Seeking Alpha
Research analyst, oil & gas, tech, mid-cap
Profile| Send Message|
( followers)  

Celldex Therapeutics (CLDX) is a small-cap biotechnology company that focuses on discovering and developing immunotherapeutics for the treatment of cancer and other serious diseases. It is currently developing Rindopepimut, a cancer vaccine for glioblastoma multiforme also known as brain cancer. Celldex also has a broad biologic pipeline including Rindopepimut for brain cancer, CDX-011 for metastatic salvage breast cancer, and other immunotherapeutics for cancer and renal disease.

In development stage for companies such as Celldex the strong pipeline acts as a revenue driver because it represents advancement toward commercialization. It has an impressive six drugs in the trials phase that are expected to launch over the course of the next few years. The strong pipeline prompted me to analyze what opportunities the company faces. I have discussed some of the drugs that could create future revenue generating opportunities:

· Rindopepimut (CDX - 110) - A Star drug

Rindopepimut is a cancer drug that received orphan drug status in the U.S. and Europe in addition to Fast Track status in the U.S. It targets the tumor-specific gene known as EGFRvIII, which is expressed as a consequence of the mutation of epidermal growth brain cancer. EGFRvIII is expressed in tumors in about 30% of glioblastoma patients, with approximately 4,000 patients in the U.S. and 8,000 patients in the Europe. It completed three Phase II trials of Rindopepimut (ACTIVATE, ACT II and ACT III) in newly diagnosed EGFRvIII-positive glioblastoma patients with consistent results. Across all three studies, trial patients generally tolerate rRndopepimut well.

Act IV (Phase III) enrollment in newly diagnosed glioblastoma started in early 2012 and should complete by end of this year. After which, the survival results analysis will decide whether to continue with the current enrollment or increase enrollment. It will mostly likely perform more than 75% of this analysis during next year, but final analysis is expected to complete in 2015 for Rindopepimut in primary glioblastoma. Additionally, there has been extremely positive feedback from the U.S. and Europe regarding their willingness to use Rindopepimut based solely on the three positive Phase II results. At an expected price of $100,000 for annual treatment, it is expected that Rindopepimut has potential to generate $1.3 billion annually for Celldex.

· CDX - 011

Celldex is developing a drug that contains a toxic chemotherapy to attack cancer cells with glycoprotein NMB, or GPNMB, protein for patients suffering from triple-negative breast cancer, or TNBC. CDX-011 is entering a Phase III study for triple negative breast cancer, and it is close to beginning enrollment. If approved after its upcoming pivotal trial, CDX-011 would be immediately applicable to the 6% of all breast cancer patients with TNBC and high GPNMB expression. The 6% is derived from the observation that 15% of patients are triple negative breast cancer and 40% of those highly express GPNMB. Patients treated under CDX-011 trials showed a reduction of 19% in their tumors. Patients with high GPNMB showed a high response rate of 32% and Progression Free Survival, or PFS, of 10 months.

The phase III CDX-011 trial is expected to start in October this year and readout in the second half of 2015. Readout is a process of taking out information from an computer and displaying it in an easy form. The previous phase trial was a success, despite enrolling advanced patients, with stage IV cancer. Going forward, Phase III trials will enroll 300 patients in 75-100 centers, which should take about 18-24 months and another six months for the final results. Therefore, FDA approval is expected in the middle of 2016. After approval and commercial launch, CDX-011 is expected to generate $5.27 million in 2016 and $46.43 million in 2017.

Solid Product Pipeline

Program

Status

Indications

Next event

CDX-011 (glembatumumab)

Phase II/III

Triple negative, metastatic breast cancer, and GPNMB

Initiate accelerated approval study in second half 2013

CDX-110 (Rindopepimut)

Phase II/III

Glioblastoma multiforme

ReACT Phase II results expected by end of 2013

CDX-1401

Phase II

Multiple solid tumors

Initate Phase II with National Cancer Institute sponsored study

CDX-301

Phase II

Hematopoietic stem cell transplant

Initiate Phase II in second half 2013 in ''Hematopoietic stem cell transplantation''

CDX-1127

Phase I

B-Cell malignancies and other cancers

Complete Phase I dose escalation, expansion, data possible by second half 2013

CDX-1135

Phase I

Dense Deposit Disease (DDD)

Pilot study in DDD, with results possible by end of this year

In addition to rindopepimut and CDX-011, several other trials could act as revenue drivers for Celldex. As shown in the above table, Celldex here has a solid product pipeline and can do wonders in terms of revenue once these trials are completed and the drugs are approved by the FDA.

Caveats

The above discussed product pipeline has some risk factors that could possibly act as roadblocks for Celldex's revenue growth in upcoming years. All companies in biotechnology and pharmaceuticals are developing treatments of the future; a clinical failure can result in delays in approval or withdrawal of programs. Celldex relies on the success of rindopepimut and CDX-011 in clinical trials, withdrawal can cause a major setback to the revenue.

