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By Jake King

Targeted therapies are the oncologists' precision tool in treating difficult cancers. Where early therapeutics like radiotherapy and chemotherapy tackle cancers by bombarding all rapidly dividing cells in the body, including healthy cells, molecularly targeted products are moving to the fore and replacing what were once considered groundbreaking treatments. Precision-targeting and personalized care are the future of cancer therapy, and investors should be looking for quality firms making headway in this space.

That's why we're picking up shares of Endocyte (ECYT) on the stock's current dip. The company develops small molecule drug conjugates (SMDCs) for the targeted treatment of specific cancers, and testing in humans has so far produced compelling results. And with a number of key events in the fourth quarter and early in 2014 - including a conditional product approval in Europe and further clinical results for its lead asset - Endocyte is entering an inflectional period in its 3-year existence as a publicly traded company. Mr. David Sobek spotlighted Endocyte late in 2012 for PropThink, suggesting that the equity was due for a tick higher in 2013 as low-risk catalysts played out; the stock is up 90% since. Despite outperforming the broader biotech sector already this year, we believe there's still significant upside for the patient investor, and Endocyte's approach to treating aggressive cancers holds considerable long-term potential. We believe that forthcoming events for ECYT are likely to be favorable, and for those still on the sidelines, Endocyte closing in on $14.50 is an attractive bet.

You can read our previous coverage here.

Hitting the Right Targets with SMDCs

Testing of vintafolide, Endocyte's lead drug candidate, to date has produced compelling results in a particular subset of cancer patients. Vintafolide (EC145) is a small molecule drug conjugate (SMDC) that targets the folate receptor (FR), which is frequently overexpressed in aggressive solid tumor indications. SMDCs are a close cousin to antibody-drug conjugates (ADCs) like Roche's (OTCQX:RHHBY) Kadcyla and Seattle Genetics' (SGEN) Adcetris, and consist of a targeting small molecule, a toxic payload to be delivered to the cancer, and a linker holding the two together. Essentially, these therapeutics target specific cell-receptors to deliver a toxic payload directly to the cancer cell, avoiding healthy cells that don't over-express the same receptors. Vintafolide is made up of an FR-targeting ligand, the company's proprietary linker, and the chemotherapeutic payload desacetylvinblastine monohydrazide ((DAVLBH)). Endocyte identifies the presence of the folate receptor in patients using etarfolatide (EC20), a proprietary companion imaging diagnostic for vintafolide that also targets the folate receptor albeit with a Technetium-99m payload -- the company plans to seek approval for both products at the same time.

In the Phase II PRECEDENT trial, for which Endocyte presented results in December of 2011, platinum resistant ovarian cancer patients were randomized to vintafolide combined with PLD (pegylated liposomal doxorubicin, or Doxil) or PLD alone. Vintafolide+PLD generated a median progression free survival (PFS) of 5 months in the Intent to Treat population (n=149) compared to 2.7 months in PLD-treated patients (p=0.031).

But more importantly a pre-defined subset of patients (n=38) that had 100% of their target lesions over-expressing the folate receptor (FR100%: more paint for the FR-targeting SMDC to hit) taking vintafolide+PLD demonstrated a median PFS of 5.5 months compared to a median of 1.5 months in patients receiving PLD alone. Vintafolide added to PLD reduced the risk of progression by 61.9%, a hazard ratio of 0.381 (p=0.018), in this patient subset. Overall response rates (according to RECIST criteria) in the trial were 28% in the ITT vintafolide + PLD arm vs. 16.3% in the ITT PLD arm; and 17.4% in the FR100% combo patients vs. 6.7% in the PLD-only FR100% patients.

As a secondary endpoint, vintafolide in combination with PLD failed to generate a statistically significant overall survival benefit in either the ITT population (a hazard ratio of 1.010) or the subset of FR100% patients (HR of 1.097). While overall survival is considered the gold standard in oncology trials, Mr. Sobek outlined in his previous article why focusing on PFS is less onerous than it might appear.

Likewise, vintafolide in a single-arm open-label trial in 2nd-line NSCLC patients demonstrated a positive trend in disease improvement when patients had more lesions expressing the folate receptor. Both OS and PFS improved in patients expressing FR on 100% of their lesions (n=14) when compared to patients whose lesions did not all express the folate receptor, referred to as FR10-90% (n=14). Median PFS in FR10-90% patients was 1.7 months compared to 7.9 in FR100% patients (HR of 0.326) (p=.028). Median OS in FR10-90% patients was 3.4 months compared to 10.9 months for FR100% patients (HR of 0.539); although the OS benefit was not statistically significant (p= 0.209). Bear in mind, this comparison does not include a control arm.

