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In the complicated world of biotech investing, an investor is often faced with a mixed basket of news and events on a company-- which usually revolves around FDA decisions (approvals, holds, halts), trial results, analyst commentary, and insider and beneficial owner buying or selling. The price action of a speculative biotech stock can fluctuate wildly on news, which provides buying opportunities from overselling or selling opportunities on stocks that get too expensive.

In GTx Inc. (GTXI), a developer of a new class of cancer treatment drugs (selective androgen receptor modulators, or SARMs), you have a company that currently falls into the "buying opportunity" camp due to a recent selloff,when one of its clinical trials was put on hold by the FDA on February 17.

Upon closer investigation, opportunistic investors will see two very compelling reasons to buy GTXI on this recent dip. These include recent bullish analyst comments on GTXI's incredible undervaluation due to the huge potential of GTXI's lead-- phase III cancer drug (Ostarine)-- and the recent, significant open market buying by GTXI's second largest shareholder.

Citigroup's $19 Price Target Call

Only 55 days ago, Citigroup raised its price target on GTx to $19 from its previous $8 target. The main driver of this massive price target increase is the bullish forecast for positive Phase III clinical trials for Ostarine, a drug used to prevent and treat muscle wasting in cancer patients.

So why is the stock priced at $3.38 and down nearly 50% since it traded at $6.55 on February 2, 2012? The answer is that on February 17 (18 days after the Citigroup upgrade), the FDA put a clinical hold on the Phase II and Phase IIb dosing clinical trials for one of GTXI's other pipeline drugs, Capesaris, which treats prostate cancer. The company is now in discussions with the FDA about the appropriate future course for Capesaris.

This sudden share price drop over the last 40 days was all about the reaction to the Capesaris news and had nothing at all to do with GTXI's principal asset, Ostarine. Investors selling this February 21 news may want to take a closer look at what Citigroup thought of GTXI's value without Capesaris, and at what GTXI's second largest shareholder has purchased since this news.

The Value Analysts Give GTXI on Ostarine Success Alone (without Capesaris)

Drilling down on the analyst commentaries for GTXI clearly shows that the greatest value given to the company is based upon its lead, stage III cancer drug candidate-- Ostarine, and not on Capesaris. According to reports of the $19 price target, "Citigroup estimated that positive outcomes of the [Ostarine] trial could be worth at least $11 per share and that Ostarine could attract the interest of biopharma companies that offer oncology products." This $11 target is just for Ostarine alone and does not even factor in the value of Capesaris. If Citigroup is right on GTXT's Ostarine-only price target of $11, this would represent a 325% upside potential on the current price of $3.38.

And Wedbush Securities agrees in their February 21 outperform reiteration that GTXI should be mostly valued on the prospects of Ostarine alone and only slightly for Capesaris. Wedbush has attributed 83% of their price target of $6 on Ostarine, and only 17% on Capesaris and GTx's other pipeline drugs. Based on Wedbush's Ostarine-only price target of $5, this would represent a nearly 80% upside potential on the current price of $3.38.

Finally, take a look at how Merck (MRK) valued the potential for Ostarine at $507M when it entered into a global strategy collaboration with GTXI in 2007.

Terms of Merck/GTXI Global Partnership With Ostarine*

Scheduled Payment to GTXI

Payment Description

$40,000,000

Upfront Payment

$15,000,000

Research Reimbursements

$30,000,000

Direct Equity Investment (40% premium)

$422,000,000

Future Milestone Payments

$507,000,000

Total Potential Payments to GTXI

(*In a GTXI management decision to bring Ostarine to profitability sooner and because of restructuring and reprioritization in Merck's merger with Schering-Plough, GTXI reacquired full rights to Ostarine after ending its partnership with Merck in 2010.)

Massive Open Market Buying On Recent Price Drop By Second Largest GTXI Shareholder

If the analyst price targets and commentary on GTXI's potential with Ostarine-only is not enough evidence to support the proposition that GTXI is extremely undervalued, look no further than the beneficial owner buying activity since the Capesaris trial was put on hold. Normally, when you have unwelcome news from the FDA on a clinical trial, you have a big selloff. That surely happened on February 21, but the opposite also happened as the second largest GTXI shareholder, Jack W. Schuler, was buying over $8M in shares on the open market on this news.

