DelMar Pharmaceuticals: Following The Former CEO Of Celgene On His Fight Against Brain Cancer

Feb.26.14 | About: DelMar Pharmaceuticals, (DMPI)

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I am following the founder of Celgene into his next cancer stock, DelMar Pharmaceuticals (NASDAQ:DMPI), a company with a promising treatment for brain cancer. Carrying minimal dilution risk this year and already boasting full approval in China, DelMar Pharmaceuticals will report U.S. results from its Phase I/II within months. Although this binary investment could result in a total loss if the FDA rejects the treatment, it could generate up to $1 billion in annual sales if approved, thereby forming a highly asymmetrical risk:reward trade. The FDA has already granted DelMar Pharmaceuticals' compound Orphan Drug Status, the Chinese State Food & Drug Administration has already approved its compound for lung cancer, and Chinese doctors have already prescribed its compound to patients. If the company releases positive results at the American Association of Cancer Research Conference in San Diego this April, it could threaten the reign of Merck's Temodar and Roche's Avastin, the current drugs for this form of brain cancer generating $423 million and $170 million in annual sales, respectively.

Just One Drug: VAL-083

DelMar Pharmaceutical is developing its lead compound, VAL-083, as a treatment for glioblastoma multiforme, the most prevalent and aggressive form of brain cancer. The company is currently conducting a Phase I/II trial on this compound, with updated results due for release by April 9.

The leading treatments for this form of brain cancer are surgery, chemotherapy, and drugs Temodar and Avastin. VAL-083 is currently in clinical trials as a back-up treatment- a last resort for patients who fail all four treatments. If approved, however, DelMar Pharmaceuticals notes in its corporate presentation that VAL-083 could receive a contemporaneous upgrade to front-line treatment status, thereby threatening the sales of Temodar and Avastin.

VAL-083 has a differentiated mechanism of action, orphan drug status, proven cross-resistance, and addresses an unmet medical need for patients who fail to respond to market treatments like Avastin and Temodar. It is a small-molecule chemotherapeutic: an alkylating agent that has been used in over 40 published clinical trials sponsored by the U.S. National Cancer Institute. The compound is orally bioavailable with a favorable safety profile.

DelMar Pharmaceuticals has intellectual property protection from internal trade secrets, seven global patent families filed globally, and a U.S. patent issued in 2013. Additionally, if VAL-083 is ultimately approved, the Orphan Drug Act will protect DelMar Pharmaceuticals by automatically granting seven years of market exclusivity in the U.S. and 10 years of market exclusivity in Europe.

Already Approved and Selling in China

Since October 2012, a subsidiary of publicly traded Guangxi Wuzhou Zhongheng Group (600252:Shanghai) has been DelMar Pharmaceuticals' partner on VAL-083 as a cancer chemotherapeutic for the treatment of chronic myelogenous leukemia and lung cancer. Guangxi Wuzhou Pharma funds all clinical activities in China. DelMar Pharmaceuticals uses this partnership for Chinese marketing rights and an established sales force to generate royalty revenue.

Clinical Trial Progress

The U.S. National Cancer Institute has already sponsored 40 clinical studies using VAL-083 as a cancer treatment. As a continuation of this research, DelMar Pharmaceuticals formally initiated a Phase I/II clinical trial on VAL-083 in October 2011 for treating glioblastoma multiforme. There are three clinical sites in Tennessee, California, and Florida. The trial is an open-label, single-arm, dose-escalation study designed to evaluate the safety, tolerability, and anti-tumor activity of VAL-083 in patients with histologically confirmed initial diagnosis of recurrent malignant glioblastoma multiforme. Patients in the trial must have been previously treated with surgery and/or radiation, and must have failed Temodar or Avastin. Patients in DelMar Pharmaceuticals' clinical trial, therefore, have no further FDA-approved treatment options for their life-threatening brain cancer.

The trial is 71% complete. In August 2013, following an extensive safety review of patients then treated to date, the FDA approved a dose-escalation request, advancing the trial significantly by skipping two interim doses. On November 22, 2013, the company presented positive interim data at the meeting of the World Federation of Neuro-Oncology in San Francisco.

