On January 8, I wrote an article explaining how an under-the-radar clinical program for Celldex Therapeutics (NASDAQ:CLDX) could spark the next wave, and lead to significantly larger stock gains. The noted program was CDX-1135, a complement modulator being tested on a rare condition called dense deposit disease (DDD); I concluded that with success, CDX-1135 could become the next Soliris over the next decade. Yet, Celldex's 2014 strategy update outlines a different direction for the company, one that might put into perspective its upside, and serves as a good reminder to lower expectations for such companies.
A Secret Pipeline Value
CDX-1135 was the fourth maybe fifth most talked about product in Celldex's pipeline last year. It was being tested to treat a disease that affects just 300-500 patients in the U.S., and for this indication has very limited fundamental upside. Yet, it's similar to Alexion Pharmaceuticals's (NASDAQ:ALXN) Soliris, which is what made it so attractive.
Soliris is a complement modulator, and works by binding to a component called C5, which has been linked to several genetic and blood diseases. Alexion Pharmaceuticals has grown to a $35 billion company with just this one single FDA approved drug, which earned $1.55 billion in sales last year. Currently, Soliris is approved to treat a life-threatening genetic disorder atypical hemolytic uremic syndrome and the blood disease paroxysmal nocturnal hemoglobinuria, but is being studied to treat five additional conditions. If successful at treating all diseases, some analysts predict peak sales reaching $5 billion worldwide due to Alexion's ability to price the drug sky-high in treating these ultra-rare conditions.
Now, back to Celldex: CDX-1135 works in the same way, binding to the exact same component. The only difference is that it also binds to the C3 component, which is why many long-term investors, including myself, believe that CDX-1135 is a secret value buried deep within the company's pipeline. Because after all, given the success of Soliris, conventional wisdom implies that CDX-1135 could be tested to treat various rare diseases, could be priced high, and would support an Alexion-like premium multiple once CDX-1135 is proven successful in clinical trials.
A New & Unexpected Roadblock
With all things considered, here's where it gets tricky: Celldex recently disclosed in its 2014 business outlook that it is closing the DDD study to focus its resources on its growing immuno-oncology pipeline. Specifically, here is a little of what management disclosed.
"In July, Celldex initiated a pilot study of CDX-1135 to explore a potential opportunity in treating patients with the ultra-orphan indication, DDD. As previously disclosed, enrollment in the pilot study has been extremely difficult due to the overall rareness of patients with DDD (300-500 in the U.S.) further compounded by the need to enroll patients at a very specific point in their disease course."
They then added:
"To date, only one patient has been enrolled. While this patient demonstrated initial evidence of clinical improvement, the effect was not sustained. The results from this one patient combined with our experience using this agent in the compassionate use setting have not provided the conclusive results necessary for a feasible approval path in this disease. Due to these challenges, Celldex has decided to close the study in DDD and focus resources on our growing immuno-oncology pipeline at this time."
Two Takeaways For Investors
First, Celldex had unprecedented clinical results with CDX-011 in treating a very sick patient population with breast cancer, but this success alone does not imply success throughout its pipeline. Celldex is a multi-product company that is going to have success and failures over the next decade. As of now, we already know that CDX-011 improved survival and slowed tumor shrinkage in patients who did not respond to at least three prior treatments. Hence, it will likely be FDA approved soon, and has peak sales expectations of $600 million annually. However, this is all that's "known".
Given the results from CDX-011, we assume Rindopepimut will be successful in treating glioblastoma multiforme (GBM); Celldex did announce interim data in November of last year. However, Celldex's Phase 3 trial is still enrolling patients, and will not complete until mid-2014. Thus, a lot can change with data through the completion of a trial, and investors should at least be cautious and take the company's valuation into consideration as the data announcement date approaches.
Second, the CDX-1135 news is unexpected and a bit disheartening, but not a complete loss. The company clearly feels it's best to focus on its advanced cancer pipeline, which makes sense given its two late-stage candidates. However, it is worth noting that the similarities between Soliris and CDX-1135 still exist, but that choosing the right diseases to pursue is very important in treating orphan conditions. In fact, Alexion also tested Soliris on DDD in a Phase 1 trial, but then never went any further in clinical testing. Hopefully, Celldex uses the DDD trial as a learning experience, and is willing to perform their due diligence in finding conditions where CDX-1135 could be most useful, such as competing with Soliris and its indications.
Since Celldex announced the closing of its DDD study, shares are lower by more than 15%. The reason for this loss ties into the two points I made: Many investors thought Celldex had a flawless pipeline and CDX-1135's potential beyond DDD appears high.
With that said, CDX-1135's potential beyond DDD is still high, but the key is whether Celldex pushes forward and initiates new trials. Based on the company's statement, it would appear that CDX-1135 is going to take a backseat for now at least, which means Celldex is no longer a rare breed of immuno-oncology and orphan, but is competing strictly in the crowded oncology space in hopes that its products can all show a distinct clinical benefit, and that it has the market presence to fundamentally succeed.
Personally, this news alone is not reason enough for me to sell my position, as the 15% of valuation lost likely warrants the news. Furthermore, I wouldn't be surprised if there is more to the story, or something in play for CDX-1135. Perhaps Alexion is looking to acquire the asset, or maybe Celldex is receiving acquisition/partnership offers from big pharma as a pure immuno-oncology play. Either scenario would be fine with me as an investor, but given the similarities to Soliris, I'd find it unacceptable if Celldex abandoned the CDX-1135 program altogether if it remains solo.
Essentially, the absence of CDX-1135 does change the long-term investment outlook for Celldex. With CDX-1135, Celldex could have Alexion-like upside to combine with its already bullish immuno-oncology prospects. To me, this is too great of upside to ignore, and hopefully, Celldex places value in the necessary research to explore CDX-1135 or at least explain to investors why they feel the need to abandon all further clinical testing. For investors, this will be an interesting story to follow, as in looking at Alexion Pharmaceuticals, Celldex's next move might very well be the difference in tens of billions in long-term market capitalization.
Disclosure: I am long CLDX. 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.