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Celsion (NASDAQ:CLSN) is a small medical device-turned drug developer focused on the treatment of cancer through its lead product candidate, ThermoDox. ThermoDox is a heat-activated liposomal formulation of the chemotherapeutic drug doxorubicin. Celsion has a Phase 3 trial for primary liver cancer or hepatocellular carcinoma, a Phase 2 trial for liver metastases, and a Phase 2 trial for breast cancer, all based on ThermoDox. The heat-activated liposome technology for ThermoDox was licensed from Duke University in 2001, based on the inventions of Prof. David Needham (US Patent 6200598 due to expire in 2018). A new patent awarded to Celsion in 2011 for this technology (US Patent 7901709) will expire in 2025.

ThermoDox Has No Competitor in Liver Cancer: A Billion Dollar Market

ThermoDox is potentially useful for multiple types of cancers, but a small biotech company usually only has enough resources to focus on 1, or at most 2 cancer trials. Therefore finding the right cancer to tackle represented a critical choice for Celsion's business strategy.

Primary liver cancer ranks as the 5th most prevalent cancer with 750,000 patients worldwide and, with an annual patient growth of 5%, it is set to overtake lung cancer as the most lethal cancer by 2020. Median survival is less than 3 years upon diagnosis, and 90% of liver cancer patients will die within 5 years of diagnosis. Thus, there is an urgent and unmet medical need in liver cancer globally. Although primary liver cancer is causing an epidemic in the Asia-Pacific, it is considered a rare disease in the US and Europe. This means primary liver cancer treatments qualify for Orphan Drug designation in the US and Europe, and entitles them to 7-10 years of market exclusivity following approval, and U.S tax credits, reduction in fees, as well as US government funding to defray clinical trial expenses. At the same time, liver metastases from lung, colorectal and breast cancer i.e. metastatic liver cancer represents a disease of epidemic proportions in US and Europe, so a therapy that addresses both primary liver cancer and metastatic liver cancer liver tumors regardless of tumor origin, will (i) address a billion dollar market globally and, (ii) win the benefits of US and European Orphan Drug designations - 2 powerful edges for a small biotech. If ThermoDox is approved for liver cancer by 2013, projected annual revenues (based on a fraction of the radiofrequency ablation market share alone) are expected to reach $230M in 2014.

Within the competitive landscape for liver cancer treatments, ThermoDox hitchhikes on radiofrequency ablation, which is currently the best treatment in the market for non-resectable liver cancers. The first line treatment for early-stage liver cancer is surgical resection. Unfortunately, 80% of patients present with late-stage, non-resectable liver cancers at the time of diagnosis. For tumors up to 5 cm in diameter, radiofrequency ablation of tumor tissue by local heating is the standard treatment approach. A large randomized trial comparing surgical resection to radiofrequency ablation showed similar 4 year-survival and less morbidities for patients treated with radiofrequency ablation, in patients with a small primary liver cancer tumor. There are few alternative treatments, since conventional radiotherapy and chemotherapy are ineffective in liver cancer. The latest addition to the drug arsenal, sorafenib, is an expensive receptor tyrosine kinase inhibitor (co-developed by Bayer and Onyx Pharmaceuticals) that only adds 2 months to the lifespan of late-stage primary liver cancer patients. Another competing treatment for non-resectable liver cancers is transcatheter arterial chemoembolization, which works by cutting off some of the blood supply to the tumor, and injecting multiple doses of chemotherapeutic drugs into the tumor via a catheter. Unfortunately, as of 2005, multiple trials show that chemoembolization only delays tumor progression, with variable and questionable benefit to patient survival. But radiofrequency ablation is not without its drawbacks either. For tumors smaller than 3 cm, the recurrence rate has been reported to be 10-20% after radiofrequency ablation treatment alone. For tumors greater than 3 cm, recurrence rates are above 40%. We note that Celsion is enrolling only patients with tumors greater than 3 cm in their Phase 3 study, thus improving its chances of trial success compared to radiofrequency ablation alone. If ThermoDox is approved, it will have no close competitor on the horizon in primary liver cancer.

