Catching Up With Celldex Therapeutics

Aug.13.12 | About: Celldex Therapeutics, (CLDX)

As a financial writer, sometimes you get lucky. That proved to be the case when I wrote about Celldex Therapeutics (NASDAQ:CLDX) in January of this year - right before the shares spiked on new-found optimism for the company's innovative oncology program. Since then, the company has reported encouraging (albeit confusing) clinical data and bounced around between $4 and $5.50. Although investors should not underestimate the risks to this story, these shares still look like an under-appreciated play on some very difficult-to-treat cancer types.

Is Celldex Now A Legitimate Breast Cancer Play?

In late May, Celldex gave investors an interim look at data from the company's EMERGE study of CDX-011 (an antibody drug conjugate) in heavily pre-treated breast cancer patients. If ever there were a case of "the good, the bad, and the ugly," this was it.

First, the good - there is a chance that Celldex has a blockbuster in the making here. In triple-negative breast cancer patients, CDX-011 showed a 21% response rate, versus 0% in the "investigator's choice" arm. Likewise, in the patient subset of triple-negative and high GPNMB expression, CDX-011 showed a 36% response rate versus naught in the investigator's choice arm. If these numbers are sustainable, they're highly significant (one sell-side analyst compared it to Pfizer's (NYSE:PFE) Xalkori and/or Plexxicon's Zalboraf (now owned and marketed by Roche (OTCQX:RHHBY)).

Now for the bad news. For starters, the overall response for the trial as a whole was not stunning - 19% in the CDX-011 arm versus 14% in the IC arm. Across the spectrum of sub-groups, there was a pronounced drop-off between response and "confirmed response" - in the triple-negative and triple-negative plus high GPNMB groups, for instance, the confirmed response rate for CDX-011 was just 8% and 9%, respectively (against zero for the investigator's choice of treatment).

As for the ugly, most of this involves fairly typical issues for experimental cancer drugs. The sample set (the number of patients included) was small and there are still a lot of unknowns (durability of response, etc.). Safety may also be a concern - there was a high incidence of rash, as well as elevated occurrences of peripheral neuropathy and vomiting. Are these effects deal-breakers for very sick patients with few medical options? Probably not, but investors shouldn't blithely ignore them.

More complete data, including progression-free survival and overall survival, should be available by year-end, but investors should note the long and decidedly mixed history of small biotechs reproducing strong Phase 2 oncology drug data in later Phase 3 studies.

For Rindopepimut, No News Is No News

Nothing has really changed with the company's most advanced program - the cancer vaccine rindopepimut in glioblastoma. As of the company's earnings call on August 10, enrollment for the Phase 3 ACT IV and Phase 2 ReACT study is progressing. Unfortunately, glioblastoma studies are not the easiest studies to enroll; doctors are willing to try experimental therapies, but it's not an especially common type of cancer and it's typically harder for a smaller company to get the necessary sign-offs to open up new clinical sites.

What's The Opportunity?

Celldex offers more than a few challenges for the biotech investor. For starters, there are the ever-present risks that go with biotech drug development, risks made all the greater by Celldex's decision to focus on difficult-to-treat cancer types.

It is also the case that there's a lot of uncertainty about the market potential for the company's drugs. An effective glioblastoma drug may be worth $4 billion in annual revenue, but rindopepimut is more specialized and the EGFRvIII opportunity is more like $800 million to $1 billion. Moreover, no drug gets 100% of its addressable market, so the real revenue opportunity may be as little as $100 million or many times more - all depending upon the strength of the Phase 3 data, Celldex's marketing capabilities (or, more probably, those of its eventual marketing partner), and/or doctors' willingness to use it off-label.

Likewise for CDX-011. Triple-negative breast cancer is widely regarded as a meaningfully under-served market, with total market potential of $1 billion to $3 billion. It's not unreasonable to think, then, that Celldex could see $300 million or more in sales. Here again, though, data have to be strong and investors shouldn't dismiss the threat of competition from Amgen (NASDAQ:AMGN), Pfizer, Bristol-Myers (NYSE:BMY) and many other Big Pharma players.

Last and by no means least, Celldex has a surprisingly large early-stage pipeline, with drugs in human trials (CDX-1401, CDX-1127, and CDX-301) for solid tumors, lymphoma, and stem cell transplantation, and another (CDX-1135) about to begin a trial in renal disease.

The Bottom Line

Here's where the boiler plate warnings come into play - Celldex is a risky stock and most biotech drugs fail to reach the market. What's more, it's not unfair for investors to ask why, if Celldex is so good, Medarex spun it out and why Pfizer ended the companies' partnership for rindopepimut. It's also understandable if investors look at names like Dendreon (NASDAQ:DNDN) and Vical (NASDAQ:VICL) and decide they want nothing to do with any biotech that is involved with cancer vaccines.

All of that said, Celldex wouldn't be the first biotech to be abandoned by an early partner and go on to eventual success. Moreover, while I'm not going to fool myself into thinking that Phase 2 data is anything like a sure thing, the data from Celldex has been encouraging and exciting.

Right now I value Celldex on the basis of $300 million in assumed revenue for rindopepimut and $250 million from CDX-011 eight years from now, a 8x multiple to that revenue (a little on the high end), and a 30% and 35% discount rate, respectively. Doing so suggests a fair value of $8 per share and while it does not include any value for the pipeline, it also doesn't include any future dilution.

With a reasonable expected flow of data over the next year, an intriguing valuation, and drugs that appear highly effective in difficult-to-treat cancer types, I think Celldex is worth a look from aggressive biotech investors.

Disclosure: I am long OTCQX:RHHBY.