DelMar Pharma: Oversold Chemo Company Presents Compelling Investment Opportunity

Nov.21.13 | About: DelMar Pharmaceuticals, (DMPI)

Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

With excitement over dendritic cell technologies from companies like Northwest Biotherapeutics (NASDAQ:NWBO) (shares have nearly doubled over the past two weeks following the airing of a Fox News segment) and ImmunoCellular (NYSEMKT:IMUC), it's easy to overlook the fact that chemotherapy will still play a role in the standard of care for glioblastoma.

DelMar Pharmaceuticals (NASDAQ:DMPI) initially caught my eye because of its miniscule valuation relative to its peers in the glioblastoma space (IMUC, NWBO, AGEN, CLDX, CYTR, etc.). Further due diligence leads me to believe that DMPI at its current valuation ($1.08/share, Market Cap = $25 M) offers great upside potential at a favorable risk profile due to its historically validated and differentiated technology. Upcoming interim trial data to be presented this Friday at the Society for NeuroOncology Annual Meeting should serve to further validate VAL-083, the company's chemotherapeutic.

Investment Thesis

Glioblastoma multiforme (GBM) is a deadly disease with limited treatment options. Temodar (standard front-line therapy) and Avastin (second-line therapy) are not very effective in treating GBM (60% of patients treated with Temodar experience tumor progression within one year, 48% fail both Temodar and Avastin). VAL-08 has already been extensively tested in the past (assessed in over 40 human clinical trials sponsored by the NCI) and shown to be just as effective, if not superior to Temodar. More importantly, VAL-08 is active in Temodar-resistant tumors, and therefore could be prescribed in combination therapy with Temodar for a more thorough therapy against brain cancer. Using Temodar and Avastin's glioblastoma sales figures as a reference, DMPI's revenue potential is many multiples of its current valuation. Although novel immunotherapies currently in clinical trials offer great potential (e.g. IMUC, NWBO), their success wouldn't preclude the need for effective chemotherapies to be used in conjunction with these new technologies in the foreseeable future.

Company Summary (read the 10-Q for more detail)

Incorporated in April 2010, DelMar is testing VAL-083, a first in class small-molecule chemotherapeutic, in a Phase I/II open-label single-arm dose-escalation clinical trial for the treatment of patients with refractory glioblastoma multiforme (the most common form of brain cancer) and progressive secondary brain tumors. The trial was initiated in October 2011 and expects to be completed in March 2014. VAL-083 has been studied since the 1960's for the treatment of various cancers and is approved in China for the treatment of chronic myelogenous leukemia and lung cancer. DelMar has established a partnership with the manufacturer of VAL-083 in China and has also obtained exclusive rights to sell the drug in China. The company has enough cash to last until mid-2015.

The key topics I will address are:

  1. Market Opportunity

  2. VAL-083's technology and prior trial results

  3. How immunotherapies play into this

Glioblastoma is a deadly disease with limited treatment options

Approximately 48% of patients with glioblastoma fail both first line (radiation + Temodar) and second line (Avastin) treatment. After that, patients are left with no treatment options in a disease with a median survival of 14.6 months following first-line treatment. Furthermore, Avastin was shown earlier this year to provide no overall survival benefit in glioblastoma patients. If it weren't for the fact that there are so few treatment options, Avastin's approval probably would've been revoked like it was in breast cancer.

Market opportunity is many multiples of DMPI's current valuation

VAL-083 will initially seek approval as a second line treatment but will also attempt to gain approval as a first-line therapy.

Last year, Temodar generated U.S. sales of $423 million and global sales of $917 million (source). Avastin generated U.S. sales of $170 million in glioblastoma.

Even if VAL-083 fails to gain approval as a first-line therapy and is only approved in second-line treatment, the revenue opportunity is over six times its current valuation if one uses Avastin's U.S. sales as a reference.

VAL-083 is a historically validated technology

VAL-083, or dianhydrogalactitol, was discovered in the 1960s and has been published in over 40 human clinical trials sponsored by the National Cancer Institute. It's already approved in China for chronic myelogenous leukemia and lung cancer.

This then raises the question as to why it hasn't been developed in the U.S. yet. I couldn't tell you. But the success of drugs like Treanda proves that gems can occasionally slip through the cracks.

A randomized Phase II trial of VAL-083 conducted in 1979 demonstrated superior performance to Temodar. The overall survival benefit of VAL-083 was over three times greater than that of Temodar.