Moreover, regulatory failure can also be a risk if the FDA determined the data produced by Celldex is inadequate it could delay or deny approval. Any delays in approval timelines could impact the earnings and stock price movement. Going forward, the company should have enough cash, as it may need additional financing from 2014 to 2018 to fund its R&D programs. It will need funds for sales and marketing activities for potential commercial launches for rindopepimut and CDX-011, if approved.

Stock price Movement

Usually small cap companies have the potential for high growth in a short period of time, which makes them more attractive for investors compared to large or mid cap companies. I believe the chances of small caps turning into large caps are higher and have the potential to provide healthy returns to shareholders. Celldex is one such company that has provided a staggering 352.2% return to its shareholders in the past one year. The stock was trading at $4.86 per share on August 3, 2012 and closed at $20.36 per share on August 6, 2013. I believe the strong product pipeline and more than 20% revenue growth in 2012, to $11.2 million compared to $9.27 million in 2011, supported this staggering uptick. I assume the completion of Rindopepimut and CDX - 011 trials in the upcoming years will result in further uptick in the stock price providing exceptional returns to shareholders. With the product pipeline still under trial phase, I forecast an increase in the stock price will be observed gradually, when the drugs are approved and commercialized over the next years.

(click to enlarge)

Source: YCharts

R&D investments showing a different picture

Through its solid product pipeline, Celldex reflects potential to grow in terms of revenue, but this is not enough. There are certain financial ratios that don't support it observing revenue growth. I have taken R&D to sales ratio into consideration, and it is indicating a completely different picture.

R&D to Sales Ratio

30-Sep-2012

31-Dec-2012

31-Mar-2013

Sales (in million)

$3.11

$3.65

$2.41

R&D Expense (in million)

11.77

$13.75

$14.09

R&D to Sales (%)

378.46

376.71

584.65

As shown in the table above, the R&D to sales ratio has been increasing quarter-over-quarter from 378.46% in third quarter of 2012 and 584.65% in first quarter of 2013. Moreover, R&D expenses for Celldex have grown considerably, experiencing a quarterly growth of 16% in the fourth quarter of 2012 and 2.4% in the first quarter of 2013.

On the flip side, the company has not been experiencing revenue growth when compared to R&D expense. The revenue has dropped by approximately 34% from last quarter of 2012 to the first quarter of 2013, which signifies the amount spent on R&D is not having favorable effects on the revenue. This is a point of concern for Celldex and its shareholders. However, the company has revenue opportunities lined up in the future, as the trials are expected to complete in the span of 2-3 years.

I assume that once these trials are completed and, upon approval, the drugs are commercialized it has an excellent opportunity to experience revenue growth. This will also bring the R&D to sales ratio down drastically. However, this will take time as the trials are expected to complete after 2015 and beyond.

Free cash flow generation

The comparison of free cash flow yield of Celldex with its rivals from the biotechnology space, NPS Pharmaceuticals (NPSP) and Acadia Pharmaceuticals (ACAD), provides interesting results. A negative free cash flow yield reflects that a company does not have the strength to generate prominent cash to fund the business activities. A majority of small companies do not have a positive free cash flow as they invest a heavy amount of their revenue to grow their business. Free cash flow yield gives the investors a way to assess the value of a company, as it is a more precise representation of the returns shareholders receive from the business.

Free cash flow yield

Celldex

NPS Pharmaceutical

Acadia Pharmaceutical

Free Cash Flow (in million)

(17.36)

(9.61)

(6.59)

Enterprise Value (in billion)

1.57

1.84

1.51

Free Cash Flow Yield

(0.011)

(0.005)

(0.004)

As illustrated in the table above, the free cash flow yield of Celldex is almost twice less as compared to its competitors. This clearly shows that Celldex has invested heavily in R&D and other activities to fund its ongoing trials, which has resulted in negative free cash flow. The company is currently in a developing stage and ongoing trails require heavy investment to secure revenue growth in the future. Additionally, it posted a net loss of $17.3 million in the first quarter of 2013 compared to a net loss of $13.5 million for the first quarter of 2012. This is evidence of Celldex's focus on R&D spending. Since there are six clinical trials currently underway, the company will continue investing heavily in R&D. Once the FDA approves the drugs from the two main trials, after 2015, the free cash flow yield scenario will reverse.

Conclusion

Despite having a strong product pipeline, Celldex has weak financials to supports the revenue growth in the near future. The drugs, if commercialized, will propel the company to a new and different level and will ensure profits in the years to come. This will take more than two to three years to have its positives effects on the balance sheet.

Therefore, this stock is attractive for long term investors having an investment horizon of more than two years. Investors looking to make a quick buck shouldn't favor this stock.

Source: Why Celldex Is A Ticket To The Top