Zacks' Bull Of The Day: Endocyte

| About: Endocyte, Inc. (ECYT)

Biotechnology stocks don't appear to be slowing down their pace at all this year, with the Nasdaq Biotech Index ETF (NASDAQ:IBB) making new highs again this week while the S&P gets back to 1820. So it pays to keep digging for biotech gold to find the next Jazz (NASDAQ:JAZZ), Furiex (NASDAQ:FURX), or Medivation (NASDAQ:MDVN).

While we missed FURX before they announced positive Phase III clinical trial results for a key digestion drug, and we only caught a piece of the great run in JAZZ, my FTM portfolio is very happy with our returns in MDVN.

My latest pick is Endocyte (NASDAQ:ECYT), a $460 million biopharma company engaged in the development of therapies for the treatment of cancer and inflammatory diseases. They create novel small molecule drug conjugates (SMDCs) and companion imaging diagnostics for personalized targeted therapies.

The company employs its proprietary targeting technology to develop novel combination therapies that have an effect on cells that express characteristics specific to certain conditions and functions like the folate receptor in cancer cells. The underpinnings of the company’s intellectual property come from research conducted at Purdue University, thus their base in West Lafayette, Indiana.

European Approval Expected

According to analysts at Roth Capital Partners, "The folate receptor (FR) is an attractive target because it is frequently highly over-expressed in some of the most prevalent solid tumors, including ovarian, non-small cell lung, breast, colorectal, kidney, endometrial, among others. Cancers that over-express folate receptors affect more than 1 million people in the U.S., Japan and Europe."

By linking active cancer-fighting drugs to Endocyte’s FR targeting mechanism, this approach can deliver more drug to FR "over-expressing" tumors with fewer toxicities.

Endocyte's initial folate-receptor program, vintafolide (the drug) and etarfolatide (the diagnostic) for the treatment of ovarian cancer, are currently being evaluated by the European Medicines Agency's (EMA) Committee for Medicinal Products for Human Use (CHMP).

Though some clinical trials are still in progress, the company and most Wall Street analysts believe the pending EU conditional marketing authorization will be approved sometime in the first quarter.

Big Brother Merck

Developmental-stage biopharma companies often wouldn't make it through years of cash-draining clinical trials if it weren't for partnerships with established drug companies who provide R&D support, regulatory experience, and mountains of cash.

In 2012, Endocyte entered into a worldwide partnership with Merck for vintafolide. In addition to $120 million upfront and potential additional milestones of $880 million for development of six cancer indications, Endocyte will share equally in US profits and receive a 15-20% royalty in other countries.

Wall Street Views

Analysts at Baird Equity Research believe that the Endocyte "unique small molecule drug conjugate technology makes for a bona fide platform story ... with a companion diagnostic approach regulators seem to like." They see vintafolide as "just the first of what we think could be numerous novel therapies born of ECYT’s proprietary drug conjugate, folate receptor (FR) targeting development platform."

And analysts at Wedbush, Cowen and Co., RBC Capital Markets, Piper Jaffray, and Chardan all seem to agree that Endocyte's technology has great promise that will soon get a foothold in Europe. Wedbush, with a great biotech team that was recommending Pharmacyclics (NASDAQ:PCYC) back in 2012 at $25, has the highest price target for ECYT shares at $23.

Again from Roth, "Despite important questions, as the overall survival (OS) data were inconclusive, we believe the ovarian PFS data is enough to gain conditional EU approval in 2013, as further analysis appears to point to a cause (platinum-free interval), EU therapies have been conditionally approved without OS benefits previously, and data for the diagnostic in patients that heavily overexpress the folate receptor (FR++ patients) is solid."

Not Risk Free

The other thing developmental-stage biopharma companies have in addition to "big brothers" is big risk. While peak sales for vintafolide are estimated to be over $1 billion, these revenues still may not turn the company profitable in the next two years.

And those sales are assuming all goes smoothly in the clinical trial and regulatory arenas. For now, the stars seem to be lining up for Endocyte. Just make sure you can see through the risk if the clouds roll in.

Disclosure: I own ECYT, MDVN, and PCYC for the Zacks Follow the Money Portfolio.