In mid-April, biotechnology company Cell Therapeutics (CTIC), acquired the worldwide rights to a Phase III-ready JAK2 inhibitor from S*BIO Pte Ltd. The drug, pacritinib, was by all account, cheap. The company paid just $30 million upfront, with only half being cash and another $15 million in convertible stock. If you consider the market for JAK2 drugs, the potential revenue, and the interest from large pharma (if the drug is approved), then this acquisition looks like a near steal. Yet since April 19th, when news was announced, the stock has slid 20%, which simply does not make sense. In addition to this acquisition, the company's lead candidate, Pixuvri, was awarded an approval in the EU, which means the company will finally see sales from this drug. If you consider both developments, it is hard to find a reason why the stock would trade with such loss over the last six weeks. Therefore, let's take a look at the latest acquisition, along with some of the questions that might be keeping the stock from reflecting this good news.
What are JAK inhibitors (and pacritinib)?
JAK inhibitors are a new class of targeting agents that treat myelofibrosis. The disease is very difficult to treat, as a result there has been a lot of excitement surrounding the treatment due to its efficiency. As of now, there is only one FDA approved JAK2 Compound, Jakafi, owned by Novartis (NVS) and Incyte Corporation (INCY). However, there are also four other candidates, including pacritinib, with two being in Phase III.
Srdan Verstovsek, a renowned professor, is going to be working with Cell Therapeutics in developing the drug, and stated, "Pacritinib is a highly specific JAK2 inhibitor that does not appear to cause suppression of platelets or red blood cells as seen with other treatments, while reducing enlarged spleen and improving disease- related debilitating symptoms in patients with myelofibrosis."
What Is The Potential For Pacritinib?
One of the primary investor concerns has been the competition from having five potential drugs in the space. However, CTIC is not worried about competition, the company's CEO recently said, "myeloproliferative neoplasms, which include myelofi brosis, polycythemia, and thrombocythemia, comprise a $7 billion per year market in the U.S. alone, with the majority of these diseases involving JAK mutations." A $7 billion market is large enough to support the survival and growth of at least five drugs, but as Dr. Bianco later mentioned, the "differentiation will be key."
In regards to pacritinib, Bianco said, "The advantage could come from its selectivity. Jakafi and CYT387 inhibit both JAK1 and JAK2, but Sanofi's SAR302503 and pacritinib both are designed to be selective to JAK2. Pacritinib also hits both wild-type mutation and clonal mutation V617F, and it has dual activity against FLT3 mutation, which could extend its potential into other blood cancers such as acute myeloid leukemia and certain lymphomas."
Pacritinib is a drug with noteworthy potential due to the selectivity of the treatment. As of now, it is the only candidate where there is no platelet cut-off level. This will allow pacritinib to treat patients, untreated by other drugs, therefore giving the candidate even more benefit over other candidates in the space that have a platelet cut-off level of 50,000, with the exception of Jakafi that has a cut-off level of 100,000.
Why So Cheap?
The question that most likely comes to the minds of all investors is "if the drug is so good then why so cheap?" The headlines will all read that CTIC paid just $30 million, but what some don't realize is that CTIC could owe S*Bio up to $132.5 million in regulatory and sales milestones if the drug performs as expected. This is typical in the biotechnology industry, unless we are looking at the hepatitis C bubble in late 2011 early 2012. Under this agreement, S*Bio will be paid according to performance, in which $132.5 million represents a very successful drug, plus stock and upfront cash. CTIC will be out the costs to develop the Phase III trials, therefore S*Bio's share is all profit and is a share of the drug's total sales. Overall, I think it is a good deal for both parties because, you must remember, S*Bio hasn't endured excessive costs due to its partnering with Onyx Pharmaceuticals (ONXX). The fact that S*Bio was willing to earn the majority of its money following an approval and the success of the drug speaks highly to the developer's outlook for the candidate.
Why Did Onyx Pass On Its Option?
Cell Therapeutics CEO, Dr. Bianco, has had to answer this question on numerous occasions, and although he has not speculated on why Onyx declined the option for the drug's Phase III program, he has reiterated the numerous involvements of Onyx at the time of the proposed renewal. It is hard to know why Onyx passed on the continuation of the development of the drug. Obviously, Onyx decided to go another route, and considering the costs associated with its own pipeline, the move made sense for Onyx.
For those of you who don't know, Onyx Pharmaceuticals and S*Bio agreed to an option back in 2009 worth as much as $550 million for S*Bio. At this point, more than $100 million has been invested into pacritinib throughout Phase I and II trials. The company declined the option for the Phase III trial following a pipeline reprioritization. Onyx was also using most of its resources to develop its candidate carfilzomib, which it felt was most important. If you consider the potential competition from Jakafi, then it makes sense that Onyx may have believed the investment was too large considering the fact that it had other late- stage candidates that were closer to approval. Some have even suggested that Onyx's investment was too large and that it couldn't have honored such a massive commitment because, although Onyx is a fairly large biotechnology company, it is not Pfizer (PFE); a $550 million commitment is hard to honor when its other candidates are close to approval and will require marketing expenses.
How Will Cell Therapeutics Afford The Phase III Trial?
It's no secret that Pixuvri's struggles have created financial concerns for investors and its trials moving forward. However, considering the potential sales of Pixuvri, the company could not abandon the drug due to a limited number of patients in its Phase III trial. As a result, some have expressed concern that CTIC cannot afford to properly develop this, although promising JAK2 candidate and another expensive trial.
When CTIC announced that it had acquired pacritinib, I was as skeptical as any in regards to how the company would progress throughout the trial, but since the announcement, the company has received conditional marketing authorization from the European Commission for Pixuvri. This will now allow the company to market the drug in 27 Member States of the EU, providing immediate income since the company plans to begin marketing the drug later this year. In addition to the approval, the company also announced Tuesday morning, a $40 million investment from an institutional investor who, might I add, did not pay a discounted price. In fact, the offer was for $1 despite the market price being $0.90, and the warrants could bring additional cash down the road with an exercise price at $1.09, to provide more cash to the company. I think deals such as this, in which I expect more, validate the pipeline of CTIC, because the deal itself was very favorable for the company and reflects a high level of confidence in the company's commercialization of Pixuvri and its clinical development of pacritinib. The company said that it plans to use the proceeds from the investment to finance the purchase of pacritinib and to prepare the commercial launch of Pixuvri. The commercial launch of Pixuvri will provide earnings for the Phase III trial of pacritinib, and considering EU approval and this latest acquisition of a promising Phase III candidate, I anticipate additional institutional investors, especially with the stock being priced so low.
I think Cell Therapeutics CEO Dr. Bianco said it best when describing the acquisition of its JAK2 inhibitor by calling the deal "a really smart pick-up". Bianco has stated that there were other firms in the hunt for the candidate, but that he did not know how many. The candidate shows an obvious benefit in the treatment of a very difficult to treat disease, and unique benefits over other candidates in the space. The last two months have been eventful for the company and it finally appears to be moving in the right direction with the approval of Pixuvri in the EU and this new acquisition of a Phase III- ready candidate. Because of recent events, it does appear as though the company will have the money to progress throughout the trial until it is ready for approval in two years.
The performance of the stock just doesn't make sense. These are key developments that should have sent shares trading 50% higher, but for some reason, shares have fallen. I look for shares of CTIC to appreciate in the coming months as Pixuvri begins to produce revenue and the Phase III trial of this promising candidate gets underway. It has been a long road for investors of CTIC, but it now looks as though the future is bright; I expect that the stock will soon change direction and reflect performance that should have occurred immediately following the announcement of such major key developments.