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Disappointment is a fact of life for biotech investors, but GTX (NASDAQ:GTXI) seems to have had a little more than its fair share in its short history. Not only did a once-promising prostate cancer drug (toremifene) fail its Phase 3 trial in 2010, but the company saw a once-promising partnership with Merck (NYSE:MRK) go south when the company re-evaluated its clinical priorities (and cost-cutting plans) after acquiring Schering-Plough.

More recently, the company's plans to develop Capesaris as a prostate cancer treatment came into serious doubt as the FDA ordered a clinical hold due to high rates of venous thromboemobolic (VTE) events in the Capesaris patient groups. Given that these deep-vein blood clots can lead to fatal pulmonary embolisms, the FDA's concern is understandable and it's unclear now as to whether there is a valid way forward with this drug.

Ostarine The Real Story

Capesaris would have been a "nice to have" drug for GTX, and may not yet be dead (more on this later), but Ostarine is the real prize asset at GTX. This also happens to be the drug that Merck returned back to the company in 2010.

Ostarine is a selective androgen receptor modulator (SARM) that appears to prevent/reverse various types of muscle wasting. While Merck chose to pursue development in sarcopenia (age-related muscle wasting), GTX is pursuing an indication for in cachexia.

Cachexia is a relatively common side-effect of many cancers and refers to weight loss, muscle/strength loss, weakness, and loss of appetite. Not only does this significantly impact quality of life, but it also hastens mortality and makes the patient more vulnerable to other problems like infection. While about one-quarter of cancer patients experience cachexia (and some believe the rate of incidence may be much higher), the rates are highest in cases of lung cancer, pancreatic cancer, and upper-GI cancers.

GTX has Ostarine in two Phase 3 studies (POWER 1 & 2) that are each enrolling 300 patients with non-small cell lung cancer (NSCLC). In the first trial patients receive taxane and Ostarine, while patients in trial #2 get a platinum-based regimen with Ostarine.

The endpoints in question are preservation of lean body mass and physical function as measured by stair climbing. While these are reasonable metrics, I do wonder if the FDA will eventually quibble with them, as CT/MRI scans and handgrip analysis are considered more conventional standards. Considering how intransigent the FDA has been lately even with agreed-upon criteria, it's a risk worth mentioning.

Data should be available early in 2013, and it looks as though the drug will need to produce double-digit improvements to show statistical significance. Prior Phase 2 data showed significant improvements in both metrics, with more than two-thirds of Ostrarine patients showing double-digit improvement in stair climbing (versus one-third of placebo recipients) and a similar ratio of improvement with respect to no loss in lean mass. If the data is strong, GTX could launch Ostarine in 2014.

Label And Use Extensions Could Be Significant

Given the above-average incidence of cachexia in lung cancer (and the fact that lung cancer is a relatively common cancer), this is a logical starting place. If pricing falls between $9,000 and $13,500 on an annual basis, the opportunity in lung cancer could be north of $300 million - close to $4 a share on a discounted basis (8 years out, 30% discount rate, fully diluted sharecount and so forth).

Follow-on indications and off-label usage seem like naturals, though. Pancreatic cancer is one fairly obvious off-label opportunity and one that could be worth another $50 million to $100 million in revenue (or $1.25 per share in value). Other targets could include esophageal cancer, prostate cancer, and other metastatic cancers.

I do wonder, though, if even more is possible beyond this. This results Merck saw in sarcopenia seemed pretty encouraging and this could be a sizable market. What's more, various types of wasting are seen in other conditions like COPD and congestive heart failure and could be worth a look further down the line.

Competition looks relatively benign for now. Megace is given in cases of cancer cachexia, but has only modest efficacy. Celgene (NASDAQ:CELG) is studying Revlimid in cachexia, and Alder Biopharmaceuticals' ALD518 (licensed out to Bristol-Myers (NYSE:BMY)) has shown some utility in controlling cachexia. Ligand Pharmaceuticals (NASDAQ:LGND) and Acadia (NASDAQ:ACAD) also have shown interest in SARM drugs for wasting.

Is It Time To Cap Capesaris?

As mentioned above, investigation of Capesaris as a treatment for prostate cancer has been halted by an FDA clinical hold tied to VTE risk. Capesaris is a selective estrogen receptor alpha agonist, or a so-called "designer estrogen" designed to offer the positive benefits of estrogen as a cancer therapy without the side-effects like feminization, cardiovascular disease, and VTE events.

Capesaris was being developed as an alternative to Abbott's (NYSE:ABT) Lupron and efficacy data has been encouraging (one study showed that 73% of patients achieved undetectable PSA levels versus 44% in the Lupron group). While Lupron too has been shown to increase the risk of VTE events, the higher rate seen with Capesaris has clearly worried the FDA.

At this point it may be possible to reposition the therapy approach, perhaps by using Lupron as a loading dose and then switching to Capesaris for maintenance, or by positioning it as a second-line therapy. In either case, though, it could still be tough to get the drug approved by the FDA. Perhaps the company can figure out a new pathway for Capesaris that the FDA will sign off on, but I think GTXI investors should not expect anything from this program.

The Bottom Line

Merck once thought that Ostarine was worth as much as $500 million in payouts and additional royalties, and the data since then supports the idea that it can play a valuable role in treating cancer cachexia. Beyond that, while it may be best to shut down Capesaris, there are other cancer-fighting compounds that GTX can attempt to advance into human studies.

It doesn't seem particularly challenging to arrive at a $5.25 fair value for GTXI shares on the basis of Ostarine in lung and pancreatic cancer. Additional indications, even if smaller or less probable, would simply be gravy on top of that. Though some may want to assign value to Capesaris and/or the preclinical pipeline, I do not.

A $5.25 fair value suggests that GTXI shares are about 40-50% undervalued today. That's a little shy of my typical minimum threshold for speculative biotechs, but it is close enough to at least merit a spot on biotech investor watchlists.

Source: If GTX Can Finally Catch A Break, The Rewards Look Worthwhile