Treatment of GBM

Temodar (Phase III, Stupp 2005)

VAL-083 (Phase II, Eagan 1979)

Number of Patients

573

42

Median Overall Survival

58 weeks

67 weeks

OS Benefit of adding Chemo

2.5 months (12.1 vs. 14.6)

8.4 months (8.8 vs. 16.8)

p<0.01

p=0.02

Click to enlarge

Of course, one must be cautious when comparing across trials in this manner. But what makes VAL-083 compelling isn't just its efficacy, it's its unique structure and mechanism of action.

VAL-083 is active in Temodar-resistant tumors

Temodar, the current first-line treatment when used in conjunction with radiotherapy, is not an incredibly effective drug with 60% of patients experiencing tumor progression within a year. Resistance to Temodar has been shown to be correlated with increased MGMT (O-6-methylguanine-DNA methyltransferase) expression. A recent in vitro study demonstrated that VAL-083 is unaffected by MGMT expression. In other words, VAL-083 is active against Temodar-resistant tumors.

The science can be summed up as follows: Temodar attacks cancer cells by methylating the O-6 position of guanine, causing apoptosis in the cell. But this is counteracted by a repair enzyme called O6-methylguanine-DNA (MGMT). VAL-083 attacks cancer cells in a different way by alkylating the N-7 position, which is unaffected by MGMT. The chart above demonstrates VAL-083's superiority to Temodar in MGMT positive tumors.

In terms of toxicity, VAL-083 is comparable to other chemotherapies. In August, the FDA allowed the company to accelerate the dose-escalation of its ongoing trial and an MTD has not yet been reached.

Given that VAL-083 potentially has comparable if not superior efficacy to Temodar and is also active in Temodar-resistant tumors, VAL-083 should be granted approval as a first-line treatment if Phase III trial data is in line with historical results.

Immunotherapies do not pose a significant threat to VAL-083's market share in the foreseeable future

Regardless of whether or not IMUC or NWBO's experimental immunotherapies turn out to be as wildly successful as they were in their sub-30 patient uncontrolled single-arm Phase 1 trials, chemotherapies will still be used in the first line of attack against glioblastoma. Current immunotherapies, although promising, do not cure cancer and aren't applicable to all patients (NWBO's DCVax-L can be used in 90% of patients, IMUC's ICT-107 in 65-75%, and Celldex's (NASDAQ:CLDX) Rindopepimut in 30%). On top of that, they are still very expensive due to the nature of the manufacturing process. Short of a miracle cure coming along for one of the deadliest cancers, doctors will still prescribe chemotherapy to maximize the chances of tumor eradication.

Key Upcoming Events

  • November 22, 2013 - Society for NeuroOncology Annual Meeting

  • March 2014 - Estimated Study Completion Date

Other Expected Events

  • Late 2013-2014 - Establishment of sales and marketing partner for VAL-083 in China

Risks

As a clinical stage microcap company, there are obviously a great deal of risks.

Financing/Dilution Risk

The company has enough cash to carry it through mid-2015, so this is not a near-term issue.

Clinical Risk

If VAL-083 is unable to meet its trial endpoints and is rejected by the FDA, then shares would plummet and the company's future would be uncertain. However, the drug has already been extensively tested in clinical trials in the past and shown to be effective, so this risk appears to be low. But nothing is ever certain.

Final Note

The stock appears to be oversold, having shed half of its value between June and mid-July on low volume and no news. Since then, shares have more or less remained flat. Moving forward, interim clinical data to be presented this Friday at the Society for NeuroOncology Annual Meeting could serve as a potential catalyst as DMPI edges closer to completing its trial. This article doesn't even address VAL-083's possible expansion into other indications and market potential in the Chinese market.

Given VAL-083's historically documented safety/efficacy, differentiated technology, limited treatment options in glioblastoma, large market opportunity, and huge discount to its peers, DMPI presents a compelling investment opportunity for investors aware of the risks associated with investing in microcap clinical stage companies. DMPI is selling at a huge discount to its competitors and could easily see shares double back to their previous level if interim trial data is strong and more people become acquainted with the company. DelMar may not be as popular as ImmunoCellular or Northwest Biotherapeutics, but just because the technology is antiquated doesn't mean that there isn't money to be made.

Disclosure: I am long DMPI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.