  • No significant adverse events
  • No dose-limiting toxicity
  • 25% of patients exhibited stable disease or tumor regression

The final point -- 25% of patients exhibited stable disease or tumor regression -- seemed particularly encouraging given the extremely low dosages administered during Phase I/II. Phase I/II trials are primarily to test safety, not efficacy, but seeing some clinical evidence of tumor-regression was "very promising," explained Jeffrey Bacha, CEO of DelMar Pharmaceuticals. "VAL‐083 is safe and well‐tolerated by patients at the doses tested to date, and based on historical data, we anticipate seeing stronger patient benefit and tumor responses as we achieve higher doses." I am skeptical of this conclusion, however, as management failed to report how many control patients, who received no drugs, exhibited stable disease or tumor regression. I have no benchmark against which to judge the 25% figure. In any case, the dosages are extremely low in Phase I/II trials, so I have no expectations to see efficacy data whatsoever until higher dosages can be administered during Phase IIb and III.

Looking ahead in 2014, DelMar Pharmaceuticals plans to complete the final 29% of the Phase I/II trial and release final results, after which the FDA will review the data. If the FDA allows the trial to continue, the company will initiate the Phase II/III portion by 2015. The best-case scenario here would be to attract a co-development deal with Big Pharma based on positive clinical results from the Phase I/II portion, eliminating most of the financing requirements for the Phase III portion. The worst-case scenario would be a large capital financing to self-fund Phase II/III entirely, but the company would not likely raise capital until next year, leaving current investors plenty of time to adjust their plans as the trial progresses. See my thoughts on the company's cash position in the Financing Outlook section below.

Analyst Coverage

SeeThruEquity initiated unbiased coverage of DelMar Pharmaceuticals on January 10, 2014, with a price target of $4.63 per share. SeeThruEquity analysts enumerated the catalysts they expect during 2014.

  • Announcement of final Phase I/II results
  • FDA decision on advancing the trial to Phase II/III
  • Possible Phase II/III financing from Big Pharma
  • Royalty opportunities in China

Two months prior, on November 27, 2013, Zacks Investment Research upgraded its unbiased coverage of DelMar Pharmaceuticals from Neutral to Outperform, with a 12-month price target of $4.50 per share.

Dr. Sol Barer's Next Multi-Bagger?

I am a DelMar Pharmaceuticals shareholder partly because its key team members have personally created enormous victories for prior shareholders during their careers. I am particularly impressed with Dr. Sol Barer, the former CEO of Celgene, as its stock price rocketed from single digits to over $100 per share. Now fighting brain cancer with DelMar Pharmaceuticals after managing billions of dollars in skin cancer drug sales at CelGene, Dr. Barer is an advisory board member and uniquely qualified to endorse a cancer treatment.

I also know that DelMar Pharmaceuticals' Chief Scientific Officer, Dr. Dennis Brown founded and sold two companies: Matrix (acquired by Chiron for $61 million) and ChemGenex (acquired by Cephalon for $231 million). Moreover, I know that DelMar Pharmaceuticals' clinical team developed Synribo, a major drug at Teva that gained full FDA approval this month.

If DelMar Pharmaceuticals' team can continue this trend, I have the potential of multi-bagger success to counterbalance my risk of total loss if the FDA rejects VAL-083. SEC filings reveal considerable insider buying when the share price recently dipped in price. In the past month alone, CEO Bacha has purchased 10,000 shares, Director John Bell has purchased 9,000 shares and Director Robert Toth has purchased 18,500 shares.

Fundamental Analysis

The market capitalization of DelMar Pharmaceuticals at $1.25 per share is $39.4 million. There are currently 31.52 million shares outstanding and 57.44 million fully-diluted shares outstanding after adding 22.65 million warrants and 3.24 million options, although some of these warrants and options are out-of-the-money. The most relevant strike price to watch is $1.60 per share. If the stock price were to rally above $1.60 per share for at least 20 trading days, there would be 13.1 million warrants callable that could add $10.5 million of cash to the company's balance sheet, if called. Note that raising this cash would not dilute shareholders.

As of the latest financial filing, management has stayed within its forecasted budget. R&D expenses were $600,000 and SG&A expenses were $700,000 for the most recently reported quarter. Adjusted non-GAAP net loss was $1.3 million, or $0.03 per share. Management's forecasted cash burn rate for 2014 is approximately $288,000 per month, with enough cash on hand to last until 2015.