The key takeaway? Patients over-expressing the folate receptor on 100% of lesions and taking vintafolide, in combination with PLD or as a single-agent, have demonstrated statistically significant improvements in time to progression over patients not expressing FR in 100% of their lesions. PROC is a notoriously difficult cancer to treat and patients are limited when resistant to platinum-based therapies. In addition, FR over-expression is generally associated with more aggressive disease and worse prognosis. The stark improvement in FR100% patients and statistically significant PFS improvement is impressive in this patient population and suggests that vintafolide is doing just what it was intended to do: target cancer cells over-expressing the folate receptor and destroy them.

Last April, Endocyte entered into a global collaboration agreement with Merck (MRK) for the development and commercialization of vintafolide. While Endocyte will develop and commercialize the FR-identifying diagnostic etarfolatide on its own, the partnership granted Merck worldwide rights to develop and commercialize vintafolide. Endocyte received an upfront payment of $120 million in addition to a $5 million milestone payment later that year. Keep in mind that before the announcement, Endocyte was valued at less than $150 million. In addition to the $125 million already paid, the terms of the partnership make Endocyte eligible for another $875 million in milestone payments based on development, regulatory, and commercialization goals in a total of six different cancer indications - Merck plans to roll vintafolide into a number of new cancer indications and will cover the cost of development in these trials. In the US, vintafolide earnings will be split on a 50/50 basis between Endocyte and Merck, and Endocyte receives a double-digit royalty on sales outside of the US. Merck covers the cost of all vintafolide development outside of the PROCEED trial.

The heady upfront and milestone payments, 50/50 profit split, and double-digit ex-U.S. royalties are handsome for a small-cap oncology company.

Near-Term Events Likely Favorable

Endocyte is running two pivotal trials for vintafolide: the Phase III PROCEED trial in PROC patients with 100% of their lesions over-expressing the folate receptor, and the Phase IIb TARGET trial in NSCLC patients with FR100%. Endocyte expects top-line results from TARGET in the first quarter of next year and an interim evaluation of PROCEED in the first half of 2014.

But investors will be paying attention to a decision from the European Medicine's Agency on vintafolide's conditional approval in Europe for PROC - expected in the fourth quarter -- which could allow Merck to begin selling vintafolide, and Endocyte to market the companion diagnostic etarfolatide alongside, as early as next year. Remember, Endocyte has not completed a Phase III trial testing vintafolide in PROC. The European filing, which was accepted last November, is built on a Phase I study in solid tumors, two Phase II single-arm studies, and the PRECEDENT trial. If the European Medicines Agency grants a conditional authorization for marketing in Europe, vintafolide and etarfolatide would be granted full approval following successful and positive completion of the PROCEED trial.

There's good reason to believe vintafolide will receive conditional approval in Europe, although our investment thesis is built around the long-term potential of Endocyte's SMDC platform. Conditional marketing authorization may be granted when, although comprehensive clinical data have not been provided, the following requirements are met: a) the benefit/risk balance is positive; b) it's likely that the applicant will be able to provide comprehensive data in the future; c) an unmet medical need will be fulfilled; and d) the benefit to public health of immediate availability outweighs risks that additional data are still required.

As Mr. Sobek pointed out in his previous column, Avastin (bevacizumab) may be the ideal proxy when assessing vintafolide's shot at conditional authorization in the EU. Avastin was approved for the treatment of platinum-sensitive ovarian cancer in October of 2012 despite demonstrating no OS benefit when added to standard chemotherapy and only a marginal PFS benefit. Vintafolide has demonstrated a statistically significant PFS benefit in a patient population that's even harder to treat (platinum-resistant ovarian cancer) and will have comprehensive data in the same patient population with a year. Furthermore, the EMA has a history of approving oncology products based on less stringent requirements than the FDA. The EMA approved Cell Therapeutics' (CTIC) Pixuvri (pixantrone) as a monotherapy for relapsed or refractory aggressive non-Hodgkin B-cell lymphomas based on a mean PFS of 10.2 months versus 7.6 months with a comparator chemotherapeutic, and a complete response rate of 20% versus 6% with chemotherapy; the FDA had rejected Pixuvri a few years earlier (note that payers in Europe have been less receptive to the product). Likewise, Roche's Erivedge (vismodegib) was granted conditional approval for advanced inoperable basal cell carcinoma (BCC) in the EU based on the Phase II single-arm ERIVANCE study; Erivedge demonstrated an objective response rate in 43% of locally advanced BCC patients and 30% of patients with metastatic BCC. Given the approval of Avastin in Platinum-sensitive ovarian cancer, we see the likelihood of conditional approval as skewed in favor of Endocyte, and conditional approval could result in incrementally beneficial economics for Endocyte with subsequent commercialization.