Just hours after GTXI publicly announced the FDA hold on Capesaris on February 21, Jack W. Schuler began a nine day, open market, buying spree of GTXI shares in the price range of $3.33 - $3.82. The buys are very significant because of the affiliation of the buyer and the timing of the buys. The breakdown of these common stock buys of Jack Schuler, his children's trusts, and his private foundation include:

Recent Open Market Buys of GTXI Common Stock By Schuler & Family Interests

Date

Number of Shares

Price Per Share ($)

Amount ($)

Owner/Buyer

2/21/2012

600,000

3.82

2,292,000

Schuler Family Foundation

2/22/2012

350,000

3.55

1,242,500

Schuler Family Foundation

2/23/2012

25,000

3.49

87,250

Tanya Eva Schuler Trust

2/23/2012

25,000

3.49

87,250

Therese Heidi Schuler Trust

2/23/2012

25,000

3.49

87,250

Tino Hans Schuler Trust

2/24/2012

28,000

3.48

97,440

Tanya Eva Schuler Trust

2/24/2012

28,000

3.48

97,440

Therese Heidi Schuler Trust

2/24/2012

28,000

3.48

97,440

Tino Hans Schuler Trust

2/27/2012

29,011

3.39

98,347

Tanya Eva Schuler Trust

2/27/2012

29,011

3.39

98,347

Therese Heidi Schuler Trust

2/27/2012

29,011

3.39

98,347

Tino Hans Schuler Trust

2/28/2012

64,000

3.52

225,280

Tanya Eva Schuler Trust

2/28/2012

64,000

3.52

225,280

Therese Heidi Schuler Trust

2/28/2012

64,000

3.52

225,280

Tino Hans Schuler Trust

2/29/2012

18,224

3.47

62,237

Tanya Eva Schuler Trust

2/29/2012

18,224

3.47

62,237

Therese Heidi Schuler Trust

2/29/2012

18,224

3.47

62,237

Tino Hans Schuler Trust

3/1/2012

69,700

3.33

232,101

Jack W. Schuler

3/2/2012

796,923

3.33

2,653,753

Jack W. Schuler

Totals

2,309,328

3.47 (avg.)

$8,132,016

Significance of Buyer And The Interests Represented

As the second largest shareholder in GTXI, Jack W. Schuler is a very well respected and seasoned veteran in the pharmaceutical industry. He is the former president and chief operating officer at Abbott Laboratories (ABT) and serves on the boards of Medtronic (MDT) and Stericyle (SRCL). He knows as well as anyone how to value the risk and rewards of biotech investing, and he is buying up GTXI shares in a big way in the $3.33-3.82 range.

Based on the Schuler family interest involved in the ownership of these recent GTXI share purchases, one can assume that he thought the risk was low, and that he took great care in deciding on this investment and at the share price that provided the most potential for upside for the beneficiaries. Not only did he buy 866,623 shares for direct ownership, but over half (1,442,705 shares or over $5M worth) were purchased for his three children's trusts and for his family's charitable foundation.

The first purchase Schuler made after the selloff was on February 21 and 22 for 950,000 shares at an average price of $3.72. These shares were bought for his family's charitable foundation. The impressive Schuler Family Foundation provides scholarships to needy, first-generation college bound students. The next Schuler buys were made on February 23-29 for 492,705 shares at an average price of $3.48. These shares were bought to benefit the trusts of Jack Schuler's three children.

Significance of the Timing of the Schuler Buys

Finally, another big clue to the value of GTXI and its lead, Phase III drug candidate, Ostarine, is the fact that these recent Schuler buys were made immediately after the company notified investors that the FDA had put a hold on the clinical trials of one of its other later stage cancer drugs, Capesaris. Why in the world would you buy $8M worth of GTXI stock after bad FDA news if you did not have a massive amount of confidence in the value of the lead, phase III drug, Ostarine, or the potential for a premium buyout by a larger oncology pharmaceutical company?

Conclusion

The recent FDA hold on the phase II study for Capesaris was unexpected, leading some to sell or reduce their stakes in GTXI. But, based on the potential value of lead, phase III drug, Ostarine, analyst commentary and significant buying by GTXI's second largest shareholder after this news, this is more likely the best biotech buying opportunity so far this year than a sell the news event.

If Ostarine proves to produce the phase III results that Citigroup is forecasting, you could very well see exactly what Citigroup is calling for: $11 valuation (Ostarine-only)/325%+ return and much interest by larger oncology pharmaceutical companies looking for a blockbuster drug to add to their portfolios.

Source: Analyzing GTx, Inc.'s Vast Upside Potential