The addressable U.S. market for VAL-083 can be divided into two categories: use as a back-up therapy and use as a front-line therapy. If VAL-083 were to be used as a back-up after third-party treatments failed, annual sales could reach $500 million. However, if VAL-083 were to be used as the primary therapy for patients suffering from glioblastoma multiforme, annual sales could reach $1 billion.

Glioblastoma multiforme affects 15,000 Americans annually. If left untreated, the median survival rate for this terminal illness is 4.5 months. Tragically, half of patients fail all FDA-approved treatments for this disease and are left with no further options. This is why DelMar Pharmaceuticals enjoys Orphan Drug Status; it addresses the unmet need of patients who have failed all available treatments.

I do not personally invest based on peer comparison calculations, but according to a corporate presentation on February 6, 2014, DelMar Pharmaceuticals' sub-$40 million market capitalization was allegedly below the mean and median of its peer group: the mean market capitalization of cancer companies at Phase II or earlier was $315 million, and the median was $153 million. I was unable to find the CEO's calculations for these two claims, but I did find a prohibitively lengthy list of such companies here. The previously cited SeeThruEquity report performed a close peer group analysis in its report and found DelMar Pharmaceuticals to the cheapest among its peers. Separately, the previously cited Zacks Investment Research's report performed its own close peer group analysis and also placed DelMar Pharmaceuticals as the cheapest among its peers.

These peer analyses might be helpful to some readers. In my view, DelMar Pharmaceuticals' drug and science are unique and cannot be directly compared to any other company. I believe shares are intrinsically cheap due to low visibility of this particular company among the investing community, low average trading volume, general skepticism of FDA approval, and fear of imminent dilution due to the low cash balance, despite management's guidance of very low cash needs this year.

In summary, Delmar Pharmaceuticals is allegedly valued below its peers, carries minimal dilution risk until 2015 per management guidance, and is pursuing a market with 10x its current valuation in annual sales potential. Nevertheless, it has only one drug in its pipeline and is a binary outcome investment with certain risks.

Risks

Although Dr. Barer and Dr. Brown have unquestionably proven their wealth-creating abilities in the biotechnology sector, it is possible that DelMar Pharmaceuticals could become an uncharacteristic failure. Here are the key risks to consider before investing.

1. Illiquidity

DelMar Pharmaceuticals is an OTC stock with a relatively illiquid market for its shares. Its 52-week price range extends from $0.75 to $2.50 per share. It is current in all filings, with PricewaterhouseCoopers serving as its auditor.

2. Just One Drug Candidate

DelMar Pharmaceuticals has only one drug in its pipeline: VAL-083. Although a single-drug pipeline simplifies analysis of the company, it also concentrates shareholder exposure to the binary potential of its business plan: FDA approval or rejection. If the drug fails to receive approval, DelMar Pharmaceuticals will have only nominal sales potential outside the U.S. and might abandon its drug candidate altogether.

3. Financing Outlook

DelMar Pharmaceuticals' management has publicly stated that the company is fully funded through March 31, 2015. Unless management reneges on this promise, I expect no equity financing until 2015, or only non-dilutive calling of existing warrants were the stock to rally above $1.60 per share (as explained earlier, if the stock price were to rally above $1.60 per share for at least 20 trading days, there would be 13.1 million warrants callable that would add $10.5 million of cash to the company's balance sheet without diluting shareholders).

Although investors always must assume the risk of a renege and should always be aware that early-stage biotech companies must raise funds for clinical trials at some point, DelMar Pharmaceuticals is in a rather enviable position from a cash standpoint for 2014. With less than $400,00 in debt and approximately $3.7 million in cash with a cash burn rate of $288,000 per month, current cash should reasonably last through this year. If management holds to its promise, I expect a small equity financing for the Phase II/III trial in 2015. In a best-case scenario, if 2014 clinical results are extraordinarily positive, all remaining clinical trials could be funded through a co-development agreement with Big Pharma.

4. Competition

Although the FDA recognizes that DelMar Pharmaceuticals' drug could treat an unmet need, there are still general competitive pressures in the oncology sector. Although there is currently no existing treatment for patients who have failed to respond to Temodar and Avastin, the global oncology sector nevertheless boasts 1,500 drug candidates currently undergoing clinical trials. Blue chip competitors in the field like Roche have substantial pipelines of candidates that could one day encroach on the unique value proposition of DelMar Pharmaceutical's drug.

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