- A large void in the Glioblastoma Multiforme treatment paradigm leaves patients with poor prognosis.
- DelMar is tremendously undervalued on a NPV/DCF basis and relative to peers Northwest Biotherapeutics, Agenus, Celldex, and ImmunoCellular.
- My estimates put fair value at $3.5/share, or 3X upside; analysts have assigned price targets as high as $8/share.
- DelMar's VAL-083 addresses a large GBM population (>50%) unresponsive to standard of care, Temodar, and could be the answer to failures rampant in cancer vaccines (aka immunotherapies).
- VAL-083 has approval in China for the treatment of Lung Cancer and CML. This serves as positive precedence for regulatory approval by the FDA and EMA.
In Glioblastoma Multiforme (GBM), the deadliest form of brain cancer, companies like Northwest Biotherapeutics (NASDAQ:NWBO), ImmunoCellular Therapeutics (NYSEMKT:IMUC) and Celldex Therapeutics (NASDAQ:CLDX) have stolen the spotlight, prematurely. As I explain later, these companies present a less than compelling case for producing strong risk-adjusted returns. They have also necessitated DelMar Pharmaceuticals' (OTCQB:DMPI) lead product, VAL-083, which is initially vying for a low-hanging $250M+ opportunity in 3rd line therapy that its peers have ignored. With ~45M shares outstanding on a fully diluted basis, DelMar is valued at just $40M. By any conservative measure, shares are worth at least $3.5, or 3X recent prices (valuation discussed below). If DelMar were valued in line with its peers, shares would trade at $5+. Maxim analyst Jason Kolbert assigned DMPI a 12-month target price of $8/share. But to understand the opportunity, we first need to understand GBM and where the current standard of care lies.
The Trending Combinational Therapy Model in GBM
With poor prognosis for patients and minimal improvement in the standard of care, Glioblastoma Multiforme is a highly focused area of cancer research. Like other areas of cancer research, novel targeted immunotherapies have been headlining developments. Similarly, these immunotherapies are primarily being implemented as the targeting agent in combinational therapies for reasons I have previously written about, here and here. The diagram below highlights the main players in GBM and their position in the developing treatment paradigm.
Figure 1. Trending Combinational Therapy Model developing in GBM.
The driving force behind this paradigm shift is the presence of an enzyme which renders the chemotherapeutic agent Temodar, currently the first-line standard, useless in roughly 50% of patients. With the second-line treatment (Avastin, discussed later) having no evidence of improving chances of overall survival, patients are left without options. For analysis of the current state of GBM refer to the next section.
As an investor looking at the evolving treatment model, it is easy to forget that the chemotherapeutic agent, or more generally non targeting agent, plays a vital role in the overall success of the treatment. Some might argue even more importance, being that the one can exist as a stand-alone therapy. That being said, developments on that front (part B in figure 1) may prove useful in improving the current stand-alone model and further amplify the success of next-generation combinational treatments. For an investor, these developments may be a better bet given the uncertainty and volatile track record associated with immunotherapies.
With all the hype surrounding immunotherapies, DelMar Pharmaceuticals, which is involved in introducing a known (approved and selling in China) chemotherapeutic agent in GBM, has fallen under the radar. DelMar is undervalued and presents an asymmetrical risk/reward investment considering it is entering at least a $250M market (10x current market cap) of patients who have failed the standard of care and are left without options. The total addressable market remains upwards of $1B.
Background Information On The State Of GBM
According to the Cancer Research Institute, Glioblastoma Multiforme is one of the most aggressive types of brain cancer, with most patients failing to reach the one year survival mark and few living to see three years following diagnosis. For newly diagnosed GBM patients treated under the current standard of care, median progression free survival is 6.9 months and median overall survival is 14.6 months. Only 25% of newly diagnosed patients survive for 24 months and less than 10% survive more than 5 years. With approximately 16,000 newly diagnosed patients and 10,000 deaths from the disease in the US alone, there is a dire need to improve the standard of care.
The current standard of care consists of Temodar as the chemotherapeutic agent in chemoradiative therapy as a first line treatment. Temodar received approval in 2005 for the treatment of newly diagnosed GBM on the basis that it improved overall survival by 2.5 months. In 2009, the FDA approved Avastin as a second line treatment for patients with disease progression following treatment with temodar. Avastin's approval was based off an improvement in progression free survival.
