Understanding The Prospects Of Endocyte

| About: Endocyte, Inc. (ECYT)

In the past, I have written on Endocyte (NASDAQ:ECYT) and have been quite bullish on its prospects (here and here). While the partnership with Merck (NYSE:MRK) led to a dramatic move higher, the actual change in market capitalization has been roughly equal to the upfront cash payment. In other words, despite the price increase, the market has not really re-valued ECYT. This is unusual as partnerships are usually seen as a validation and derisking event, which generally increases the value of a company and its assets. This has not yet happened with ECYT. In order to get a better understanding of the company and its prospects, I interviewed its CEO Ron Ellis. I asked a wide range of questions that should cover most of the issues that investors and potential investors would want to better understand.

David Sobek: Can you provide a quick overview of your company and lead compound?

Ron Ellis, CEO Endocyte: Endocyte is developing targeted therapies for the treatment of cancer and inflammatory diseases. We use proprietary technology to create novel Small Molecule Drug Conjugates (SMDCs) and companion imaging diagnostics for personalized targeted therapies. An SMDC consists of a targeting ligand attached to a very potent drug. This technology allows us to treat patients with much more potent drugs with less toxicity because the drug is targeted. The companion imaging agent uses the same targeting ligand as the SMDC but instead of attaching a drug to the ligand an imaging agent is attached. The companion imaging agent allows us to identify which patients will most likely benefit from treatment with the SMDC. Our lead drug, vintafolide, targets a potent vinca alkaloid to the folate receptor (FR), which is expressed on many types of cancer, including ovarian, lung, breast, colorectal, etc. We use our companion imaging diagnostic, etarfolatide, to identify patients who are positive for the receptor. These drugs are currently in a phase 3 trial (PROCEED) in platinum resistant ovarian cancer and a Phase 2 trial in non-small cell lung cancer (NSCLC).

DS: I think most investors see Seattle Genetics (NASDAQ:SGEN) and its antibody drug conjugates (ADC) as the closest analog to EC-145 and your small molecule drug conjugate (SMDC) technology. What makes your technology different?

RE: The biggest difference is the size. SMDCs are 100-150 times smaller than an antibody. These small conjugates are able to penetrate solid tumors more effectively than large molecules. In preclinical studies, we see 20-30 fold improvement in drug concentration inside solid tumors with small molecule drug conjugates than large molecule drug conjugates. The small size also means faster excretion which helps to reduce toxicity. Finally, our linker technology is highly stable so we see very little free drug being released in the blood stream which can contribute to toxicity.

Although companion diagnostics are not new, our use of companion "imaging" agents is unique and new. As opposed to tissue-based assays, our imaging diagnostics can provide a full body view of the disease and presence of the targeted receptors immediately prior to administration of the therapy. We've found this to be important as disease characteristics can change over time and having a more complete understanding of the receptor's presence, as opposed to a biopsy from a single site in the disease, may be important in predicting outcomes.

DS: The market reacted quite negatively to your phase II platinum resistance ovarian cancer (PROC) data at the end of 2011. What explains the change in the overall survival (OS) and why do you feel the reaction was overdone?

RE: First, the phase 2 study was conducted in platinum resistant ovarian cancer. This is a a very challenging patient population. Prior to vintafolide, no drug has demonstrated an improvement in either survival or delayed disease progression. Survival is approximately 12 months and the FR positive patients, the patients we target, have an even worse prognosis. This is probably because these FR rich cells are dividing more rapidly.

The study enrolled both FR positive and FR negative patients. It was an all-comers study. We included the FR negative patients, as requested by the FDA, as part of the validation of the companion imaging diagnostic. Even with FR negative patients included, the study met the primary endpoint of delaying disease progression in all patients, but more importantly it demonstrated that the FR negative patients didn't benefit from vintafolide therapy while the patients with all tumors positive for the receptor showed a significant benefit (HR 0.381 p=0.018). These results provide proof of principle of this technology in a very difficult patient population.

As reported we did not see an improvement in overall survival. However, as we pointed out, the study was not powered for OS analysis so no definitive conclusions can be drawn from these data. The lack of OS benefit appeared to be an issue with a longer than expected survival in the control arm. There may be a few reasons. First, the study used a 2:1 randomiziation, so we had 100 patients in the treatment arm and only 49 in the control arm, so a much smaller sample for the ccntrol arm. The control arm received more post-study therapy than treatment arm and the control arm patients had a better prognosis than the treatment arm. In fact when adjusted for these prognostic factors the HR for patients with all FR positive tumors was below 0.50. These OS issues will be addressed in the larger phase 3 trial with a 1:1 randomization. .

DS: In your discussion with European Union (EU) regulators the company seemed to indicate to them that you did not want to file if there was little chance for approval, while acknowledging that nothing is guaranteed, what sort of feedback did you get from them that gave you the confidence to file?