In line with its liver cancer strategy, Celsion has signed an exclusive licensing agreement with Yakult Honsha to commercialize ThermoDox in the largest primary liver cancer markets of Asia-Pacific, in exchange for over $11M in R&D milestone revenues and double-digit sales royalties. Celsion is also collaborating with Philips Electronics to develop a new heat treatment technology, called high-intensity focused ultrasound, which extends ThermoDox to the treatment of other cancers like bone and pancreatic cancer. Interestingly, Celsion had previously developed a medical device that uses heat to destroy prostate tumors, the Prolieve Thermodilation system, which it sold to Boston Scientific for $43M in 2007. Thus Celsion has one of the best management teams in the world to develop and market ThermoDox.

ThermoDox Works Well

ThermoDox is administered along with radiofrequency ablation, a technique which uses local heating to destroy tumors. Electrodes are inserted into the liver tumor under ultrasound image guidance. However, the efficacy of radiofrequency ablation is limited to single small tumors. Local failures and tumor recurrences are primarily due to sublethal temperatures at the thermal margin of electrodes. ThermoDox aims to solve this problem and improve upon radiofrequency ablation, by vastly expanding the killing zone within tumors using a heat-activated chemotherapeutic drug. This would also be a vast improvement over conventional chemotherapy, which leads to adverse side-effects due to off-target delivery in non-tumor tissues.

However, two of our biggest technological concerns were the heat-sensitivity of ThermoDox in vivo, and its accumulation in other tissues after local delivery of highly concentrated doxorubicin in a vascularized tumor. Our third concern was that liver tumors are traditionally regarded as chemo-resistant tumors, and it was unclear if application of a conventional chemotherapeutic drug like doxorubicin would have any effects on primary liver cancer tumors. Preclinical studies in mice showed that less than 20% of ThermoDox was activated after 30 minutes at the body temperature of 37oC, but activation rose sharply to 80% within 1 minute at 40oC. Studies in a rabbit tumor model also showed that heat-activated ThermoDox delivered 10-fold more doxorubicin to the tumor, than conventional injections of doxorubicin. And although ThermoDox did accumulate to high levels in the kidney and spleen, it was not higher than conventional injections of doxorubicin. Finally, the 2008 Phase 1 trial for ThermoDox in liver cancer showed that an optimal dose of 50mg/m2 extended the time-to-progression from 1 month to 6 months and, very importantly, the "dead zone" within the tumor kept expanding for 3 months after the radiofrequency ablation treatment, suggesting that heat-activated ThermoDox was killing the presumed chemo-resistant tumor cells with long-lasting effect. In contrast, the "dead zone" shrunk over time with radiofrequency ablation treatment alone. As validation of ThermoDox's positive results, the US FDA granted it an Orphan Drug designation in 2009, and Fast Track status in 2010. If ThermoDox works in primary liver cancer, the ramifications for its use in other cancers will be enormous.

CLSN Is Cheap Now

Soon after a $5.1M preferred stock offering in Jan '11, CLSN kept sinking to a low of $2 in Apr '11. But 2 weeks after it received the NASDAQ delisting notice, CLSN shot up to $3.50, thereby avoiding a NASDAQ delisting in May '11. News of positive Phase 1 data for breast cancer, and an impending announcement of Phase 3 interim data for liver cancer, drove CLSN to a high of $4.37 in Jul '11. Soon after the Jul '11 $18.4M direct and private offerings, which triggered the conversion of previously-issued preferred stocks into common stock, CLSN dropped to $2.70. After the Aug. announcement that an interim efficacy analysis will commence, CLSN rose back to $3.50. The stock then wavered between $2.50 and $3.50 up till Nov '11, when the committee unanimously recommended completion of the Phase 3 study. CLSN subsequently declined to a low of $1.63 in Dec '11 and stayed relatively flat below $2 till May '12. As an indicator of its undervaluation, 6 insiders have been constantly buying back shares since Dec '11.

Two Catalysts Arriving by Late 2012

The Phase 1 trial on both primary liver cancer and metastatic liver cancer was completed in 2008. In that Phase 1 trial on 24 patients, Celsion not only observed zero adverse events but also a statistically significant correlation between time-to-progression and dosage. Celsion thereby established the safety and also preliminary efficacy of ThermoDox in treating liver cancer.