The inability of the standard of care to effectively treat the GBM patient population can be attributed to the effect of the presence of an enzyme called MGMT. Also known as the DNA repair enzyme, MGMT corrects any damage done to the genetic information of the cancer cells by the chemotherapeutic agent. This effectively renders the treatment useless. Roughly 50% of GBM tumors highly express this enzyme, leaving a large void in the standard of care for this large subgroup of patients. As a result, many novel immunotherapeutic developments have received large visibility from investors.
Drawbacks Of Investing In the Current Targeting Therapies in GBM
As it pertains to GBM, immunotherapeutic vaccines are thought to be the answer to the Temodar's MGMT resistance issue. In theory, when combined, the drugs should have a synergistic effect; however, it seems unlikely that the net effect will sustain if the chemotherapy is ineffective. A clear example of this is ImmunoCellular Therapeutics' comparison between the unmethylated and methylated MGMT subgroup of patients expressing the HLA-A2 antigen from their Phase II trial studying their dendritic vaccine, ICT-107. For those wondering, unmethylated refers to a higher expression of the MGMT enzyme and methylated the lower expression.
PFS in Control Group
PFS in Active Group
The chart above highlights the difference between the two groups. There was a 2.5 month difference between the control groups and a 8.3 month difference between the treated groups. This huge discrepancy suggests that the vaccine is marginally helping deal with Temodar's resistance to MGMT. The underlying issue is still there. As a disclaimer, the subgroups mentioned were not powered to show statistical significance. For IMUC investors, this last statement is taken directly from their latest press release and should raise some red flags considering the company has rationalized moving forward with a Phase III trial. Especially since the Phase II trial mentioned above did not meet its primary endpoint of overall survival (OS).
Northwest Biotherapeutics should be approaching the conclusion of their Phase III study of GBM vaccine DC-Vax-L, with the primary endpoint being extended PFS in newly diagnosed patients. This seems strange since approval as a first-line treatment would usually demand improvement in OS which was the primary endpoint of IMUC's trial. At face value, it would seem the company is leading the pack in GBM, with its Phase III trial scheduled to conclude in September 2014, as per the clinical trial page; however, the controversy surrounding the company provokes uncertainty. NWBO has its fair share of skeptics challenging the drug's efficacy following the failure of IMUC's similar dendritic cell immunotherapy, ICT-107. Granted, there are differences between the two vaccines; however, they are both dependent on the presence of an effective chemotherapeutic agent. In my opinion, the necessary coupling with effective Temodar treatment will prevent the two vaccines from becoming a benchmark under the evolving standard. The company has also been scrutinized for its "inappropriate" reporting of data, which has proven disconcerting to investors to say the least.
Anecdotal evidence of the associated risk of investing in vaccine type cancer immunotherapies can be derived from the story of Dendreon's (NASDAQ:DNDN) Provenge. Behind the approval of Provenge, the first and only cancer vaccine (but not immunotherapy), the company's stock rose to an all-time high of $54. This was short-lived due to the competitive landscape that formed in the field of prostate cancer subsequent to Provenge's approval. Both Johnson & Johnson's (NYSE:JNJ) Zytiga and Medivation's (NASDAQ:MDVN) Xtandi offered better results at a cheaper cost making both more favorable to Provenge. Currently, Dendreon has a market cap of $350M and trades at $2.30/share. As it relates to GBM, the anecdote is meant to remind investors of companies such as NWBO that even if the drug is approved (in my opinion, not likely), a position in the marketplace is not guaranteed.
On an optimistic note, Agenus Inc. (NASDAQ:AGEN) announced encouraging final results from a Phase II study on its autologous cancer vaccine Prophage. The drug is being developed for patients with newly diagnosed Glioblastoma Multiforme. Like the other two GBM vaccines, the treatment is designed to be in combination with the current standard of care. Since the drug is being developed for newly diagnosed GBM patients, it will be implemented as a first-line treatment. This means that the company will have to register for a lengthy Phase III trial prior to FDA approval.
