose 93.8% to $6.2 million, which the company attributes to establishing commercial capability and an increase in compensation expenses. The company's cash burn for the quarter was roughly $16 million up slightly from the first quarter, which came in at $15.5 million. Endocyte maintained its cash, cash equivalents and investment guidance in the range of $145 - $160 million as provided on Dec 31, 2013.

On Friday, August 2nd, Endocyte stock opened at its 52-week high of $19 per share, but gave back the gains and ended down $1.25 as the stock closed at $17.55 per share on higher than normal volume. Also on Friday Leerink Swann raised its target price on shares of Endocyte from $14.00 to $21.00 with a "market perform" rating on the stock. Separately, RBC Capital raised its price target from $18.00 to $22.00, and has an outperform rating on the stock. And finally Roth Capital also raised its price target from $16.00 to $20.00, and currently has a buy rating on the stock.


Cancer drugs that look promising in early stages of trials have generally failed in later stages; therefore, small companies that are in the business of developing cancer-fighting drugs have a very low risk of success. However, Endocyte may have found a successful product through vintafolide and its collaboration with Merck. The stock should continue to outperform as vintafolide makes its way through the latter stages of approval. Not including vintafolide, Endocyte has six ongoing clinical trials for a number of cancer indications in both Phase 1 and Phase 2 utilizing its SMDC technology. The company is also developing targeted therapies for other cancer-cell receptors and other diseases for its own drug pipeline which if any of these therapies show promise there is a good chance a larger pharmaceutical company, like Merck did, will pay for a collaboration agreement. Although the stock is sitting close to its 52-week high, if good news from the company continues, the share price should climb upward.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.