RE: The conditional authorization we are seeking in the EU is based on what we believe is a favorable benefit / risk profile for vintafolide, especially in the FR(++) patient population, those with 100% of their target lesions positive for the FR. There are a couple of key points here. First, this patient population has a significant unmet need. If there were better options for these patients, the case would not be as compelling. The fact that there is evidence that the mere presence of the FR in the disease is a negative prognostic for these patients just adds to the need. Second, the ability to select these targeted patients with our companion imaging diagnostic is very important. This is the future of medicine. Finally, the delay in progression of the disease demonstrated in the PRECEDENT trial was robust. In a disease such as ovarian cancer when progression is often associated with symptoms and decreasing quality of life, a delay in that progression is meaningful to patients.

DS: What are the endpoints that regulators have indicated would be needed for approval? My reading is that the Europeans want to use the phase II progression free survival (PFS) for conditional approval and then PFS from the phase III trial for full approval. In the United States, the FDA wants to see PFS from the phase III for possible accelerated approval and then OS data for full approval. Is this accurate?

RE: We plan to submit data from 4 clinical trials as part of the EU filing for conditional authorization. The phase 3 PROCEED trial would serve as the confirmatory trial. It also has PFS as the primary endpoint. The FDA has suggested that the Phase 3 design has the potential for accelerated approval.

DS: The phase III trial was delayed because of the shortage in Doxil. You have resolved that by re-importing some Doxil from Europe. When will the trial restart and when should we expect data?

RE: FDA's approval to import our supply of Doxil has allowed us to resume enrollment in the PROCEED trial. We expect final PFS data to be available in the first half of 2014.

DS: What are the timelines for EU and U.S. submission and approval?

RE: We plan to file in the EU in Q3 2012 and in the US soon after final PFS data is available.

DS: Given the EC-145 targets the folate receptor, what other indications could we expect an effect? What are your plans to expand beyond PROC?

RE: There are over 1 million new cancer patients each year with cancers that express the folate receptor, so there are many opportunities for development in new indications (see question #1). Merck's commitment and enthusiasm to develop the drug aggressively is among the reasons they are an outstanding partner for vintafolide.

DS: The SMDC is a platform technology that should allow for a number of drugs to be developed. What are your plans to bring new molecules into the clinic?

RE: There are three paths we are pursuing to develop new SMDC's and companion imaging diagnostics. The first is to target other highly potent drug payloads using folate. We plan to file an IND for a folate targeted tubulysin by early next year. This is the most potent drug payload we have worked with and we've seen very promising preclinical results. We also have a lead developed in the inflammatory space - using folate to target a potent anti-inflammatory drug. Activated macrophage also express the folate receptor and are involved in numerous inflammatory diseases. We have seen promising safety and efficacy in several pre-clinical models with our lead therapeutic compound (EC0746). Finally, we have several new targeting ligands in development for SMDCs outside of the folate platform. The program that is furthest along targets prostate specific membrane antigen. We are currently evaluating the imaging diagnostic in humans to assess targeting specificity.

DS: You recently signed a large partnership with Merck. Why choose Merck and how do you think this benefits the company moving forward?

RE: For Endocyte this deal with Merck is about growth. This deal accelerates the growth of vintafolide in multiple indications and accelerates growth globally. With co-promotion rights for vintafolide in the US and global rights for commercialization of the companion imaging diagnostic, we can work with Merck to build and grow our own commercial organization to support our future pipeline.

DS: The partnership provided $120 million in upfront cash and an additional $880 million in milestones. With the current cash on hand, the upfront, milestones, and potential cash burn, how much of a runway does the company now have?

RE: With vintafolide success, the funding from this partnership is sufficient to bridge us to profitability. Both the additional cash and the sharing of vintafolide development expenses contribute to this. It will also allow us to bring multiple SMDCs from our pipeline forward more quickly and ensure we are well positioned to commercialize etarfolatide particularly in Europe where our first approval could occur.

DS: While the potential approval of EC-145 is an important milestone, what are the upcoming catalysts in the next 6-12 months that investors should pay attention to?

RE: Near-term catalysts include the acceptance of the EU marketing applications, initiation of clinical development of our next folate targeted therapeutic, and restoration of J&J's supply of Doxil.

DS: Finally, what do you think investors are missing in the ECYT story?

RE: That's a good question. We have seen promising clinical results in very challenging indications. Our ability to select patients dramatically reduces the risk and cost of our clinical development and is right in line with what regulators, physicians, patients, and payors desire in terms of personalized, targeted medicine. The partnership with Merck demonstrates they share our optimism and are in a position to help us accelerate growth. This is a platform that is highly leveragable, allowing us to bring multiple new drugs to the clinical for multiple indications quickly and cheaply. We're in a position to create substantial value for investors.

DS: Thank you for your time.

Disclosure: I am long ECYT.

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