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By David J. Phillips

Shares of Endocyte (NASDAQ:ECYT) fell recently after the company said its lead investigational product, the cancer drug vintafolide - being developed in concert with Merck (NYSE:MRK) - didn't work any better than the standard-of-care chemotherapy docetaxel in patients with advanced non-small cell lung cancer (NSCLC). Despite the setback, upcoming events could provide positive catalysts for an upside reversal in the company's valuation. Some investment research is warranted.

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ECYT data by YCharts

Vintafolide links folate-containing (vitamin B9) with the potent anti-mitotic chemotherapy agent vinblastine and is designed to deliver the novel small molecule drug conjugate (SMDC) directly to cancer cells by targeting folate receptors, which are expressed on 80 - 90% of ovarian and lung cancers (but not on most normal cells), delivering its chemo-payload inside the cancer cells.

Following an interim analysis, management reported last Thursday that the independent Drug Safety Monitoring Board (DSMB) advised investigators to tell patients enrolled in the TARGET study that vintafolide use in monotherapy was unlikely to prove superior to docetaxel in progression-free survival ((NYSE:PFS)) at the termination of the study.

The TARGET study was designed to investigate whether there was sufficiently strong efficacy (i.e. PFS) in order to proceed with late-stage testing with either vintafolide single-agent and/or the combination of vintafolide plus docetaxel (taxotere) against the standard-of-care docetaxel in second-line NSCLC (Stage IIIB or IV patients who had failed at least one prior chemotherapy regimen and who have all target lesions positively expressing the folate receptor).

Though a wide range of molecular targeted agents now exist in the treatment of NSCLC - such as, Roche's (OTCQX:RHHBY) vascular endothelial growth factor (VEGF)-directed therapy Avastin, its EGRF inhibitor Tarceva, and Pfizer's (NYSE:PFE) ALK-positive inhibitor Xalkori - the five-year survival rate for those with advanced NSCLC remains a dismal 15%, as clinical resistance remains the rule rather than the exception.

Novel new options are wanted and needed: the NSCLC market is expected to grow to over $6 billion by 2020, according to a competitive intelligence report published by Thomson Reuters last year.

News that the DSMB observed the combo arm of the TARGET study (vintafolide & taxotere) was trending toward the statistical goal of a 50% improvement in PFS relative to the taxotere arm (and didn't demonstrate any new safety concerns) ultimately could prove to be good tidings for Endocyte shareholders. Top-line results are expected to be unveiled in first-quarter 2014.

Vintafolide in combination with a liposome-encapsulated version of the anthracycline doxorubicin (Doxil) is currently under review with the European Medicines Agency ((NYSEMKT:EMA)) for the treatment of adult patients with folate-receptor positive platinum-resistant ovarian cancer (PROC). Conditional approval - pending eventual results from a late-stage trial called PROCEED (top-line PFS analysis is expected come 2Q:14) - could be granted by year-end.

Although more than 70 percent of women with ovarian cancer will present with advanced disease at diagnosis and currently approved therapies have demonstrated little improvement in overall survival rates -- up to 80 percent will experience disease recurrence and eventually die from their disease -- Decision Resources analyst Amy Duval still believes that "the well-validated pathway of angiogenesis in this disease will mean vintafolide will struggle to capture market share from Avastin and Amgen's (NASDAQ:AMGN) promising, investigational late-stage trebananib (AMG-386)."

Nonetheless, Wedbush Securities estimates that the use of Vintafolide in a third-line setting alone could generate peak sales of $400 million in European and $500 million in the United States.

A word of cogent caution is warranted: Pending regulatory approval, Endocyte intends to co-promote vintafolide in the U.S. That said, investors should note that overall survival is typically the preferred primary endpoint for an ovarian cancer registration trial in the U.S. Nonetheless, the company chose to design the PROCEED trial with PFS as the primary efficacy outcome endpoint in patients with PROC - which means the effect size of progression free survival data endpoints for vintafolide better be robust!

In April 2012, Merck bought the development and worldwide commercialization rights to vintafolide and (the right to use) etarfolatide, the companion imaging diagnostic for vintafolide in an exclusive deal worth $1.0 billion -- almost three times the stock's current market valuation. Merck paid $120 million in upfront, nonrefundable payments and will owe $880 million in milestone payments (development milestones of approximately $380.0 million and sales-based milestones of approximately $500.0 million).

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The company is also developing companion imaging diagnostics for each of its SMDCs, designed to identify the patients whose disease over-expresses the target of the therapy (and who are therefore more likely to benefit from treatment).

Owing little debt, management believes that its current cash position of $169.8 million (at June 30, 2013) should be sufficient to fund current operating plans, including completion of the PROCEED trial and the advancement of earlier stage pipeline projects, such as proprietary SMDC applications in autoimmune diseases. Cash burn was just $16 million in second-quarter 2013, as most expenses are reimbursed by Merck.

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ECYT Total Interest Expense (Quarterly) data by YCharts

Even if vintafolide fails to gain marketing approval for use as a single-agent drug, the commercial potential for this SMDC in combination therapy is huge: Folate-receptor expression correlates with poor prognosis (overall survival and DFS); and, some one-million newly diagnosed patients - including, kidney (60%), endometrial (65%), colorectal (30%), breast (~ 30%), and brain (~ 20%) - in the industrialized world over-express folate-receptor positive lesions. Merck has expressed plans to further evaluate the drug's potential for treatment in a number of these other cancer types.

Consensus estimates call for peak sales of vintafolide to hit $2.5 billion in the next decade.

Although the company has never been profitable and has accumulated an earnings' deficit of $168 million, investors aware of the risks inherent to any late-stage clinical biotech company - especially one dependent on one drug platform - might still look to its recent stock price stumble as the buying opportunity, given the currently overlooked commercial opportunities that Endocyte could offer in a variety of solid tumor types - even if used in a second or third-line treatment position.

David J. Phillips, a contributing editor at YCharts, is a former equity analyst. His journalism has appeared in Bloomberg BusinessWeek, Forbes, and Kiplinger's Personal Finance. From 2008 to 2011, David was a reporter for CBS News Interactive. He can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.

Source: Endocyte's Plunge Ignores Drug's $2.5B Potential