Market Overreaction, Pullback Offers Hidden Opportunity For Synta

Summary

Synta shares fell sharply last year and are down more than 20% so far this year.

The sell-off in Synta shares was triggered by disappointment over clinical trial results from ganetespib reported in June and October last year.

The sell-off is an overreaction, as ganetespib's trial results are encouraging.

The appointment of a new CEO has further boosted the prospects of Synta.

Synta has a very favorable risk/reward profile.

Synta Pharmaceuticals Corp. (SNTA) was one of those rare biotech stocks that missed out on a rally last year. Synta, which is developing the experimental cancer drug, ganetespib, struggled as investors were disappointed with reports from the trial of ganetespib in advanced non-small cell lung adenocarcinoma. The sell-off in Synta shares, though, has been an overreaction. However, the pullback does offer an excellent buying opportunity. Also, with the appointment of a new CEO, the company's prospects look even better.

Synta's Sharp Pullback

Synta was among the worst performers in the biotechnology sector in 2013, a year that saw the sector post impressive gains. The company's shares fell more than 44% last year. The performance of Synta shares has been disappointing this year as well. Year-to-date, the stock is down more than 20%. It must be noted that 2014 has been a disappointing year for biotechnology stocks in general.

Last year's losses in Synta shares were triggered by disappointment over results from the clinical trial of ganetespib, an Hsp90 inhibitor. Ganetespib is being evaluated as a treatment for advanced non-small cell lung adenocarcinoma. In addition, the company is testing the drug as a treatment for a number of other cancers.

Tumor cells depend on Hsp 90 for survival and growth. Researchers, therefore, believe that inhibition of Hsp 90 can be an effective cancer treatment. Several Hsp 90 inhibitors have been under evaluation, including Synta's ganetespib. However, several of the trials involving Hsp 90 inhibitors have either been suspended or are in early stages. Synta's ganetespib has shown the most promise in clinical trials.

Indeed, that is the reason why Synta shares traded above $10 in January 2013. However, since then, the shares have been on a downward trajectory as investors have digested recent reports from Phase II trial of ganetespib in advanced non-small cell lung adenocarcinoma.

The reports, which came out in June and October last year, disappointed investors, as the hazard ratio deteriorated. The stock was also hurt after the company said that it will expand its Phase III clinical trial for ganetespib from 500 to 700 patients. The expansion means that the interim and final results would be delayed. Apart from these factors, Synta shares have struggled this year amid a sharp pullback in biotech stocks. The departure of the company's co-founder and CEO earlier this year also hit shares.

Sell-Off An Overreaction

The sell-off in Synta shares is an overreaction. While the hazard ratio deteriorated in the October 2013 report, this was due to the fact that the medical profiles of certain patients enrolled from two Eastern European countries were different from the profiles of patients enrolled from other countries in the study. In the two countries, there was a great deal of excitement over the drug, which led to some earlier-stage disease patients being enrolled in the trial. As a result, the hazard ratio for the east was in the 0.8 to 0.9 range. In the West, where there were more standard, advanced disease patients, the hazard ratio was about 0.5. More importantly, in the crucial Phase III trial, the company has decided to terminate enrollment from the two Eastern European countries. The Phase III trial will be centered on western centers. This means that there will be enrollment of more standard, advanced disease patients. If the kind of results seen in the Phase II trial for western patients is repeated in the Phase III trial, then it will be an extremely positive outcome for Synta and strengthen the case for a regulatory approval. It must be noted that compared to other Hsp 90 inhibitors in evaluation, ganetespib has a very robust safety profile.

Back in May, Synta reported results from final analysis of the GALAXY-I trial of ganetespib. The data was statistically significant for the chemosensitive population, which has been selected for Phase III GALAXY-2 trial.

Indeed, based on these data, it seems that investors have been too bearish on Synta's prospects. In addition, another uncertainty surrounding Synta has ended recently, as the company appointed Anne Whitaker as CEO. Whitaker has over two decades of experience in the pharmaceutical industry. She has worked at Big Pharma companies, such as GlaxoSmithKline (NYSE:GSK) and Sanofi (NYSE:SNY). Her most recent role was as president of North America Pharmaceuticals at Sanofi.

Commenting on Whitaker's appointment, Keith Gollust, chairman of Synta, said, "Her knowledge and experience, product development, regulatory affairs, leadership and organizational development and commercialization will be invaluable to the company as we continue to advance ganetespib through late stage development."

Whitaker's experience will be certainly helpfully if and when ganetespib moves to commercialization. Synta will also benefit from Whitaker's leadership if it decides to seek a partner in the future, given that the new CEO has spent many years at Big Pharma companies.

Favorable Risk/Reward Profile

The biggest risk with Synta, of course, is failure of the ganetespib trial. However, that is a risk associated with any biotech company. In Synta's case, this risk is worth taking. While inhibiting Hsp 90 is a promising treatment for cancer, no drug has reached commercial stage. But, Synta currently has the best chance of doing that with ganetespib, based on the results of the Phase II trial, the design of the Phase III trial and the drug's safety profile. Given this scenario, there could be significant reward for shareholders. If ganetespib is approved for non-small cell lung cancer, the drug is expected to hit peak sales of between $425 million and $600 million annually. Assuming that Synta hits the mid-point of peak sales projections, and given that the stock now trades at around $4, this translates to a price-to-sales ratio (104 million shares outstanding) of under 1. This is very attractive valuation given the potential of ganetespib, if approved. Also, the drug is being evaluated for other cancers, which could potentially open up more revenue generating opportunities in the future.

Another risk is dilution. Currently, Synta has sufficient cash to last until the fourth quarter of 2015. However, the company will have to raise money if ganetespib reaches commercialization stage, which could possibly lead to dilution. Synta, though, has not entered into any licensing agreements so far. If the GALAXY-2 trial progresses well, there could be interest from Big Pharma in possible licensing agreements. The company certainly has the right person in Whitaker, if it gets to a stage where it has to negotiate a licensing agreement. Overall, Synta has a very favorable risk/reward profile. With the stock trading at just around $4, I think this is a good time to go long.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in SNTA over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.