[Editor's Note, October 10: This article has been revised since original publication, as the author has made changes to the content]
CytRx (CYTR) shares slid approximately 20% today after the company announced an offering of common shares. Such a slide due to dilution is a common occurrence and should not be an alarm for long-term investors. In fact, it is an opportunity to get in at even cheaper valuations.
CytRx Corporation is a biotechnology firm working on developing various oncology treatments. The company’s primary technology aims to improve the efficacy and safety of existing chemotherapy drugs by attaching a linker molecule, which helps concentrate the drug at the tumor. Aldoxorubicin is the lead drug candidate using this technology.
It is a tumor targeted doxorubicin conjugate; it is the hydrazine of doxorubicin. While doxorubicin itself has adverse effects (myelosuppression, gastrointestinal disorders, mucositis, stomatitis, cumulative cardiotoxicity and extravasation), attaching the EMCH (an acid sensitive linker) reduces the adverse events and improves the efficacy as well.
CytRx holds the global right to the compound and is already conducting a number of clinical trials with the target of getting an FDA approval. The drug is currently in four different clinical trials, with the 2nd-line soft tissue Sarcoma study in Phase 3 trials and 1st-line tissue Sarcoma study in Phase 2b.
The drug has already completed Phase 1 b/2 clinical trials for patients with advanced solid tumors. The clinical benefit from this trial was defined as partial response and stable disease of 8 cycles of treatment. Out of the 13 subjects with soft tissue sarcomas, 5 achieved partial response (30% tumor shrinkage), 7 showed prolonged stable disease (>4 months) and 8 showed tumor shrinkage. More interestingly, five of the eight who showed partial responses or prolonged stable disease had previously been treated with doxorubicin.
The most important piece of information for potential investors is that the company has managed to reach an agreement with the FDA to conduct a global pivotal aldoxorubicin Phase 3 trial for treating patients with soft tissue sarcoma who were refractory following prior treatments or had relapsed. This SPA defines the different parameters of the trials and would enable the company to file an NDA for aldoxorubicin.
2) Tamibaroteneand Bafetinib
CytRx has the rights to two other anti-cancer compounds called tamibarotene and bafetinib. They are not actively being developed and the company may find a partner to continue their development in the future.
The market recently responded positively to the company’s updates on the aldoxorubicin clinical trials. The shares had gone up almost 23% since the company announced positive data from a favorable confirmatory pre-clinical study in glioblastoma conducted in partnership with the Louisiana School of Medicine. The detailed findings of this study will be announced on the 30th of September during the European Society for Medical Oncology conference in Amsterdam. The interim response rates from the ongoing Phase 2b trial provides the Street with more insight into the potential of aldoxorubicin. Those results showed that soft tissue sarcoma patients treated with aldoxorubicin had a 22% response rate versus 0% for patients receiving doxorubicin.
Despite a major rally, the valuation of CytRx is still pretty reasonable. The company is trading at a 70% discount to mean sell side target price of $8, with the lowest target price of $7. This shows that the shares of CytRx still have a significant upside and more rallies can be expected on positive catalysts.
The success of aldoxorubicin is determining the valuation of CytRx. As mentioned above, the drug is currently in a number of clinical trials and the data from these clinical trials is likely to determine valuations of CytRx. The following are some important catalysts for potential long-term investors and also those looking for short-term, profit-taking opportunities:
1) The top-line data from 1st-line soft tissue sarcoma – Phase 2b trial is expected in December 2013 and positive results should send the share price soaring.
2) The company is expected to start the Glioblastoma Phase 2b trial pretty soon and data for this trial is expected to be released during the third quarter of 2014.
3) CytRx expects to start the Kaposi’s Sarcoma Phase 2 trial in 2013. The data from this trial will help demonstrate the linker technology and could have an impact on the company’s valuation. The company will start releasing trial data 12-18 months after the trial starts.
4) The investors can also expect CytRx to announce partnerships for some of its ongoing trials. Partnership news can also act as a major catalyst for shares. Partnership agreements are a good sign for any small biotechnology company because they reduce the financial burden of the trials and also provide an ‘insightful’ acquirer.
Stock dilution is a major risk with holding shares of small biotechnology companies. As the firms constantly need to raise cash to finance their operations, they are forced to make regular share offerings. The investors felt this affect today after the shares tumbled 20% on offering of common stock. However, this also gives the new investors a chance to get in at even lower prices. Investors are effectively getting the stock for the price before the recent aldoxorubicin data was released. After the current offering of $22.5 million, I believe another one would not occur until late 2014 or even later.
Another common risk with investing in small biotechnologies is setbacks in trials. CytRx also faced this phenomenon when its shares fell almost 6% in May after the company announced that it was halting all trials of tamibarotene. The decision was taken after an independent Data Safety Monitoring Committee suggested that trials should be discontinued because patients under trials were unlikely to show improved progression-free survival, as compared to other already approved chemotherapeutic agents. However, the current valuation already reflects the discontinuation of tamibarotene.