The pivotal Phase 3 study on primary liver cancer was launched in 2008, with progression-free survival as the endpoint. Celsion had projected completion of their 600 patient-enrollment by mid-2010, and that it would be completed by mid-2011, based on a historical review of radiofrequency ablation cases. Celsion had missed these projected deadlines by over a year primarily due to the drying of financial resources in 2011. However during this period, the ThermoDox treatment of primary liver cancer received Orphan Drug designations from both the US and European regulatory agencies, and was also granted Fast Track status by the FDA. By Aug 2011, Celsion had enrolled all 600 patients and reached 190 progression-free survival events, which allowed for the planned interim efficacy analysis. With agreement of the FDA, enrollment was increased to 700 in 2011. In Nov 2011, the independent Data Monitoring Committee unanimously recommended that the study continue to its final analysis as planned. By Apr 2012, the Committee completed another review of 652 patients and again unanimously recommended that the study continue according to protocol. Celsion also announced that its study has achieved its enrollment target in China. In addition to meeting the US and European enrollment objectives, the study has also fulfilled the numbers needed for filings in South Korea and Taiwan, two other large Asian markets for primary liver cancer treatment. According to Celsion, the study remains on track to complete enrollment in the second quarter of 2012. Celsion reconfirms that 380 progression-free survival events are projected to occur in late 2012, with top line results following review. Hence, we expect 2 catalysts arriving soon: (i) the announcement of complete 700-patient enrollment next month in Jun '12, and (ii) the announcement of the final review in Sep-Dec '12.

Celsion in Good Financial Health to Last Till 1Q13

Besides the Phase 3 study on primary liver cancer, Celsion is also running two Phase 2 studies on colorectal liver metastases and recurrent chest wall breast cancer. These two Phase 2 trials were only initiated in late 2011-12, and are unlikely to yield significant catalysts in 2012. Prior to 2011, Celsion had financed its operations primarily through the net aggregate proceeds of $43M received from the divestiture of their medical device business to Boston Scientific in 2007, paid in installments of $13M in 2007 and $15M in each of 2008 and 2009. Further revenues came from the licensing agreement with Yakult Honsha which yielded a total of $13.5M in milestone payments by 2012. Throughout 2011, Celsion drove a series of equity financings to raise a total of $63M through the issuance of 20M shares and warrants to purchase another 11M shares. Institutional investors collectively own 10.8% of CLSN stock as of 1Q12. Celsion has an annual burn rate of about $25M, mostly on R&D and especially the costs of the Phase 3 study which increased by 50% to $12M in 2011. Costs associated with their breast cancer clinical trial decreased by 33% to $0.4 million in 2011, and has not increased in 1Q12 on a quarterly basis. Costs associated with their liver metastases trial were $0.3 million in 2011, and also did not increase significantly in 1Q12 on a quarterly basis. Costs associated with the production of ThermoDox increased by 48% to $4.3M in 2011 due to the expansion of commercial manufacturing capabilities with Zhejiang Hisun Pharmaceutical in China, and increased by 31% in 1Q12 on a quarterly basis. Other costs remained relatively unchanged in 2011 from 2010. By 2013, we expect their expenditures on the Phase 3 study to decrease dramatically (we already see an 8% drop in 1Q12), while expenditures for the two other Phase 2 trials will only progressively increase. Their next biggest expenditure is likely to come from the continued expansion of ThermoDox production, especially if it is approved. At the start of 2012, Celsion had $30.5M cash, which they estimated to last till mid-2013. Conservatively, we estimate that it will last till 1Q13.


Armed with $30.5M in cash to last till 2013, a technologically unrivaled cancer treatment that will release its positive Phase 3 results by late 2012, and projected annual revenues of $230M in 2014 based on the liver cancer treatment alone (compared to May '12 market cap of ~$60M and enterprise value of ~$50M), we believe Celsion's stock is ripe for appreciation again. Given that the heat-activated liposome technology still has a significant patent lifespan, and it could be extended to any other new cancer drug, and multiple other cancers, Celsion also looks like a promising candidate for a buyout by Big Pharma in the current biotech-hungry M&A market. We cite as recent examples, GSK's proposed deal with Human Genome Sciences (HGSI) and AstraZeneca's (NYSE:AZN) deal with Ardea (NASDAQ:RDEA), both at over 70% premiums. Localized cancer-specific drug therapy has been the Holy Grail in oncology, and deserves no less. We believe CLSN's current share price of less than $2 represents an undiscovered and undervalued opportunity for long-term investment in 2012.

Source: Celsion Is Ripe For A Long Position