Next in line, after NWBO's DCVax-L, to gain regulatory approval is Celldex Therapeutics' Rindopepimut. The company is expecting to conclude its Phase III ACT IV trial of its GBM drug candidate Rindopepimut in November of 2016 as outlined in its clinical trial page. ACT IV is modelled after a successful ACT III Phase II trial that produced an OS of 21.8 months and 26% 3-year survival vs. the 15.1 months OS and 18% 3-year survival obtained from an independent control dataset. The drug is also involved in a Phase II trial assessing Rindopepimut as a second line treatment in combination with Avastin. The trial is set to conclude in June of 2015. Using the Avastin approval in 2004 as a baseline, the drug could get approval from a Phase II study and potentially be on the market as early as late 2015. Like DCVax-L, the drug is designed to be in combination with the standard of care. However, unlike DCVax-L, Rindopepimut is specifically targeted at patients expressing EGFRvIII, representing at most a 30% subgroup of all GBM tumors. With that being said, the targeted drug market for GBM will not see any change from Celldex's Rindopepimut until early 2016 following the conclusion of ACT IV. This means that when (or, more appropriately IF) immunotherapies finally penetrate the standard of care, they won't apply to the majority 70% of patients.
From an investor's perspective, prospects on the immunotherapeutic front, in particular cancer vaccines, seem volatile given their uncertainty and the possibility of inadequacy. This is not to write off all immunotherapies, treatments under this umbrella have shown promise. In particular, checkpoint inhibitors have and continue to impress.
On the contrary, enhancing the current treatment paradigm or future combinational treatments through exploring the benefit of other known chemotherapeutic agents presents a more compelling investment opportunity with an asymmetrical risk/reward. Companies such as the one I am about to discuss have been overshadowed due to the hype surrounding immunotherapies.
VAL-083: The Answer To Temodar's Resistance?
As an investment opportunity, DelMar's chemotherapeutic drug VAL-083 has flown under the radar due to the hype of higher profile immunotherapies.
VAL-083 is an alkylating agent similar to its present market counterpart Temodar. The drug works by binding to DNA and interfering with the normal processes within the cancer cell. The cell is rendered dysfunctional and dies from improper protein production. Unlike Temodar, VAL-083 has demonstrated functionality in the presence of the enzyme MGMT. This is ultimately because Temodar damages with DNA at the O-6 guanine position and VAL-083 targets at the N-7 guanine position. This inherent attribute could threaten Temodar's reign in GBM. This short video better elaborates on the science.
What makes the company a particularly attractive investment is the approach it is taking to gain approval. The drug is being tested as a possible treatment for patients who have failed both first and second line therapy. The company would like to establish the drug as a "third line" treatment which, according to their 10-K, roughly represents 50% of all patients under the current standard of care, amounting to a $250M market in GBM alone (Refer to Valuation Section). Using Avastin's FDA approval as a comparative metric, the drug would likely have to show a good safety profile and demonstrate progression free survival.
To Reiterate: The company is seeking to treat a patient population with no current treatments available or likely to be available in the foreseeable future. This population is roughly half of all GBM patients.
Also streamlining its approval process and de-risking shareholder value is the data the company brings from over 40 clinical trials sponsored by the National Cancer Institute, NCI. The company is looking to approve a drug that has been tested on over 1000 patients and presents a safety profile that is well tolerated. To further solidify its case, the company can leverage the drug's international approval in China for CML and NSCLC.
An important fact about VAL-083 is that it is a drug that has been studied since the 70s under the name DAG (Dianhydrogalactitol). So why were developments dropped then and renewed now? According to the company's 10-K, this was ironically due to the attention targeted therapies were receiving which is consistent with the history of immunotherapies. The resurgence of the drug is fueled by a better understanding of cancer mechanisms and, as CEO Jeffrey Bacha explains, the increased availability for screening patients that are more prone to response from the drug.
VAL-083 is currently being studied in a Phase I/II, open label, single-arm study to determine the safety and maximal tolerated dose (NYSE:MTD) of VAL-083. Highlights of their clinical trial interim data from their presentation at ASCO include:
1) One of two patients in cohort 6 exhibited stable disease after one cycle of treatment. Outcome of analysis of cohorts 6 and 7 are ongoing.
2) No drug related serious adverse events have been detected, and maximum tolerated dose has not been reached at doses up to 30mg/m^2. Enrolment and evaluation of cohort 7 (40mg/m^2) is ongoing.
3) Pharmacokinetics are linear and consistent with previous published data, suggesting that concentrations of VAL-083 being obtained are effective against glioma cell lines in vitro.