Of the 27 countries in the European Union (EU27), Endocyte estimates roughly 42,300 patients are afflicted with ovarian cancer. Excluding ovarian cancer patients in stages 1, 3, 4, in addition to patients that are platinum-sensitive in stage 2, Endocyte projects a population of 17,100 platinum resistant ovarian cancer patients; the company excludes an additional 10% for comorbidities, for a total of ~15,000-patient market for folate-receptor screening with the company's companion diagnostic etarfolatide; remember, vintafolide is expected to primarily benefit FR100% patients. Endocyte estimates that 35-45% of PROC patients will over-express the folate-receptor in 100% of lesions, or approximately 6,000 patients. Endocyte has not publicly discussed pricing, so for our purposes we estimate pricing of $1000 and $80,000 for etarfolatide and vintafolide in Europe. Using the figures above, we arrive at sales of $15M and $480M between etarfolatide and vintafolatide. Endocyte retains full economics on etarfolatide and a double-digit royalty (we estimate 15%) of vintafolide sales, for EU revenue to Endocyte based on a conditional marketing authorization for the treatment of FR++ PROC of ~$87M annually. Considering that this is primarily a royalty stream, it will be primarily accretive immediately. It's certainly not a major earnings driver, but will offset expense significantly and the approval adds validation to the company's mid-stage pipeline. Endocyte and Merck have been building out commercialization teams for etarfolatide and vintafolide in the EU during 2013.

While a decision from the EU is Endocyte's most important near-term catalyst, Endocyte expects to have results from the Phase IIb TARGET study of vintafolide in second-line FR100% non small cell lung cancer in the first quarter of 2014. The TARGET trial compares vintafolide, vintafolide + docetaxel, and docetaxel alone in FR100% 2nd-line NSCLC patients, with PFS as its primary endpoint. Vintafolide as a monotherapy produced a statistically significant PFS benefit in patients expressing the folate receptor on 100% of their tumors compared to those expressing the receptor on just some lesions. While extrapolating from an uncontrolled study of vintafolide as a monotherapy warrants caution, the drug's demonstrable effect on FR++ cancers suggests a likely favorable outcome in PFS in this patient subset next year. Additionally, an independent data safety monitoring committee will take an interim look at the ongoing PROCEED trial to decide on a possible enrollment expansion in the first half of next year. Endocyte incorporated in the PROCEED trial a PFS analysis on 250 FR100% patients. The DSMB may select one of three alternatives based on the analysis: 1) stop the trial if the PFS endpoint has not been met; 2) stop the trial because the PFS endpoint has been met and it would be unethical to continue because of demonstrated patient benefit; or 3) add 100 FR100% patients to expand the OS analysis. The company and investors won't be privy to the PFS numbers, but the independent data monitoring committee's determination regarding the additional FR100% patients will be indicative that the trial is, at the least, showing some level of PFS benefit. The primary endpoint in the PROCEED trial includes only FR100% patients, but the company plans a hierarchical analysis of partially FR positive patients to determine if these patients are receiving a benefit despite fewer FR over-expressing lesions.

The company will begin clinical testing of more SMDCs over the course of the next year, some based on targeting the folate receptor, like vintafolide, and others targeting the Prostate Specific Membrane Antigen (PSMA):

1. Endocyte intends to file an IND and initiate a Phase I clinical trial this quarter for EC1456, an SMDC targeting FR++ solid tumors with a tubulysin payload rather than DAVLBH.

2. Endocyte will file INDs and initiate clinical trials for both EC1719 and EC0652 in early 2014. EC1719 is an SMDC targeting PSMA that delivers tubulysin for the treatment of prostate cancer. 1719 is coupled with a companion diagnostic, EC0652, in a methodology similar to vintafolide and etarfolatide. If the PSMA targeting small molecule is effective, this imaging agent will determine patient PSMA levels before treatment.

3. Endocyte will create a companion diagnostic for EC1669, an anti-inflammatory SMDC targeting the folate receptor, and will follow up with an IND filing and clinical trials in the second half of 2014.

4. Merck will begin a Phase II randomized trial of vintafolide in FR-positive triple-negative breast cancer later this year.

Endocyte's SMDC technology makes for a compelling platform, and the evidence of activity in the patient population intended to benefit from vintafolide's FR-targeting mechanism is intriguing. For those not already involved, ECYT becomes more and more attractive coming off of its 52-week highs into a number of key catalysts in the next six months. Note the repeat top around $14.50; it's an attractive entry point as ECYT's uptrend line has held up in the last two weeks despite intra-day breaks.


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A long-term position in ECYT following Mr. Sobek's coverage last year has produced close to a 100% return, and at ~$390M in enterprise value we continue to like Endocyte's prospects in the oncology space. The company is well-capitalized with $169M in cash and investments and expects to end the year with $145-160M.

Source: Leaning Towards Favorable Outcomes From Endocyte's Upcoming Events