If the MTD is not determined following treatment of the 7th cohort, DelMar will likely request regulatory approval for studying the drug in doses larger than 40mg/m^2. This will likely delay, with good reason, the readout of final data. Following the conclusion of the trial, DelMar will likely obtain guidance from the FDA before proceeding with a final Phase II/III trial. Assuming the trial can produce positive data, the drug would be in a position to penetrate the US GBM market in 2017.
DelMar's Valuation Reveals An Upside of 300% to $3.45/Share
Below is a table of assumptions that I used in my valuation. Most important among these is that sales are solely contingent on VAL-083 use in refractory GBM. This analysis neglected the future cashflows from possible label expansion into first and second line therapy, as this may be looking too far ahead for the cautious investor. Inclusion of this would cause the company's valuation to further increase. With 16,000 newly diagnosed patients in GBM every year, this represents $800M market opportunity under the same assumptions mentioned below.
Table 1. Valuation Assumptions
The company obtains FDA approval and begins marketing the drug as a "third line" treatment in 2017.
The 10,000 patients that die annually from GBM are the targeted patient population. For conservatism, I assumed that only 50% of this population can afford the treatment either through insurance coverage or otherwise.
The cost of one round of treatment is $50,000. The total addressable market is therefore $250M. Sales experience a 30% growth rate in the 7 years (2017-2024) of market exclusivity following approval.
Sales are discounted backwards at a rate of 15% and additionally a 60% margin of safety is applied to net present value.
All Outstanding warrants are exercised.
Estimated Out Shares following exercise of warrants
Fully Diluted Shares
Source: Prospectus as of April 29, 2014
Below is a Sensitivity Table, illustrating the change in market valuation as a function of the market penetration.
Mkt Cap ($)
**Market Cap is in millions.
Assuming a 15% market penetration, the company should be valued at $154.1M. This reveals an approximate 300% upside from the current price of a share to $3.45.
In my opinion, this valuation represents a significant upside given its conservatism.
Understanding The Risks Associated With DelMar
The main risk associated with the company's success is its ability finance its operations for the foreseeable future. The company most recently raised $2.4 million in net proceed upon the closing of a lead order, which management believes will fund operations till December 2015. The company has also filed a tender offer on June 9, 2014 to outstanding warrant holders, decreasing the exercise price from $0.80 to $0.65. Potential exercise of these warrants could bring in a total of $6M and fund the registration trial of VAL-083. This financing is not truly dilutive, as all current warrants were introduced from previous rounds of financing. There still remains the risk that the company may need to raise funds via purely dilutive financing.
The second major risk is that company's success is solely contingent on the approval and commercialization of VAL-083. Although the company has approval in China for CML and Lung Cancer, it requires the approval of the FDA, which may be more stringent than other regulatory bodies. There are no other drugs in the company's pipeline, although the company has presented pre-clinical data of VAL-083 in treatment of non-small-cell-lung-cancer (NSCLC). This means that the drug's failure in GBM does not imply the end of VAL-083 in all cancer indications.
The third major risk is competition. The immunotherapy companies mentioned above can all be considered competition. With that being said, DelMar does have one major advantage that would allow them to gain approval on a much shorter time scale. DelMar is trying to treat patients who have failed the current standard of care making them a "third line" treatment. This is in contrast to the companies mentioned above who are either going for first or second line treatment, and likely to be scrutinized more heavily prior to regulatory approval. On the chemotherapeutic front, the company also has a competitor in CyTRX Corporation. Just like its counterparts in immunotherapy, the company will likely face a relatively long road to approval as it begins its Phase II trial determining efficacy and safety in patients who have failed first line treatment with Temodar.
Near Term De-Risking Catalysts and Concluding Remarks
The company performance should see upside from approaching catalysts, most notably from the conclusion of its current clinical trial, meetings with regulatory authorities and registration of its Phase II/III trial, among others. For a more extensive list of catalysts, refer to this. Each of these milestones will likely serve as de-risking events in the company's maturation and drug's approval process.
As a concluding remark, I would like to remind investors of the benefits that prospective combinational treatments bring. The use of multiple drugs not only improves results for patients, but also creates multiple investment opportunities within the same indication. This creates an interesting dichotomy between therapies, such as chemotherapy and immunotherapy, where the two are symbiotic competitors. This decouples the risk for agents that are more integral to the overall efficacy, such as Temodar, under the current treatments and hopefully VAL-083 in future treatments.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.